10-Q 1 form10q_3-05.htm THE SOUTHERN COMPANY
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
             
Commission   Registrant, State of Incorporation,   I.R.S. Employer  
File Number   Address and Telephone Number   Identification No.  
1-3526
  The Southern Company     58-0690070  
 
  (A Delaware Corporation)        
 
  270 Peachtree Street, N.W.        
 
  Atlanta, Georgia 30303        
 
  (404) 506-5000        
1-3164
  Alabama Power Company     63-0004250  
 
  (An Alabama Corporation)        
 
  600 North 18th Street        
 
  Birmingham, Alabama 35291        
 
  (205) 257-1000        
1-6468
  Georgia Power Company     58-0257110  
 
  (A Georgia Corporation)        
 
  241 Ralph McGill Boulevard, N.E.        
 
  Atlanta, Georgia 30308        
 
  (404) 506-6526        
0-2429
  Gulf Power Company     59-0276810  
 
  (A Maine Corporation)        
 
  One Energy Place        
 
  Pensacola, Florida 32520        
 
  (850) 444-6111        
001-11229
  Mississippi Power Company     64-0205820  
 
  (A Mississippi Corporation)        
 
  2992 West Beach        
 
  Gulfport, Mississippi 39501        
 
  (228) 864-1211        
1-5072
  Savannah Electric and Power Company     58-0418070  
 
  (A Georgia Corporation)        
 
  600 East Bay Street        
 
  Savannah, Georgia 31401        
 
  (912) 644-7171        
333-98553
  Southern Power Company        
 
  (A Delaware Corporation)     58-2598670  
 
  270 Peachtree Street, N.W.        
 
  Atlanta, Georgia 30303        
 
  (404) 506-5000        
 
 

 


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     Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934).

                 
 
  Registrant     Yes     No  
 
The Southern Company
    ü        
 
Alabama Power Company
          ü  
 
Georgia Power Company
          ü  
 
Gulf Power Company
          ü  
 
Mississippi Power Company
          ü  
 
Savannah Electric and Power Company
          ü  
 
Southern Power Company
          ü  
 
             
    Description of   Shares Outstanding  
Registrant   Common Stock   at March 31, 2005  
The Southern Company
  Par Value $5 Per Share     744,318,776  
Alabama Power Company
  Par Value $40 Per Share     8,250,000  
Georgia Power Company
  Without Par Value     7,761,500  
Gulf Power Company
  Without Par Value     992,717  
Mississippi Power Company
  Without Par Value     1,121,000  
Savannah Electric and Power Company
  Par Value $5 Per Share     10,844,635  
Southern Power Company
  Par Value $0.01 Per Share     1,000  

     This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, Savannah Electric and Power Company, and Southern Power Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies.

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INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2005

         
    Page  
    Number  
    5  
    6  
 
       
Item 1. Financial Statements (Unaudited)
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
       
       
    8  
    9  
    10  
    12  
    13  
       
    26  
    26  
    27  
    28  
    30  
       
    39  
    39  
    40  
    41  
    43  
       
    52  
    52  
    53  
    54  
    56  
       
    64  
    64  
    65  
    66  
    68  
       
    76  
    76  
    77  
    78  
    80  
       
    88  
    88  
    89  
    90  
    92  
    97  
    23  
    23  

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INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2005

         
    Page  
    Number  
Legal Proceedings   106
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds Inapplicable
Item 3.
Defaults Upon Senior Securities Inapplicable
Item 4.
Submission of Matters to a Vote of Security Holders Inapplicable
Item 5.
Other Information Inapplicable
Exhibits   106
  Signatures   110

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DEFINITIONS

     
TERM   MEANING
Alabama Power
  Alabama Power Company
AFUDC
  Allowance for funds used during construction
BMA
  Bond Market Association
Clean Air Act
  Clean Air Act Amendments of 1990
DOE
  U.S. Department of Energy
ECO Plan
  Environmental Compliance Overview Plan
EPA
  U.S. Environmental Protection Agency
FASB
  Financial Accounting Standards Board
FERC
  Federal Energy Regulatory Commission
Form 10-K
  Combined Annual Report on Form 10-K of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, and Southern Power for the year ended December 31, 2004
Georgia Power
  Georgia Power Company
Gulf Power
  Gulf Power Company
IRC
  Internal Revenue Code of 1986, as amended
IRS
  Internal Revenue Service
LIBOR
  London Interbank Offered Rate
Mirant
  Mirant Corporation
Mississippi Power
  Mississippi Power Company
Moody’s
  Moody’s Investors Service, Inc.
MW
  Megawatts
PEP
  Performance Evaluation Plan
PPA
  Purchase Power Agreement
PSC
  Public Service Commission
retail operating companies
  Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric
RTO
  Regional Transmission Organization
S&P
  Standard and Poor’s, a division of The McGraw-Hill Companies, Inc.
Savannah Electric
  Savannah Electric and Power Company
SCS
  Southern Company Services, Inc.
SEC
  Securities and Exchange Commission
Southern Company
  The Southern Company
Southern Company GAS
  Southern Company Gas LLC
Southern Company system
  Southern Company, the retail operating companies, Southern Power, and other subsidiaries
Southern Power
  Southern Power Company
Super Southeast
  Southern Company’s traditional service territory, Alabama, Florida, Georgia, and Mississippi, plus the surrounding states of Kentucky, Louisiana, North Carolina, South Carolina, Tennessee, and Virginia

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, statements concerning the strategic goals for Southern Company’s wholesale business, retail sales growth, storm damage cost recovery, environmental regulations and expenditures, financing activities, completion of construction projects, and estimated construction and other expenditures. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar terminology. There are various factors that could cause actual results to differ materially from those suggested by the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include:

•   the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry, and also changes in environmental, tax, and other laws and regulations to which Southern Company and its subsidiaries are subject, as well as changes in application of existing laws and regulations;
 
•   current and future litigation, regulatory investigations, proceedings, or inquiries, including the pending EPA civil actions against certain Southern Company subsidiaries, IRS audits, and Mirant related matters;
 
•   the effects, extent, and timing of the entry of additional competition in the markets in which Southern Company’s subsidiaries operate;
 
•   variations in demand for electricity and gas, including those relating to weather, the general economy and population, and business growth (and declines);
 
•   available sources and costs of fuels;
 
•   ability to control costs;
 
•   investment performance of Southern Company’s employee benefit plans;
 
•   advances in technology;
 
•   state and federal rate regulations and the impact of pending and future rate cases and negotiations;
 
•   the performance of projects undertaken by the non-utility businesses and the success of efforts to invest in and develop new opportunities;
 
•   internal restructuring or other restructuring options that may be pursued;
 
•   potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial to Southern Company or its subsidiaries;
 
•   the ability of counterparties of Southern Company and its subsidiaries to make payments as and when due;
 
•   the ability to obtain new short- and long-term contracts with neighboring utilities;
 
•   the direct or indirect effect on Southern Company’s business resulting from terrorist incidents and the threat of terrorist incidents;
 
•   interest rate fluctuations and financial market conditions and the results of financing efforts, including Southern Company’s and its subsidiaries’ credit ratings;
 
•   the ability of Southern Company and its subsidiaries to obtain additional generating capacity at competitive prices;
 
•   catastrophic events such as fires, earthquakes, explosions, floods, hurricanes, or other similar occurrences;
 
•   the direct or indirect effects on Southern Company’s business resulting from incidents similar to the August 2003 power outage in the Northeast;
 
•   the effect of accounting pronouncements issued periodically by standard setting bodies; and
 
•   other factors discussed elsewhere herein and in other reports filed by the registrants from time to time with the SEC.

The registrants expressly disclaim any obligation to update any forward-looking statements.

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THE SOUTHERN COMPANY
AND SUBSIDIARY COMPANIES

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Operating Revenues:
               
Retail revenues
  $ 2,268,809     $ 2,144,089  
Sales for resale
    347,065       350,737  
Other electric revenues
    101,095       93,571  
Other revenues
    147,491       143,918  
 
           
Total operating revenues
    2,864,460       2,732,315  
 
           
Operating Expenses:
               
Fuel
    921,384       838,772  
Purchased power
    98,216       119,758  
Other operations
    526,099       514,015  
Maintenance
    294,092       237,497  
Depreciation and amortization
    292,609       240,654  
Taxes other than income taxes
    162,998       158,484  
 
           
Total operating expenses
    2,295,398       2,109,180  
 
           
Operating Income
    569,062       623,135  
Other Income and (Expense):
               
Allowance for equity funds used during construction
    16,859       8,184  
Interest income
    5,272       7,654  
Equity in losses of unconsolidated subsidiaries
    (23,104 )     (25,316 )
Leveraged lease income
    18,248       15,927  
Interest expense, net of amounts capitalized
    (138,986 )     (130,585 )
Interest expense to affiliate trusts
    (31,930 )      
Distributions on mandatorily redeemable preferred securities
          (31,168 )
Preferred dividends of subsidiaries
    (7,402 )     (5,472 )
Other income (expense), net
    (5,736 )     (8,162 )
 
           
Total other income and (expense)
    (166,779 )     (168,938 )
 
           
Earnings Before Income Taxes
    402,283       454,197  
Income taxes
    79,323       123,055  
 
           
Consolidated Net Income
  $ 322,960     $ 331,142  
 
           
Common Stock Data:
               
Consolidated basic earnings per share
  $ 0.43     $ 0.45  
Consolidated diluted earnings per share
  $ 0.43     $ 0.45  
Average number of basic shares of common stock outstanding (in thousands)
    744,025       736,638  
Average number of diluted shares of common stock outstanding (in thousands)
    748,672       741,603  
Cash dividends paid per share of common stock
  $ 0.3575     $ 0.350  

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Operating Activities:
               
Consolidated net income
  $ 322,960     $ 331,142  
Adjustments to reconcile consolidated net income to net cash provided from operating activities —
               
Depreciation and amortization
    343,071       301,461  
Deferred income taxes and investment tax credits
    111,385       130,231  
Allowance for equity funds used during construction
    (16,859 )     (7,996 )
Equity in losses of unconsolidated subsidiaries
    23,104       25,316  
Leveraged lease income
    (18,248 )     (15,927 )
Pension, postretirement, and other employee benefits
    16,695       15,915  
Tax benefit of stock options
    15,049       11,731  
Hedge settlements
    (18,357 )     (1,966 )
Natural disaster reserve accounting order
    45,000        
Other, net
    (19,586 )     (53,324 )
Changes in certain current assets and liabilities —
               
Receivables, net
    (16,670 )     101,118  
Fossil fuel stock
    (36,951 )     23,978  
Materials and supplies
    (3,885 )     (2,932 )
Other current assets
    5,260       (96,052 )
Accounts payable
    (88,579 )     (7,736 )
Accrued taxes
    (231,334 )     (134,227 )
Accrued compensation
    (275,701 )     (248,051 )
Other current liabilities
    14,458       (65,345 )
 
           
Net cash provided from operating activities
    170,812       307,336  
 
           
Investing Activities:
               
Gross property additions
    (479,518 )     (515,233 )
Investment in unconsolidated subsidiaries
    (23,913 )     (8,215 )
Cost of removal net of salvage
    (16,040 )     (9,767 )
Construction receivables/payables, net
    (45,399 )     (20,632 )
Other
    13,658       1,465  
 
           
Net cash used for investing activities
    (551,212 )     (552,382 )
 
           
Financing Activities:
               
Increase in notes payable, net
    363,710       107,398  
Proceeds —
               
Long-term debt
    500,000       597,717  
Mandatorily redeemable preferred securities
          200,000  
Preferred stock
          100,000  
Common stock
    56,031       48,702  
Redemptions —
               
Long-term debt
    (252,423 )     (282,524 )
Mandatorily redeemable preferred securities
          (240,000 )
Payment of common stock dividends
    (265,958 )     (257,506 )
Other
    (12,370 )     (14,524 )
 
           
Net cash provided from financing activities
    388,990       259,263  
 
           
Net Change in Cash and Cash Equivalents
    8,590       14,217  
Cash and Cash Equivalents at Beginning of Period
    373,199       311,274  
 
           
Cash and Cash Equivalents at End of Period
  $ 381,789     $ 325,491  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $6,708 and $11,962 capitalized for 2005 and 2004, respectively)
  $ 170,760     $ 142,750  
Income taxes (net of refunds)
  $ 31,855     $ 25,884  

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2005     2004  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 381,789     $ 373,199  
Receivables —
               
Customer accounts receivable
    718,831       755,436  
Unbilled revenues
    252,412       304,479  
Under recovered regulatory clause revenues
    609,742       530,898  
Other accounts and notes receivable
    278,479       310,971  
Accumulated provision for uncollectible accounts
    (38,722 )     (46,100 )
Fossil fuel stock, at average cost
    362,321       325,370  
Vacation pay
    105,007       105,437  
Materials and supplies, at average cost
    605,705       601,820  
Prepaid expenses
    171,533       126,059  
Other
    153,051       75,134  
 
           
Total current assets
    3,600,148       3,462,703  
 
           
Property, Plant, and Equipment:
               
In service
    41,722,002       41,437,517  
Less accumulated depreciation
    15,127,836       14,950,939  
 
           
 
    26,594,166       26,486,578  
Nuclear fuel, at amortized cost
    214,975       218,133  
Construction work in progress
    1,730,097       1,656,772  
 
           
Total property, plant, and equipment
    28,539,238       28,361,483  
 
           
Other Property and Investments:
               
Nuclear decommissioning trusts, at fair value
    899,569       904,828  
Leveraged leases
    994,248       976,000  
Other
    362,446       380,904  
 
           
Total other property and investments
    2,256,263       2,261,732  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    878,715       864,477  
Prepaid pension costs
    995,292       985,633  
Unamortized debt issuance expense
    161,470       153,351  
Unamortized loss on reacquired debt
    317,797       323,394  
Other regulatory assets
    212,378       248,953  
Other
    328,652       300,360  
 
           
Total deferred charges and other assets
    2,894,304       2,876,168  
 
           
 
               
Total Assets
  $ 37,289,953     $ 36,962,086  
 
           

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

                 
    At March 31,     At December 31,  
Liabilities and Stockholders’ Equity   2005     2004  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 1,053,609     $ 983,282  
Notes payable
    789,097       426,394  
Accounts payable
    728,169       884,240  
Customer deposits
    206,135       200,454  
Accrued taxes —
               
Income taxes
    41,024       47,237  
Other
    154,432       243,200  
Accrued interest
    182,017       179,301  
Accrued vacation pay
    136,363       137,452  
Accrued compensation
    154,384       431,023  
Other
    275,468       258,308  
 
           
Total current liabilities
    3,720,698       3,790,891  
 
           
Long-term Debt
    10,655,460       10,488,076  
 
           
Long-term Debt Payable to Affiliated Trusts
    1,960,644       1,960,644  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    5,299,736       5,237,162  
Deferred credits related to income taxes
    334,530       372,528  
Accumulated deferred investment tax credits
    545,322       552,108  
Employee benefit obligations
    890,888       864,216  
Asset retirement obligations
    918,514       903,385  
Other cost of removal obligations
    1,311,351       1,295,871  
Miscellaneous regulatory liabilities
    396,381       350,166  
Other
    287,919       308,880  
 
           
Total deferred credits and other liabilities
    9,984,641       9,884,316  
 
           
Total Liabilities
    26,321,443       26,123,927  
 
           
Preferred Stock of Subsidiaries
    560,450       560,472  
 
           
Common Stockholders’ Equity:
               
Common stock, par value $5 per share —
               
Authorized — 1 billion shares
               
Issued — March 31, 2005: 744,574,000 Shares;
        — December 31, 2004: 741,734,998 Shares
               
Treasury — March 31, 2005: 255,224 Shares;
        — December 31, 2004: 240,425 Shares
               
Par value
    3,722,870       3,708,675  
Paid-in capital
    925,696       868,747  
Treasury, at cost
    (5,895 )     (5,557 )
Retained earnings
    5,895,565       5,838,986  
Accumulated other comprehensive loss
    (130,176 )     (133,164 )
 
           
Total Common Stockholders’ Equity
    10,408,060       10,277,687  
 
           
Total Liabilities and Stockholders’ Equity
  $ 37,289,953     $ 36,962,086  
 
           

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Consolidated Net Income
  $ 322,960     $ 331,142  
Other comprehensive income (loss):
               
Change in fair value of marketable securities, net of tax of $(1,729) and $4,061, respectively
    (3,326 )     7,623  
Changes in fair value of qualifying hedges, net of tax of $2,025 and $(7,711), respectively
    3,163       (12,704 )
Reclassification adjustment for amounts included in net income, net of tax of $2,010 and $2,171, respectively
    3,151       3,490  
 
           
COMPREHENSIVE INCOME
  $ 325,948     $ 329,551  
 
           

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FIRST QUARTER 2005 vs. FIRST QUARTER 2004

OVERVIEW

Discussion of the results of operations is focused on Southern Company’s primary business of electricity sales in the Southeast by the retail operating companies – Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric – and Southern Power. Southern Power is an electric wholesale generation subsidiary with market-based rate authority. Southern Company’s other business activities include investments in synthetic fuels and leveraged lease projects, telecommunications, energy-related services, and natural gas marketing. For additional information on these businesses, see BUSINESS – The SOUTHERN System – “Retail Operating Companies,” “Southern Power,” and “Other Business” in Item 1 of the Form 10-K.

     Southern Company continues to focus on several key performance indicators. These indicators include customer satisfaction, peak season equivalent forced outage rate, return on equity, and earnings per share. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Southern Company in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Southern Company’s first quarter 2005 earnings were $323 million ($0.43 per share) compared with $331 million ($0.45 per share) in the first quarter 2004. Earnings in the first quarter 2005 decreased due to milder than normal weather, the expiration of certain provisions of Georgia Power’s three-year retail rate plan ending December 31, 2004 (2001 Retail Rate Plan), and higher non-fuel operation and maintenance costs as compared to the first quarter of 2004. These decreases were partially offset by a base rate increase at Georgia Power and customer growth in the Southern Company service area.

     Significant income statement items appropriate for discussion include the following:

                 
    Increase (Decrease)  
    First Quarter  
    (in thousands)       %  
Retail revenues
  $ 124,720       5.8  
Other electric revenues
    7,524       8.0  
Fuel expense
    82,612       9.8  
Purchased power expense
    (21,542 )     (18.0 )
Other operations and maintenance expense
    68,679       9.1  
Depreciation and amortization expense
    51,955       21.6  
Allowance for equity funds used during construction
    8,675       106.0  
Interest expense, net of amounts capitalized
    8,401       6.4  
Income taxes
    (43,732 )     (35.5 )

     Retail revenues. The chart below reflects the primary drivers of the 5.8% increase in retail revenues in the first quarter 2005 compared to the prior year. Changes in revenue related to cost recovery mechanisms such as fuel and environmental have no effect on net income. In the first quarter 2005, retail kilowatt-hour energy sales decreased by 0.8% from the same period a year ago, primarily due to milder weather. The decrease was partially offset by continued customer and demand growth due to sustained economic growth in the Southeast. The number of retail customers increased by 1.6% and weather-adjusted average consumption by retail customers increased by 1.1% in the first quarter 2005 when compared with the first quarter 2004.

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     Details of retail revenues are as follows:

                 
 
    First Quarter  
    (in millions)     %  
 
Retail – prior year
  $ 2,144          
Change in —
               
Base rates
    47       2.2  
Sales growth
    23       1.1  
Weather
    (27 )     (1.3 )
Fuel cost recovery
    77       3.6  
Other cost recovery
    5       0.2  
 
Retail – current year
  $ 2,269       5.8 %
 

     Other electric revenues. In the first quarter 2005, when compared to the same period in 2004, other electric revenues increased $7.5 million, or 8.0%, primarily due to higher transmission and outdoor lighting revenues of $2.4 million and $1.5 million, respectively.

     Fuel expense. During the first quarter 2005, fuel expense was higher due to a 10.7% increase in the average unit cost of fuel per net kilowatt-hour generated when compared to the same period in the prior year. Increases in fuel expense at the retail operating companies are generally offset by fuel revenues and do not affect net income.

     Purchased power expense. The decrease in the first quarter 2005 for purchased power compared with the same period last year is primarily a result of lower kilowatt-hour purchases and a decrease in the cost of purchased power per kilowatt-hour. These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues.

     Other operations and maintenance expense. The $68.7 million increase in other operations and maintenance in the first quarter 2005 is mainly attributable to $45 million of expenses recorded by Alabama Power in accordance with an accounting order approved by the Alabama PSC to offset the costs of Hurricane Ivan and restore the natural disaster reserve. In accordance with the accounting order, Alabama Power also returned certain regulatory liabilities related to deferred taxes to its retail customers; therefore, the combined effects of this accounting order had no impact on net income. See Note 3 to the financial statements of Southern Company under “Gulf Power and Alabama Power Storm Damage Recovery” in Item 8 of the Form 10-K and “Income taxes” below for additional information. In addition, fossil and hydro expenses increased $13.3 million as compared to the prior year primarily due to lower than normal operation and maintenance spending in the first quarter 2004.

     Depreciation and amortization expense. The $52 million increase in depreciation and amortization in the first quarter of 2005 is due to the expiration in 2004 of certain provisions in Georgia Power’s 2001 Retail Rate Plan. In accordance with the 2001 Retail Rate Plan, Georgia Power amortized an accelerated cost recovery liability equally as a credit to amortization expense and recognized new Georgia PSC-certified purchased power costs in rates evenly over the three years ended December 31, 2004. This treatment resulted in a credit to amortization expense of $47 million during the first quarter of 2004. See Note 3 to the financial statements of Southern Company under “Georgia Power Retail Rate Activity” in Item 8 of the Form 10-K for additional information.

     Allowance for equity funds used during construction. The first quarter 2005 increase in AFUDC compared to the same period in the prior year relates primarily to construction of the McIntosh combined cycle units 10 and 11 by Georgia Power and Savannah Electric. See Note 3 to the financial statements of Southern Company under “Plant McIntosh Construction Project” in Item 8 of the Form 10-K for further information.

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     Interest expense, net of amounts capitalized. The increase in interest expense, net of amounts capitalized in the first quarter 2005 when compared to the same period in 2004 is mainly attributed to an increase in the amount of senior notes outstanding and lower amounts of interest capitalized as projects have reached completion, partially offset by refinancing long-term debt with lower interest-rate debt. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Financing Activities” of Southern Company in Item 7 of the Form 10-K and herein for additional information.

     Income taxes. The decrease in income taxes in the first quarter 2005 compared to the prior year is primarily due to the impact of the Alabama PSC accounting order discussed under “Other operations and maintenance expense” above and is expected to maintain Southern Company’s annual effective income tax rate at approximately 27% for 2005. See Note 5 to the financial statements of Southern Company in Item 8 of the Form 10-K and Note (N) to the Condensed Financial Statements herein for additional information.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of future earnings potential. The level of Southern Company’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Company’s primary business of selling electricity. These factors include the retail operating companies’ ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stringent environmental standards. Another major factor is the profitability of the competitive market-based wholesale generating business and federal regulatory policy, which may impact Southern Company’s level of participation in this market. Future earnings for the electricity business in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in the service area. For additional information relating to these issues, see BUSINESS – The SOUTHERN System – “Risk Factors” in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form 10-K.

Environmental Matters

Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be recovered. For additional information, including information on certain environmental litigation, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters” in Item 8 of the Form 10-K.

Plant Wansley Environmental Litigation

On March 11, 2005, the U.S. Court of Appeals for the Eleventh Circuit accepted Georgia Power’s petition for review of the U.S. District Court for the Northern District of Georgia’s December 15, 2004 order related to the Plant Wansley environmental litigation. Oral argument on that appeal has not been scheduled. See Note 3 to the financial statements of Southern Company under “Environmental Matters – Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K for additional information. The ultimate outcome of this matter cannot now be determined.

Other Environmental Matters

The EPA issued the final Clean Air Interstate Rule on March 10, 2005. The rule addresses sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions that contribute to nonattainment of the eight-hour ozone and fine particulate matter National Ambient Air Quality Standards. Twenty-eight eastern states, including each of the

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states within Southern Company’s service area, are subject to the fine particulate and/or the eight-hour ozone requirements set forth within the rule. The rule may require additional reductions of NOx and/or SO2 to be achieved by the installation of additional controls at Southern Company facilities or through the purchase of allowances. The impact of this final rule on Southern Company will, however, depend on the development and implementation of applicable state regulations and therefore cannot be determined at this time.

     On March 15, 2005, the EPA announced the final Clean Air Mercury Rule, selecting a cap-and-trade approach to be implemented in two phases, 2010 and 2018. The rule sets a permanent cap on emissions at the 2018 level and provides for an emissions allowance trading market. The impact of this final rule on Southern Company will depend on resolution of legal challenges and the development and implementation of applicable state regulations and therefore cannot be determined at this time.

     On April 15, 2005, the EPA announced plans to extend the deadline for issuance of final rules addressing Best Available Retrofit Technology standards under its Regional Haze program until June 15, 2005.

     The EPA published a proposed rule on April 20, 2005 to approve redesignation of the Atlanta metro area to “attainment” under the one-hour ozone standard.

FERC and State PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC and State PSC Matters – Market-Based Rate Authority” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Each of the retail operating companies and Southern Power has authorization from the FERC to sell power to non-affiliates at market-based prices. The retail operating companies and Southern Power also have FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. As directed by this order, on February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. Any new market-based rate transactions in its retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. In the event that the FERC’s default mitigation measures are ultimately applied, the retail operating companies and Southern Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The impact of such sales through March 31, 2005 is not material to Southern Company’s net income. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

Generation Interconnection Agreements

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC and State PSC Matters – Generation Interconnection Agreements” of Southern Company in Item 7 of the Form 10-K for information on the FERC’s Order 2003 related to standardization of generation interconnection agreements and procedures. The FERC has indicated that Order 2003, which was effective January 20, 2004, is to be applied prospectively to interconnection agreements. Subsidiaries of Tenaska, Inc., as counterparties to three previously executed interconnection agreements with subsidiaries of Southern Company, have filed complaints at the FERC requesting that the FERC modify the agreements and that Southern Company refund a total of $19 million previously paid for interconnection facilities, with interest. Southern Company has also received similar requests from other entities totaling approximately $14 million. Southern Company has

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opposed such relief, and the proceedings are still pending. The impact of Order 2003 and its subsequent rehearings on Southern Company and the final results of these matters cannot be determined at this time.

Retail Fuel Cost Recovery

The retail operating companies each have established fuel cost recovery rates approved by their respective state PSCs. In recent quarters, the retail operating companies have experienced higher than expected fuel costs for coal and gas. These higher fuel costs have increased the under recovered fuel costs included in the balance sheets. The retail operating companies will continue to monitor the under recovered fuel cost balance in light of these higher fuel costs.

     Alabama Power fuel costs are recovered under Rate ECR (Energy Cost Recovery), which provides for the addition of a fuel and energy cost factor to base rates. Alabama Power’s under recovered fuel costs as of March 31, 2005 totaled $96.4 million as compared to $101.6 million at December 31, 2004. Alabama Power increased its fuel billing factor in April 2005. See Note 3 to the financial statements of Southern Company under “Alabama Power Retail Regulatory Matters” in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements herein for additional information.

     On February 18, 2005, Georgia Power filed a request with the Georgia PSC for a fuel cost recovery rate increase. The requested increase, representing an average annual increase in revenues of approximately 11.8%, will allow for the recovery of fuel costs based on an estimate of future fuel costs, as well as the collection of the existing under recovery of fuel costs. The Georgia PSC may require that this existing under recovery be collected over a period greater than twelve months. Georgia Power’s under recovered fuel costs as of March 31, 2005 totaled $455.2 million. Hearings before the Georgia PSC were held in April 2005. A final decision from the Georgia PSC is expected in May 2005 with the new fuel rate effective June 1. The final outcome of the filing cannot be determined at this time. For additional information on Georgia Power’s current fuel cost recovery rate, see Note 3 to the financial statements of Southern Company under “Georgia Power Retail Rate Activity” in Item 8 of the Form 10-K and Note (I) to the Condensed Financial Statements herein.

Storm Damage Cost Recovery

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC and State PSC Matters — Storm Damage Cost Recovery” of Southern Company in Item 7 and Notes 1 and 3 to the financial statements of Southern Company under “Storm Damage Reserves” and “Gulf Power and Alabama Power Storm Damage Recovery,” respectively, in Item 8 of the Form 10-K. Each retail operating company maintains a reserve for property damage to cover the cost of damages from major storms to its transmission and distribution lines and the cost of uninsured damages to its generation facilities and other property.

     Hurricane Ivan hit Gulf Power’s service territory in September 2004. In March 2005, the Florida PSC approved a Stipulation and Settlement between Gulf Power, the Office of Public Counsel for the State of Florida, and the Florida Industrial Power Users Group which allows Gulf Power to recover the retail portion of $51.7 million, the projected reserve deficiency, plus interest and revenue taxes, from customers over a 24-month period beginning in April 2005. In connection with the Stipulation, Gulf Power has agreed that it will not seek any additional increase in its base rates and charges to become effective on or before March 1, 2007.

Mirant Related Matters

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Other Matters” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Mirant Related Matters” in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein under “Mirant Related Matters.” In July 2003, Mirant filed for voluntary reorganization under Chapter

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11 of the U.S. Bankruptcy Code. In June 2004, Mirant’s bankruptcy counsel notified Southern Company that it was investigating, on behalf of a committee of independent Mirant directors, potential claims against Southern Company. On March 25, 2005, Mirant filed with the U.S. Bankruptcy Court for the Northern District of Texas a First Amended Disclosure Statement relating to Mirant’s plan of reorganization. In the First Amended Disclosure Statement, Mirant disclosed that its board of directors has authorized litigation against Southern Company to recover certain transfers made by Mirant to Southern Company from 1999 through 2001. Other than identifying these transfers, the First Amended Disclosure Statement provided no factual or legal basis for any claim against Southern Company. Southern Company believes there is no meritorious basis for a claim and intends to vigorously defend itself in the event that Mirant brings an action to recover any amounts in connection with these transfers. The ultimate outcome of any potential action by Mirant cannot be determined at this time. Southern Company has various other contingent liabilities associated with Mirant, including guarantees of contractual commitments, litigation, and joint and several liabilities in connection with the consolidated federal income tax return. The ultimate outcome of such contingent liabilities cannot now be determined.

Income Tax Matters

Leveraged Lease Transactions

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Income Tax Matters - Leveraged Lease Transactions” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Income Tax Matters — Leveraged Lease Transactions” in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for information regarding IRS challenges to Southern Company’s transactions related to international leveraged leases that could have material impacts on Southern Company’s financial statements. The ultimate outcome of these matters cannot now be determined.

Synthetic Fuel Tax Credits

As discussed in Note 3 to the financial statements of Southern Company under “Income Tax Matters - Synthetic Fuel Tax Credits” in Item 8 of the Form 10-K, Southern Company has investments in two entities that produce synthetic fuel and receive tax credits under Section 29 of the IRC. In accordance with Section 29 of the IRC, these tax credits are subject to limitation as the annual average price of oil (as determined by the DOE) increases over a specified, inflation-adjusted dollar amount published in the spring of the subsequent year. Southern Company, along with its partners in these investments, will continue to monitor oil prices. Any indicated potential limitation on these credits could affect either the timing or the amount of the credit recognition and could also require an impairment analysis of these investments by Southern Company. Subsequent to March 31, 2005, Southern Company entered into a derivative transaction designed to reduce its exposure to the potential phase-out of these credits in 2005. The purchased option, which had an initial fair value of approximately $7 million, will be marked to market over the remainder of the year through other income (expense), net.

Other Matters

On April 8, 2005, Southern Power entered into an agreement with Constellation Power, Inc. and certain other subsidiaries of Constellation Energy Group, Inc. to acquire all of the outstanding general and limited partnership interests of Oleander Power Project, L.P. (Oleander), for an aggregate purchase price of approximately $206 million. The purchase price is subject to certain working capital and timing of closing adjustments. Oleander owns a dual-fueled generating plant in Brevard County, Florida with a nominal installed capacity of 680 MW. The entire output of the plant is sold under separate PPAs with Florida Power & Light Company and Seminole Electric Cooperative, Inc. The PPAs expire in 2007 and 2009, respectively. The acquisition is subject to certain regulatory approvals, including the approval of the FERC, as well as review by the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act.

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     Southern Company is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Southern Company’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation against Southern Company and its subsidiaries cannot be predicted at this time; however, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Southern Company’s financial statements.

     See the Notes to the Condensed Financial Statements herein for discussion of various contingencies and other matters which may affect future earnings potential.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Southern Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Southern Company in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Company’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. Also see MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES - “Application of Critical Accounting Policies and Estimates” of Southern Company in Item 7 of the Form 10-K for a complete discussion of Southern Company’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.

New Accounting Standards

FASB Statement No. 123R, Share-Based Payments, was issued in December 2004. This statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. In April 2005, the SEC amended the compliance dates for FASB Statement No. 123R. For Southern Company, this statement is now effective beginning January 1, 2006. Although the compensation expense calculation required under the revised statement differs slightly, the impacts on Southern Company’s financial statements are expected to be similar to the pro forma disclosures included in Note 1 to the financial statements of Southern Company under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein.

     FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations, was issued in March 2005. This interpretation requires that asset retirement obligations be recorded when a legal obligation exists even though the timing and/or the method of settlement are conditional on a future event. For Southern Company, FIN 47 is effective no later than December 31, 2005. Southern Company is currently assessing the impact of FIN 47 on its balance sheet; however, adoption is not currently expected to have a material impact on Southern Company’s income statement.

     In December 2004, the FASB issued Staff Position No. 109-1 (FSP 109-1), Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities provided by the American Jobs Creation Act of 2004, which requires that the generation deduction for utilities be accounted for as a special tax deduction rather than as a tax rate reduction. Southern Company adopted FSP 109-1 in the first quarter of 2005 with no material impact on its financial statements.

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FINANCIAL CONDITION AND LIQUIDITY

Overview

Southern Company’s financial condition continued to be strong at March 31, 2005. Net cash flow from operating activities totaled $170 million for the first quarter 2005, compared to $307 million for the first quarter 2004. The $137 million decrease in 2005 resulted primarily from higher fuel costs at the retail operating companies. Those costs are recoverable in future periods and are reflected on the balance sheets as under recovered regulatory clause revenues. Gross property additions to utility plant were $480 million in the first quarter 2005. The majority of funds needed for gross property additions since 2000 has been provided from operating activities.

     Significant balance sheet changes include a $237 million increase in long-term debt for the first quarter 2005 due to the replacement of short-term financing with long-term debt, consistent with Southern Company’s finance policy, and an increase of $178 million in property, plant, and equipment.

     The market price of Southern Company’s common stock at March 31, 2005 was $31.83 per share and the book value was $13.98 per share, representing a market-to-book ratio of 228%, compared to $33.52, $13.86, and 242%, respectively, at the end of 2004. The dividend for the first quarter 2005 was $0.3575 per share compared to $0.35 per share in the first quarter 2004. In April 2005, the dividend was increased to $0.3725 per share for the dividend payable in June 2005.

     The retail operating companies, Southern Power, and SCS have each maintained investment grade ratings from the major rating agencies.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY –“Capital Requirements and Contractual Obligations” of Southern Company in Item 7 of the Form 10-K for a description of Southern Company’s capital requirements for its construction program and other funding requirements associated with scheduled maturities of long-term debt, as well as the related interest, preferred stock dividends, leases, trust funding requirements, and other purchase commitments. Approximately $745 million will be required by March 31, 2006 for redemptions and maturities of long-term debt.

Sources of Capital

Southern Company intends to meet its future capital needs through internal cash flow and external security issuances. The amounts and timing of additional equity capital to be raised will be contingent on Southern Company’s investment opportunities. The retail operating companies and Southern Power plan to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from operating cash flows, security issuances, and term loan and short-term borrowings. However, the a mount, type, and timing of any financings, if needed, will depend upon market conditions and regulatory approval. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Southern Company in Item 7 of the Form 10-K for additional information.

     To meet short term cash needs and contingencies, the Southern Company system had at March 31, 2005 approximately $382 million of cash and cash equivalents and approximately $3.2 billion of unused credit arrangements with banks, of which $1.8 billion expire in 2005 and $1.4 billion expire in 2006 and beyond. Of the facilities maturing in 2005 and 2006, $1.2 billion contain provisions allowing two-year term loans executable at the expiration date and $275 million contain provisions allowing one-year term loans executable at the expiration date. These unused credit arrangements also provide liquidity support to variable rate pollution control bonds and commercial paper programs. Southern Company expects to renew its credit

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facilities, as needed, prior to expiration. The retail operating companies may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of each of the retail operating companies. At March 31, 2005, the Southern Company system had outstanding commercial paper of $714.5 million and extendible commercial notes of $24.6 million. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.

Off-Balance Sheet Financing Arrangements

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Off-Balance Sheet Financing Arrangements” of Southern Company in Item 7 and Note 7 to the financial statements of Southern Company under “Operating Leases” in Item 8 of the Form 10-K for information related to Mississippi Power’s lease of a combined cycle generating facility at Plant Daniel.

Credit Rating Risk

Southern Company does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- or Baa3 or below. These contracts are primarily for physical electricity purchases and sales. At March 31, 2005, the maximum potential collateral requirements at a BBB- or Baa3 rating were approximately $43 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $326 million. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit, or cash. Southern Company is also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade. These agreements are primarily for natural gas price and interest rate risk management activities. At March 31, 2005, Southern Company and its subsidiaries had no exposure under these contracts.

Market Price Risk

Southern Company’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2004 reporting period. In addition, Southern Company is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

     Due to cost-based rate regulations, the retail operating companies have limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. In addition, Southern Power’s exposure to market volatility in commodity fuel prices and prices of electricity is limited because its long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. To mitigate residual risks relative to movements in electricity prices, the retail operating companies and Southern Power enter into fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, into similar contracts for gas purchases. The retail operating companies have implemented fuel hedging programs at the instruction of their respective state PSCs. Southern Company GAS also has in place a risk management program to substantially mitigate its exposure to price volatility for its natural gas purchases.

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     The fair value of derivative energy contracts at March 31, 2005 was as follows:

         
    First Quarter  
    2005  
    Changes  
    Fair Value  
    (in millions)  
Contracts beginning of period
  $ 10.5  
Contracts realized or settled
    10.0  
New contracts at inception
     
Changes in valuation techniques
     
Current period changes (a)
    99.0  
 
Contracts at March 31, 2005
  $ 119.5  
 

(a)   Current period changes also include the changes in fair value of new contracts entered into during the period.

                         
    Source of March 31, 2005  
    Valuation Prices  
    Total     Maturity  
    Fair Value     Year 1     1-3 Years  
    (in millions)  
Actively quoted
  $ 120.6     $ 92.3     $ 28.3  
External sources
    (1.1 )     (1.1 )      
Models and other methods
                 
 
Contracts at March 31, 2005
  $ 119.5     $ 91.2     $ 28.3  
 

     For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Southern Company in Item 7 and Notes 1 and 6 to the financial statements of Southern Company under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.

Financing Activities

In the first three months of 2005, Southern Company and its subsidiaries issued $500 million of senior notes and $55 million of common stock through employee and director stock plans. The proceeds were primarily used to refund senior notes and other long-term debt and to fund ongoing construction projects. The remainder was used to repay short-term indebtedness. See Southern Company’s Condensed Consolidated Statements of Cash Flows herein for further details on financing activities during the first three months of 2005.

     Subsequent to March 31, 2005, Georgia Power issued $125 million of Series Y 5.80% Senior Notes. Additionally, Georgia Power refinanced $85 million of obligations incurred in connection with pollution control bonds. Also, subsequent to March 31, 2005, Georgia Power entered into an interest rate swap related to the Series Y 5.80% Senior Notes issued in April 2005. The interest rate swap had a fixed rate of 4.984%, a final maturity of 2015, and was terminated at a cost of $0.3 million. This cost will be amortized over a 10-year period.

     In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Company and its subsidiaries plan to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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PART I

Item 3. Quantitative And Qualitative Disclosures About Market Risk.

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” herein for each registrant and Notes 1 and 6 to the financial statements of each registrant under “Financial Instruments” in Item 8 of the Form 10-K. Also, see Note (F) to the Condensed Financial Statements herein for information relating to derivative instruments.

Item 4. Controls and Procedures.

     (a) Evaluation of disclosure controls and procedures.

Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power

     As of the end of the period covered by this quarterly report, Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power conducted separate evaluations under the supervision and with the participation of each company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon these evaluations, the Chief Executive Officer and the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures are effective in alerting them in a timely manner to material information relating to their company (including its consolidated subsidiaries, if any) required to be included in periodic filings with the SEC.

Savannah Electric

     As of the end of the period covered by this quarterly report, Savannah Electric conducted an evaluation under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Section 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon these evaluations, which took into consideration the revisions made in February 2005 to Savannah Electric’s process and controls related to unbilled revenues which are described below, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures were effective in alerting them in a timely manner to material information relating to Savannah Electric required to be included in periodic filings with the SEC.

     As disclosed in the Form 10-K, in connection with the review and preparation of the financial statements of Savannah Electric for the year ended December 31, 2004, errors in Savannah Electric’s estimates of unbilled revenues for the years ended December 31, 2003 and 2002 and periods prior to 2002 were identified. The errors also affected Savannah Electric’s previously issued financial statements for the quarters ended March 31, June 30, and September 30, 2004 and 2003. Savannah Electric’s financial statements were restated to reflect adjustments to the financial information previously reported. See Note 9 to the financial statements of Savannah Electric in Item 8 of the Form 10-K.

     In February 2005, management revised its process and controls related to estimating unbilled revenues to utilize a gross change methodology that reverses each period’s estimate in total in the following period.

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     (b) Changes in internal controls.

Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power

     There have been no changes in Southern Company’s, Alabama Power’s, Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the first quarter of 2005 that have materially affected or are reasonably likely to materially affect Southern Company’s, Alabama Power’s, Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s internal control over financial reporting.

Savannah Electric

     As described above under “Disclosure Controls and Procedures,” Savannah Electric made changes to its process and controls related to estimating unbilled revenues in February 2005. Otherwise, there have been no changes in Savannah Electric’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the first quarter of 2005 that have materially affected or are reasonably likely to materially affect Savannah Electric’s internal control over financial reporting.

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ALABAMA POWER COMPANY

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ALABAMA POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Operating Revenues:
               
Retail revenues
  $ 709,086     $ 744,633  
Sales for resale —
               
Non-affiliates
    114,414       111,945  
Affiliates
    107,286       65,788  
Other revenues
    38,950       37,328  
 
           
Total operating revenues
    969,736       959,694  
 
           
Operating Expenses:
               
Fuel
    299,820       271,979  
Purchased power —
               
Non-affiliates
    23,866       28,642  
Affiliates
    48,298       59,932  
Other operations
    146,290       146,386  
Maintenance
    123,554       80,387  
Depreciation and amortization
    108,491       105,353  
Taxes other than income taxes
    62,549       64,447  
 
           
Total operating expenses
    812,868       757,126  
 
           
Operating Income
    156,868       202,568  
Other Income and (Expense):
               
Allowance for equity funds used during construction
    5,654       4,110  
Interest income
    3,568       4,439  
Interest expense, net of amounts capitalized
    (46,307 )     (50,079 )
Interest expense to affiliate trusts
    (4,059 )      
Distributions on mandatorily redeemable preferred securities
          (3,938 )
Other income (expense), net
    (2,805 )     (4,338 )
 
           
Total other income and (expense)
    (43,949 )     (49,806 )
 
           
Earnings Before Income Taxes
    112,919       152,762  
Income taxes
    13,445       57,268  
 
           
Net Income
    99,474       95,494  
Dividends on Preferred Stock
    6,072       4,747  
 
           
Net Income After Dividends on Preferred Stock
  $ 93,402     $ 90,747  
 
           

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Net Income After Dividends on Preferred Stock
  $ 93,402     $ 90,747  
Other comprehensive loss:
               
Changes in fair value of qualifying hedges, net of tax of $(713) and $(6,162), respectively
    (1,172 )     (10,136 )
Reclassification adjustment for amounts included in net income, net of tax of $66 and $854, respectively
    108       1,405  
 
           
COMPREHENSIVE INCOME
  $ 92,338     $ 82,016  
 
           

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Operating Activities:
               
Net income
  $ 99,474     $ 95,494  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    127,300       124,220  
Deferred income taxes and investment tax credits, net
    64       35,416  
Deferred revenues
    (3,555 )     (3,080 )
Allowance for equity funds used during construction
    (5,654 )     (4,110 )
Pension, postretirement, and other employee benefits
    (1,227 )     (12,907 )
Tax benefit of stock options
    5,302       4,091  
Hedge settlements
    (19,942 )     (1,706 )
Natural disaster reserve accounting order
    45,000        
Other, net
    (4,881 )     3,110  
Changes in certain current assets and liabilities —
               
Receivables, net
    31,219       3,258  
Fossil fuel stock
    (26,299 )     9,043  
Materials and supplies
    (9,039 )     (3,448 )
Other current assets
    (11,661 )     (70,705 )
Accounts payable
    (88,387 )     (63,611 )
Accrued taxes
    (27,128 )     49,427  
Accrued compensation
    (45,701 )     (47,924 )
Other current liabilities
    36,423       6,368  
 
           
Net cash provided from operating activities
    101,308       122,936  
 
           
Investing Activities:
               
Gross property additions
    (197,648 )     (204,249 )
Cost of removal net of salvage
    (8,824 )     (9,272 )
Other
    (189 )     14,048  
 
           
Net cash used for investing activities
    (206,661 )     (199,473 )
 
           
Financing Activities:
               
Proceeds —
               
Senior notes
    250,000       200,000  
Preferred stock
          100,000  
Common stock
          20,000  
Redemptions — Other long-term debt
    (3 )     (1,438 )
Payment of preferred stock dividends
    (4,742 )     (4,636 )
Payment of common stock dividends
    (102,475 )     (109,325 )
Other
    (2,344 )     (4,807 )
 
           
Net cash provided from financing activities
    140,436       199,794  
 
           
Net Change in Cash and Cash Equivalents
    35,083       123,257  
Cash and Cash Equivalents at Beginning of Period
    84,461       42,752  
 
           
Cash and Cash Equivalents at End of Period
  $ 119,544     $ 166,009  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $2,078 and $1,648 capitalized for 2005 and 2004, respectively)
  $ 26,375     $ 36,445  
Income taxes (net of refunds)
  $ 23,154     $ 2,140  

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2005     2004  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 119,544     $ 84,461  
Receivables —
               
Customer accounts receivable
    220,704       235,221  
Unbilled revenues
    76,807       96,486  
Under recovered regulatory clause revenues
    101,340       119,773  
Other accounts and notes receivable
    49,918       52,145  
Affiliated companies
    71,553       61,149  
Accumulated provision for uncollectible accounts
    (6,882 )     (5,404 )
Fossil fuel stock, at average cost
    84,087       57,787  
Vacation pay
    36,494       36,494  
Materials and supplies, at average cost
    246,958       237,919  
Prepaid expenses
    75,063       61,897  
Other
    36,348       11,268  
 
           
Total current assets
    1,111,934       1,049,196  
 
           
Property, Plant, and Equipment:
               
In service
    14,780,404       14,636,168  
Less accumulated provision for depreciation
    5,154,335       5,097,930  
 
           
 
    9,626,069       9,538,238  
Nuclear fuel, at amortized cost
    90,208       93,388  
Construction work in progress
    478,806       470,844  
 
           
Total property, plant, and equipment
    10,195,083       10,102,470  
 
           
Other Property and Investments:
               
Equity investments in unconsolidated subsidiaries
    45,457       45,455  
Nuclear decommissioning trusts, at fair value
    443,900       445,634  
Other
    36,553       36,192  
 
           
Total other property and investments
    525,910       527,281  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    330,395       316,528  
Prepaid pension costs
    493,455       489,193  
Unamortized debt issuance expense
    29,650       28,392  
Unamortized loss on reacquired debt
    107,347       109,403  
Other regulatory assets
    8,916       46,603  
Other
    108,982       114,393  
 
           
Total deferred charges and other assets
    1,078,745       1,104,512  
 
           
Total Assets
  $ 12,911,672     $ 12,783,459  
 
           

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

                 
    At March 31,     At December 31,  
Liabilities and Stockholder's Equity   2005     2004  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 395,005     $ 225,005  
Accounts payable —
               
Affiliated
    101,028       141,096  
Other
    137,392       198,834  
Customer deposits
    51,460       49,598  
Accrued taxes —
               
Income taxes
    44,203       28,498  
Other
    48,409       29,688  
Accrued interest
    60,114       40,029  
Accrued vacation pay
    36,494       36,494  
Accrued compensation
    31,157       76,858  
Other
    35,174       26,365  
 
           
Total current liabilities
    940,436       852,465  
 
           
Long-term Debt
    3,935,527       3,855,257  
 
           
Long-term Debt Payable to Affiliated Trusts
    309,279       309,279  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    1,870,314       1,885,120  
Deferred credits related to income taxes
    114,932       148,395  
Accumulated deferred investment tax credits
    202,614       205,353  
Employee benefit obligations
    197,872       194,837  
Deferred capacity revenues
    21,501       25,056  
Asset retirement obligations
    390,051       383,621  
Asset retirement obligation regulatory liability
    155,059       159,230  
Other cost of removal obligations
    603,703       597,147  
Miscellaneous regulatory liabilities
    77,912       55,459  
Other
    21,963       36,989  
 
           
Total deferred credits and other liabilities
    3,655,921       3,691,207  
 
           
Total Liabilities
    8,841,163       8,708,208  
 
           
Preferred Stock
    465,046       465,047  
 
           
Common Stockholder’s Equity:
               
Common stock, par value $40 per share —
               
Authorized - 15,000,000 shares
               
Outstanding - 8,250,000 shares
    330,000       330,000  
Paid-in capital
    1,960,483       1,955,183  
Retained earnings
    1,332,072       1,341,049  
Accumulated other comprehensive loss
    (17,092 )     (16,028 )
 
           
Total common stockholder’s equity
    3,605,463       3,610,204  
 
           
Total Liabilities and Stockholder’s Equity
  $ 12,911,672     $ 12,783,459  
 
           

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FIRST QUARTER 2005 vs. FIRST QUARTER 2004

OVERVIEW

Discussion of the results of operations is focused on Alabama Power’s business of electricity sales to retail customers within its traditional service area located within the State of Alabama and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Alabama Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stringent environmental standards.

     Alabama Power continues to focus on several key performance indicators. These indicators include customer satisfaction, peak season equivalent forced outage rate, and return on equity. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Alabama Power in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Alabama Power’s net income after dividends on preferred stock for the first quarter 2005 was $93.4 million compared to $90.7 million for the corresponding period of 2004. Earnings in the first quarter of 2005 increased by $2.7 million, or 2.9%, primarily due to an increase in industrial revenues reflecting sustained economic strength and a decrease in interest expense. In addition, retail rates increased 1% in January 2005 resulting from an environmental rate order of the Alabama PSC.

     Significant income statement items appropriate for discussion include the following:

                 
    Increase (Decrease)  
    First Quarter  
    (in thousands)     %  
Retail revenues
  $ (35,547 )     (4.8 )
Sales for resale – affiliates
    41,498       63.1  
Fuel expense
    27,841       10.2  
Purchased power expense – non-affiliates
    (4,776 )     (16.7 )
Purchased power expense – affiliates
    (11,634 )     (19.4 )
Maintenance expense
    43,167       53.7  
Income tax expense
    (43,823 )     (76.5 )
Interest expense, net of amounts capitalized
    (3,772 )     (7.5 )

     Retail revenues. The chart below reflects the primary drivers of the 4.8% decrease in retail revenues in the first quarter 2005 compared to the same period in the prior year. Energy cost recovery revenues and revenues associated with the recovery of costs associated with the PPAs certificated by the Alabama PSC (Rate CNP-PPA) generally do not affect net income. Excluding these revenues, retail revenues decreased by $1.2 million, or 0.2%, for the first quarter 2005 when compared to the corresponding period in 2004. Kilowatt-hour energy sales to residential and commercial customers decreased 3.7% and 1.6%, respectively, for the first quarter 2005 when compared to the corresponding period of 2004 primarily due to less favorable weather conditions in 2005. Kilowatt-hour energy sales to industrial customers increased 3.2% for the first quarter 2005 when compared to the corresponding period of 2004 primarily due to improved sales mainly in the pulp and paper, mining, and automotive sectors.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Details of retail revenues are as follows:

                 
 
    First Quarter  
    (in millions)     %  
Retail – prior year
  $ 745          
Change in —
               
Base rates
    3       0.4  
Sales growth
    7       1.0  
Weather
    (12 )     (1.6 )
Energy cost recovery
    (35 )     (4.7 )
Rate CNP-PPA cost recovery
    1       0.1  
 
Retail – current year
  $ 709       (4.8 )%
 

     Sales for resale affiliates and Purchased power expense affiliates. Energy sales to and purchases from affiliated companies within the Southern Company electric system vary from period to period depending on demand and the availability and cost of generating resources at each company. These sales and purchases are made in accordance with the affiliated company interchange agreement, as approved by the FERC. Sales for resale to affiliates increased in the first quarter 2005 when compared to the corresponding period in 2004 primarily due to a 21% increase in kilowatt-hour sales to affiliates from Alabama Power’s more economical available capacity and price increases related to the recovery of increased fuel-related expenses. Purchased power from affiliates decreased in the first quarter 2005 compared to the same period in 2004 due to a 20.1% reduction in energy purchased due to increased self-generation, which was more economical. Excluding the increase in capacity revenues of $1.3 million received under the interchange agreement, these transactions did not have a significant impact on earnings since the related energy is sold at marginal cost, and energy purchases are generally offset by energy revenues through Alabama Power’s energy cost recovery clause.

     Purchased power expense – non-affiliates. Purchased power from non-affiliates will vary depending on the market cost of available energy compared to the cost of Alabama Power and Southern Company system owned generation, demand for energy within the Southern Company service territory, and availability of Southern Company system generation. In the first quarter 2005, purchased power from non-affiliates decreased when compared to the same period in 2004 primarily due to a 13.3% decrease in the amount of energy purchased due to increased self-generation and a 22.1% decrease in the average price of non-affiliate purchased power. These transactions did not have a significant impact on earnings since energy purchases are generally offset by energy revenues through Alabama Power’s energy cost recovery clause.

     Fuel expense. Fuel expense was higher in the first quarter 2005 when compared to the corresponding period in 2004 mainly due to a 13.9% increase in coal prices and a 14.3% increase in generation from coal-fired generating facilities. The increase in generation from coal-fired facilities in the first quarter 2005 when compared to the first quarter 2004 is mainly due to a 42.6% decrease in generation from Alabama Power’s gas-fired generating facilities because of increased gas prices. Since energy expenses are generally offset by energy revenues, these expenses do not have a significant impact on earnings.

     Maintenance expense. The increase in maintenance expense for the first quarter 2005 when compared to the same period in 2004 is attributed to a $10.8 million increase to transmission expense and a $34.2 million increase in distribution expense. This increase is due to the Alabama PSC accounting order to offset the costs of the damage from Hurricane Ivan in September 2004 and to restore a balance in the natural disaster reserve. See Notes 1 and 3 to the financial statements of Alabama Power under “Natural Disaster Reserve” and “Natural Disaster Cost Recovery,” respectively, in Item 8 of the Form 10-K for additional information. Also, see “Income tax expense” below for additional offsetting impacts of the Alabama PSC’s order.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Income tax expense. In accordance with the Alabama PSC accounting order described above, Alabama Power returned $27.7 million of regulatory liabilities related to deferred income taxes to its retail customers. The remainder of the decrease in income tax expense in the first quarter 2005 primarily reflects the $17.3 million tax effect of the additional maintenance expenses recorded under the accounting order. For additional information, see “Maintenance expense” above and Note 3 to the financial statements of Alabama Power under “Natural Disaster Cost Recovery” in Item 8 of the Form 10-K. The impact of this accounting order is expected to reduce Alabama Power’s annual effective income tax rate to approximately 34% for 2005. See Note 5 to the financial statements of Alabama Power in Item 8 of the Form 10-K and Note (N) to the Condensed Financial Statements herein for additional information.

     Interest expense, net of amounts capitalized. The decrease in interest expense, net of amounts capitalized during the first quarter 2005 when compared to the same period in 2004 is the result of refinancing higher cost debt. For additional information, see FINANCIAL CONDITION AND LIQUIDITY – “Financing Activities” herein and in Item 7 of Alabama Power of the Form 10-K.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Alabama Power’s future earnings potential. The level of Alabama Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Alabama Power’s business of selling electricity. These factors include Alabama Power’s ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stringent environmental standards. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Alabama Power’s service area. For additional information relating to these issues, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Alabama Power in Item 7 of the Form 10-K.

Environmental Matters

Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be recovered. For additional information, including information on certain environmental litigation, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Environmental Matters” in Item 8 of the Form 10-K.

     The EPA issued the final Clean Air Interstate Rule on March 10, 2005. The rule addresses sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions that contribute to nonattainment of the eight-hour ozone and fine particulate matter National Ambient Air Quality Standards. Twenty-eight eastern states, including the State of Alabama, are subject to the fine particulate and/or the eight-hour ozone requirements set forth within the rule. The rule may require additional reductions of NOx and/or SO2 to be achieved by the installation of additional controls at Alabama Power’s facilities or through the purchase of allowances. The impact of this final rule on Alabama Power will, however, depend on the development and implementation of applicable state regulations and therefore cannot be determined at this time.

     On March 15, 2005, the EPA announced the final Clean Air Mercury Rule, selecting a cap-and-trade approach to be implemented in two phases, 2010 and 2018. The rule sets a permanent cap on emissions at the 2018 level and provides for an emissions allowance trading market. The impact of this final rule on Alabama Power will depend on resolution of legal challenges and the development and implementation of applicable state regulations and therefore cannot be determined at this time.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     On April 15, 2005, the EPA announced plans to extend the deadline for issuance of final rules addressing Best Available Retrofit Technology standards under its Regional Haze program until June 15, 2005.

FERC and Alabama PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC and Alabama PSC Matters – Market-Based Rate Authority” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Alabama Power has authorization from the FERC to sell power to non-affiliates at market-based prices. Alabama Power, through SCS as agent, also has FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. As directed by this order, on February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. Any new market-based rate transactions in Southern Company’s retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. In the event that the FERC’s default mitigation measures are ultimately applied Alabama Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The impact of such sales through March 31, 2005 is not material to Alabama Power’s net income. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

Generation Interconnection Agreements

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC and Alabama PSC Matters – Generation Interconnection Agreements” of Alabama Power in Item 7 of the Form 10-K for information on the FERC’s Order 2003 related to standardization of generation interconnection agreements and procedures. The FERC has indicated that Order 2003, which was effective January 20, 2004, is to be applied prospectively to interconnection agreements. Subsidiaries of Tenaska, Inc., as counterparties to two previously executed interconnection agreements with Alabama Power, have filed complaints at the FERC requesting that the FERC modify the agreements and that Alabama Power refund a total of $11 million previously paid for interconnection facilities, with interest. Alabama Power has also received similar requests from other entities totaling $7 million. Alabama Power has opposed such relief, and the proceedings are still pending. The impact of Order 2003 and its subsequent rehearings on Alabama Power and the final results of these matters cannot be determined at this time.

Environmental Rate Filing

On October 5, 2004, the Alabama PSC approved a specific rate mechanism for the recovery of Alabama Power’s retail costs associated with environmental laws, regulations, or other such mandates. The rate mechanism began operation in January 2005 and provides for the recovery of these costs pursuant to a factor that will be calculated annually. Environmental costs to be recovered include operation and maintenance expenses, depreciation, and a return on invested capital. Retail rates have increased 1 percent in 2005, which should yield an annual recovery of approximately $33 million, and are expected to increase an additional 1 percent in 2006. In conjunction with the Alabama PSC’s approval, Alabama Power agreed to a moratorium until March 2007 on any retail rate increase under the previously approved Rate Stabilization and Equalization plan (RSE). Any increase in March 2007 would be based upon the earned return on retail common equity at December 31, 2006. See Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters” in Item 8 of the Form 10-K for further information on the RSE plan.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Retail Fuel Cost Recovery

Alabama Power has established fuel cost recovery rates approved by the Alabama PSC. Alabama Power’s under recovered fuel costs as of March 31, 2005 totaled $96.4 million as compared to $101.6 million at December 31, 2004. Alabama Power increased its fuel billing factor in April 2005. Alabama Power will continue to monitor the under recovered fuel cost balance to determine if an additional adjustment to billing rates should be requested from the Alabama PSC. See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS – “Revenues” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters” in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements herein for additional information.

Other Matters

Alabama Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Alabama Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation against Alabama Power cannot be predicted at this time; however, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Alabama Power’s financial statements.

     See the Notes to the Condensed Financial Statements herein for discussion of various contingencies and other matters which may affect future earnings potential.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Alabama Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Alabama Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Alabama Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Alabama Power in Item 7 of the Form 10-K for a complete discussion of Alabama Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.

New Accounting Standards

FASB Statement No. 123R, Share-Based Payments, was issued in December 2004. This statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. In April

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2005, the SEC amended the compliance dates for FASB Statement No. 123R. For Alabama Power, this statement is now effective beginning January 1, 2006. Although the compensation expense calculation required under the revised statement differs slightly, the impacts on the financial statements are expected to be similar to the pro forma disclosures included in Note 1 to the financial statements of Alabama Power under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein.

     FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations, was issued in March 2005. This interpretation requires that asset retirement obligations be recorded when a legal obligation exists even though the timing and/or the method of settlement are conditional on a future event. For Alabama Power, FIN 47 is effective no later than December 31, 2005. Alabama Power is currently assessing the impact of FIN 47 on its balance sheet; however, adoption is not currently expected to have a material impact on Alabama Power’s income statement.

     In December 2004, the FASB issued Staff Position No. 109-1 (FSP 109-1), Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities provided by the American Jobs Creation Act of 2004, which requires that the generation deduction for utilities be accounted for as a special tax deduction rather than as a tax rate reduction. Alabama Power adopted FSP 109-1 in the first quarter of 2005 with no material impact on its financial statements.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Alabama Power’s financial condition continued to be strong at March 31, 2005. Net cash flows from operating activities totaled $101.3 million for the first quarter 2005, compared to $122.9 million for the first quarter 2004. The $21.6 million decrease in 2005 resulted primarily from an increase in cost and inventory of fuel. Those costs are recoverable in future periods and are reflected on the balance sheets as under recovered regulatory clause revenues. Gross property additions to utility plant were $197.6 million in the first quarter 2005 and are included in the balance sheets herein. The majority of funds needed for gross property additions since 2000 has been provided from operating activities.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS - FINANCIAL CONDITION AND LIQUIDITY “Capital Requirements and Contractual Obligations” of Alabama Power in Item 7 of the Form 10-K for a description of Alabama Power’s capital requirements for its construction program, lease obligations, purchase commitments, and trust funding requirements. Approximately $395 million will be required by March 31, 2006 for redemptions and maturities of long-term debt.

Sources of Capital

In addition to the financing activities described below, Alabama Power plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type, and timing of any financings — if needed — will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Alabama Power in Item 7 of the Form 10-K for additional information.

     To meet short-term cash needs and contingencies, at March 31, 2005 Alabama Power had $120 million of cash and cash equivalents, unused committed lines of credit of approximately $868 million (including $504

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

million of such lines which are dedicated to funding purchase obligations relating to variable rate pollution control bonds), of which $643 million will expire at various times during 2005, and an extendible commercial note program. Alabama Power expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Alabama Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. Alabama Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Alabama Power and other Southern Company subsidiaries. Alabama Power has regulatory authority for up to $1 billion of short-term borrowings. At March 31, 2005, Alabama Power had no commercial paper or extendible notes payable outstanding. Management believes that the need for working capital can be adequately met by issuing commercial paper or utilizing lines of credit without maintaining large cash balances.

Credit Rating Risk

Alabama Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are contracts that could require collateral – but not accelerated payment – in the event of a credit rating change to below investment grade. These contracts are primarily for physical electricity purchases and sales, fixed-price physical gas purchases, and agreements covering interest rate swaps. At March 31, 2005, Alabama Power had no exposure under these types of contracts.

Market Price Risk

Alabama Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2004 reporting period. In addition, Alabama Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

     Due to cost-based rate regulations, Alabama Power has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Alabama Power enters into fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas purchases. Alabama Power has also implemented a retail fuel hedging program at the instruction of the Alabama PSC. The fair value of derivative energy contracts at March 31, 2005 was as follows:

         
    First Quarter  
    2005  
    Changes  
    Fair Value  
    (in thousands)  
Contracts beginning of period
  $ 4,017  
Contracts realized or settled
    3,820  
New contracts at inception
     
Changes in valuation techniques
     
Current period changes (a)
    30,325  
 
Contracts at March 31, 2005
  $ 38,162  
 

(a)   Current period changes also include the changes in fair value of new contracts entered into during the period.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                         
    Source of March 31, 2005  
    Valuation Prices  
    Total     Maturity  
    Fair Value     Year 1     1-3 Years  
    (in thousands)  
Actively quoted
  $ 38,164     $ 29,944     $ 8,220  
External sources
    (2 )     (2 )      
Models and other methods
                 
 
Contracts at March 31, 2005
  $ 38,162     $ 29,942     $ 8,220  
 

     For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY “Market Price Risk” of Alabama Power in Item 7 and Notes 1 and 6 to the financial statements of Alabama Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.

Financing Activities

In March 2005, Alabama Power issued $250 million of Series DD 5.65% Senior Notes due March 15, 2035. The proceeds from the sale were used to repay a portion of Alabama Power’s outstanding short-term indebtedness and for other general corporate purposes, including Alabama Power’s continuing construction activities. Alabama Power settled an interest rate swap related to the transaction at a cost of $21 million, which was recorded in other comprehensive income. This cost will be amortized over a 30-year period.

     In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Alabama Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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GEORGIA POWER COMPANY

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GEORGIA POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Operating Revenues:
               
Retail revenues
  $ 1,185,236     $ 1,037,795  
Sales for resale —
               
Non-affiliates
    112,852       65,456  
Affiliates
    25,631       54,142  
Other revenues
    46,711       41,996  
 
           
Total operating revenues
    1,370,430       1,199,389  
 
           
Operating Expenses:
               
Fuel
    309,266       285,214  
Purchased power —
               
Non-affiliates
    52,974       62,689  
Affiliates
    220,004       135,142  
Other operations
    202,079       198,393  
Maintenance
    116,650       108,468  
Depreciation and amortization
    123,100       67,737  
Taxes other than income taxes
    60,759       56,432  
 
           
Total operating expenses
    1,084,832       914,075  
 
           
Operating Income
    285,598       285,314  
Other Income and (Expense):
               
Allowance for equity funds used during construction
    9,257       3,347  
Interest income
    471       2,352  
Interest expense, net of amounts capitalized
    (50,420 )     (45,650 )
Interest expense to affiliate trusts
    (14,878 )      
Distributions on mandatorily redeemable preferred securities
          (15,839 )
Other income (expense), net
    (2,842 )     (4,395 )
 
           
Total other income and (expense)
    (58,412 )     (60,185 )
 
           
Earnings Before Income Taxes
    227,186       225,129  
Income taxes
    84,654       81,120  
 
           
Net Income
    142,532       144,009  
Dividends on Preferred Stock
    168       168  
 
           
Net Income After Dividends on Preferred Stock
  $ 142,364     $ 143,841  
 
           

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Net Income After Dividends on Preferred Stock
  $ 142,364     $ 143,841  
Other comprehensive income (loss):
               
Change in fair value of marketable securities, net of tax of $75
    118        
Changes in fair value of qualifying hedges, net of tax of $1,370 and $(880), respectively
    2,172       (1,395 )
Reclassification adjustment for amounts included in net income, net of tax of $176 and $679, respectively
    280       1,077  
 
           
COMPREHENSIVE INCOME
  $ 144,934     $ 143,523  
 
           

The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

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GEORGIA POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Operating Activities:
               
Net income
  $ 142,532     $ 144,009  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    142,765       99,095  
Deferred income taxes and investment tax credits
    59,414       49,190  
Deferred expenses – affiliates
    19,974       12,860  
Allowance for equity funds used during construction
    (9,257 )     (3,347 )
Pension, postretirement, and other employee benefits
    3,755       5,614  
Tax benefit of stock options
    4,907       4,523  
Other, net
    (16,384 )     (24,802 )
Changes in certain current assets and liabilities —
               
Receivables, net
    (82,623 )     42,798  
Fossil fuel stock
    (5,334 )     (3,808 )
Materials and supplies
    1,430       773  
Other current assets
    6,828       24,430  
Accounts payable
    (106,494 )     (7,380 )
Accrued taxes
    (65,104 )     (131,794 )
Accrued compensation
    (86,041 )     (93,468 )
Other current liabilities
    3,880       (261 )
 
           
Net cash provided from operating activities
    14,248       118,432  
 
           
Investing Activities:
               
Gross property additions
    (202,405 )     (158,743 )
Cost of removal net of salvage
    (4,696 )     2,059  
Change in construction payables, net of joint owner portion
    (34,441 )     (20,809 )
Other
    11,622       5,210  
 
           
Net cash used for investing activities
    (229,920 )     (172,283 )
 
           
Financing Activities:
               
Increase in notes payable, net
    339,693       55,044  
Proceeds —
               
Senior notes
    250,000       350,000  
Mandatorily redeemable preferred securities
          200,000  
Redemptions —
               
Senior notes
    (250,000 )     (200,000 )
Mandatorily redeemable preferred securities
          (200,000 )
Payment of preferred stock dividends
    (48 )     (16 )
Payment of common stock dividends
    (139,025 )     (141,375 )
Other
    (9,725 )     (11,551 )
 
           
Net cash provided from financing activities
    190,895       52,102  
 
           
Net Change in Cash and Cash Equivalents
    (24,777 )     (1,749 )
Cash and Cash Equivalents at Beginning of Period
    33,497       8,699  
 
           
Cash and Cash Equivalents at End of Period
  $ 8,720     $ 6,950  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $3,709 and $1,180 capitalized for 2005 and 2004, respectively)
  $ 58,350     $ 62,923  
Income taxes (net of refunds)
  $ (492 )   $ 16,494  

The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

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GEORGIA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2005     2004  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 8,720     $ 33,497  
Receivables —
               
Customer accounts receivable
    306,838       317,937  
Unbilled revenues
    124,239       140,027  
Under recovered regulatory clause revenues
    455,408       345,542  
Other accounts and notes receivable
    77,818       94,377  
Affiliated companies
    26,229       17,042  
Accumulated provision for uncollectible accounts
    (6,500 )     (7,100 )
Fossil fuel stock, at average cost
    189,601       184,267  
Vacation pay
    56,942       57,372  
Materials and supplies, at average cost
    268,992       270,422  
Prepaid expenses
    18,544       32,696  
Other
    39,152       25,260  
 
           
Total current assets
    1,565,983       1,511,339  
 
           
Property, Plant, and Equipment:
               
In service
    18,803,605       18,681,533  
Less accumulated provision for depreciation
    7,306,929       7,217,607  
 
           
 
    11,496,676       11,463,926  
Nuclear fuel, at amortized cost
    124,767       124,745  
Construction work in progress
    808,933       766,140  
 
           
Total property, plant, and equipment
    12,430,376       12,354,811  
 
           
Other Property and Investments:
               
Equity investments in unconsolidated subsidiaries
    66,159       66,192  
Nuclear decommissioning trusts, at fair value
    455,668       459,194  
Other
    64,418       64,571  
 
           
Total other property and investments
    586,245       589,957  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    506,358       505,664  
Prepaid pension costs
    452,545       450,270  
Unamortized debt issuance expense
    86,379       77,925  
Unamortized loss on reacquired debt
    174,101       176,825  
Other regulatory assets
    97,273       72,639  
Other
    70,048       82,908  
 
           
Total deferred charges and other assets
    1,386,704       1,366,231  
 
           
Total Assets
  $ 15,969,308     $ 15,822,338  
 
           

The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

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GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

                 
    At March 31,     At December 31,  
Liabilities and Stockholder's Equity   2005     2004  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 352,550     $ 452,498  
Notes payable
    547,926       208,233  
Accounts payable —
               
Affiliated
    121,045       194,253  
Other
    236,617       310,763  
Customer deposits
    120,393       115,661  
Accrued taxes —
               
Income taxes
    119,245       78,269  
Other
    61,484       129,520  
Accrued interest
    77,485       74,529  
Accrued vacation pay
    44,179       44,894  
Accrued compensation
    41,299       127,340  
Other
    77,124       75,699  
 
           
Total current liabilities
    1,799,347       1,811,659  
 
           
Long-term Debt
    3,809,180       3,709,852  
 
           
Long-term Debt Payable to Affiliated Trusts
    969,073       969,073  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    2,582,917       2,556,040  
Deferred credits related to income taxes
    167,781       170,973  
Accumulated deferred investment tax credits
    296,945       300,018  
Employee benefit obligations
    336,935       331,002  
Asset retirement obligations
    512,537       504,515  
Other cost of removal obligations
    414,122       411,692  
Miscellaneous regulatory liabilities
    110,622       92,611  
Other
    53,862       59,733  
 
           
Total deferred credits and other liabilities
    4,475,721       4,426,584  
 
           
Total Liabilities
    11,053,321       10,917,168  
 
           
Preferred Stock
    14,609       14,609  
 
           
Common Stockholder’s Equity:
               
Common stock, without par value—
               
Authorized — 15,000,000 shares
               
Outstanding — 7,761,500 shares
    344,250       344,250  
Paid-in capital
    2,483,175       2,478,268  
Retained earnings
    2,106,138       2,102,798  
Accumulated other comprehensive loss
    (32,185 )     (34,755 )
 
           
Total common stockholder’s equity
    4,901,378       4,890,561  
 
           
Total Liabilities and Stockholder’s Equity
  $ 15,969,308     $ 15,822,338  
 
           

The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

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GEORGIA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FIRST QUARTER 2005 vs. FIRST QUARTER 2004

OVERVIEW

Georgia Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the State of Georgia and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Georgia Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stringent environmental standards.

     Georgia Power continues to focus on several key performance indicators. These indicators include customer satisfaction, peak season equivalent forced outage rate, and return on equity. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Georgia Power in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Georgia Power’s net income after dividends on preferred stock for the first quarter 2005 was $142.4 million compared to $143.8 million for the corresponding period in 2004. The slight decrease was due to higher non-fuel operating expenses, partially offset by higher retail base revenues resulting from the retail rate increase effective January 1, 2005. For additional information on the rate increase, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC and Georgia PSC Matters – Retail Rate Case” of Georgia Power in Item 7 of the Form 10-K.

     Significant income statement items appropriate for discussion include the following:

                 
    Increase (Decrease)  
    First Quarter  
    (in thousands)     %  
Retail revenues
  $ 147,441       14.2  
Sales for resale – non-affiliates
    47,396       72.4  
Sales for resale – affiliates
    (28,511 )     (52.7 )
Fuel expense
    24,052       8.4  
Purchased power expense – non-affiliates
    (9,715 )     (15.5 )
Purchased power expense – affiliates
    84,862       62.8  
Maintenance expense
    8,182       7.5  
Depreciation and amortization expense
    55,363       81.7  
Allowance for equity funds used during construction
    5,910       176.6  

     Retail revenues. The chart below reflects the primary drivers of the 14.2% increase in retail revenues in the first quarter 2005 compared to the same period in the prior year. Excluding fuel cost recovery revenues, which generally do not affect net income, retail sales revenue increased by $59.8 million, or 8.5%, in the first quarter 2005 compared to the corresponding period in 2004, primarily due to the retail rate increase effective January 1, 2005. During the first quarter 2005, kilowatt-hour energy sales to residential, commercial, and industrial customers were down by 2.3%, up by 2.8%, and down by 2.5%, respectively, when compared to the same period in 2004. Despite customer growth of 1.9% in the residential sector, the decrease in kilowatt-hour

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energy sales in the first quarter 2005 was due to milder winter weather in 2005. The increase in commercial kilowatt-hour energy sales in the first quarter 2005 can be attributed to sustained economic strength and customer growth of 2.4% when compared to the same period in 2004. Industrial kilowatt-hour energy sales were down primarily due to a 2.7% decrease in customers resulting primarily from a reclassification of customers from industrial to commercial when compared to the same period in 2004.

     Details of retail revenues are as follows:

                 
    Increase (Decrease)  
 
    First Quarter  
 
    (in millions)     %  
Retail – prior year
  $ 1,038          
Change in —
               
Base Rates
    44       4.3  
Sales Growth
    22       2.1  
Weather
    (7 )     (0.7 )
Fuel Cost Recovery
    88       8.5  
 
Retail – current year
  $ 1,185       14.2 %
 

     Sales for resale – non-affiliates. During the first quarter 2005, sales for resale to non-affiliates increased due to higher demand for energy by these customers as a result of new contracts effective in January 2005 when compared to the corresponding period in 2004.

     Sales for resale – affiliates and Purchased power expense – affiliates. Energy sales to and purchases from affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. These sales and purchases are made in accordance with the affiliated company interchange agreement, as approved by the FERC. These transactions did not have a significant impact on earnings since this energy is generally sold at marginal cost and energy purchases are generally offset by energy revenues through Georgia Power’s fuel cost recovery clause. Sales to affiliated companies decreased due to an increase in Georgia Power’s fuel costs relative to other Southern Company system generating plants. Therefore, Georgia Power’s generating plants were not called upon as often in the first quarter 2005 to supply energy to affiliates. Purchased power from affiliates increased during the first quarter 2005 when compared to the first quarter 2004 due to a 46.4% increase in the average cost of fuel per kilowatt-hour and $17.6 million of additional capacity expenses under PPAs with Southern Power that went into effect in June 2004.

     Fuel expense. Fuel expense increased in the first quarter 2005 as a result of an increase in the average cost of fuel per net kilowatt-hour generated of 12.7% when compared to the same period in the prior year. These expenses do not have a significant impact on earnings since fuel expenses are generally offset by fuel revenues through Georgia Power’s fuel cost recovery clause. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC and Georgia PSC Matters – Retail Fuel Cost Recovery” herein for additional information.

     Purchased power – non-affiliates. The decrease in purchased power from non-affiliates in the first quarter 2005 when compared to the first quarter 2004 resulted from lower demand which caused self-generation to be more economical. These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Georgia Power’s fuel cost recovery clause.

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     Maintenance expense. In the first quarter 2005, maintenance expense increased primarily due to an increase of $6.1 million in scheduled fossil power production maintenance expense at Plants Yates and Branch and an increase of $1.5 million in scheduled distribution line maintenance when compared to the same period in 2004.

     Depreciation and amortization expense. Depreciation and amortization expense in the first quarter 2005 compared to the same period in the prior year increased primarily due to the expiration in 2004 of certain provisions in Georgia Power’s three-year retail rate plan ending December 31, 2001 (2001 Retail Rate Plan). In accordance with the 2001 Retail Rate Plan, Georgia Power amortized an accelerated cost recovery liability equally as a credit to amortization expense and recognized new Georgia PSC-certified purchased power costs in rates evenly over the three years ended December 31, 2004. This treatment resulted in a credit to amortization expense of $47 million during the first quarter 2004. See Note 3 to the financial statements of Georgia Power under “Retail Rate Orders” in Item 8 of the Form 10-K for additional information.

     Allowance for equity funds used during construction. The first quarter 2005 increase in AFUDC compared to the same period in the prior year relates primarily to construction of the McIntosh combined cycle units 10 and 11. See Note 3 to the financial statements of Georgia Power under “Plant McIntosh Construction Project” in Item 8 of the Form 10-K for further information.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Georgia Power’s future earnings potential. The level of Georgia Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Georgia Power’s business of selling electricity. These factors include Georgia Power’s ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stringent environmental standards. Future earnings in the near term will depend, in part, upon growth in energy sales which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Georgia Power’s service area. For additional information relating to these issues, see BUSINESS – The SOUTHERN System – “Risk Factors” in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Georgia Power in Item 7 of the Form 10-K.

Environmental Matters

Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be recovered. For additional information, including information on certain environmental litigation, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “New Source Review Actions” in Item 8 of the Form 10-K.

Plant Wansley Environmental Litigation

On March 11, 2005, the U.S. Court of Appeals for the Eleventh Circuit accepted Georgia Power’s petition for review of the U.S. District Court for the Northern District of Georgia’s December 15, 2004 order related to the Plant Wansley environmental litigation. Oral argument on that appeal has not been scheduled. See Note 3 to the financial statements of Georgia Power under “Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K for additional information. The ultimate outcome of this matter cannot now be determined.

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Other Environmental Matters

The EPA issued the final Clean Air Interstate Rule on March 10, 2005. The rule addresses sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions that contribute to nonattainment of the eight-hour ozone and fine particulate matter National Ambient Air Quality Standards. Twenty-eight eastern states, including the State of Georgia, are subject to the fine particulate and/or the eight-hour ozone requirements set forth within the rule. The rule may require additional reductions of NOx and/or SO2 to be achieved by the installation of additional controls at Georgia Power’s facilities or through the purchase of allowances. The impact of this final rule on Georgia Power will, however, depend on the development and implementation of applicable state regulations and therefore cannot be determined at this time.

     On March 15, 2005, the EPA announced the final Clean Air Mercury Rule, selecting a cap-and-trade approach to be implemented in two phases, 2010 and 2018. The rule sets a permanent cap on emissions at the 2018 level and provides for an emissions allowance trading market. The impact of this final rule on Georgia Power will depend on resolution of legal challenges and the development and implementation of applicable state regulations and therefore cannot be determined at this time.

     On April 15, 2005, the EPA announced plans to extend the deadline for issuance of final rules addressing Best Available Retrofit Technology standards under its Regional Haze program until June 15, 2005.

     The EPA published a proposed rule on April 20, 2005 to approve redesignation of the Atlanta metro area to “attainment” under the one-hour ozone standard.

FERC and Georgia PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC and Georgia PSC Matters – Market-Based Rate Authority,” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Georgia Power has authorization from the FERC to sell power to non-affiliates at market-based prices. Georgia Power, through SCS as agent, also has FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. As directed by this order, on February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. Any new market-based rate transactions in Southern Company’s retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. In the event that the FERC’s default mitigation measures are ultimately applied, Georgia Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The impact of such sales through March 31, 2005 is not material to Georgia Power’s net income. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

Generation Interconnection Agreements

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC and Georgia PSC Matters – Generation Interconnection Agreements” of Georgia Power in Item 7 of the Form 10-K for information on the FERC’s Order 2003 related to standardization of generation interconnection agreements and procedures. The FERC has indicated that Order 2003, which was effective January 20, 2004, is to be

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applied prospectively to interconnection agreements. Subsidiaries of Tenaska, Inc., as counterparties to previously executed interconnection agreements with Georgia Power and another Southern Company subsidiary, have filed complaints at the FERC requesting that the FERC modify the agreements and that Georgia Power refund a total of $7.9 million previously paid for interconnection facilities, with interest. Georgia Power has opposed such relief, and the proceedings are still pending. The impact of Order 2003 and its subsequent rehearings on Georgia Power and the final results of these matters cannot be determined at this time.

Retail Fuel Cost Recovery

On February 18, 2005, Georgia Power filed a request with the Georgia PSC for a fuel cost recovery rate increase. The requested increase, representing an average annual increase in revenues of approximately 11.8%, will allow for the recovery of fuel costs based on an estimate of future fuel costs, as well as the collection of the existing under recovery of fuel costs. The Georgia PSC may require that this existing under recovery be collected over a period greater than twelve months. Georgia Power’s under recovered fuel costs as of March 31, 2005 totaled $455.4 million. Hearings before the Georgia PSC were held in April 2005. A final decision from the Georgia PSC is expected in May 2005 with the new fuel rate effective June 1. The final outcome of the filing cannot be determined at this time. For additional information on Georgia Power’s current fuel cost recovery rate, see Note 3 to the financial statements of Georgia Power under “Fuel Cost Recovery” in Item 8 of the Form 10-K and Note (I) to the Condensed Financial Statements herein.

Other Matters

Georgia Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Georgia Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation against Georgia Power cannot be predicted at this time; however, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Georgia Power’s financial statements.

     See the Notes to the Condensed Financial Statements herein for discussion of various contingencies and other matters which may affect future earnings potential.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Georgia Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Georgia Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Georgia Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. Also see MANAGEMENT’S DISCUSSION AND ANALYSIS — ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Georgia Power in Item 7 of the Form 10-K for a complete discussion of Georgia Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

New Accounting Standards

FASB Statement No. 123R, Share-Based Payments, was issued in December 2004. This statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. In April 2005, the SEC amended the compliance dates for FASB Statement No. 123R. For Georgia Power, this statement is now effective beginning January 1, 2006. Although the compensation expense calculation required under the revised statement differs slightly, the impacts on Georgia Power’s financial statements are expected to be similar to the pro forma disclosures included in Note 1 to the financial statements of Georgia Power under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein.

     FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations, was issued in March 2005. This interpretation requires that asset retirement obligations be recorded when a legal obligation exists even though the timing and/or the method of settlement are conditional on a future event. For Georgia Power, FIN 47 is effective no later than December 31, 2005. Georgia Power is currently assessing the impact of FIN 47 on its balance sheet; however, adoption is not currently expected to have a material impact on Georgia Power’s income statement.

     In December 2004, the FASB issued Staff Position No. 109-1 (FSP 109-1), Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities provided by the American Jobs Creation Act of 2004, which requires that the generation deduction for utilities be accounted for as a special tax deduction rather than as a tax rate reduction. Georgia Power adopted FSP 109-1 in the first quarter of 2005 with no material impact on its financial statements.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Over the last several years, Georgia Power’s financial condition has remained stable. Net cash flow from operating activities totaled $14.2 million for the first quarter 2005, compared to $118.4 million for the first quarter 2004. The decrease of $104.2 million in 2005 is primarily the result of higher fuel costs, which are recoverable in future periods and are reflected in the balance sheets as under recovered regulatory clause revenues. During the first quarter 2005, gross property additions were $202.4 million. These additions were primarily related to the construction of Plant McIntosh Units 10 and 11, transmission and distribution facilities, and purchases of nuclear fuel and equipment to comply with environmental standards. The majority of funds for these additions and other capital requirements were derived primarily from operating activities and financing activities. See Georgia Power’s Condensed Statements of Cash Flows herein for further details.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY “Capital Requirements and Contractual Obligations” of Georgia Power in Item 7 of the Form 10-K for a description of Georgia Power’s capital requirements for its construction program, lease obligations, purchase commitments, and trust funding requirements. Approximately $353 million will be required by March 31, 2006 for redemptions and maturities of long-term debt.

Sources of Capital

Georgia Power plans to obtain the funds required for construction and other purposes from sources similar to those used in the past, including funds from operations and new security issuances. The amount, type, and

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timing of additional security issuances, if needed, will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Georgia Power in Item 7 of the Form 10-K for additional information.

     At March 31, 2005, Georgia Power’s current liabilities exceeded current assets because of the continued use of short-term debt as a funding source to meet cash needs, which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Georgia Power had at March 31, 2005 approximately $9 million of cash and cash equivalents and $773 million of unused credit arrangements with banks. Of these facilities, $423 million expire in 2005 and contain provisions allowing two-year term loans executable at expiration; and the remaining $350 million expire in 2007. Georgia Power expects to renew its credit facilities, as needed, prior to expiration. These unused credit arrangements provide liquidity support to Georgia Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Georgia Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Georgia Power and other Southern Company subsidiaries. At March 31, 2005, Georgia Power had $531.4 million of commercial paper and $16.6 million of extendible commercial notes outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.

Credit Rating Risk

Georgia Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- or Baa3 or below. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit, or cash. These contracts are primarily for physical electricity purchases and sales. At March 31, 2005, the maximum potential collateral requirements at a BBB- or Baa3 rating were approximately $8 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $247 million. Georgia Power is also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade. These agreements are primarily for natural gas price and interest rate risk management activities. At March 31, 2005, Georgia Power had no material exposure related to these agreements.

Market Price Risk

Georgia Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2004 reporting period. In addition, Georgia Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

     Due to cost-based rate regulations, Georgia Power has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Georgia Power enters into fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas purchases. Georgia Power has also implemented a fuel hedging program at the instruction of the Georgia PSC.

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     The fair value of derivative energy contracts at March 31, 2005 was as follows:

         
    First Quarter 2005  
    Changes  
 
    Fair Value  
 
    (in thousands)  
Contracts beginning of period
  $ 5,777  
Contracts realized or settled
    1,249  
New contracts at inception
     
Changes in valuation techniques
     
Current period changes(a)
    30,106  
 
Contracts at March 31, 2005
  $ 37,132  
 

(a)   Current period changes also include the changes in fair value of new contracts entered into during the period.

                         
    Source of March 31, 2005  
    Valuation Prices  
 
    Total     Maturity  
    Fair Value     Year 1     1-3 Years  
 
    (in thousands)  
Actively quoted
  $ 36,932     $ 29,034     $ 7,898  
External sources
    200       200        
Models and other methods
                 
 
Contracts at March 31, 2005
  $ 37,132     $ 29,234     $ 7,898  
 

     For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Market Price Risk” of Georgia Power in Item 7 and Notes 1 and 6 to the financial statements of Georgia Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.

Financing Activities

In January 2005, Georgia Power issued $250 million of Series X 5.70% Senior Notes due January 15, 2045. Proceeds from the sale were used to repay at maturity $250 million principal amount of Series L Floating Rate Senior Notes in February 2005.

     In April 2005, Georgia Power incurred obligations in connection with the issuance of $85 million 4.75% pollution control revenue bonds. Proceeds from the sale will be used to repay obligations in connection with $85 million of 5.40% pollution control revenue bonds in May 2005. Also in April, Georgia Power issued $125 million of Series Y 5.80% Senior Notes due April 15, 2035. Proceeds were used to repay a portion of Georgia Power’s short-term indebtedness and for other corporate purposes.

     In April 2005, Georgia Power entered into an interest rate swap designed to mitigate its exposure to adverse interest rate movements with respect to the anticipated Series Y Senior Note issuance. In connection with the issuance of such senior notes, Georgia Power terminated the swap at a fair value loss of $0.3 million, which will be amortized over a 10-year period.

     In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Georgia Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Operating Revenues:
               
Retail revenues
  $ 162,282     $ 165,084  
Sales for resale —
               
Non-affiliates
    19,712       19,488  
Affiliates
    32,600       20,695  
Other revenues
    10,003       9,652  
 
           
Total operating revenues
    224,597       214,919  
 
           
Operating Expenses:
               
Fuel
    92,630       78,416  
Purchased power —
               
Non-affiliates
    5,108       6,433  
Affiliates
    6,012       7,428  
Other operations
    33,769       33,018  
Maintenance
    17,599       16,206  
Depreciation and amortization
    20,749       20,552  
Taxes other than income taxes
    17,501       17,063  
 
           
Total operating expenses
    193,368       179,116  
 
           
Operating Income
    31,229       35,803  
Other Income and (Expense):
               
Allowance for equity funds used during construction
    719       527  
Interest income
    255       135  
Interest expense, net of amounts capitalized
    (8,260 )     (7,894 )
Interest expense to affiliate trusts
    (1,148 )      
Distributions on mandatorily redeemable preferred securities
          (1,113 )
Other income (expense), net
    (527 )     (644 )
 
           
Total other income and (expense)
    (8,961 )     (8,989 )
 
           
Earnings Before Income Taxes
    22,268       26,814  
Income taxes
    7,568       9,921  
 
           
Net Income
    14,700       16,893  
Dividends on Preferred Stock
    54       54  
 
           
Net Income After Dividends on Preferred Stock
  $ 14,646     $ 16,839  
 
           

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Net Income After Dividends on Preferred Stock
  $ 14,646     $ 16,839  
Other comprehensive income:
               
Reclassification adjustment for amounts included in net income, net of tax of $31 and $31, respectively
    51       50  
 
           
COMPREHENSIVE INCOME
  $ 14,697     $ 16,889  
 
           

The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

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CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Operating Activities:
               
Net income
  $ 14,700     $ 16,893  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    22,209       22,084  
Deferred income taxes
    (2,230 )     5  
Pension, postretirement, and other employee benefits
    1,219       1,427  
Tax benefit of stock options
    534       932  
Other, net
    (2,972 )     1,940  
Changes in certain current assets and liabilities —
               
Receivables, net
    27,861       16,812  
Fossil fuel stock
    (11,650 )     2,303  
Materials and supplies
    464       624  
Other current assets
    5,630       (2,248 )
Accounts payable
    (8,853 )     (4,899 )
Accrued taxes
    (150 )     7,199  
Accrued compensation
    (11,504 )     (8,591 )
Other current liabilities
    5,878       1,998  
 
           
Net cash provided from operating activities
    41,136       56,479  
 
           
Investing Activities:
               
Gross property additions
    (34,060 )     (33,145 )
Cost of removal net of salvage
    (1,731 )     (3,067 )
Investment in property damage fund
          (6,700 )
Other
    (15,424 )     (1,327 )
 
           
Net cash used for investing activities
    (51,215 )     (44,239 )
 
           
Financing Activities:
               
Decrease in notes payable, net
          (19,682 )
Proceeds — Capital contributions from parent company
          25,000  
Payment of preferred stock dividends
    (54 )     (54 )
Payment of common stock dividends
    (17,100 )     (17,500 )
Other
    (171 )     (203 )
 
           
Net cash used for financing activities
    (17,325 )     (12,439 )
 
           
Net Change in Cash and Cash Equivalents
    (27,404 )     (199 )
Cash and Cash Equivalents at Beginning of Period
    64,829       2,548  
 
           
Cash and Cash Equivalents at End of Period
  $ 37,425     $ 2,349  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $317 and $233 capitalized for 2005 and 2004, respectively)
  $ 28,562     $ 8,915  
Income taxes (net of refunds)
  $ 6,720     $ 1,849  
 
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

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CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2005     2004  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 37,425     $ 64,829  
Receivables —
               
Customer accounts receivable
    41,195       44,255  
Unbilled revenues
    28,572       35,889  
Under recovered regulatory clause revenues
    1,361       9,283  
Other accounts and notes receivable
    8,608       7,177  
Affiliated companies
    4,256       16,218  
Accumulated provision for uncollectible accounts
    (1,166 )     (2,144 )
Fossil fuel stock, at average cost
    44,649       32,999  
Vacation pay
    5,446       5,446  
Materials and supplies, at average cost
    36,297       36,761  
Prepaid income taxes
    35,902       34,812  
Other regulatory assets — current
    26,897       7,097  
Other
    11,093       5,198  
 
           
Total current assets
    280,535       297,820  
 
           
Property, Plant, and Equipment:
               
In service
    2,374,400       2,367,189  
Less accumulated provision for depreciation
    858,867       844,617  
 
           
 
    1,515,533       1,522,572  
Construction work in progress
    94,845       74,004  
 
           
Total property, plant, and equipment
    1,610,378       1,596,576  
 
           
Other Property and Investments
    6,486       6,425  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    17,382       17,566  
Prepaid pension costs
    44,911       45,384  
Unamortized debt issuance expense
    6,608       6,615  
Unamortized loss on reacquired debt
    18,763       19,197  
Other regulatory assets
    88,363       107,994  
Other
    17,183       13,086  
 
           
Total deferred charges and other assets
    193,210       209,842  
 
           
Total Assets
  $ 2,090,609     $ 2,110,663  
 
           

The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

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CONDENSED BALANCE SHEETS (UNAUDITED)

                 
    At March 31,     At December 31,  
Liabilities and Stockholder’s Equity   2005     2004  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 100,000     $ 100,000  
Notes payable
    50,000       50,000  
Accounts payable —
               
Affiliated
    34,632       35,359  
Other
    51,039       77,452  
Customer deposits
    18,122       18,470  
Accrued taxes —
               
Income taxes
          1,927  
Other
    9,100       9,250  
Accrued interest
    8,486       7,665  
Accrued vacation pay
    5,446       5,446  
Accrued compensation
    6,200       16,989  
Other regulatory liabilities — current
    21,331       7,821  
Other
    3,183       5,167  
 
           
Total current liabilities
    307,539       335,546  
 
           
Long-term Debt
    551,116       550,989  
 
           
Long-term Debt Payable to Affiliated Trusts
    72,166       72,166  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    233,767       229,909  
Deferred credits related to income taxes
    22,673       23,354  
Accumulated deferred investment tax credits
    18,009       18,489  
Employee benefit obligations
    55,616       54,869  
Other cost of removal obligations
    158,241       155,831  
Miscellaneous regulatory liabilities
    6,353       2,048  
Other
    70,728       71,192  
 
           
Total deferred credits and other liabilities
    565,387       555,692  
 
           
Total Liabilities
    1,496,208       1,514,393  
 
           
Preferred Stock
    4,098       4,098  
 
           
Common Stockholder’s Equity:
               
Common stock, without par value—
               
Authorized - 992,717 shares
               
Outstanding - 992,717 shares
    38,060       38,060  
Paid-in capital
    397,929       397,396  
Retained earnings
    157,128       159,581  
Accumulated other comprehensive loss
    (2,814 )     (2,865 )
 
           
Total common stockholder’s equity
    590,303       592,172  
 
           
Total Liabilities and Stockholder’s Equity
  $ 2,090,609     $ 2,110,663  
 
           

The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

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GULF POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FIRST QUARTER 2005 vs. FIRST QUARTER 2004

OVERVIEW

Gulf Power operates as a vertically integrated utility providing electricity to customers within its traditional service area located in northwest Florida and to wholesale customers in the Southeast. Prices for electricity provided by Gulf Power to retail customers are set by the Florida PSC. Many factors affect the opportunities, challenges, and risks of Gulf Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stringent environmental standards.

     Gulf Power continues to focus on several key performance indicators. These indicators include customer satisfaction, peak season equivalent forced outage rate, and return on equity. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS — OVERVIEW - “Key Performance Indicators” of Gulf Power in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Gulf Power’s net income after dividends on preferred stock for the first quarter 2005 was $14.6 million compared to $16.8 million for the corresponding period in 2004. First quarter 2005 net income decreased by $2.2 million, or 13.0%, primarily due to a reduction in retail revenue caused by milder winter weather, as compared to the same period in 2004.

     Significant income statement items appropriate for discussion include the following:

                 
    Increase (Decrease)  
    First Quarter  
    (in thousands)     %  
Retail revenues
  $ (2,802 )     (1.7 )
Sales for resale – affiliates
    11,905       57.5  
Fuel expense
    14,214       18.1  
Purchased power expense – non-affiliates
    (1,325 )     (20.6 )
Purchased power expense – affiliates
    (1,416 )     (19.1 )
Other operations and maintenance expense
    2,144       4.4  
Income tax expense
    (2,353 )     (23.7 )

     Retail revenues. The chart below reflects the primary drivers of the 1.7% decrease in retail revenues in the first quarter 2005 compared to the same period in the prior year. Excluding revenues related to fuel and other cost recovery, which do not affect net income, retail revenues decreased by $4.3 million, or 4.5%, for the first quarter 2005 as compared to the corresponding period in 2004. Energy sales to residential, commercial, and industrial customers were lower by 8.6%, 2.7%, and 2.8%, respectively, in the first quarter 2005 as compared to the same period in 2004 primarily due to milder winter weather conditions.

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     Details of retail revenues are as follows:

                 
 
    First Quarter  
 
    (in thousands)     %  
Retail – prior year
  $ 165,084          
Change in —
               
Sales growth
    1,504       0.9  
Weather
    (5,812 )     (3.5 )
Fuel cost recovery
    (380 )     (0.2 )
Other cost recovery
    1,886       1.1  
 
Retail – current year
  $ 162,282       (1.7 )%
 

     Sales for resale – affiliates and Purchased power expense affiliates. Revenues from sales for resale to affiliates and purchases of energy from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These affiliate sales and purchases are made in accordance with the affiliate company interchange agreement as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost and energy purchases are generally offset by energy revenues through Gulf Power’s fuel cost recovery mechanism. The increase in sales for resale to affiliates is due to increased sales of available generation to affiliate companies at a higher unit cost resulting from higher fuel prices. The decrease in purchased power from affiliates is the result of a decrease in the demand for purchased power due to increased self-generation, which was more economical.

     Fuel expense. In the first quarter 2005, fuel expense was higher than the same period in 2004 primarily due to a greater percentage of generation needs supplied by higher priced natural gas units as well as a 10.7% increase in coal prices and a 12.8% increase in natural gas prices. Since energy expenses are generally offset by energy revenues through Gulf Power’s fuel cost recovery mechanism, these expenses do not have a material impact on net income.

     Purchased power expense – non-affiliates. The decrease in the first quarter 2005, as compared to the corresponding period in 2004, is primarily the result of an increase in available Southern Company system generation. Since energy expenses are generally offset by revenues through Gulf Power’s fuel cost recovery mechanism, these expenses do not have a significant impact on net income.

     Other operations and maintenance expense. The increase in other operations expense during the first quarter 2005 is primarily due to increased employee benefit expenses as compared to the same period in 2004. The first quarter 2005 increase in maintenance expense from the same period in the prior year reflects an increase in scheduled maintenance performed on power generation and distribution facilities in 2005.

     Income tax expense. The decrease in income taxes of $2.4 million, or 23.7%, in the first quarter 2005 is primarily due to the $4.5 million reduction in pretax net income as compared to the same period in 2004.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Gulf Power’s future earnings potential. The level of Gulf Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Gulf Power’s business of selling electricity. These factors include the ability of Gulf Power to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stringent environmental standards. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Gulf Power’s service area. For additional information relating to these issues, see BUSINESS – The SOUTHERN System – “Risk Factors” in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL of Gulf Power in Item 7 of the Form 10-K.

Environmental Matters

Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be recovered. For additional information, including information on certain environmental litigation, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “Environmental Matters” in Item 8 of the Form 10-K.

     The EPA issued the final Clean Air Interstate Rule on March 10, 2005. The rule addresses sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions that contribute to nonattainment of the eight-hour ozone and fine particulate matter National Ambient Air Quality Standards. Twenty-eight eastern states, including the States of Georgia, Florida, and Mississippi, are subject to the fine particulate and/or the eight-hour ozone requirements set forth within the rule. The rule may require additional reductions of NOx and/or SO2 to be achieved by the installation of additional controls at Gulf Power’s facilities or through the purchase of allowances. The impact of this final rule on Gulf Power will, however, depend on the development and implementation of applicable state regulations and therefore cannot be determined at this time.

     On March 15, 2005, the EPA announced the final Clean Air Mercury Rule, selecting a cap-and-trade approach to be implemented in two phases, 2010 and 2018. The rule sets a permanent cap on emissions at the 2018 level and provides for an emissions allowance trading market. The impact of this final rule on Gulf Power will depend on resolution of legal challenges and the development and implementation of applicable state regulations and therefore cannot be determined at this time.

     On April 15, 2005, the EPA announced plans to extend the deadline for issuance of final rules addressing Best Available Retrofit Technology standards under its Regional Haze program until June 15, 2005.

FERC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC and Florida PSC Matters – Market-Based Rate Authority” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

generation dominance within its retail service territory. Gulf Power has authorization from the FERC to sell power to non-affiliates at market-based prices. Gulf Power, through SCS as agent, also has FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. As directed by this order, on February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. Any new market-based rate transactions in Southern Company’s retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. In the event that the FERC’s default mitigation measures are ultimately applied Gulf Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The impact of such sales through March 31, 2005 is not material to Gulf Power’s net income. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

Generation Interconnection Agreements

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC and Florida PSC Matters – Generation Interconnection Agreements” of Gulf Power in Item 7 of the Form 10-K for information on the FERC’s Order 2003 related to standardization of generation interconnection agreements and procedures. The FERC has indicated that Order 2003, which was effective January 20, 2004, is to be applied prospectively to interconnection agreements. Subsidiaries of Tenaska, Inc., as counterparties to three previously executed interconnection agreements with other Southern Company subsidiaries, have filed complaints at the FERC requesting that the FERC modify the agreements and that Southern Company refund amounts previously paid for interconnection facilities, with interest. Gulf Power has also received similar requests from other entities totaling $6.6 million. Gulf Power has opposed such relief, and the proceedings are still pending. The impact of Order 2003 and its subsequent rehearings on Gulf Power and the final results of these matters cannot be determined at this time.

Storm Damage Cost Recovery

Hurricane Ivan hit Gulf Power’s service territory in September 2004. In March 2005, the Florida PSC approved a Stipulation and Settlement between Gulf Power, the Office of Public Counsel for the State of Florida, and the Florida Industrial Power Users Group which allows Gulf Power to recover the retail portion of $51.7 million, the projected reserve deficiency, plus interest and revenue taxes, from customers over a 24-month period beginning in April 2005. In connection with the Stipulation, Gulf Power has agreed that it will not seek any additional increase in its base rates and charges to become effective on or before March 1, 2007. See “Storm Damage Cost Recovery” of Gulf Power in Item 7 of the Form 10-K for additional information.

Other Matters

Gulf Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Gulf Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation against Gulf Power cannot be predicted at this time; however, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Gulf Power’s financial statements.

     See the Notes to the Condensed Financial Statements herein for discussion of various contingencies and other matters which may affect future earnings potential.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Gulf Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Gulf Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Gulf Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. Also see MANAGEMENT’S DISCUSSION AND ANALYSIS — ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Gulf Power in Item 7 of the Form 10-K for a complete discussion of Gulf Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.

New Accounting Standards

FASB Statement No. 123R, Share-Based Payments, was issued in December 2004. This statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. In April 2005, the SEC amended the compliance dates for FASB Statement No. 123R. For Gulf Power, this statement is now effective beginning January 1, 2006. Although the compensation expense calculation required under the revised statement differs slightly, the impacts on Gulf Power’s financial statements are expected to be similar to the pro forma disclosures included in Note 1 to the financial statements of Gulf Power under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein.

     FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations, was issued in March 2005. This interpretation requires that asset retirement obligations be recorded when a legal obligation exists even though the timing and/or the method of settlement are conditional on a future event. For Gulf Power, FIN 47 is effective no later than December 31, 2005. Gulf Power is currently assessing the impact of FIN 47 on its balance sheet; however, adoption is not currently expected to have a material impact on Gulf Power’s income statement.

     In December 2004, the FASB issued Staff Position No. 109-1 (FSP 109-1), Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities provided by the American Jobs Creation Act of 2004, which requires that the generation deduction for utilities be accounted for as a special tax deduction rather than as a tax rate reduction. Gulf Power adopted FSP 109-1 in the first quarter of 2005 with no material impact on its financial statements.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Gulf Power’s financial condition continued to be strong at March 31, 2005. Net cash flow from operating activities totaled $41.1 million for the first quarter 2005, compared to $56.5 million for the first quarter 2004. The $15.4 million decrease in 2005 resulted primarily from payments related to storm damage from Hurricane Ivan. Gross property additions to utility plant were $34.1 million in the first quarter 2005. Funds for Gulf Power’s property additions were provided by operating activities, capital contributions, and other financing activities. See the Condensed Statements of Cash Flows for additional information.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY - “Capital Requirements and Contractual Obligations” of Gulf Power in Item 7 of the Form 10-K for a description of Gulf Power’s capital requirements for its construction program, lease obligations, purchase commitments, and trust funding requirements.

Sources of Capital

Gulf Power plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. These sources include cash flows from operating activities and issuances of unsecured debt, preferred securities or stock, and pollution control bonds issued for Gulf Power’s benefit by public authorities. The amount, type, and timing of any future financings, if needed, will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Gulf Power in Item 7 of the Form 10-K for additional information.

     At March 31, 2005, Gulf Power’s current liabilities exceeded current assets because of the continued use of short-term debt as a funding source to meet cash needs, which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Gulf Power has various internal and external sources of liquidity. At March 31, 2005, Gulf Power had approximately $37.4 million of cash and cash equivalents and $56.3 million of unused committed lines of credit with banks that expire in 2005. Gulf Power expects to renew its credit facilities, as needed, prior to expiration. In addition, Gulf Power has substantial cash flow from operating activities. The credit arrangements provide liquidity support to Gulf Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Gulf Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Gulf Power and other Southern Company subsidiaries. At March 31, 2005, Gulf Power had no commercial paper or extendible commercial notes outstanding.

Credit Rating Risk

Gulf Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- or Baa3 or below. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit, or cash. These contracts are primarily for the sale of electric capacity. At March 31, 2005, the maximum potential collateral requirements at a BBB- or Baa3 rating were approximately $5 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $10 million. Gulf Power is also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade. These agreements are primarily for natural gas price and interest rate risk management activities. At March 31, 2005, Gulf Power had no exposure under these agreements.

Market Price Risk

Gulf Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2004 reporting period. In addition, Gulf Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Due to cost-based rate regulation, Gulf Power has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Gulf Power enters into fixed-price contracts for purchase of coal supplies, the purchase and sale of electricity through the wholesale electricity market, and, to a lesser extent, similar contracts for gas purchases. Gulf Power has received approval from the Florida PSC to recover prudently incurred costs related to its fuel hedging program through the fuel cost recovery mechanism. The fair value of derivative energy contracts at March 31, 2005 was as follows:

         
    First Quarter  
    2005  
    Changes  
 
    Fair Value  
 
    (in thousands)  
Contracts beginning of period
  $ 317  
Contracts realized or settled
    1,435  
New contracts at inception
     
Changes in valuation techniques
     
Current period changes (a)
    10,164  
 
Contracts at March 31, 2005
  $ 11,916  
 

(a)   Current period changes also include the changes in fair value of new contracts entered into during the period.

                         
    Source of March 31, 2005  
    Valuation Prices  
 
    Total     Maturity  
    Fair Value     Year 1     1-3 Years  
 
    (in thousands)  
Actively quoted
  $ 11,917     $ 9,159     $ 2,758  
External sources
    (1 )     (1 )      
Models and other methods
                 
 
Contracts at March 31, 2005
  $ 11,916     $ 9,158     $ 2,758  
 

     See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Gulf Power in Item 7 and Notes 1 and 6 to the financial statements of Gulf Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein for further information.

Financing Activities

Gulf Power did not issue or redeem any long-term securities in the first quarter of 2005. In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Gulf Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

     Subsequent to March 31, 2005, Gulf Power repaid $30 million of a $50 million short-term borrowing incurred in the fourth quarter 2004.

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MISSISSIPPI POWER COMPANY

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CONDENSED STATEMENTS OF INCOME (UNAUDITED)

                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Operating Revenues:
               
Retail revenues
  $ 131,794     $ 128,555  
Sales for resale —
               
Non-affiliates
    59,586       65,800  
Affiliates
    18,925       11,809  
Other revenues
    4,905       3,564  
 
           
Total operating revenues
    215,210       209,728  
 
           
Operating Expenses:
               
Fuel
    91,039       76,547  
Purchased power —
               
Non-affiliates
    5,434       6,955  
Affiliates
    9,582       17,316  
Other operations
    39,512       34,956  
Maintenance
    15,538       15,072  
Depreciation and amortization
    8,057       14,143  
Taxes other than income taxes
    14,146       13,139  
 
           
Total operating expenses
    183,308       178,128  
 
           
Operating Income
    31,902       31,600  
Other Income and (Expense):
               
Interest income
    35       119  
Interest expense
    (3,526 )     (2,803 )
Interest expense to affiliate trusts
    (649 )      
Distributions on mandatorily redeemable preferred securities
          (630 )
Other income (expense), net
    431       452  
 
           
Total other income and (expense)
    (3,709 )     (2,862 )
 
           
Earnings Before Income Taxes
    28,193       28,738  
Income taxes
    10,813       10,916  
 
           
Net Income
    17,380       17,822  
Dividends on Preferred Stock
    433       503  
 
           
Net Income After Dividends on Preferred Stock
  $ 16,947     $ 17,319  
 
           

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Net Income After Dividends on Preferred Stock
  $ 16,947     $ 17,319  
Other comprehensive loss:
               
Changes in fair value of qualifying hedges, net of tax net of tax of $(172) and $(474), respectively
    (277 )     (765 )
 
           
COMPREHENSIVE INCOME
  $ 16,670     $ 16,554  
 
           

The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

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CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Operating Activities:
               
Net income
  $ 17,380     $ 17,822  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    15,467       15,247  
Deferred income taxes and investment tax credits, net
    6,956       5,872  
Plant Daniel capacity
    (6,281 )      
Pension, postretirement, and other employee benefits
    1,473       (272 )
Tax benefit of stock options
    1,067       293  
Other, net
    474       869  
Changes in certain current assets and liabilities —
               
Receivables, net
    22,138       6,776  
Fossil fuel stock
    (4,789 )     4,732  
Materials and supplies
    1,104       571  
Other current assets
    (1,378 )     (244 )
Accounts payable
    (4,327 )     (7,781 )
Accrued taxes
    (20,795 )     (28,379 )
Accrued compensation
    (15,302 )     (14,552 )
Over recovered regulatory clause revenues
    (3,373 )     (8,844 )
Other current liabilities
    (2,328     (3,039 )
 
           
Net cash provided from (used for) operating activities
    7,486       (10,929 )
 
           
Investing Activities:
               
Gross property additions
    (14,197 )     (15,611 )
Cost of removal net of salvage
    265       2,463  
Other
    (581 )     (1,651 )
 
           
Net cash used for investing activities
    (14,513 )     (14,799 )
 
           
Financing Activities:
               
Increase in notes payable, net
    19,940       34,939  
Proceeds — Senior notes
          40,000  
Redemptions — Senior notes
          (80,000 )
Payment of preferred stock dividends
    (434 )     (503 )
Payment of common stock dividends
    (15,500 )     (16,550 )
 
           
Net cash provided from (used for) financing activities
    4,006       (22,114 )
 
           
Net Change in Cash and Cash Equivalents
    (3,021 )     (47,842 )
Cash and Cash Equivalents at Beginning of Period
    6,945       69,120  
 
           
Cash and Cash Equivalents at End of Period
  $ 3,924     $ 21,278  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest
  $ 2,765     $ 2,468  
Income taxes (net of refunds)
  $ (11,281 )   $ 1,615  

The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

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MISSISSIPPI POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2005     2004  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 3,924     $ 6,945  
Receivables —
               
Customer accounts receivable
    30,091       32,978  
Unbilled revenues
    17,853       20,803  
Under recovered regulatory clause revenues
    19,171       32,499  
Other accounts and notes receivable
    3,046       8,881  
Affiliated companies
    18,484       15,769  
Accumulated provision for uncollectible accounts
    (628 )     (774 )
Fossil fuel stock, at average cost
    24,493       19,704  
Vacation pay
    6,125       6,125  
Materials and supplies, at average cost
    26,335       27,438  
Assets from risk management activities
    17,629       4,471  
Prepaid income taxes
    7,457       5,814  
Prepaid expenses
    5,504       3,423  
Other
    920       3,193  
 
           
Total current assets
    180,404       187,269  
 
           
Property, Plant, and Equipment:
               
In service
    1,885,378       1,882,542  
Less accumulated provision for depreciation
    705,113       697,862  
 
           
 
    1,180,265       1,184,680  
Construction work in progress
    32,290       27,961  
 
           
Total property, plant, and equipment
    1,212,555       1,212,641  
 
           
Other Property and Investments
    6,439       6,402  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    10,492       10,668  
Prepaid pension costs
    17,754       19,158  
Unamortized debt issuance expense
    6,882       6,955  
Unamortized loss on reacquired debt
    9,249       9,437  
Prepaid rent
    12,403       12,874  
Other
    22,720       13,709  
 
           
Total deferred charges and other assets
    79,500       72,801  
 
           
Total Assets
  $ 1,478,898     $ 1,479,113  
 
           

The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

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CONDENSED BALANCE SHEETS (UNAUDITED)

                 
    At March 31,     At December 31,  
Liabilities and Stockholder’s Equity   2005     2004  
    (in thousands)  
Current Liabilities:
               
Notes payable
  $ 19,940     $  
Accounts payable —
               
Affiliated
    28,662       19,568  
Other
    39,969       52,688  
Customer deposits
    8,350       9,053  
Accrued taxes —
               
Income taxes
    9,329       396  
Other
    14,246       44,285  
Accrued interest
    2,403       1,731  
Accrued vacation pay
    6,125       6,125  
Accrued compensation
    8,611       23,913  
Regulatory clauses over recovery
    1,984       5,356  
Plant Daniel capacity
    22,096       25,125  
Other regulatory liabilities - current
    19,625       4,806  
Other
    9,111       13,390  
 
           
Total current liabilities
    190,451       206,436  
 
           
Long-term Debt
    242,500       242,498  
 
           
Long-term Debt Payable to Affiliated Trusts
    36,082       36,082  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    177,443       167,345  
Deferred credits related to income taxes
    19,881       20,261  
Accumulated deferred investment tax credits
    18,357       18,654  
Employee benefit obligations
    56,934       57,275  
Plant Daniel lease guarantee obligation, at fair value
    10,519       10,990  
Plant Daniel capacity
    15,415       18,667  
Other cost of removal obligations
    77,849       76,228  
Miscellaneous regulatory liabilities
    12,746       9,522  
Other
    39,867       36,538  
 
           
Total deferred credits and other liabilities
    429,011       415,480  
 
           
Total Liabilities
    898,044       900,496  
 
           
Preferred Stock
    32,780       32,780  
 
           
Common Stockholder’s Equity:
               
Common stock, without par value —
               
Authorized - 1,130,000 shares
               
Outstanding - 1,121,000 shares
    37,691       37,691  
Paid-in capital
    296,904       295,837  
Retained earnings
    217,340       215,893  
Accumulated other comprehensive loss
    (3,861 )     (3,584 )
 
           
Total common stockholder’s equity
    548,074       545,837  
 
           
Total Liabilities and Stockholder’s Equity
  $ 1,478,898     $ 1,479,113  
 
           

The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

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MISSISSIPPI POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FIRST QUARTER 2005 vs. FIRST QUARTER 2004

OVERVIEW

Mississippi Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the State of Mississippi and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Mississippi Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stringent environmental standards.

     Mississippi Power continues to focus on several key performance indicators. In recognition that Mississippi Power’s long-term financial success is dependent upon how well it satisfies its customers’ needs, Mississippi Power’s retail base rate mechanism, PEP, includes performance indicators that directly tie customer service indicators to Mississippi Power’s allowed return. In addition to the PEP performance indicators, Mississippi Power focuses on other performance measures, including broader measures of customer satisfaction, return on equity, and peak season equivalent forced outage rate. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW — “Key Performance Indicators” of Mississippi Power in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Mississippi Power’s net income after dividends on preferred stock for the first quarter 2005 of $16.9 million decreased $372,000, or 2.1%, from $17.3 million for the same period of 2004.

     Significant income statement items appropriate for discussion include the following:

                 
    Increase (Decrease)  
    First Quarter  
    (in thousands)     %  
Retail revenues
  $ 3,239       2.5  
Sales for resale – non-affiliates
    (6,214 )     (9.4 )
Sales for resale – affiliates
    7,116       60.3  
Fuel expense
    14,492       18.9  
Purchased power expense – non-affiliates
    (1,521 )     (21.9 )
Purchased power expense – affiliates
    (7,734 )     (44.7 )
Other operations expense
    4,556       13.0  
Depreciation and amortization expense
    (6,086 )     (43.0 )
Taxes other than income taxes
    1,007       7.7  

     Retail revenues. The chart below reflects the primary drivers of the 2.5% increase in retail revenues in the first quarter 2005 compared to the same period in the prior year. Retail revenues for the first quarter 2005 increased when compared to the same period in 2004 primarily as a result of a $5.6 million increase in fuel and other cost recovery revenues, which generally do not have an effect on income. Retail revenues, excluding fuel revenues, for the first quarter 2005 from residential and commercial customers decreased 3.2% and 6.0%, respectively, primarily as a result of milder weather. Retail revenues, excluding fuel revenues, for the first quarter 2005 from industrial customers remained consistent compared to the same period in 2004.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Details of retail revenues are as follows:

                 
 
    First Quarter  
 
    (in thousands)     %  
Retail – prior year
  $ 128,555          
Change in —
               
Base rates
    (94 )     (0.1 )
Sales growth
    (103 )     (0.1 )
Weather
    (2,181 )     (1.7 )
Fuel cost recovery
    3,538       2.8  
Other cost recovery
    2,079       1.6  
 
Retail – current year
  $ 131,794       2.5 %
 

     Sales for resale non-affiliates. The decrease in sales for resale to non-affiliates in the first quarter 2005 as compared to the same period in 2004 is primarily due to fewer opportunities in the wholesale market as a result of higher fuel prices.

     Sales for resale affiliates and Purchased power expense affiliates. Revenues from sales for resale to affiliates, as well as purchases of energy from affiliates, will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These affiliate sales and purchases are made in accordance with the affiliate company interchange agreement approved by the FERC. These transactions do not have a significant impact on earnings since the energy is generally sold at marginal cost and energy purchases are generally offset by energy revenues through Mississippi Power’s retail and wholesale fuel cost recovery clauses. The increase in sales for resale to affiliates and the decrease in purchased power from affiliates are a result of Mississippi Power’s more economical generating costs when compared to others.

     Fuel expense. In the first quarter 2005, fuel expense increased when compared to the same period in 2004 as a result of a 2.6% increase in generation and a 18.0% increase in the cost of coal, oil, gas, and emission allowances. Since energy expenses are generally offset by energy revenues through Mississippi Power’s retail and wholesale fuel cost recovery clauses, these expenses do not have a significant impact on earnings.

     Purchased power expense – non-affiliates. In the first quarter 2005, purchased power from non-affiliates decreased due to increased self-generation that resulted from higher generating unit availability during the first quarter 2005 as compared to the same period in 2004, when more scheduled maintenance outages occurred.

     Other operations expense. In the first quarter 2005, other operations expense increased primarily due to a $1.6 million increase in employee and retiree benefit expense as a result of higher employee medical expenses and updated actuarial studies for pension and postretirement benefits for 2005, an increase in lease expense of approximately $0.6 million due to higher interest rates on the embedded variable rate debt, a $0.4 million increase in expenses related to customer accounts, and a $0.4 million increase in legal and accounting expenses.

     Depreciation and amortization. The first quarter 2005 decrease in depreciation and amortization expense when compared to the same period in 2004 is primarily the result of $6.3 million in amortization of the regulatory liability related to Plant Daniel capacity recorded in 2005 as approved by the Mississippi PSC. See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information.

     Taxes other than income taxes. The increase in taxes other than income taxes for the first quarter 2005 as compared to the same period in 2004 is a result of higher property taxes.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Mississippi Power’s future earnings potential. The level of Mississippi Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Mississippi Power’s business of selling electricity. These factors include the ability of Mississippi Power to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stringent environmental standards. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Mississippi Power’s service area. For additional information relating to these issues, see BUSINESS — The SOUTHERN System - “Risk Factors” in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Mississippi Power in Item 7 of the Form 10-K.

Environmental Matters

Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be recovered. For additional information, including information on certain environmental litigation, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “Environmental Matters” in Item 8 of the Form 10-K.

     The EPA issued the final Clean Air Interstate Rule on March 10, 2005. The rule addresses sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions that contribute to nonattainment of the eight-hour ozone and fine particulate matter National Ambient Air Quality Standards. Twenty-eight eastern states, including the States of Alabama and Mississippi, are subject to the fine particulate and/or the eight-hour ozone requirements set forth within the rule. The rule may require additional reductions of NOx and/or SO2 to be achieved by the installation of additional controls at Mississippi Power’s facilities or through the purchase of allowances. The impact of this final rule on Mississippi Power will, however, depend on the development and implementation of applicable state regulations and therefore cannot be determined at this time.

     On March 15, 2005, the EPA announced the final Clean Air Mercury Rule, selecting a cap-and-trade approach to be implemented in two phases, 2010 and 2018. The rule sets a permanent cap on emissions at the 2018 level and provides for an emissions allowance trading market. The impact of this final rule on Mississippi Power will depend on resolution of legal challenges and the development and implementation of applicable state regulations and therefore cannot be determined at this time.

     On April 15, 2005, the EPA announced plans to extend the deadline for issuance of final rules addressing Best Available Retrofit Technology standards under its Regional Haze program until June 15, 2005.

FERC and Mississippi PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC and Mississippi PSC Matters – Market-Based Rate Authority” of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Mississippi Power has authorization

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

from the FERC to sell power to non-affiliates at market-based prices. Mississippi Power, through SCS as agent, also has FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. As directed by this order, on February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. Any new market-based rate transactions in Southern Company’s retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. In the event that the FERC’s default mitigation measures are ultimately applied Mississippi Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The impact of such sales through March 31, 2005 is not material to Mississippi Power’s net income. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

     See Note 3 to the financial statements of Mississippi Power under “Environmental Compliance Overview Plan” in Item 8 of the Form 10-K for additional information on the ECO Plan. Mississippi Power’s ECO Plan annual filing for 2005 was approved by the Mississippi PSC at the conclusion of the ECO Plan hearings on April 5, 2005. An order is forthcoming. The result will be a slight increase in rates effective May 2005. Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot continue to be recovered.

Other Matters

Mississippi Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Mississippi Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation against Mississippi Power cannot be predicted at this time; however, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Mississippi Power’s financial statements.

     See the Notes to the Condensed Financial Statements herein for discussion of various contingencies and other matters which may affect future earnings potential.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Mississippi Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Mississippi Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Mississippi Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. Also see MANAGEMENT’S DISCUSSION AND ANALYSIS — ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Mississippi Power in Item 7 of the Form 10-K for a complete discussion of Mississippi Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, Unbilled Revenues, and Plant Daniel Operating Lease.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

New Accounting Standards

FASB Statement No. 123R, Share-Based Payments, was issued in December 2004. This statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. In April 2005, the SEC amended the compliance dates for FASB Statement No. 123R. For Mississippi Power, this statement is now effective beginning January 1, 2006. Although the compensation expense calculation required under the revised statement differs slightly, the impacts on Mississippi Power’s financial statements are expected to be similar to the pro forma disclosures included in Note 1 to the financial statements of Mississippi Power under “Stock Options” in Item 8 of the Form 10-K and Note (C) to the Condensed Financial Statements herein.

     FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations, was issued in March 2005. This interpretation requires that asset retirement obligations be recorded when a legal obligation exists even though the timing and/or the method of settlement are conditional on a future event. For Mississippi Power, FIN 47 is effective no later than December 31, 2005. Mississippi Power is currently assessing the impact of FIN 47 on its balance sheet; however, adoption is not currently expected to have a material impact on Mississippi Power’s income statement.

     In December 2004, the FASB issued Staff Position No. 109-1 (FSP 109-1), Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities provided by the American Jobs Creation Act of 2004, which requires that the generation deduction for utilities be accounted for as a special tax deduction rather than as a tax rate reduction. Mississippi Power adopted FSP 109-1 in the first quarter of 2005 with no material impact on its financial statements.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Mississippi Power’s financial condition continued to be strong at March 31, 2005. Net cash flow provided from operating activities totaled $7.5 million for the first quarter 2005, compared to net cash flow used for operating activities of $10.9 million for the first quarter 2004. The $18.4 million increase in 2005 resulted primarily from fuel and Energy Cost Management clause collections. Gross property additions to utility plant were $14.2 million in the first quarter 2005. The majority of funds needed for gross property additions since 2000 has been provided from operating activities.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Mississippi Power in Item 7 of the Form 10-K for a description of Mississippi Power’s capital requirements for its construction program, lease obligations, purchase commitments, and trust funding requirements.

Sources of Capital

In addition to the financing activities described herein, Mississippi Power plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type, and timing of any financings, if needed, will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Mississippi Power in Item 7 of the Form 10-K for additional information.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     At March 31, 2005, Mississippi Power’s current liabilities exceeded current assets because of the continued use of short-term debt as a funding source to meet cash needs, which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Mississippi Power had at March 31, 2005 approximately $3.9 million of cash and cash equivalents and $100.5 million of unused committed credit arrangements with banks that expire in 2005. Approximately $38 million of these credit arrangements contain provisions allowing two-year term loans executable at expiration. Mississippi Power expects to renew its credit facilities, as needed, prior to expiration. The credit arrangements provide liquidity support to Mississippi Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Mississippi Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Mississippi Power and other Southern Company subsidiaries. At March 31, 2005, Mississippi Power had $19.9 million in outstanding notes payable. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances.

Off-Balance Sheet Financing Arrangements

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Off-Balance Sheet Financing Arrangements” in Item 7 and Note 7 to the financial statements of Mississippi Power under “Operating Leases” in Item 8 of the Form 10-K for information related to Mississippi Power’s lease of a combined cycle generating facility at Plant Daniel.

Credit Rating Risk

Mississippi Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. Mississippi Power is party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade. These agreements are primarily for natural gas price risk management activities. At March 31, 2005, Mississippi Power had no exposure under these agreements.

Market Price Risk

Mississippi Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2004 reporting period. In addition, Mississippi Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

     Due to cost-based rate regulation, Mississippi Power has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Mississippi Power enters into fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Mississippi Power has also implemented retail fuel hedging programs at the instruction of the Mississippi PSC and wholesale fuel hedging programs under agreements with wholesale customers.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The fair value of derivative, fuel, and energy contracts at March 31, 2005 was as follows:

         
    First Quarter  
    2005  
    Changes  
 
    Fair Value  
 
    (in thousands)  
Contracts beginning of period
  $ 889  
Contracts realized or settled
    2,005  
New contracts at inception
     
Changes in valuation techniques
     
Current period changes (a)
    20,286  
 
Contracts at March 31, 2005
  $ 23,180  
 

(a)   Current period changes also include the changes in fair value of new contracts entered into during the period.

                         
    Source of March 31, 2005  
    Valuation Prices  
 
    Total     Maturity
    Fair Value     Year 1     1-3 Years  
 
    (in thousands)  
Actively quoted
  $ 24,499     $ 17,563     $ 6,936  
External sources
    (1,319 )     (1,319 )      
Models and other methods
                 
 
Contracts at March 31, 2005
  $ 23,180     $ 16,244     $ 6,936  
 

     For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Mississippi Power in Item 7 and Notes 1 and 6 to the financial statements under “Financial Instruments” of Mississippi Power in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.

Financing Activities

Mississippi Power did not issue or redeem any long-term securities during the first quarter of 2005. In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Mississippi Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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SAVANNAH ELECTRIC
AND
POWER COMPANY

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SAVANNAH ELECTRIC AND POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

                 
    For the Three Months  
    Ended March 31,  
            2004  
            As Restated  
    2005     (Note L)  
    (in thousands)  
Operating Revenues:
               
Retail revenues
  $ 85,004     $ 67,509  
Sales for resale —
               
Non-affiliates
    458       1,410  
Affiliates
    2,061       2,437  
Other revenues
    1,065       965  
 
           
Total operating revenues
    88,588       72,321  
 
           
Operating Expenses:
               
Fuel
    13,122       10,484  
Purchased power —
               
Non-affiliates
    1,886       2,342  
Affiliates
    36,279       22,130  
Other operations
    14,324       14,101  
Maintenance
    9,886       6,431  
Depreciation and amortization
    5,348       5,204  
Taxes other than income taxes
    3,799       3,597  
 
           
Total operating expenses
    84,644       64,289  
 
           
Operating Income
    3,944       8,032  
Other Income and (Expense):
               
Interest income
    17       71  
Interest expense, net of amounts capitalized
    (3,223 )     (3,143 )
Distributions on mandatorily redeemable preferred securities
          (109 )
Other income (expense), net
    1,106       (418 )
 
           
Total other income and (expense)
    (2,100 )     (3,599 )
 
           
Earnings Before Income Taxes
    1,844       4,433  
Income taxes
    149       1,600  
 
           
Net Income
    1,695       2,833  
Dividends on Preferred Stock
    675        
 
           
Net Income After Dividends on Preferred Stock
  $ 1,020     $ 2,833  
 
           

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

                 
    For the Three Months  
    Ended March 31,  
            2004  
            As Restated  
    2005     (Note L)  
    (in thousands)  
Net Income After Dividends on Preferred Stock
  $ 1,020     $ 2,833  
Other comprehensive income (loss):
               
Changes in fair value of qualifying hedges, net of tax of $450 and $(20), respectively
    713       (33 )
Reclassification adjustment for amounts included in net income, net of tax of $3 and $15, respectively
    4       24  
 
           
COMPREHENSIVE INCOME
  $ 1,737     $ 2,824  
 
           

The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.

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CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
            2004  
            As Restated  
    2005     (Note L)  
    (in thousands)  
Operating Activities:
               
Net income
  $ 1,695     $ 2,833  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    5,804       5,739  
Deferred income taxes and investment tax credits, net
    6,606       1,516  
Allowance for equity funds used during construction
    (1,194 )     (106 )
Pension, postretirement, and other employee benefits
    2,077       1,713  
Tax benefit of stock options
    574       263  
Other, net
    3,272       2,586  
Changes in certain current assets and liabilities —
               
Receivables, net
    (6,156 )     5,934  
Fossil fuel stock
    (1,587 )     122  
Materials and supplies
    981       (967 )
Other current assets
    (7,365 )     (2,526 )
Accounts payable
    (2,850 )     (2,275 )
Accrued taxes
    (2,476 )     923  
Accrued compensation
    (3,537 )     (3,129 )
Other current liabilities
    2,041       1,017  
 
           
Net cash provided from (used for) operating activities
    (2,115 )     13,643  
 
           
Investing Activities:
               
Gross property additions
    (15,945 )     (11,743 )
Other
    (357 )     (515 )
 
           
Net cash used for investing activities
    (16,302 )     (12,258 )
 
           
Financing Activities:
               
Increase in notes payable, net
    19,546       6,695  
Redemptions — Mandatorily redeemable preferred securities
          (40,000 )
Payment of preferred stock dividends
    (675 )      
Payment of common stock dividends
    (6,675 )     (5,800 )
Other
    (6 )     1,105  
 
           
Net cash provided from (used for) financing activities
    12,190       (38,000 )
 
           
Net Change in Cash and Cash Equivalents
    (6,227 )     (36,615 )
Cash and Cash Equivalents at Beginning of Period
    8,862       37,943  
 
           
Cash and Cash Equivalents at End of Period
  $ 2,635     $ 1,328  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $595 and $95 capitalized for 2005 and 2004, respectively)
  $ 1,338     $ 1,392  
Income taxes (net of refunds)
  $ (384 )   $ 774  

The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.

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CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2005     2004  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 2,635     $ 8,862  
Receivables —
               
Customer accounts receivable
    22,936       22,875  
Unbilled revenues
    4,941       6,681  
Under recovered regulatory clause revenues
    32,462       23,800  
Other accounts and notes receivable
    1,303       1,608  
Affiliated companies
    2,868       3,392  
Accumulated provision for uncollectible accounts
    (876 )     (878 )
Fossil fuel stock, at average cost
    12,177       10,590  
Materials and supplies, at average cost
    8,931       9,913  
Prepaid income taxes
    24,715       21,615  
Prepaid expenses
    2,147       1,415  
Assets from risk management activities
    5,541       1,772  
 
           
Total current assets
    119,780       111,645  
 
           
Property, Plant, and Equipment:
               
In service
    951,534       945,359  
Less accumulated provision for depreciation
    411,128       408,415  
 
           
 
    540,406       536,944  
Construction work in progress
    99,521       91,275  
 
           
Total property, plant, and equipment
    639,927       628,219  
 
           
Other Property and Investments
    3,981       3,925  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    10,590       10,588  
Cash surrender value of life insurance for deferred compensation plans
    25,653       25,335  
Unamortized debt issuance expense
    5,183       5,303  
Unamortized loss on reacquired debt
    7,753       7,935  
Other regulatory assets
    14,868       16,107  
Other
    4,443       3,534  
 
           
Total deferred charges and other assets
    68,490       68,802  
 
           
Total Assets
  $ 832,178     $ 812,591  
 
           

The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.

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CONDENSED BALANCE SHEETS (UNAUDITED)

                 
    At March 31,     At December 31,  
Liabilities and Stockholder’s Equity   2005     2004  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 1,041     $ 1,010  
Notes payable
    40,114       20,567  
Accounts payable —
               
Affiliated
    15,651       17,379  
Other
    14,155       16,166  
Customer deposits
    7,058       6,973  
Accrued taxes —
               
Income taxes
          148  
Other
    3,062       5,390  
Accrued interest
    4,549       3,050  
Accrued vacation pay
    2,683       2,661  
Accrued compensation
    2,075       5,612  
Other
    5,084       5,200  
 
           
Total current liabilities
    95,472       84,156  
 
           
Long-term Debt
    237,611       237,769  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    93,996       90,079  
Deferred credits related to income taxes
    8,483       8,738  
Accumulated deferred investment tax credits
    7,795       7,961  
Employee benefit obligations
    48,657       46,580  
Other cost of removal obligations
    43,124       41,890  
Miscellaneous regulatory liabilities
    18,273       12,631  
Other
    7,037       6,693  
 
           
Total deferred credits and other liabilities
    227,365       214,572  
 
           
Total Liabilities
    560,448       536,497  
 
           
Preferred Stock
    43,917       43,938  
 
           
Common Stockholder’s Equity:
               
Common stock, par value $5 per share —
               
Authorized - 16,000,000 shares
Outstanding - 10,844,635 shares
    54,223       54,223  
Paid-in capital
    73,107       72,533  
Retained earnings
    102,051       107,685  
Accumulated other comprehensive loss
    (1,568 )     (2,285 )
 
           
Total common stockholder’s equity
    227,813       232,156  
 
           
Total Liabilities and Stockholder’s Equity
  $ 832,178     $ 812,591  
 
           

The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.

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SAVANNAH ELECTRIC AND POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FIRST QUARTER 2005 vs. FIRST QUARTER 2004

OVERVIEW

Savannah Electric operates as a vertically integrated utility providing electricity to retail customers within its traditional service area of southeastern Georgia. Many factors affect the opportunities, challenges, and risks of Savannah Electric’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stringent environmental standards.

     Savannah Electric continues to focus on several key performance indicators. These indicators include customer satisfaction, peak season equivalent forced outage rate, and return on equity. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Savannah Electric in Item 7 of the Form 10-K.

     See Note 9 to the financial statements of Savannah Electric in Item 8 of the Form 10-K for information regarding Savannah Electric’s restatement of its financial statements for the quarter ended March 31, 2004 as the result of errors in the estimate of unbilled revenues for the period.

RESULTS OF OPERATIONS

Earnings

Savannah Electric’s net income after dividends on preferred stock for the first quarter 2005 was $1.0 million compared to $2.8 million for the corresponding period of 2004. Earnings decreased by $1.8 million, or 64.0%, in the first quarter 2005, primarily due to higher operating expenses, partially offset by higher operating revenues.

     Significant income statement items appropriate for discussion include the following:

                 
    Increase (Decrease)  
    First Quarter  
    (in thousands)     %  
Retail revenues
  $ 17,495       25.9  
Sales for resale – non-affiliates
    (952 )     (67.5 )
Sales for resale – affiliates
    (376 )     (15.4 )
Fuel expense
    2,638       25.2  
Purchased power expense – non-affiliates
    (456 )     (19.5 )
Purchased power expense – affiliates
    14,149       63.9  
Maintenance expense
    3,455       53.7  
Other income (expense), net
    1,524       N/M  
Income taxes
    (1,451 )     N/M  
Dividends on preferred stock
    675       N/M  

N/M Not meaningful    

     Retail revenues. The chart below reflects the primary drivers of the 25.9% increase in retail revenues in the first quarter 2005 compared to the same period in the prior year. Excluding fuel cost recovery revenues, which do not affect net income, retail revenue increased by $0.2 million, or 0.4%, in the first quarter 2005 when compared to the corresponding period in 2004. The first quarter 2005 increase in retail revenue is mainly attributed to a slight increase in residential and commercial customer growth.

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     Details of retail revenues are as follows:

                 
   
Retail Revenues   First Quarter  
    (in thousands)     %  
Retail – prior year
  $ 67,509          
Change in —
               
Sales growth
    378       0.6  
Weather
    (205 )     (0.3 )
Fuel cost recovery
    17,322       25.6  
 
Retail – current year
  $ 85,004       25.9 %
 

     Sales for resale non-affiliates. In the first quarter 2005, revenues from sales for resale to non-affiliates were lower primarily due to less opportunity in the market as a result of higher fuel prices. These transactions had no significant effect on net income.

     Sales for resale – affiliates and Purchased power expense affiliates. Energy sales to and purchases from affiliated companies within the Southern Company system will vary from period to period depending on demand and the availability and cost of generating resources at each company. These sales and purchases are made in accordance with the affiliated company interchange agreement, as approved by the FERC. Sales for resale to affiliates decreased in the first quarter 2005 when compared to the corresponding period in 2004 due to higher fuel prices. Purchased power from affiliates increased during the first quarter 2005 due to a 20.5% increase in energy purchases as a result of scheduled maintenance on Savannah Electric’s largest coal units and an increase in the average cost of fuel per net kilowatt-hour. These transactions do not have a significant impact on earnings since energy is sold at marginal cost and energy purchases are generally offset by energy revenues through Savannah Electric’s fuel cost recovery clause.

     Fuel expense. Fuel expense increased in the first quarter 2005 primarily as a result of higher energy prices and an adjustment in 2004 as a result of billing credits relating to the Plant McIntosh combustion turbines, which reduced 2004 fuel expense. Since fuel expenses are generally offset by fuel revenues through Savannah Electric’s fuel cost recovery clause, these expenses do not have a significant impact on net income.

     Purchased power expense non-affiliates. The slight decrease in the amount of purchased power from non-affiliates in the first quarter 2005 when compared to the first quarter 2004 resulted from the increase in more economical purchased power from affiliates discussed above. These transactions do not have a significant impact on earnings, as energy costs are generally recovered through Savannah Electric’s fuel cost recovery clause.

     Maintenance expense. The increase in the first quarter 2005 as compared to the same period in the prior year is mainly due to scheduled maintenance outages at Plant Kraft and Plant McIntosh and an increase in distribution expenses primarily related to tree trimming.

     Other income (expense), net and income taxes. In the first quarter 2005, other income increased and income taxes decreased primarily due to an increase in non-taxable AFUDC equity of $1.1 million associated with the Plant McIntosh combined cycle construction project. See Note 3 to the financial statements under “Retail Regulatory Matters – Plant McIntosh Construction Project” of Savannah Electric in Item 8 of the Form 10-K for additional information. AFUDC equity is expected to substantially decrease following commercial operation of the project in June 2005; thus Savannah Electric’s annual effective income tax rate is expected to be approximately 35% for 2005. See Note 5 to the financial statements of Savannah Electric in Item 8 of the Form 10-K and Note (N) to the Condensed Financial Statements herein for additional information.

     Dividends on preferred stock. Dividends on preferred stock increased for the first quarter 2005 due to the issuance of 1.8 million shares of 6.00% Series Preferred Stock in June 2004.

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FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Savannah Electric’s future earnings potential. The level of Savannah Electric’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Savannah Electric’s business of selling electricity. These factors include Savannah Electric’s ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stringent environmental standards. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Savannah Electric’s service area. For additional information relating to these issues, see BUSINESS - The SOUTHERN System — “Risk Factors” in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Savannah Electric in Item 7 of the Form 10-K.

Environmental Matters

Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be recovered. For additional information, including information on certain environmental litigation, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Savannah Electric in Item 7 and Note 3 to the financial statements of Savannah Electric under “Environmental Matters” in Item 8 of the Form 10-K.

     The EPA issued the final Clean Air Interstate Rule on March 10, 2005. The rule addresses sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions that contribute to nonattainment of the eight-hour ozone and fine particulate matter National Ambient Air Quality Standards. Twenty-eight eastern states, including the State of Georgia, are subject to the fine particulate and/or the eight-hour ozone requirements set forth within the rule. The rule may require additional reductions of NOx and/or SO2 to be achieved by the installation of additional controls at Savannah Electric’s facilities or through the purchase of allowances. The impact of this final rule on Savannah Electric will, however, depend on the development and implementation of applicable state regulations and therefore cannot be determined at this time.

     On March 15, 2005, the EPA announced the final Clean Air Mercury Rule, selecting a cap-and-trade approach to be implemented in two phases, 2010 and 2018. The rule sets a permanent cap on emissions at the 2018 level and provides for an emissions allowance trading market. The impact of this final rule on Savannah Electric will depend on resolution of legal challenges and the development and implementation of applicable state regulations and therefore cannot be determined at this time.

     On April 15, 2005, the EPA announced plans to extend the deadline for issuance of final rules addressing Best Available Retrofit Technology standards under its Regional Haze program until June 15, 2005.

FERC and Georgia PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC and Georgia PSC Matters – Market-Based Rate Authority” of Savannah Electric in Item 7 and Note 3 to the financial statements of Savannah Electric under “Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Savannah Electric has authorization from the FERC

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to sell power to non-affiliates at market-based prices. Savannah Electric, through SCS as agent, also has FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. As directed by this order, on February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. Any new market-based rate transactions in Southern Company’s retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. In the event that the FERC’s default mitigation measures are ultimately applied Savannah Electric may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The impact of such sales through March 31, 2005 is not material to Savannah Electric’s net income. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

Retail Rate Case Filing

On November 30, 2004, Savannah Electric filed a traditional one-year rate case with the Georgia PSC requesting a $23.2 million, or 6.7%, increase in retail revenues, effective January 1, 2005. The requested increase is based on a future test year ending December 31, 2005 and a proposed retail return on common equity of 12.5%. As an alternative, Savannah Electric has also included in its request a three-year rate plan that is based on the same test year and proposed retail return on common equity.

     The increase in retail revenues is being requested to cover Savannah Electric’s investment in the new Plant McIntosh Combined Cycle Units 10 and 11; increasing operating and maintenance expenses; and continued investment in generation, transmission, and distribution facilities to support growth and ensure reliability. Hearings were held in March and April 2005 and the Georgia PSC is expected to issue a final order in May 2005, following which the new rates will become effective in June 2005. The final outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “FERC and Georgia PSC Matters – Retail Rate Case Filing” in Item 7 and Note 3 to the financial statements of Savannah Electric under “Retail Regulatory Matters – 2004 Retail Rate Case Filing” in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements herein for additional information.

Other Matters

Effective September 30, 2004, Savannah Electric retired Units 4 and 5 at Plant Riverside. The remaining units at the plant are expected to be retired on May 31, 2005. These retirements will have no material impact on Savannah Electric’s financial statements.

     Savannah Electric is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Savannah Electric’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation against Savannah Electric cannot be predicted at this time; however, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Savannah Electric’s financial statements.

     See the Notes to the Condensed Financial Statements herein for discussion of various contingencies and other matters which may affect future earnings potential.

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ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Savannah Electric prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Savannah Electric in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Savannah Electric’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. Also see MANAGEMENT’S DISCUSSION AND ANALYSIS — ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Savannah Electric in Item 7 of the Form 10-K for a complete discussion of Savannah Electric’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.

New Accounting Standards

FASB Statement No. 123R, Share-Based Payments, was issued in December 2004. This statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. In April 2005, the SEC amended the compliance dates for FASB Statement No. 123R. For Savannah Electric, this statement is now effective beginning January 1, 2006. Although the compensation expense calculation required under the revised statement differs slightly, the impacts on Savannah Electric’s financial statements are expected to be similar to the pro forma disclosures included in Note 1 to the financial statements of Savannah Electric under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein.

          FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations, was issued in March 2005. This interpretation requires that asset retirement obligations be recorded when a legal obligation exists even though the timing and/or the method of settlement are conditional on a future event. For Savannah Electric, FIN 47 is effective no later than December 31, 2005. Savannah Electric is currently assessing the impact of FIN 47 on its balance sheet; however, adoption is not currently expected to have a material impact on Savannah Electric’s income statement.

     In December 2004, the FASB issued Staff Position No. 109-1 (FSP 109-1), Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities provided by the American Jobs Creation Act of 2004, which requires that the generation deduction for utilities be accounted for as a special tax deduction rather than as a tax rate reduction. Savannah Electric adopted FSP 109-1 in the first quarter of 2005 with no material impact on its financial statements.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Net cash flow provided from operating activities totaled $(2.1) million for the first quarter 2005, compared to $13.6 million for the first quarter 2004. The $15.7 million decrease in 2005 resulted primarily from higher fuel costs. Those costs are recoverable in future periods and are reflected on the balance sheets as under recovered regulatory clause revenues. Major changes in Savannah Electric’s financial condition during the first three months of 2005 included the addition of approximately $15.9 million to utility plant, which includes the Plant McIntosh combined cycle construction project. The funds for these additions and other capital requirements

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were derived primarily from short-term debt. See Savannah Electric’s Condensed Statements of Cash Flows herein for further details.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Capital Requirements and Contractual Obligations” of Savannah Electric in Item 7 of the Form 10-K for a description of Savannah Electric’s capital requirements for its construction program, lease obligations, purchase commitments, and trust funding requirements.

Sources of Capital

Savannah Electric plans to obtain the funds required for construction and other purposes from sources similar to those used in the past including both internal and external funds. The amount, type, and timing of any future financings — if needed — will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Savannah Electric in Item 7 of the Form 10-K for additional information.

     To meet short-term cash needs and contingencies, Savannah Electric had at March 31, 2005 approximately $2.6 million of cash and cash equivalents and $80 million of unused committed credit arrangements with banks, of which $70 million expires in 2005, and $10 million expires in 2007. Of the unused credit arrangements expiring in 2005, $40 million include two-year term loan options executable at the expiration date. The credit arrangements provide liquidity support to some of Savannah Electric’s obligations with respect to its variable rate debt and its commercial paper. Savannah Electric expects to renew its credit facilities, as needed, prior to expiration. Savannah Electric may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Savannah Electric and other Southern Company subsidiaries. At March 31, 2005, Savannah Electric had $32.1 million of outstanding commercial paper and $8.0 million of outstanding extendible commercial notes.

Credit Rating Risk

Savannah Electric does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. Savannah Electric is party to certain derivatives agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade. These agreements are primarily for natural gas price and interest rate risk management activities. At March 31, 2005, Savannah Electric had no exposure under these contracts.

Market Price Risk

Savannah Electric’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2004 reporting period. In addition, Savannah Electric is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

     Due to cost-based rate regulations, Savannah Electric has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Savannah Electric enters into fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas and oil purchases. Savannah Electric has also implemented a retail fuel hedging program at the instruction of the Georgia PSC.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The fair value of derivative energy contracts at March 31, 2005 was as follows:

         
    First Quarter  
    2005  
    Changes  
    Fair Value  
    (in thousands)  
Contracts beginning of period
  $ 1,474  
Contracts realized or settled
    (20 )
New contracts at inception
     
Changes in valuation techniques
     
Current period changes (a)
    6,580  
 
Contracts at March 31, 2005
  $ 8,034  
 

(a)   Current period changes also include the changes in fair value of new contracts entered into during the period.

                         
    Source of March 31, 2005  
    Valuation Prices  
    Total     Maturity  
    Fair Value     Year 1     1-3 Years  
    (in thousands)  
Actively quoted
  $ 7,995     $ 5,467     $ 2,528  
External sources
    39       39        
Models and other methods
                 
 
Contracts at March 31, 2005
  $ 8,034     $ 5,506     $ 2,528  
 

     For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Savannah Electric in Item 7 and Notes 1 and 6 to the financial statements of Savannah Electric under “Financial Instruments” in Item 8 of the Form 10-K, and Note (F) to the Condensed Financial Statements herein.

Financing Activities

Savannah Electric did not issue or redeem any long-term securities during the first quarter of 2005. In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Savannah Electric plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

     In the first quarter of 2005, Savannah Electric entered into a forward starting interest rate swap in order to mitigate its exposure to unfavorable changes in interest rates related to a series of senior notes Savannah Electric anticipates to issue in 2006. See Note (F) to the Condensed Financial Statements herein for additional information.

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SOUTHERN POWER COMPANY

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CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Operating Revenues:
               
Sales for resale —
               
Non-affiliates
  $ 40,104     $ 86,699  
Affiliates
    112,337       86,795  
Other revenues
    380       2,111  
 
           
Total operating revenues
    152,821       175,605  
 
           
Operating Expenses:
               
Fuel
    34,544       30,335  
Purchased power —
               
Non-affiliates
    8,862       13,605  
Affiliates
    20,954       42,056  
Other operations
    12,719       14,725  
Maintenance
    3,259       3,012  
Depreciation and amortization
    12,783       12,778  
Taxes other than income taxes
    2,955       2,679  
 
           
Total operating expenses
    96,076       119,190  
 
           
Operating Income
    56,745       56,415  
Other Income and (Expense):
               
Interest expense, net of amounts capitalized
    (19,244 )     (12,586 )
Other income (expense), net
    92       493  
 
           
Total other income and (expense)
    (19,152 )     (12,093 )
 
           
Earnings Before Income Taxes
    37,593       44,322  
Income taxes
    14,520       17,137  
 
           
Net Income
  $ 23,073     $ 27,185  
 
           

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Net Income
  $ 23,073     $ 27,185  
Other comprehensive income:
               
Changes in fair value of qualifying hedges, net of tax of $(522)
          (928 )
Reclassification adjustment for amounts included in net income, net of tax of $1,041 and $987, respectively
    1,612       1,569  
 
           
COMPREHENSIVE INCOME
  $ 24,685     $ 27,826  
 
           

The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.

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CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (in thousands)  
Operating Activities:
               
Net income
  $ 23,073     $ 27,185  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    16,448       15,267  
Deferred income taxes and investment tax credits, net
    15,598       16,525  
Deferred revenues
    (26,194 )     (19,235 )
Tax benefit of stock options
    188       109  
Other, net
    (538 )     (4,957 )
Changes in certain current assets and liabilities —
               
Receivables, net
    964       (9,435 )
Fossil fuel stock
    593       2,867  
Materials and supplies
    (232 )     (508 )
Other current assets
    (3,894 )     (161 )
Accounts payable
    (6,148 )     (9,961 )
Accrued taxes
    3,014       2,884  
Accrued interest
    (15,598 )     (16,166 )
 
           
Net cash provided from operating activities
    7,274       4,414  
 
           
Investing Activities:
               
Gross property additions
    (2,075 )     (68,779 )
Change in construction payables, net
    (121 )     (6,589 )
Other
    (2,292 )     185  
 
           
Net cash used for investing activities
    (4,488 )     (75,183 )
 
           
Financing Activities:
               
Increase in notes payable, net — affiliated
          67,411  
Increase in notes payable, net
          94  
Other
          933  
 
           
Net cash provided from financing activities
          68,438  
 
           
Net Change in Cash and Cash Equivalents
    2,786       (2,331 )
Cash and Cash Equivalents at Beginning of Period
    25,241       2,798  
 
           
Cash and Cash Equivalents at End of Period
  $ 28,027     $ 467  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $0 and $8,739 capitalized for 2005 and 2004, respectively)
  $ 31,073     $ 25,114  
Income taxes (net of refunds)
  $ 3,593     $ 1,684  

The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.

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CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2005     2004  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 28,027     $ 25,241  
Receivables —
               
Customer accounts receivable
    9,851       12,865  
Other accounts receivable
    52       893  
Accumulated provision for uncollectible accounts
    (350 )     (350 )
Affiliated companies
    28,313       25,423  
Fossil fuel stock, at average cost
    2,311       2,904  
Materials and supplies, at average cost
    10,070       9,839  
Prepaid income taxes
    10,655       4,619  
Prepaid expenses
    6,781       8,085  
Other
    17       112  
 
           
Total current assets
    95,727       89,631  
 
           
Property, Plant, and Equipment:
               
In service
    1,822,316       1,821,434  
Less accumulated provision for depreciation
    123,973       111,200  
 
           
 
    1,698,343       1,710,234  
Construction work in progress
    202,095       200,903  
 
           
Total property, plant, and equipment
    1,900,438       1,911,137  
 
           
Deferred Charges and Other Assets:
               
Unamortized debt issuance expense
    13,105       14,078  
Prepaid long-term service agreements
    36,946       34,800  
Other—
               
Affiliated
    6,455       6,455  
Other
    10,638       10,912  
 
           
Total deferred charges and other assets
    67,144       66,245  
 
           
Total Assets
  $ 2,063,309     $ 2,067,013  
 
           

The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.

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CONDENSED BALANCE SHEETS (UNAUDITED)

                 
    At March 31,     At December 31,  
Liabilities and Stockholder’s Equity   2005     2004  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 200     $ 200  
Accounts payable —
               
Affiliated
    20,297       19,265  
Other
    3,827       11,024  
Accrued taxes — Other
    7,118       4,104  
Accrued interest
    13,028       28,626  
Other
    15       83  
 
           
Total current liabilities
    44,485       63,302  
 
           
Long-term Debt
    1,099,484       1,099,435  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    56,852       40,212  
Deferred capacity revenues — Affiliated
    12,923       39,118  
Other—
               
Affiliated
    13,076       13,333  
Other
    5       2  
 
           
Total deferred credits and other liabilities
    82,856       92,665  
 
           
Total Liabilities
    1,226,825       1,255,402  
 
           
Common Stockholder’s Equity:
               
Common stock, par value $.01 per share —
           
Authorized - 1,000,000 shares
               
Outstanding - 1,000 shares
               
Paid-in capital
    740,723       740,535  
Retained earnings
    145,207       122,134  
Accumulated other comprehensive loss
    (49,446 )     (51,058 )
 
           
Total common stockholder’s equity
    836,484       811,611  
 
           
Total Liabilities and Stockholder’s Equity
  $ 2,063,309     $ 2,067,013  
 
           

The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.

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SOUTHERN POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FIRST QUARTER 2005 vs. FIRST QUARTER 2004

OVERVIEW

Southern Power constructs, owns, and manages Southern Company’s competitive generation assets and sells electricity at market-based rates in the Super Southeast wholesale market. Southern Power continues to focus on executing its regional strategy in the Super Southeast in 2005. However, Southern Power continues to face challenges related to market power issues at the federal regulatory level, specifically the ability to charge market-based rates.

     To evaluate operating results and to ensure Southern Power’s ability to meet its contractual commitments to customers, Southern Power focuses on two key performance indicators. These indicators consist of plant availability and peak season equivalent forced outage rate (EFOR). Plant availability shows the percentage of time during the year that Southern Power’s generating units are available to be called upon to generate (the higher the better), whereas the EFOR more narrowly defines the hours during peak demand times when Southern Power’s generating units are not available due to forced outages (the lower the better). For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Southern Power in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Southern Power’s net income for first quarter 2005 was $23.1 million compared to $27.2 million for the corresponding period of 2004. The decrease in first quarter 2005 earnings of $4.1 million, or 15.1%, was primarily the result of ceasing the capitalization of interest on construction. Capitalization of construction interest ended with the sale of Plant McIntosh Units 10 and 11 to Georgia Power and Savannah Electric in May 2004 and the cessation of construction activities at Plant Franklin Unit 3 in August 2004. For further information, see Note 2 to the financial statements of Southern Power under “Plant Franklin Unit 3 Construction Project” and “Plant McIntosh Construction Project” in Item 8 of the Form 10-K. Reductions in operating revenues at Plant Harris Unit 2 and Plant Franklin 2 caused by the shift from market sales of this capacity to sales to affiliates under PPAs in June 2004 were largely offset by reductions in purchased power expense.

     Significant income statement items appropriate for discussion include the following:

                 
    Increase (Decrease)  
    First Quarter  
    (in thousands)     %  
Sales for resale – non-affiliates
  $ (46,595 )     (53.7 )
Sales for resale – affiliates
    25,542       29.4  
Fuel expense
    4,209       13.9  
Purchased power expense – non-affiliates
    (4,743 )     (34.9 )
Purchased power expense – affiliates
    (21,102 )     (50.2 )
Other operations expense
    (2,006 )     (13.6 )
Interest expense, net of amounts capitalized
    (6,658 )     (52.9 )

     Sales for resale affiliates and non-affiliates. In the first quarter 2005, revenues from sales for resale to non-affiliates were lower when compared to the corresponding period in 2004. This decrease was due primarily

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

to the inception of a PPA with Georgia Power at Plant Harris Unit 2 and a scheduled increase in the PPA with Georgia Power at Plant Franklin Unit 2 in June 2004; these units were initially placed into service in June 2003 and were previously available for market sales to non-affiliates until the commencement of the PPAs.

     Fuel expense. Fuel expense in the first quarter 2005 increased when compared to the same period in 2004 primarily from increased generation at Plant Wansley under PPAs with Georgia Power and Savannah Electric and also due to an average increase in gas prices over the same period in 2004 of 20.2%. The PPAs for Plant Wansley call for Southern Power to purchase the gas and to bill the cost to Georgia Power and Savannah Electric. Therefore, these expenses have no impact on net income. Under Southern Power’s other PPAs, the responsibility for fuel purchases lies directly with the counterparty.

     Purchased power expense affiliates and non-affiliates. The decrease in purchased power from affiliates and non-affiliates during the first quarter 2005 when compared to the first quarter 2004 is primarily due to the commitment of Plant Harris Unit 2 and an additional portion of Plant Franklin Unit 2 to Georgia Power beginning in June 2004; prior to that time the capacity from these units was sold into short-term markets and related energy sales were sometimes served with short-term power purchases from both affiliates and non-affiliates when market costs were lower than the cost of self-generation.

     Other operations expense. During the first quarter 2005, other operations expense decreased when compared to the same period in the prior year due primarily to transmission costs incurred with Plant Harris Unit 2 prior to its commitment to Georgia Power in June 2004. Under the PPA, Georgia Power is now responsible for providing transmission service for Plant Harris Unit 2.

     Interest expense, net of amounts capitalized. In the first quarter 2005, interest expense, net of amounts capitalized when compared to the same period in 2004 increased primarily as the result of ceasing the capitalization of interest on construction. Capitalized interest on construction ended with the sale of Plant McIntosh Units 10 and 11 to Georgia Power and Savannah Electric in May 2004 and the cessation of construction activities at Plant Franklin Unit 3 in August 2004. For further information, see Note 2 to the financial statements of Southern Power under “Plant Franklin Unit 3 Construction Project” and “Plant McIntosh Construction Project” in Item 8 of the Form 10-K. In addition Southern Power repurchased $50 million of its 4.875% senior notes in December 2004.

FUTURE EARNINGS POTENTIAL

The results of operations are not necessarily indicative of future earnings. Several factors affect the opportunities, challenges, and risks of Southern Power’s competitive wholesale energy business. These factors include the ability to achieve sales growth while containing costs. Another major factor is federal regulatory policy, which may impact Southern Power’s level of participation in this market. The level of future earnings depends on numerous factors, especially regulatory matters, including those related to affiliate contracts, sales, creditworthiness of customers, total generating capacity available in the Southeast, and the successful remarketing of capacity as current contracts expire. For additional information relating to these issues, see BUSINESS – The SOUTHERN System – “Risk Factors” in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Power in Item 7 of the Form 10-K.

     See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “General” and “Power Sales Agreements” of Southern Power in Item 7 of the Form 10-K for additional information on long-term power sales agreements and PPAs. Southern Power’s PPAs with non-affiliated counterparties have provisions that require the posting of collateral or an acceptable substitute guarantee in the event that S&P or Moody’s downgrades the credit ratings of such counterparty to below investment grade, or, if

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

the counterparty is not rated, such counterparty fails to maintain a minimum coverage ratio. The PPAs are expected to provide Southern Power with a stable source of revenue during their respective terms.

     On April 8, 2005, Southern Power entered into an agreement with Constellation Power Inc. and certain other subsidiaries of Constellation Energy Group, Inc. to acquire all of the outstanding general and limited partnership interests of Oleander Power Project, L.P. (Oleander), for an aggregate purchase price of approximately $206 million. The purchase price is subject to certain working capital and timing of closing adjustments. Oleander owns a dual-fueled generating plant in Brevard County, Florida with a nominal installed capacity of 680 MW. The entire output of the plant is sold under PPAs with Florida Power & Light Company and Seminole Electric Cooperative, Inc. The PPAs expire in 2007 and 2009, respectively. The acquisition is subject to certain regulatory approvals, including the approval of the FERC, as well as review by the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act.

     See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Market-Based Rate Authority” of Southern Power in Item 7 and Note 2 to the financial statements of Southern Power under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Southern Power has authorization from the FERC to sell power to non-affiliates at market-based prices. Southern Power, through SCS as agent, also has FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. As directed by this order, on February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. Any new market-based rate transactions in Southern Company’s retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. In the event that the FERC’s default mitigation measures are ultimately applied, Southern Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The impact of such sales through March 31, 2005 is not material to Southern Power’s net income. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

     See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Southern Power in Item 7 of the Form 10-K for information on the development by federal and state environmental regulatory agencies of additional control strategies for emission of air pollution from industrial sources, including electric generating facilities. Compliance costs related to current and future environmental laws and regulations could affect earnings if such costs are not fully recovered.

     Southern Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Southern Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. No such litigation is currently pending against Southern Power.

     See also the Notes to the Condensed Financial Statements herein for discussion of various contingencies and other matters which may affect future earnings potential.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Southern Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Southern Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. Also see MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Southern Power in Item 7 of the Form 10-K for a complete discussion of Southern Power’s critical accounting policies and estimates related to Revenue Recognition and Asset Impairments.

New Accounting Standards

FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations, was issued in March 2005. This interpretation requires that asset retirement obligations be recorded when a legal obligation exists even though the timing and/or the method of settlement are conditional on a future event. For Southern Power, FIN 47 is effective no later than December 31, 2005. Southern Power is currently assessing the impact of FIN 47 on its financial statements.

FINANCIAL CONDITION AND LIQUIDITY

Overview

There have been no major changes in Southern Power’s financial condition during the first quarter 2005. With respect to the impending purchase of Oleander, it is anticipated this purchase will be financed with a combination of commercial paper, loans or capital contributions from Southern Company, and funds generated from operations. Pending regulatory approvals, this purchase is expected to close in the second quarter of 2005.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY –“Capital Requirements and Contractual Obligations” of Southern Power in Item 7 of the Form 10-K for a description of Southern Power’s capital requirements for its construction program, maturing debt, purchase commitments, and long-term service agreements.

Sources of Capital

Southern Power may use external funds, equity capital from Southern Company, or internally generated cash from operations to finance any new projects and ongoing capital requirements. Southern Power expects to generate external funds from the issuance of unsecured senior debt and commercial paper or utilization of credit arrangements from banks. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Southern Power in Item 7 of the Form 10-K for additional information.

     To meet liquidity and capital resource requirements, Southern Power had at March 31, 2005 approximately $325 million of an unused committed credit arrangement with banks expiring in 2006. This arrangement also provides liquidity support for Southern Power’s commercial paper program. Amounts drawn under the

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

arrangements may be used to finance acquisition and construction costs related to electric generating facilities and for general corporate purposes, subject to borrowing limitations for each generating facility. The arrangements permit Southern Power to fund construction of future generating facilities upon meeting certain requirements. Southern Power expects to renew its credit facility, as needed, prior to expiration.

Credit Rating Risk

Southern Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- or Baa3 or below. Generally, collateral may be provided with a Southern Company guaranty, letter of credit, or cash. These contracts are primarily for physical electricity purchases and sales. At March 31, 2005, the maximum potential collateral requirements at a BBB- or Baa3 rating were approximately $35 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $79 million. Southern Power is also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade. These agreements are primarily for natural gas price risk management activities. At March 31, 2005, Southern Power had no material exposure related to these agreements.

Market Price Risk

Southern Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2004 reporting period. In addition, Southern Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

     Because energy from Southern Power’s generating facilities is primarily sold under long-term PPAs with tolling agreements and provisions shifting substantially all of the responsibility for fuel cost to the purchasers, Southern Power’s exposure to market volatility in commodity fuel prices and prices of electricity is limited. To mitigate residual risks in those areas, Southern Power enters into fixed-price contracts for the sale of electricity. Unrealized gains and losses on electric and gas contracts qualifying as cash flow hedges of anticipated purchases and sales are deferred in Other Comprehensive Income.

     The fair values of derivative energy contracts outstanding at March 31, 2005 were not material. At March 31, 2005, all of these contracts mature within one year and are based on actively quoted market prices. For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Southern Power in Item 7 and Notes 1 and 5 to the financial statements of Southern Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS

FOR
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SAVANNAH ELECTRIC AND POWER COMPANY
SOUTHERN POWER COMPANY

INDEX TO APPLICABLE NOTES TO
FINANCIAL STATEMENTS BY REGISTRANT

     
Registrant   Applicable Notes
Southern Company
  A, B, C, D, E, F, G, H, I, J, N, O
 
   
Alabama Power
  A, B, C, D, F, G, H, N
 
   
Georgia Power
  A, B, C, D, F, G, I
 
   
Gulf Power
  A, B, C, D, F, G, J
 
   
Mississippi Power
  A, B, C, D, F, G
 
   
Savannah Electric
  A, B, C, D, F, G, K, L, N
 
   
Southern Power
  A, B, F, M

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SAVANNAH ELECTRIC AND POWER COMPANY
SOUTHERN POWER COMPANY

NOTES TO THE CONDENSED FINANCIAL STATEMENTS:

  (A)   The condensed financial statements of the registrants included herein have been prepared by each registrant, without audit, pursuant to the rules and regulations of the SEC. In the opinion of each registrant’s management, the information regarding such registrant furnished herein reflects all adjustments necessary to present fairly the results of operations for the periods ended March 31, 2005 and 2004. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although each registrant believes that the disclosures regarding such registrant are adequate to make the information presented not misleading. Disclosure which would substantially duplicate the disclosure in the Form 10-K and details which have not changed significantly in amount or composition since the filing of the Form 10-K are omitted from this Quarterly Report on Form 10-Q. Therefore, these condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in the Form 10-K. Certain prior period amounts have been reclassified to conform to current period presentation. Due to seasonal variations in the demand for energy, operating results for the periods presented do not necessarily indicate operating results for the entire year.
 
  (B)   See Note 3 to the financial statements of Southern Company and the retail operating companies and Note 2 to the financial statements of Southern Power in Item 8 of the Form 10-K for information relating to various lawsuits and other contingencies.
 
      PLANT WANSLEY ENVIRONMENTAL LITIGATION
 
      See Note 3 to the financial statements of Southern Company under “Environmental Matters - Plant Wansley Environmental Litigation” and Georgia Power under “Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K. On March 11, 2005, the U.S. Circuit Court of Appeals for the Eleventh Circuit accepted Georgia Power’s petition for review of the U.S. District Court for the Northern District of Georgia’s December 15, 2004 order related to the Plant Wansley environmental litigation. Oral argument on that appeal has not been scheduled. The final outcome of this matter cannot now be determined.
 
      MIRANT RELATED MATTERS
 
      See Note 3 to the financial statements of Southern Company under “Mirant Related Matters – Mirant Bankruptcy” in Item 8 of the Form 10-K for information regarding Southern Company’s contingent liabilities associated with Mirant, including guarantees of contractual commitments, litigation, and joint and several liabilities in connection with the consolidated federal income tax return.

          In July 2003, Mirant filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code. In June 2004, Mirant’s bankruptcy counsel notified Southern Company that it was investigating, on behalf of a committee of independent Mirant directors, potential claims against Southern Company. On March 25, 2005, Mirant filed with the U.S. Bankruptcy Court for the Northern District of Texas a First Amended Disclosure Statement relating to Mirant’s plan of reorganization. In the First Amended Disclosure Statement, Mirant disclosed that its board of directors has authorized litigation against

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Southern Company to recover certain transfers made by Mirant to Southern Company from 1999 through 2001. The transfers disclosed by Mirant include (1) certain dividends in an aggregate amount of $668 million, (2) the repayment of certain intercompany loans and accrued interest thereon in an aggregate amount of $1.035 billion, and (3) the dividend distribution that Mirant asserts is valued at $242 million of one share of Series B Preferred Stock and its subsequent redemption in exchange for Mirant’s 80% interest in Southern Company Holdings, which owned SE Finance Capital Corporation and Southern Company Capital Funding, Inc. Other than identifying these transfers, the First Amended Disclosure Statement provided no factual or legal basis for any claim against Southern Company. Southern Company believes there is no meritorious basis for a claim and intends to vigorously defend itself in the event that Mirant brings an action to recover any amounts in connection with these transfers. The ultimate outcome of any potential action by Mirant cannot be determined at this time.

RACE DISCRIMINATION LITIGATION

See Note 3 to the financial statements of Southern Company and Georgia Power under “Race Discrimination Litigation” in Item 8 of the Form 10-K. On April 15, 2005, the U.S. Court of Appeals for the Eleventh Circuit denied the plaintiffs’ petition for rehearing by the entire Eleventh Circuit panel of judges. The plaintiffs have 90 days from April 15, 2005 to file a petition for writ of certiorari to the U.S. Supreme Court. The final outcome of this matter cannot now be determined.

FERC MATTERS

See Note 3 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric under “Market-Based Rate Authority” and Note 2 to the financial statements of Southern Power under “FERC Matters — Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Each of the retail operating companies and Southern Power has authorization from the FERC to sell power to non-affiliates at market-based prices. Through SCS, as agent, the retail operating companies and Southern Power also have FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. As directed by this order, on February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. Any new market-based rate transactions in Southern Company’s retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. In the event that the FERC’s default mitigation measures are ultimately applied, Southern Power and the retail operating companies may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The impact of such sales through March 31, 2005 is not material to the net income of Southern Company, any of the retail operating companies, or Southern Power. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

INCOME TAX MATTERS

See Note 3 to the financial statements of Southern Company under “Income Tax Matters - Leveraged Lease Transactions” in Item 8 of the Form 10-K for information related to Southern Company’s deductions related to three international lease transactions (so-called SILO or sale-in-lease-out transactions), which the IRS challenged in connection with its audit of Southern Company’s 2000 and 2001 tax returns. If the IRS is ultimately successful in disallowing the tax deductions related to these transactions beginning with the 2000 tax year, Southern Company could be subject to additional interest charges of up to $23 million. Furthermore, although management does not believe a penalty is appropriate, the IRS is currently evaluating whether one may be assessed. Additionally, although the

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

payment of the tax liability, exclusive of interest and any penalties, would not affect Southern Company’s results of operations under current accounting standards, it could have a material impact on cash flow. See Note 1 to the financial statements of Southern Company under “Leveraged Leases” in Item 8 of the Form 10-K for additional details of the deferred taxes related to these transactions. The ultimate outcome of these matters cannot now be determined.

  (C)   See Note 1 to the financial statements of Southern Company and the retail operating companies under “Stock Options” and Note 8 to the financial statements of Southern Company and the retail operating companies under “Stock Option Plan” in Item 8 of the Form 10-K for information regarding non-qualified employee stock options provided by Southern Company. Southern Company accounts for options granted in accordance with Accounting Principles Board Opinion No. 25; thus, no compensation expense is recognized because the exercise price of all options granted equaled the fair market value on the date of the grant. The estimated fair values of stock options granted during the three-month periods ending March 31, 2005 and 2004 have been derived using the Black-Scholes stock option pricing model. The following table shows the assumptions and the weighted average fair values of these stock options:

                 
    Three Months     Three Months  
    Ended     Ended  
    March 31,     March 31,  
    2005     2004  
Interest rate
    3.9 %     3.1 %
Average expected life of stock options (in years)
    5.0       5.0  
Expected volatility of common stock
    17.9 %     19.7 %
Expected annual dividends on common stock
  $ 1.43     $ 1.40  
Weighted average fair value of stock
               
options Granted
  $ 3.90     $ 3.29  

The pro forma impact of fair-value accounting for options granted on Southern Company’s consolidated earnings per share is as follows:

                 
    As Reported     Pro Forma  
Three Months Ended March 31, 2005 Earnings per share (dollars):
               
Basic
  $ 0.43     $ 0.42  
Diluted
  $ 0.43     $ 0.42  
Three Months Ended March 31, 2004 Earnings per share (dollars):
               
Basic
  $ 0.45     $ 0.44  
Diluted
  $ 0.45     $ 0.44  

The pro forma impact of fair-value accounting for options granted on net income after dividends on preferred stock is as follows:

                 
    As Reported     Pro Forma  
    (in millions)     (in millions)  
Three Months Ended March 31, 2005
               
Net income after dividends on preferred stock
               
Alabama Power
  $ 93     $ 91  
Georgia Power
    142       140  
Gulf Power
    15       14  
Mississippi Power
    17       16  
Savannah Electric
    1       1  
Southern Power
    23       23  
 
               
Southern Company
  $ 323     $ 311  

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

                 
    As Reported     Pro Forma  
    (in millions)     (in millions)  
Three Months Ended March 31, 2004
               
Net income after dividends on preferred stock
               
Alabama Power
  $ 91     $ 89  
Georgia Power
    144       142  
Gulf Power
    17       17  
Mississippi Power
    17       17  
Savannah Electric
    3       3  
Southern Power
    27       27  
 
               
Southern Company
  $ 331     $ 321  

  (D)   See Note 1 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric under “Asset Retirement Obligations and Other Costs of Removal” in Item 8 of the Form 10-K. The following table reflects the details of the asset retirement obligations included in the Condensed Balance Sheets.

                                                 
    Balance at     Liabilities     Liabilities             Cash Flow     Balance at  
    12/31/04     Incurred     Settled     Accretion     Revisions     3/31/05  
    (in millions)  
Alabama Power
  $ 383.6     $     $     $ 6.4     $     $ 390.0  
Georgia Power
    504.5                   8.0             512.5  
Gulf Power
    5.8                   0.1             5.9  
Mississippi Power
    5.5                   0.1             5.6  
Savannah Electric
    3.9       0.5       (0.1 )     0.1             4.4  
 
                                               
Southern Company
  $ 903.3     $ 0.5     $ (0.1 )   $ 14.7     $     $ 918.4  

  (E)   For Southern Company, the only difference in computing basic and diluted earnings per share is attributable to outstanding options under the stock option plan. See Note 8 to the financial statements of Southern Company in Item 8 of the Form 10-K for further information on the stock option plan. The effect of the stock options was determined using the treasury stock method. Shares used to compute diluted earnings per share are as follows:

                 
    Three Months     Three Months  
    Ended     Ended  
    March 31, 2005     March 31, 2004  
    (in thousands)  
As reported shares
    744,025       736,638  
Effect of options
    4,647       4,965  
Diluted shares
    748,672       741,603  

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

  (F)   See Note 6 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric under “Financial Instruments” in Item 8 of the Form 10-K. At March 31, 2005, the fair value of derivative energy contracts was reflected in the financial statements as follows:

                                                 
    Southern     Alabama     Georgia     Gulf     Mississippi     Savannah  
    Company     Power     Power     Power     Power     Electric  
    Amounts  
    (in millions)  
Regulatory liabilities, net
  $ 119.3     $ 38.2     $ 37.1     $ 11.9     $ 24.1     $ 8.0  
Other comprehensive income (loss)
    0.2                         (0.9 )      
 
Total fair value
  $ 119.5     $ 38.2     $ 37.1     $ 11.9     $ 23.2     $ 8.0  
 

     For the three months ended March 31, 2005 and 2004, the amounts recognized in income for derivative energy contracts that are not hedges, as well as the amounts expected to be reclassified from other comprehensive income to fuel expense for the twelve month period ending March 31, 2006 were immaterial for each company. Additionally, no material ineffectiveness has been recorded in net income for the three months ended March 31, 2005 and 2004.

     At March 31, 2005, Southern Company had $1.9 billion notional amount of interest rate derivatives outstanding with net fair value gains of $23.8 million as follows:

     Fair Value Hedges

                                         
   
                                    Fair Value Gain  
                                    (Loss)  
    Notional     Fixed Rate     Variable Rate     Maturity     March 31, 2005  
    Amount     Received     Paid     Date     (in millions)  
Southern Company
  $400 million     5.30 %   6-month LIBOR   February 2007   $ 7.4  
 
                  (in arrears)                
 
                  less 0.103%                
 
Southern Company
  $40 million     7.625 %   6-month LIBOR   December 2009   $ (0.1 )
 
                  (in arrears) plus                
 
                    2.9225 %                

     Cash Flow Hedges

                                         
       
                    Weighted             Fair Value  
                    Average             Gain (Loss)  
    Notional     Variable Rate     Fixed Rate     Maturity     March 31, 2005  
    Amount     Received     Paid     Date     (in millions)  
Alabama Power
  $536 million   BMA Index     2.007 %   January 2007   $ 8.4  
Alabama Power
  $195 million   3-month LIBOR     1.89 %   April 2006   $ 4.2  
Georgia Power
  $100 million   3-month LIBOR     5.029 %   December 2015   $ 0.5  
Georgia Power*
  $150 million   3-month LIBOR     4.133 – 6.00 %   February 2006   $ 0.3  
Georgia Power**
  $400 million   Floating     2.35 – 3.85 %   December 2007   $ 1.9  
Savannah Electric
  $14 million   BMA Index     2.502 %   December 2007   $ 0.2  
Savannah Electric
  $30 million   3-month LIBOR     4.686 %   May 2016   $ 1.0  

*   Interest rate collar
 
**   Series of interest rate caps and collars with variable rate based on one-month LIBOR

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

For the twelve month period ended March 31, 2006, the following table reflects the estimated pre-tax gains/(losses) that will be reclassified from Accumulated Other Comprehensive Income to Interest Expense.

         
    (in millions)  
Alabama Power
  $ 4.4  
Georgia Power
    (1.4 )
Gulf Power
    (0.3 )
Savannah Electric
     
Southern Power
    (11.3 )
Southern Company
  $ (8.6 )

  (G)   See Note 2 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric in Item 8 of the Form 10-K. Components of the pension plans’ and postretirement plans’ net periodic costs for the three-month periods ending March 31, 2005 and 2004 are as follows:

                                                 
    Southern     Alabama     Georgia     Gulf     Mississippi     Savannah  
PENSION PLANS (in millions)   Company     Power     Power     Power     Power     Electric  
Three Months Ended March 31, 2005
                                               
 
                                               
Service cost
  $ 36     $ 8     $ 11     $ 2     $ 2     $ 1  
Interest cost
    72       19       27       3       3       1  
Expected return on plan assets
    (116 )     (35 )     (46 )     (5 )     (5 )     (1 )
Recognized net (gain)/loss
    3       1       1                    
Net amortization
    5       2       2                    
Net cost (income)
  $     $ (5 )   $ (5 )   $     $     $ 1  
 
                                               
Three Months Ended March 31, 2004
                                               
 
                                               
Service cost
  $ 32     $ 8     $ 10     $ 1     $ 2     $ 1  
Interest cost
    68       18       26       3       3       1  
Expected return on plan assets
    (113 )     (35 )     (45 )     (5 )     (5 )     (1 )
Recognized net (gain)/loss
    (1 )     (1 )     (1 )                  
Net amortization
    4       1       2                    
Net cost (income)
  $ (10 )   $ (9 )   $ (8 )   $ (1 )   $     $ 1  
                                                 
POSTRETIREMENT PLANS   Southern     Alabama     Georgia     Gulf     Mississippi     Savannah  
(in millions)   Company     Power     Power     Power     Power     Electric  
Three Months Ended March 31, 2005
                                               
 
                                               
Service cost
  $ 7     $ 2     $ 3     $     $     $  
Interest cost
    24       7       10       1       1       1  
Expected return on plan assets
    (11 )     (4 )     (6 )                  
Net amortization
    9       2       5                    
Net cost (income)
  $ 29     $ 7     $ 12     $ 1     $ 1     $ 1  
 
                                               
Three Months Ended March 31, 2004
                                               
 
                                               
Service cost
  $ 7     $ 2     $ 2     $     $     $  
Interest cost
    24       6       11       1       1       1  
Expected return on plan assets
    (12 )     (4 )     (6 )                  
Net amortization
    9       2       5                    
Net cost (income)
  $ 28     $ 6     $ 12     $ 1     $ 1     $ 1  

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  (H)   Alabama Power fuel costs are recovered under Rate ECR (Energy Cost Recovery), which provides for the addition of a fuel and energy cost factor to base rates. In April 2005, this factor was increased from 1.518 cents per kilowatt-hour to 1.788 cents per kilowatt-hour, which should result in a 4.5% increase in annual retail revenues, or approximately $148 million. Alabama Power will continue to monitor the under recovered fuel cost balance to determine if an additional adjustment to billing rates should be requested from the Alabama PSC. Alabama Power’s under recovered fuel costs as of March 31, 2005 totaled $96.4 million. See Note 3 to the financial statements of Southern Company and Alabama Power under “Alabama Power Retail Regulatory Matters” and “Retail Regulatory Matters,” respectively, in Item 8 of the Form 10-K for additional information.
 
  (I)   On February 18, 2005, Georgia Power filed a request with the Georgia PSC for a fuel cost recovery rate increase. The requested increase, representing an annual increase in revenues of approximately 11.8%, will allow for the recovery of fuel costs based on an estimate of future fuel costs, as well as the collection of the existing under recovery of fuel costs. The Georgia PSC may require that this existing under recovery be collected over a period greater than twelve months. Georgia Power’s under recovered fuel costs as of March 31, 2005 totaled $455.4 million. Hearings were held in April 2005 and a final decision from the Georgia PSC is expected in May 2005, following which the new rates will become effective June 1, 2005. The final outcome of this matter cannot be determined at this time. For additional information on Georgia Power’s fuel cost recovery, see Note 3 to the financial statements of Southern Company and Georgia Power under “Georgia Power Retail Rate Activity” and “Fuel Cost Recovery,” respectively, in Item 8 of the Form 10-K.
 
  (J)   See Note 3 to the financial statements of Southern Company and Gulf Power under “Gulf Power and Alabama Power Storm Damage Recovery” and “Retail Regulatory Matters,” respectively, in Item 8 of the Form 10-K for information on a Stipulation and Settlement filed with the Florida PSC to resolve all matters regarding the effects of Hurricane Ivan on Gulf Power’s reserve for property damage. The Florida PSC approved the Stipulation and Settlement as filed in March 2005 and Gulf Power began billing customers accordingly in April 2005.
 
  (K)   On November 30, 2004, Savannah Electric filed a traditional one-year rate case with the Georgia PSC requesting a $23.2 million, or 6.7%, increase in retail revenues, effective January 1, 2005. The requested increase is based on a future test year ending December 31, 2005 and a proposed retail return on common equity of 12.5%. As an alternative, Savannah Electric also included in its request a three-year rate plan that is based on the same test year and proposed retail return on common equity. The increase in retail revenues was requested to cover Savannah Electric’s investment in the Plant McIntosh Combined Cycle Units 10 and 11; increasing operating and maintenance expenses; and continued investment in generation, transmission, and distribution facilities to support growth and ensure reliability. The increase also includes recognition on an annual basis of the $3.8 million of Plant Wansley PPA expenses which were excluded by the Georgia PSC from Savannah Electric’s last rate case and subsequently were subject to deferral through a Georgia PSC accounting order issued in December 2002. The Georgia PSC suspended implementation of the rates until the completion of the hearing process. Hearings were held in March and April 2005 and the Georgia PSC is expected to issue a final order in May 2005, following which the new rates will become effective in June 2005. The final outcome of this matter cannot now be determined.
 
  (L)   See Notes 9 and 10 to the financial statements of Savannah Electric in Item 8 of the Form 10-K for information regarding Savannah Electric’s restatement of its financial statements for the quarter ended March 31, 2004 as the result of errors in the estimate of unbilled revenues for the period. A summary of the effects of those restatement adjustments for the quarter ended March 31, 2004 is as follows (in thousands of dollars):

                 
    March 31, 2004  
    As Originally
Reported
    As
Restated
 
       
Retail sales revenues
  $ 68,023     $ 67,509  
Total operating revenues
    72,835     72,321
Operating income
    8,546     8,032
Earnings before income taxes
    4,946       4,433  
Income taxes
    1,798     1,600
Net income
    3,148       2,833  
Net income after dividends on preferred stock
    3,148       2,833  
Comprehensive income
    3,139       2,824  

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

  (M)   On April 8, 2005, Southern Power and two of its wholly-owned subsidiaries entered into an agreement with Constellation Power, Inc. and certain other subsidiaries of Constellation Energy Group, Inc. to acquire all of the outstanding general and limited partnership interests of Oleander Power Project, L.P. (Oleander), for an aggregate purchase price of approximately $206 million. The purchase price is subject to certain working capital and timing of closing adjustments. Oleander owns a dual-fueled generating plant in Brevard County, Florida with a nominal installed capacity of 680 MW. The entire output of the plant is sold under separate PPAs with Florida Power & Light Company and Seminole Electric Cooperative, Inc. The PPAs expire in 2007 and 2009, respectively. The acquisition is subject to certain regulatory approvals, including the approval of the FERC, as well as review by the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act.

  (N)   See Note 5 to the financial statements of Southern Company, Alabama Power, and Savannah Electric in Item 8 of the Form 10-K for information on each company’s effective income tax rate. In accordance with an Alabama PSC approved accounting order to restore the natural disaster reserve, Alabama Power recorded a reduction in its income tax expense of approximately $27.7 million for the quarter ended March 31, 2005. In addition, in connection with construction on the Plant McIntosh combined cycle units, Savannah Electric recorded an increase of approximately $1.1 million in AFUDC equity, which is not taxable, for the quarter ended March 31, 2005. The impact of these entries caused a significant reduction in the effective income tax rate for the quarter ended March 31, 2005, for each of Southern Company, Alabama Power, and Savannah Electric. On a annual basis, the effective income tax rate for 2005 is expected to be approximately 27% for Southern Company, 34% for Alabama Power, and 35% for Savannah Electric. For additional information on Alabama Power’s accounting order, see Note 3 to the financial statements of Southern Company and Alabama Power under “Gulf Power and Alabama Power Storm Damage Recovery” and “Natural Disaster Cost Recovery,” respectively, in Item 8 of the Form 10-K. For additional information on the Plant McIntosh construction, see Note 3 to the financial statements of Southern Company and Savannah Electric under “Plant McIntosh Construction Project” in Item 8 of the Form 10-K.

  (O)   Southern Company’s reportable business segment is the sale of electricity in the Southeast by the five retail operating companies and Southern Power. The “All Other” column includes parent Southern Company, which does not allocate operating expenses to business segments. Also, this category includes segments below the quantitative threshold for separate disclosure. These segments include investments in synthetic fuels and leveraged lease projects, telecommunications, energy-related services, and natural gas marketing. Southern Power’s revenues from sales to the retail operating companies were $112 million and $87 million for the three months ended March 31, 2005 and 2004, respectively. All other intersegment revenues are not material. Financial data for business segments and products and services are as follows:

                                                         
    Electric Utilities                    
    Retail                                            
    Operating                             All     Reconciling        
    Companies     Southern Power     Eliminations     Total     Other     Eliminations     Consolidated  
    (in millions)  
Three Months Ended March 31, 2005:
                                                       
Operating revenues
  $ 2,697     $ 153     $ (133 )   $ 2,717     $ 173     $ (26 )   $ 2,864  
Segment net income (loss)
    266       23             289       35       (1 )     323  
Total assets at March 31, 2005
  $ 33,839     $ 2,063     $ (81 )   $ 35,821     $ 1,926     $ (457 )   $ 37,290  
               
 
                                                       
Three Months Ended March 31, 2004:
                                                       
Operating revenues
  $ 2,542     $ 176     $ (130 )   $ 2,588     $ 173     $ (29 )   $ 2,732  
Segment net income (loss)
    272       27             299       33       (1 )     331  
Total assets at December 31, 2004
  $ 33,524     $ 2,067     $ (103 )   $ 35,488     $ 1,996     $ (522 )   $ 36,962  
 
                                 
Products and Services
    Electric Utilities Revenues  
Period   Retail     Wholesale     Other     Total  
    (in millions)  
Three Months Ended March 31, 2005
  $ 2,269     $ 347     $ 101     $ 2,717  
Three Months Ended March 31, 2004
    2,144       351       93       2,588  
 

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PART II- OTHER INFORMATION

     
Item 1.
  Legal Proceedings.
 
   
  See the Notes to the Condensed Financial Statements herein for information regarding certain legal and administrative proceedings in which Southern Company and its reporting subsidiaries are involved.

Item 6.  Exhibits.

         
(24)
  Power of Attorney and Resolutions
 
  Southern Company    
 
  (a) 1 -   Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2004, File No. 1-3526 as Exhibit 24(a) and incorporated herein by reference.)
 
       
  Alabama Power    
 
       
  (b) 1 -   Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2004, File No. 1-3164 as Exhibit 24(b) and incorporated herein by reference.)
 
       
  Georgia Power    
 
       
  (c) 1 -   Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2004, File No. 1-6468 as Exhibit 24(c) and incorporated herein by reference.)
 
       
  (c) 2 -   Power of Attorney for Cliff S. Thrasher.
 
       
  Gulf Power    
 
       
  (d) 1 -   Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2004, File No. 0-2429 as Exhibit 24(d) and incorporated herein by reference.)
 
       
  Mississippi Power    
 
       
  (e) 1 -   Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2004, File No. 001-11229 as Exhibit 24(e) and incorporated herein by reference.)
 
       
  Savannah Electric    
 
       
  (f)1 -   Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2004, File No. 1-5072 as Exhibit 24(f) and incorporated herein by reference.)

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Item 6. Exhibits.

         
(24)
  Power of Attorney and Resolutions (continued)
 
  Southern Power    
 
  (g) 1 -   Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2004, File No. 333-98553 as Exhibit 24(g) and incorporated herein by reference.)
 
       
  (g)2 -   Power of Attorney for Ronnie L. Bates.
 
       
  (g)3 -   Power of Attorney for Michael W. Southern.
         
(31)
  Section 302 Certifications    
 
  Southern Company    
 
  (a) 1 -   Certificate of Southern Company’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
       
  (a) 2 -   Certificate of Southern Company’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
       
  Alabama Power    
 
       
  (b) 1 -   Certificate of Alabama Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
       
  (b) 2 -   Certificate of Alabama Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
       
  Georgia Power    
 
       
  (c) 1 -   Certificate of Georgia Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
       
  (c) 2 -   Certificate of Georgia Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
       
  Gulf Power    
 
       
  (d)1 -   Certificate of Gulf Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
       
  (d)2 -   Certificate of Gulf Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

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Item 6. Exhibits.

         
(31)
  Section 302 Certifications (continued)
 
  Mississippi Power    
 
  (e) 1 -   Certificate of Mississippi Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
       
  (e) 2 -   Certificate of Mississippi Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
       
  Savannah Electric    
 
       
  (f) 1 -   Certificate of Savannah Electric’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
       
  (f) 2 -   Certificate of Savannah Electric’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
       
  Southern Power    
 
       
  (g) 1 -   Certificate of Southern Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
       
  (g) 2 -   Certificate of Southern Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
         
(32)
  Section 906 Certifications    
 
  Southern Company    
 
  (a) -   Certificate of Southern Company’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
 
       
  Alabama Power    
 
       
  (b) -   Certificate of Alabama Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
 
       
  Georgia Power    
 
       
  (c) -   Certificate of Georgia Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
 
       
  Gulf Power    
 
       
  (d) -   Certificate of Gulf Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

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Item 6. Exhibits.

         
(32)
  Section 906 Certifications (continued)
 
 
  Mississippi Power
 
  (e) -   Certificate of Mississippi Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
 
       
  Savannah Electric    
 
       
  (f) -   Certificate of Savannah Electric’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
 
       
  Southern Power    
 
       
  (g) -   Certificate of Southern Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

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THE SOUTHERN COMPANY

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

         
      THE SOUTHERN COMPANY
 
       
  By   David M. Ratcliffe
      Chairman and Chief Executive Officer
      (Principal Executive Officer)
 
       
  By   Thomas A. Fanning
      Executive Vice President, Chief Financial Officer and Treasurer
      (Principal Financial Officer)
 
       
  By   /s/ Wayne Boston
       
      (Wayne Boston, Attorney-in-fact)

Date: May 4, 2005

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ALABAMA POWER COMPANY

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

         
      ALABAMA POWER COMPANY
 
       
  By   Charles D. McCrary
      President and Chief Executive Officer
      (Principal Executive Officer)
 
       
  By   Art P. Beattie
      Executive Vice President, Chief Financial Officer and Treasurer
      (Principal Financial Officer)
 
       
  By   /s/ Wayne Boston
       
      (Wayne Boston, Attorney-in-fact)

Date: May 4, 2005

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GEORGIA POWER COMPANY

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

         
      GEORGIA POWER COMPANY
 
       
  By   Michael D. Garrett
      President and Chief Executive Officer
      (Principal Executive Officer)
 
       
  By   Cliff S. Thrasher
      Executive Vice President, Chief Financial Officer and Treasurer
      (Principal Financial Officer)
 
       
  By   /s/ Wayne Boston
       
      (Wayne Boston, Attorney-in-fact)

Date: May 4, 2005

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GULF POWER COMPANY

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

         
      GULF POWER COMPANY
  By   Susan N. Story
      President and Chief Executive Officer
      (Principal Executive Officer)
 
       
  By   Ronnie R. Labrato
      Vice President, Chief Financial Officer and Comptroller
      (Principal Financial and Accounting Officer)
 
       
  By   /s/ Wayne Boston
       
      (Wayne Boston, Attorney-in-fact)

Date: May 4, 2005

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MISSISSIPPI POWER COMPANY

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

         
      MISSISSIPPI POWER COMPANY
 
       
  By   Anthony J. Topazi
      President and Chief Executive Officer
      (Principal Executive Officer)
 
       
  By   Frances V. Turnage
      Vice President, Chief Financial Officer and Treasurer
      (Principal Financial Officer)
 
       
  By   /s/ Wayne Boston
       
      (Wayne Boston, Attorney-in-fact)

Date: May 4, 2005

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SAVANNAH ELECTRIC AND POWER COMPANY

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

         
      SAVANNAH ELECTRIC AND POWER COMPANY
 
       
  By   A. R. James
      President and Chief Executive Officer
      (Principal Executive Officer)
 
       
  By   Kirby R. Willis
      Vice President, Chief Financial Officer and Treasurer
      (Principal Financial and Accounting Officer)
 
       
  By   /s/ Wayne Boston
       
      (Wayne Boston, Attorney-in-fact)

Date: May 4, 2005

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SOUTHERN POWER COMPANY

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

         
      SOUTHERN POWER COMPANY
 
       
  By   Ronnie L. Bates
      President and Chief Executive Officer
      (Principal Executive Officer)
 
       
  By   Michael W. Southern
      Senior Vice President and Chief Financial Officer
      (Principal Financial Officer)
 
       
  By   /s/ Wayne Boston
       
      (Wayne Boston, Attorney-in-fact)

Date: May 4, 2005

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