10-Q 1 soco10q9-08.htm 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 September 30, 2008
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)    
 
  30 Ivan Allen Jr. Boulevard, N.W.    
 
  Atlanta, Georgia 30308    
 
  (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 Florida 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    
 
       
333-98553
  Southern Power Company   58-2598670
 
  (A Delaware Corporation)    
 
  30 Ivan Allen Jr. Boulevard, N.W.    
 
  Atlanta, Georgia 30308    
 
  (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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
                 
    Large           Smaller
    Accelerated   Accelerated   Non-accelerated   Reporting
Registrant   Filer   Filer   Filer   Company
The Southern Company
  X            
Alabama Power Company
          X    
Georgia Power Company
          X    
Gulf Power Company
          X    
Mississippi Power Company
          X    
Southern Power Company
          X    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No þ (Response applicable to all registrants.)
             
    Description of   Shares Outstanding  
Registrant   Common Stock   at September 30, 2008  
The Southern Company
  Par Value $5 Per Share     774,580,361  
Alabama Power Company
  Par Value $40 Per Share     23,600,000  
Georgia Power Company
  Without Par Value     9,261,500  
Gulf Power Company
  Without Par Value     1,792,717  
Mississippi Power Company
  Without Par Value     1,121,000  
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, and Southern Power Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.

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INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2008
                 
            Page
            Number
DEFINITIONS     5  
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION     7  
       
 
       
PART I — FINANCIAL INFORMATION
       
 
       
Item 1.  
Financial Statements (Unaudited)
       
Item 2.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
       
               
            9  
            10  
            11  
            13  
            14  
               
            38  
            38  
            39  
            40  
            42  
               
            59  
            59  
            60  
            61  
            63  
               
            80  
            80  
            81  
            82  
            84  
               
            100  
            100  
            101  
            102  
            104  
               
            123  
            123  
            124  
            125  
            127  
            139  
Item 3.       36  
Item 4.       36  
Item 4T.       36  

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INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2008
                 
            Page
            Number
PART II — OTHER INFORMATION
       
 
       
Item 1.         165
Item 1A.         165
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
Item 6.         166
              169

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DEFINITIONS
     
Term   Meaning
2007 Retail Rate Plan
  Georgia Power’s retail rate plan for the years 2008 through 2010
Alabama Power
  Alabama Power Company
Bcf
  Billion cubic feet
Clean Air Act
  Clean Air Act Amendments of 1990
Dalton Utilities
  The City of Dalton, Georgia, an incorporated municipality in the State of Georgia acting by and through its Board of Water, Light and Sinking Fund Commissioners
DOE
  U.S. Department of Energy
Duke Energy
  Duke Energy Corporation
ECO Plan
  Mississippi Power’s 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, and Southern Power for the year ended December 31, 2007
Georgia Power
  Georgia Power Company
Gulf Power
  Gulf Power Company
IGCC
  Integrated coal gasification combined cycle
IIC
  Intercompany Interchange Contract
IRC
  Internal Revenue Code of 1986, as amended
IRS
  Internal Revenue Service
KWH
  Kilowatt-hour
LIBOR
  London Interbank Offered Rate
MEAG Power
  Municipal Electric Authority of Georgia
Mirant
  Mirant Corporation
Mississippi Power
  Mississippi Power Company
mmBtu
  Million British thermal unit
MW
  Megawatt
MWH
  Megawatt-hour
NRC
  Nuclear Regulatory Commission
NSR
  New Source Review
OPC
  Oglethorpe Power Corporation
PEP
  Performance Evaluation Plan
Power Pool
  The operating arrangement whereby the integrated generating resources of the traditional operating companies and Southern Power are subject to joint commitment and dispatch in order to serve their combined load obligations
PPA
  Power Purchase Agreement
PSC
  Public Service Commission
Rate CNP
  Alabama Power’s certified new plant rate mechanism
Rate ECR
  Alabama Power’s energy cost recovery rate mechanism
Rate NDR
  Alabama Power’s natural disaster recovery rate mechanism
Rate RSE
  Alabama Power’s rate stabilization and equilization rate mechanism
registrants
  Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power

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DEFINITIONS
(continued)
     
Term   Meaning
SCS
  Southern Company Services, Inc.
SEC
  Securities and Exchange Commission
SFAS No. 157
  FASB Statement No. 157, “Fair Value Measurement”
Southern Company
  The Southern Company
Southern Company system
  Southern Company, the traditional operating companies, Southern Power, and other subsidiaries
Southern Nuclear
  Southern Nuclear Operating Company, Inc.
Southern Power
  Southern Power Company
Stone & Webster
  Stone & Webster, Inc.
traditional operating companies
  Alabama Power, Georgia Power, Gulf Power, and Mississippi Power
Westinghouse
  Westinghouse Electric Company LLC
wholesale revenues
  revenues generated from sales for resale

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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 the wholesale business, retail sales growth, customer growth, storm damage cost recovery and repairs, fuel cost recovery and other rate actions, environmental regulations and expenditures, earnings growth, dividend payout ratios, access to sources of capital, projections for postretirement benefit and nuclear decommissioning trust contributions, financing activities, completion of construction projects, plans and estimated costs for new generation resources, sales under new PPAs, impacts of adoption of new accounting rules, costs of implementing the IIC settlement with the FERC, cash flow impact of the Economic Stimulus Act of 2008 on tax payments in 2008, unrecognized tax benefits related to leveraged lease transactions, estimated sales under new power sale agreements, 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, implementation of the Energy Policy Act of 2005, environmental laws including regulation of water quality and emissions of sulfur, nitrogen, mercury, carbon, soot, or particulate matter and other substances, and also changes in 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, FERC matters, IRS audits, and Mirant 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, including those relating to weather, the general economy, population and business growth (and declines), and the effects of energy conservation measures;
  available sources and costs of fuels;
  effects of inflation;
  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, including rate actions relating to fuel and storm restoration cost recovery;
  regulatory approvals related to the potential Plant Vogtle expansion, including Georgia PSC and NRC approvals;
  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 and to perform as required;
  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, droughts, pandemic health events such as an avian influenza, 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 (including the Form 10-K) filed by the registrants from time to time with the SEC.
Each registrant expressly disclaims 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     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2008     2007     2008     2007  
    (in thousands)     (in thousands)  
Operating Revenues:
                               
Retail revenues
  $ 4,478,292     $ 4,085,704     $ 10,933,784     $ 9,934,571  
Wholesale revenues
    774,847       563,233       1,880,311       1,530,809  
Other electric revenues
    142,459       130,590       413,811       381,467  
Other revenues
    30,901       52,516       96,690       165,793  
 
                       
Total operating revenues
    5,426,499       4,832,043       13,324,596       12,012,640  
 
                       
Operating Expenses:
                               
Fuel
    2,152,828       1,738,693       5,226,845       4,512,718  
Purchased power
    378,259       281,489       668,423       445,698  
Other operations
    644,191       651,127       1,853,986       1,802,876  
Maintenance
    264,213       260,449       866,233       831,483  
Depreciation and amortization
    367,014       311,939       1,069,644       928,569  
Taxes other than income taxes
    215,298       206,763       602,612       574,329  
 
                       
Total operating expenses
    4,021,803       3,450,460       10,287,743       9,095,673  
 
                       
Operating Income
    1,404,696       1,381,583       3,036,853       2,916,967  
Other Income and (Expense):
                               
Allowance for equity funds used during construction
    35,541       28,050       111,612       71,821  
Interest income
    9,744       11,638       20,737       31,853  
Equity in income (losses) of unconsolidated subsidiaries
    4,704       (410 )     6,129       (20,712 )
Leveraged lease income (losses)
    6,343       12,359       (53,611 )     31,928  
Interest expense, net of amounts capitalized
    (219,067 )     (232,786 )     (665,123 )     (673,212 )
Preferred and preference dividends of subsidiaries
    (16,194 )     (10,451 )     (48,584 )     (30,709 )
Other income (expense), net
    (10,816 )     17,271       (14,386 )     8,325  
 
                       
Total other income and (expense)
    (189,745 )     (174,329 )     (643,226 )     (580,706 )
 
                       
Earnings Before Income Taxes
    1,214,951       1,207,254       2,393,627       2,336,261  
Income taxes
    434,515       445,259       837,605       806,424  
 
                       
Consolidated Net Income
  $ 780,436     $ 761,995     $ 1,556,022     $ 1,529,837  
 
                       
Common Stock Data:
                               
Earnings per share —
                               
Basic
  $ 1.01     $ 1.00     $ 2.02     $ 2.03  
Diluted
  $ 1.00     $ 1.00     $ 2.01     $ 2.02  
Average number of shares of common stock outstanding (in thousands)
                               
Basic
    772,622       758,308       769,298       754,568  
Diluted
    776,903       762,392       773,451       759,182  
Cash dividends paid per share of common stock
  $ 0.4200     $ 0.4025     $ 1.2425     $ 1.1925  
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 Nine Months  
    Ended September 30,  
    2008     2007  
    (in thousands)  
Operating Activities:
               
Consolidated net income
  $ 1,556,022     $ 1,529,837  
Adjustments to reconcile consolidated net income to net cash provided from operating activities —
               
Depreciation and amortization
    1,265,696       1,108,475  
Deferred income taxes and investment tax credits
    46,006       102,314  
Deferred revenues
    94,924       (5,527 )
Allowance for equity funds used during construction
    (111,612 )     (71,821 )
Equity in income (losses) of unconsolidated subsidiaries
    (6,129 )     20,712  
Leveraged lease income (losses)
    53,611       (31,928 )
Pension, postretirement, and other employee benefits
    75,965       75,303  
Stock option expense
    17,730       26,011  
Hedge settlements
    17,289       15,151  
Hurricane Katrina grant proceeds-property reserve
          60,000  
Other, net
    (57,111 )     15,981  
Changes in certain current assets and liabilities —
               
Receivables
    (522,004 )     (426,107 )
Fossil fuel stock
    (112,328 )     (57,624 )
Materials and supplies
    (25,347 )     (55,191 )
Other current assets
    (33,896 )     (2,808 )
Hurricane Katrina grant proceeds
          14,345  
Accounts payable
    (45,080 )     (3,951 )
Accrued taxes
    409,684       303,781  
Accrued compensation
    (86,436 )     (148,274 )
Other current liabilities
    49,651       (1,342 )
 
           
Net cash provided from operating activities
    2,586,635       2,467,337  
 
           
Investing Activities:
               
Property additions
    (2,860,118 )     (2,469,059 )
Investment in restricted cash from pollution control bonds
    (5,454 )     (96,052 )
Distribution of restricted cash from pollution control bonds
    46,782       44,550  
Nuclear decommissioning trust fund purchases
    (581,171 )     (538,049 )
Nuclear decommissioning trust fund sales
    574,291       531,169  
Proceeds from property sales
    5,718       31,333  
Investment in unconsolidated subsidiaries
    (1,000 )     (34,550 )
Cost of removal, net of salvage
    (74,714 )     (65,601 )
Hurricane Katrina capital grant proceeds
    7,314       10,869  
Other
    (91,419 )     25,908  
 
           
Net cash used for investing activities
    (2,979,771 )     (2,559,482 )
 
           
Financing Activities:
               
Increase (decrease) in notes payable, net
    62,302       (656,348 )
Proceeds —
               
Long-term debt
    2,416,035       3,081,500  
Common stock
    381,200       414,498  
Preference stock
          150,000  
Redemptions —
               
Long-term debt
    (769,790 )     (1,599,646 )
Preferred stock
    (125,000 )      
Payment of common stock dividends
    (954,438 )     (898,766 )
Other
    (11,704 )     (31,432 )
 
           
Net cash provided from financing activities
    998,605       459,806  
 
           
Net Change in Cash and Cash Equivalents
    605,469       367,661  
Cash and Cash Equivalents at Beginning of Period
    200,550       166,846  
 
           
Cash and Cash Equivalents at End of Period
  $ 806,019     $ 534,507  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $54,403 and $44,229 capitalized for 2008 and 2007, respectively)
  $ 575,597     $ 600,634  
Income taxes (net of refunds)
  $ 489,600     $ 388,634  
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 September 30,     At December 31,  
Assets   2008     2007  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 806,019     $ 200,550  
Restricted cash
    31,007       68,013  
Receivables —
               
Customer accounts receivable
    1,310,242       999,264  
Unbilled revenues
    390,069       294,487  
Under recovered regulatory clause revenues
    630,336       715,744  
Other accounts and notes receivable
    272,367       347,573  
Accumulated provision for uncollectible accounts
    (27,723 )     (22,142 )
Fossil fuel stock, at average cost
    826,460       709,823  
Materials and supplies, at average cost
    755,060       725,001  
Vacation pay
    134,622       134,806  
Prepaid expenses
    258,022       147,903  
Other
    438,220       411,210  
 
           
Total current assets
    5,824,701       4,732,232  
 
           
Property, Plant, and Equipment:
               
In service
    49,821,845       47,175,717  
Less accumulated depreciation
    18,105,660       17,412,658  
 
           
 
    31,716,185       29,763,059  
Nuclear fuel, at amortized cost
    460,848       336,129  
Construction work in progress
    2,935,064       3,227,605  
 
           
Total property, plant, and equipment
    35,112,097       33,326,793  
 
           
Other Property and Investments:
               
Nuclear decommissioning trusts, at fair value
    978,450       1,131,798  
Leveraged leases
    929,824       984,441  
Other
    224,290       237,400  
 
           
Total other property and investments
    2,132,564       2,353,639  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    957,151       910,402  
Prepaid pension costs
    2,430,760       2,368,798  
Unamortized debt issuance expense
    199,191       190,700  
Unamortized loss on reacquired debt
    274,130       288,973  
Deferred under recovered regulatory clause revenues
    654,127       388,945  
Other regulatory assets
    914,500       769,226  
Other
    513,128       459,172  
 
           
Total deferred charges and other assets
    5,942,987       5,376,216  
 
           
 
               
Total Assets
  $ 49,012,349     $ 45,788,880  
 
           
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 September 30,     At December 31,  
Liabilities and Stockholders’ Equity   2008     2007  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 1,076,285     $ 1,177,889  
Notes payable
    1,333,760       1,271,457  
Accounts payable
    1,187,460       1,213,766  
Customer deposits
    295,611       273,800  
Accrued taxes —
               
Income taxes
    203,673       52,237  
Unrecognized tax benefits
    241,676       164,599  
Other
    429,554       329,895  
Accrued interest
    256,974       217,883  
Accrued vacation pay
    170,279       170,574  
Accrued compensation
    323,059       407,543  
Other
    372,354       351,017  
 
           
Total current liabilities
    5,890,685       5,630,660  
 
           
Long-term Debt
    15,781,761       14,143,114  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    5,996,905       5,838,674  
Deferred credits related to income taxes
    258,426       272,181  
Accumulated deferred investment tax credits
    461,431       479,302  
Employee benefit obligations
    1,575,486       1,492,472  
Asset retirement obligations
    1,164,770       1,200,094  
Other cost of removal obligations
    1,340,587       1,307,732  
Other regulatory liabilities
    1,665,155       1,613,004  
Other
    391,224       346,371  
 
           
Total deferred credits and other liabilities
    12,853,984       12,549,830  
 
           
Total Liabilities
    34,526,430       32,323,604  
 
           
Preferred and Preference Stock of Subsidiaries
    1,081,863       1,080,248  
 
           
Common Stockholders’ Equity:
               
Common stock, par value $5 per share —
               
Authorized — 1 billion shares
               
Issued — September 30, 2008: 774,988,223 Shares;
               
— December 31, 2007: 763,502,427 Shares
               
Treasury — September 30, 2008: 407,862 Shares;
               
— December 31, 2007: 398,746 Shares
               
Par value
    3,874,898       3,817,453  
Paid-in capital
    1,812,324       1,454,288  
Treasury, at cost
    (12,867 )     (11,143 )
Retained earnings
    7,752,182       7,154,596  
Accumulated other comprehensive loss
    (22,481 )     (30,166 )
 
           
Total Common Stockholders’ Equity
    13,404,056       12,385,028  
 
           
Total Liabilities and Stockholders’ Equity
  $ 49,012,349     $ 45,788,880  
 
           
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     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2008     2007     2008     2007  
    (in thousands)     (in thousands)  
Consolidated Net Income
  $ 780,436     $ 761,995     $ 1,556,022     $ 1,529,837  
Other comprehensive income (loss):
                               
Qualifying hedges:
                               
Changes in fair value, net of tax of $11,996, $(7,342), $579, and $6,087, respectively
    18,604       (11,667 )     690       9,704  
Reclassification adjustment for amounts included in net income, net of tax of $1,730, $1,548, $5,879, and $4,227, respectively
    2,708       2,369       9,217       6,770  
Marketable securities:
                               
Change in fair value, net of tax of $163, $1,094, $(2,293), and $2,998, respectively
    86       2,130       (3,940 )     4,757  
Reclassification adjustment for amounts included in net income, net of tax of $3, $(127), $3, and $(488), respectively
    4       (201 )     4       (774 )
Pension and other post retirement benefit plans:
                               
Additional prior service costs from amendment to non-qualified plans, net of tax of $-, $-,$-, and $(1,510), respectively
                      (2,424 )
Reclassification adjustment for amounts included in net income, net of tax of $237, $263, $773, and $790, respectively
    376       422       1,258       1,264  
 
                       
Total other comprehensive income (loss)
    21,778       (6,947 )     7,229       19,297  
 
                       
COMPREHENSIVE INCOME
  $ 802,214     $ 755,048     $ 1,563,251     $ 1,549,134  
 
                       
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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Table of Contents

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2008 vs. THIRD QUARTER 2007
AND
YEAR-TO-DATE 2008 vs. YEAR-TO-DATE 2007
OVERVIEW
Discussion of the results of operations is focused on Southern Company’s primary business of electricity sales in the Southeast by the traditional operating companies – Alabama Power, Georgia Power, Gulf Power, and Mississippi Power – and Southern Power. The traditional operating companies are vertically integrated utilities providing electric service in four Southeastern states. Southern Power constructs, acquires, and manages generation assets and sells electricity at market-based rates in the wholesale market. Southern Company’s other business activities include investments in leveraged lease projects, telecommunications, and energy-related services. For additional information on these businesses, see BUSINESS – The Southern Company System – “Traditional Operating Companies,” “Southern Power,” and “Other Businesses” in Item 1 of the Form 10-K.
Southern Company continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, 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
Net Income
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$18.4
  2.4   $26.2   1.7
       
Southern Company’s third quarter 2008 earnings were $780.4 million ($1.01 per share) compared to $762.0 million ($1.00 per share) for the third quarter 2007. The increase for third quarter 2008 when compared to the same period in 2007 was primarily the result of an increase in contributions from market-response rates to large commercial and industrial customers and retail base rate increases at Alabama Power and Georgia Power. This increase was partially offset by higher depreciation and amortization.
Southern Company’s year-to-date 2008 earnings were $1.56 billion ($2.02 per share) compared to $1.53 billion ($2.03 per share) for year-to-date 2007. The increase for year-to-date 2008 when compared to the same period in 2007 was primarily the result of an increase in contributions from market-response rates to large commercial and industrial customers, retail base rate increases at Alabama Power and Georgia Power, and an increase in allowance for equity funds used during construction. This increase for year-to-date 2008 was partially offset by lower leveraged lease income related to a significant charge in the second quarter 2008, higher depreciation and amortization, and higher other operations and maintenance expenses.
Retail Revenues
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$392.6   9.6   $999.2   10.1
       
In the third quarter 2008, retail revenues were $4.48 billion compared to $4.09 billion for the same period in 2007.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For year-to-date 2008, retail revenues were $10.93 billion compared to $9.93 billion for the same period in 2007.
Details of the change to retail revenues are as follows:
                                 
    Third Quarter     Year-to-Date  
    2008     2008  
    (in millions)     (% change)     (in millions)     (% change)  
Retail – prior year
  $ 4,085.7             $ 9,934.6          
Estimated change in —
                               
Rates and pricing
    194.4       4.8       542.8       5.5  
Sales growth
    (21.5 )     (0.5 )     1.9       0.0  
Weather
    (84.4 )     (2.1 )     (97.8 )     (1.0 )
Fuel and other cost recovery
    304.1       7.4       552.3       5.6  
 
Retail – current year
  $ 4,478.3       9.6 %   $ 10,933.8       10.1 %
         
Revenues associated with changes in rates and pricing increased in the third quarter and year-to-date 2008 when compared to the same periods in 2007 primarily as a result of an increase in revenues from market-response rates to large commercial and industrial customers and retail base rate increases at Alabama Power and Georgia Power.
Revenues attributable to changes in sales growth decreased in the third quarter 2008 when compared to the same period in 2007 due to a 1.4% decrease in weather-adjusted retail KWH sales. This decrease resulted primarily from a 2.1% decrease in electricity usage mainly due to a slowing economy and lower home occupancy rates in Southern Company’s service area as compared to the same period in 2007, partially offset by a 0.7% increase in customer growth. For the third quarter 2008, weather-adjusted residential KWH sales decreased 2.4%, weather-adjusted commercial KWH sales increased 1.1%, and weather-adjusted industrial KWH sales decreased 3.0%. Revenues attributable to changes in sales growth were insignificant for year-to-date 2008 when compared to the same period in 2007.
Revenues resulting from changes in weather decreased in the third quarter and year-to-date 2008 because of less favorable weather when compared to the same periods in 2007.
Fuel and other cost recovery revenues increased $304.1 million in the third quarter 2008 and $552.3 million for year-to-date 2008 when compared to the same periods in 2007. Electric rates for the traditional operating companies include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the fuel component of purchased power costs, and do not affect net income.
Wholesale Revenues
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$211.6
  37.6   $349.5   22.8
       
In the third quarter 2008, wholesale revenues were $774.8 million compared to $563.2 million for the same period in 2007.
For year-to-date 2008, wholesale revenues were $1.88 billion compared to $1.53 billion for the same period in 2007.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The increases for the third quarter and year-to-date 2008 when compared to the same periods in 2007 were primarily the result of higher revenues associated with new and existing wholesale contracts, as well as increases in fuel revenues due to increases of 31.6% and 19.3% in the average unit cost of fuel per net KWH generated in the third quarter and year-to-date 2008, respectively. Lower revenues from short-term opportunity sales partially offset the third quarter and year-to-date 2008 increases. Short-term opportunity sales are made at market-based rates that generally provide a margin above Southern Company’s variable cost to produce the energy. Weather-related generation load reductions when compared to the same periods in 2007 also partially offset the third quarter and year-to-date 2008 increases.
Other Electric Revenues
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$11.9   9.1   $32.3   8.5
       
In the third quarter 2008, other electric revenues were $142.5 million compared to $130.6 million for the same period in 2007. The increase was primarily the result of a $5.3 million increase in co-generation revenues due to higher natural gas prices, an increase in customer fees of $3.0 million, and a $2.0 million increase in transmission revenues.
For year-to-date 2008, other electric revenues were $413.8 million compared to $381.5 million for the same period in 2007. The increase was primarily the result of a $14.5 million increase in co-generation revenues due to higher natural gas prices, an increase in customer fees of $6.8 million, an increase in transmission revenues of $5.7 million, and an increase in outdoor lighting revenues of $5.2 million.
Co-generation revenues do not have a significant impact on earnings since they are generally offset by fuel expense.
Other Revenues
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$(21.6)   (41.2)   $(69.1)   (41.7)
       
In the third quarter 2008, other revenues were $30.9 million compared to $52.5 million for the same period in 2007. The decrease was primarily the result of a $15.4 million decrease due to Southern Company ending its synthetic fuel production in December 2007.
For year-to-date 2008, other revenues were $96.7 million compared to $165.8 million for the same period in 2007. The decrease was primarily the result of a $47.2 million decrease due to Southern Company ending its synthetic fuel production in December 2007 and a $4.4 million decrease in revenues at a subsidiary that provides energy-related services.
Fuel and Purchased Power Expenses
                                 
    Third Quarter 2008     Year-to-Date 2008  
    vs.     vs.  
    Third Quarter 2007     Year-to-Date 2007  
    (change in millions)     (% change)     (change in millions)     (% change)  
Fuel
  $ 414.1       23.8     $ 714.1       15.8  
Purchased power
    96.8       34.4       222.7       50.0  
                         
Total fuel and purchased power expenses
  $ 510.9             $ 936.8          
                         

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the third quarter 2008, fuel and purchased power expenses were $2.53 billion compared to $2.02 billion for the same period in 2007. The increase was primarily due to a $572.9 million net increase in the average cost of fuel and purchased power, primarily related to a 34.7% increase in the cost of coal per net KWH generated, partially offset by a $62.0 million net decrease related to lower total KWHs generated and purchased when compared to the same period in 2007.
For year-to-date 2008, fuel and purchased power expenses were $5.90 billion compared to $4.96 billion for the same period in 2007. The increase was primarily due to a $923.5 million net increase in the average cost of fuel and purchased power, primarily related to a 22.4% increase in the cost of coal per net KWH generated, and a $13.3 million net increase related to higher total KWHs generated and purchased when compared to the same period in 2007.
Increases in fuel expense at the traditional operating companies are generally offset by fuel revenues and do not affect net income. See FUTURE EARNINGS POTENTIAL – “FERC and State PSC Matters – Retail Fuel Cost Recovery” herein for additional information. Fuel expenses incurred under Southern Power’s PPAs are generally the responsibility of the counterparties and do not significantly affect net income.
Details of Southern Company’s cost of generation and purchased power are as follows:
                                                 
    Third Quarter     Third Quarter     Percent     Year-to-Date     Year-to-Date     Percent  
Average Cost   2008     2007     Change     2008     2007     Change  
    (cents per net KWH)             (cents per net KWH)          
Fuel
  3.96     3.01     31.6     3.46     2.90     19.3  
Purchased power
  10.19     8.67     17.5     8.80     7.75     13.6  
             
Energy purchases will vary depending on demand for energy within the Southern Company service area, the market cost of available energy as compared to the cost of Southern Company system-generated energy, and the availability of Southern Company system generation.
Other Operations and Maintenance Expenses
                                 
    Third Quarter 2008   Year-to-Date 2008
    vs.   vs.
    Third Quarter 2007   Year-to-Date 2007
    (change in millions)   (% change)   (change in millions)   (% change)
Other operations
  $ (6.9 )     (1.1 )   $ 51.1       2.8  
Maintenance
    3.7       1.4       34.8       4.2  
                       
Total other operations and maintenance
  $ (3.2 )           $ 85.9          
                       
In the third quarter 2008, other operations and maintenance expenses were $908.4 million compared to $911.6 million for the same period in 2007. The third quarter 2008 variance when compared to the third quarter 2007 is not material.
For year-to-date 2008, other operations and maintenance expenses were $2.72 billion compared to $2.63 billion for the same period in 2007. The increase was primarily due to a $62.6 million increase in fossil and hydro expenses due to costs incurred for scheduled outages, increases in commodity and labor costs, and expenses for new facilities; and a $27.5 million increase in nuclear expenses due to costs incurred for scheduled outages and increases in commodity and labor costs, partially offset by levelization of nuclear refueling outages.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation and Amortization
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$55.1
  17.7   $141.1   15.2
       
In the third quarter 2008, depreciation and amortization was $367.0 million compared to $311.9 million for the same period in 2007.
For year-to-date 2008, depreciation and amortization was $1.07 billion compared to $928.6 million for the same period in 2007.
The increases for the third quarter and year-to-date 2008 when compared to the same periods in 2007 were primarily due to an increase in plant in service related to environmental projects at Alabama Power and environmental, transmission, and distribution projects at Georgia Power. An increase in depreciation rates at Georgia Power and Southern Power also contributed to the third quarter and year-to-date 2008 increases, as well as the completion of Southern Power’s Plant Oleander Unit 5 in December 2007 and Plant Franklin Unit 3 in June 2008.
Taxes Other Than Income Taxes
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$8.5   4.1   $28.3   4.9
       
In the third quarter 2008, taxes other than income taxes were $215.3 million compared to $206.8 million for the same period in 2007.
For year-to-date 2008, taxes other than income taxes were $602.6 million compared to $574.3 million for the same period in 2007.
The increases for the third quarter and year-to-date 2008 when compared to the same periods in 2007 were primarily due to increases in franchise fees and municipal gross receipt taxes associated with increases in revenues from energy sales.
Allowance for Equity Funds Used During Construction
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$7.4   26.7   $39.8   55.4
       
In the third quarter 2008, allowance for equity funds used during construction was $35.5 million compared to $28.1 million for the same period in 2007.
For year-to-date 2008, allowance for equity funds used during construction was $111.6 million compared to $71.8 million for the same period in 2007.
The increases for the third quarter and year-to-date 2008 when compared to the same periods in 2007 were primarily due to additional investments in environmental projects mainly at Alabama Power, Georgia Power, and Gulf Power; transmission projects at Alabama Power and Georgia Power; generation facilities at Georgia Power; and distribution projects at Alabama Power.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest Income
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$(1.9)   (16.3)   $(11.2)   (34.9)
       
In the third quarter 2008, interest income was $9.7 million compared to $11.6 million for the same period in 2007. The third quarter 2008 variance when compared to the third quarter 2007 is not material.
For year-to-date 2008, interest income was $20.7 million compared to $31.9 million for the same period in 2007. The decrease was primarily the result of the reversal of accrued interest income on IRS deposits related to sale-in-lease-out (SILO) transactions.
Equity in Income (Losses) of Unconsolidated Subsidiaries
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$5.1   N/M   $26.8   129.6
       
 
N/M — Not Meaningful
In the third quarter 2008, equity in income (losses) of unconsolidated subsidiaries was $4.7 million compared to $(0.4) million for the same period in 2007. The third quarter 2008 variance when compared to the third quarter 2007 is not material.
For year-to-date 2008, equity in income (losses) of unconsolidated subsidiaries was $6.1 million compared to $(20.7) million for the same period in 2007. The increase was primarily the result of Southern Company ending its investment in synthetic fuel production facilities in December 2007.
Leveraged Lease Income (Losses)
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$(6.1)   (48.7)   $(85.5)   (267.9)
       
In the third quarter 2008, leveraged lease income (losses) were $6.3 million compared to $12.4 million for the same period in 2007.
For year-to-date 2008, leveraged lease income (losses) were $(53.6) million compared to $31.9 million for the same period in 2007.
Southern Company has several leveraged lease agreements which relate to international and domestic energy generation, distribution, and transportation assets. Southern Company receives federal income tax deductions for depreciation and amortization, as well as interest on long-term debt related to these investments. The decreases in leveraged lease income for the third quarter and year-to-date 2008 when compared to the same periods in 2007 were primarily the result of the application of FASB Staff Position No. 13-2, “Accounting for a Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” (FSP 13-2), including a $51.2 million after tax adjustment in the second quarter 2008. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Leveraged Lease Transactions” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Leveraged Lease Transactions” herein for further information.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest Expense, Net of Amounts Capitalized
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$(13.7)   (5.9)   $(8.1)   (1.2)
       
In the third quarter 2008, interest expense, net of amounts capitalized was $219.1 million compared to $232.8 million for the same period in 2007. The decrease was primarily due to $25.5 million related to lower average interest rates on existing variable rate debt and a $5.6 million decrease related to other interest charges, partially offset by a $15.1 million increase associated with $1.37 billion in additional debt outstanding at September 30, 2008 compared to September 30, 2007. 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. Also partially offsetting this decrease was $2.3 million less capitalized interest in the third quarter 2008 compared to the third quarter 2007.
For year-to-date 2008, interest expense, net of amounts capitalized was $665.1 million compared to $673.2 million for the same period in 2007. The decrease was primarily due to $61.2 million related to lower average interest rates on existing variable rate debt and $10.2 million more capitalized interest year-to-date 2008 compared to year-to-date 2007. This decrease was partially offset by a $44.7 million increase associated with the additional debt outstanding and an $18.6 million increase related to other interest charges primarily resulting from a $15.7 million after tax adjustment in the second quarter 2008 relating to the application of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Leveraged Lease Transactions” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Leveraged Lease Transactions” herein for further information.
Preferred and Preference Dividends of Subsidiaries
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$5.7   55.0   $17.9   58.2
       
In the third quarter 2008, preferred and preference dividends of subsidiaries were $16.2 million compared to $10.5 million for the same period in 2007.
For year-to-date 2008, preferred and preference dividends of subsidiaries were $48.6 million compared to $30.7 million for the same period in 2007.
The increases for the third quarter and year-to-date 2008 resulted primarily from the issuance of $470 million of preference stock in September and October 2007, partially offset by the redemption of $125 million of preferred stock in January 2008. 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 further information.
Other Income (Expense), Net
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$(28.1)   (162.6)   $(22.7)   (272.8)
       
In the third quarter 2008, other income (expense), net was $(10.8) million compared to $17.3 million for the same period in 2007.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For year-to-date 2008, other income (expense), net was $(14.4) million compared to $8.3 million for the same period in 2007.
The decreases in other income (expense), net for the third quarter and year-to-date 2008 when compared to the same periods in 2007 were primarily the result of gains during 2007 on hedge transactions associated with Southern Company’s investment in synthetic fuel production facilities, which ended in December 2007.
Income Taxes
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$(10.8)   (2.4)   $31.2   3.9
       
In the third quarter 2008, income taxes were $434.5 million compared to $445.3 million for the same period in 2007. The decrease was primarily due to an increase in the net synthetic fuel tax credits reserve in 2007.
For year-to-date 2008, income taxes were $837.6 million compared to $806.4 million for the same period in 2007. The increase was primarily due to higher pre-tax earnings and a decrease in net synthetic fuel tax credits, partially offset by the tax benefit associated with an increase in allowance for equity funds used during construction. See Note (H) to the Condensed Financial Statements under “Effective Tax Rate” herein for further information.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Southern Company’s 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 traditional operating companies’ ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. Other major factors include profitability of the competitive wholesale supply business and federal regulatory policy (including the FERC’s market-based rate proceeding), 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. In addition, the level of future earnings for the wholesale supply business also depends on numerous factors including 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 RISK FACTORS in Item 1A 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 statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. 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 for additional information.

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New Source Review Actions
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – New Source Review Actions” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding civil actions brought by the EPA against certain Southern Company subsidiaries. The EPA’s action against Alabama Power alleged that Alabama Power had violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of its coal-fired generating facilities. On July 24, 2008, the U.S. District Court for the Northern District of Alabama granted partial summary judgment in favor of Alabama Power regarding the proper legal test for determining whether projects are routine maintenance, repair, and replacement and therefore are excluded from NSR permitting. The decision does not resolve the case. The ultimate outcome of these matters cannot be determined at this time.
Clean Air Interstate Rule
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Southern Company in Item 7 of the Form 10-K for background regarding the Clean Air Interstate Rule (CAIR). On July 11, 2008, in response to petitions brought by certain states and regulated industries challenging particular aspects of CAIR, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating CAIR in its entirety and remanding it to the EPA for further action consistent with its opinion. Southern Company’s overall environmental compliance strategy has been developed in response to numerous federal and state regulatory requirements, many of which remain unaffected by the court’s ruling; however, the court’s decision has the potential to impact future decision making regarding capital expenditures, the installation and operation of pollution control equipment, and the purchase, use, and associated carrying values of emissions allowances. The ultimate impact of the court’s decision cannot be determined at this time and may depend on subsequent legal action, including issuance of the court’s mandate, and future rulemaking and regulatory treatment.
Eight-Hour Ozone Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Southern Company in Item 7 of the Form 10-K for additional information regarding revisions to the eight-hour ozone air quality standard. In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and new nonattainment areas within Southern Company’s service territory are expected. The ultimate outcome of this matter cannot be determined at this time and will depend on subsequent legal action and/or future nonattainment designations and regulatory plans.
Carbon Dioxide Litigation
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the U.S. District Court for the Northern District of California against several electric utilities (including Southern Company), several oil companies, and a coal company. The plaintiffs are the governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The plaintiffs assert claims for public and private nuisance and contend that the defendants have acted in concert and are therefore

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jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which cost is alleged to be $95 million to $400 million. On June 30, 2008, all defendants filed motions to dismiss this case. Southern Company believes that these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this time.
Global Climate Issues
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters - Global Climate Issues” of Southern Company in Item 7 of the Form 10-K for additional information regarding executive orders issued by the Governor of the State of Florida addressing reduction of greenhouse gas emissions within the state. On June 25, 2008, Florida’s Governor signed comprehensive energy-related legislation that includes authorization for the Florida Department of Environmental Protection to adopt rules for a cap-and-trade regulatory program to address greenhouse gas emissions from electric utilities, conditioned upon their ratification by the legislature no sooner than the 2010 legislative session. This legislation also authorizes the Florida PSC to adopt a renewable portfolio standard for public utilities, subject to legislative ratification. The impact of this legislation on Southern Company will depend on the development, adoption, legislative ratification, implementation, and potential legal challenges in connection with rules governing greenhouse gas emissions and mandates regarding the use of renewable energy, and the ultimate outcome cannot be determined at this time.
FERC and State PSC Matters
Market-Based Rate Authority
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Market-Based Rate Authority” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information regarding market-based rate authority. In June 2007, the FERC issued its final rule in Order No. 697 regarding market-based rate authority. The FERC generally retained its current market-based rate standards. Responding to a number of requests for rehearing, the FERC issued Order No. 697-A on April 21, 2008. This order largely affirmed its prior revision and codification of the regulations governing market-based rates for public utilities. In accordance with the order, Southern Company submitted to the FERC an updated market power analysis on September 2, 2008 related to its continued market-based rate authority. The ultimate outcome of this matter cannot now be determined.
On October 17, 2008, Southern Company filed with the FERC a revised market-based rate (MBR) tariff and a new cost-based rate (CBR) tariff. The revised MBR tariff provides for a “must offer” energy auction whereby Southern Company offers all of its available energy for sale in a day-ahead auction and an hour-ahead auction, after considering Southern Company’s native load requirements, reliability obligations, and sales commitments to third parties. All sales under the energy auction would be at market clearing prices established under the auction rules. The new CBR tariff is designed to be an alternative means for conducting short-term transactions in the wholesale markets and provides for a cost-based cap for wholesale sales of less than a year. Both tariffs must be approved by the FERC. The final outcome of this matter cannot now be determined.
Retail Fuel Cost Recovery
The traditional operating companies each have established fuel cost recovery rates approved by their respective state PSCs. Over the past several years, the traditional operating companies have continued to experience

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higher than expected fuel costs for coal, natural gas, and uranium. These higher fuel costs have resulted in under recovered fuel costs included in the balance sheets of approximately $1.2 billion at September 30, 2008 as compared to $1.1 billion at December 31, 2007. Operating revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes to the billing factors will have no significant effect on Southern Company’s revenues or net income but will affect cash flow. The traditional operating companies continuously monitor the under recovered fuel cost balance in light of these higher fuel costs. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Alabama Power Retail Regulatory Matters” and “Georgia Power Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information.
On February 29, 2008, Georgia Power filed a request with the Georgia PSC to change the fuel cost recovery rate effective June 1, 2008. The request was approved on May 20, 2008. Total annual fuel recovery billings increased by approximately $222 million. Georgia Power is required to file its next fuel cost recovery case by March 1, 2009.
Gulf Power filed a petition on June 20, 2008 with the Florida PSC requesting an adjustment to the fuel cost recovery factor. On July 29, 2008, the Florida PSC approved Gulf Power’s request for an increase of approximately 28.3% in the fuel factor for retail customers. This change represents an increase of 11.3% for a residential customer billing of 1,000 KWH per month. The increase will result in the recovery of $38.2 million of the projected under recovered balance during the period from September 2008 through December 2008. The remaining portion of the projected under recovered balance is expected to be recovered in 2009. On September 2, 2008, Gulf Power filed its 2009 projected fuel cost recovery filing with the Florida PSC which includes the fuel factors proposed for January through December 2009. The proposed 2009 fuel factor represents an increase of 12.9% over the fuel factor in place September 2008 through December 2008. This change represents an increase of 5.8% in the total bill for a residential customer using 1,000 KWH per month. The Florida PSC will hold hearings to address this filing in November 2008. On October 13, 2008, Gulf Power notified the Florida PSC that the projected fuel cost under recovery balance at year-end exceeds the 10% threshold, but no adjustment to the 2008 or the 2009 factor was requested.
On October 7, 2008, the Alabama PSC approved an increase in Alabama Power’s Rate ECR factor to 3.983 cents per KWH for a 24-month period beginning with October 9, 2008 billings. Thereafter, the Rate ECR factor shall be 5.910 cents per KWH, absent a contrary order by the Alabama PSC. During the 24-month period, Alabama Power will be allowed to continue to include a carrying charge associated with the under recovered fuel costs in the fuel expense calculation. In the event the application of this increased Rate ECR factor results in an over recovered position during this period, Alabama Power will pay interest on any such over recovered balance at the same rate used to derive the carrying cost. Accordingly, this approved increase in the billing factor will have no significant effect on Southern Company’s revenues or net income, but will increase annual cash flow.
Alabama Retail Rate Adjustments
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Alabama Power” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Alabama Power Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information. On October 7, 2008, the Alabama PSC approved a corrective rate package effective in January 2009 providing for various adjustments to customer charges under Alabama Power’s rate structure which are expected to generate additional annual revenues of $168 million. Alabama Power expects that these additional revenues will preclude the need for a rate adjustment under the Rate RSE in 2009 and agreed to a moratorium on any increase in 2009 under Rate RSE.

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On October 7, 2008, Alabama Power agreed to defer collection during 2009 of any increase in rates under the portion of Rate CNP which permits recovery of costs associated with environmental laws and regulations until 2010.
Mississippi Base Load Construction Legislation
In the 2008 regular session of the Mississippi legislature, a bill was passed and signed by the Governor on May 9, 2008 to enhance the Mississippi PSC’s authority to facilitate development and construction of base load generation in the State of Mississippi. The bill authorizes, but does not require, the Mississippi PSC to include in retail base rates, prior to and during construction, all or a portion of the prudently incurred pre-construction and construction costs incurred by a utility in constructing a base load electric generating plant. The bill also provides for periodic prudence reviews by the Mississippi PSC and prohibits the cancellation of any such generating plant without the approval of the Mississippi PSC. In the event of cancellation of the construction of the plant without approval of the Mississippi PSC, the bill authorizes the Mississippi PSC to make a public interest determination as to whether and to what extent the utility will be afforded rate recovery for costs incurred in connection with such cancelled generating plant. The effect of this legislation on Mississippi Power cannot now be determined.
Mirant Matters
Mirant Securities Litigation
See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Securities Litigation” in Item 8 of the Form 10-K for information regarding a class action lawsuit that several Mirant shareholders (plaintiffs) originally filed against Mirant and certain Mirant officers in May 2002. On August 6, 2008, the court entered an order in regard to the defendants’ motions to dismiss and for partial summary judgment. The court granted the defendants’ motion for partial summary judgment in two respects concluding that certain holders of Mirant stock do not have standing under the securities laws. The court denied the defendants’ other motions and granted leave to the plaintiffs to re-plead their claims against the defendants. In accordance with the court’s order, the plaintiffs filed an amended complaint. Southern Company and the remaining defendants filed motions to dismiss the amended complaint on October 9, 2008. The ultimate outcome of this matter 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 of the Form 10-K for information regarding pending litigation and proposed legislation related to the SILO transactions. Also see Note 1 to the financial statements of Southern Company under “Income and Other Taxes,” Note 3 to the financial statements of Southern Company under “Income Tax Matters,” and Note 5 to the financial statements of Southern Company under “Unrecognized Tax Benefits” in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements under “Unrecognized Tax Benefits” herein for information regarding Southern Company’s unrecognized tax benefit related to the SILO transactions.
During the second quarter 2008, decisions in favor of the IRS were reached in several court cases involving other tax payers with similar leveraged lease investments. Pursuant to the application of FIN 48 and FSP 13-2, management is required to assess, on a periodic basis, the likely outcome of the uncertain tax positions related to the SILO transactions. Based on these accounting standards and management’s review of the recent court

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decisions, Southern Company recorded an after tax charge of approximately $67 million in the second quarter 2008. Of the total, approximately $16 million is associated with the application of FIN 48 and represents additional interest expense related to tax returns for years 2000 through 2007 and approximately $51 million represents non-cash charges related to the application of FSP 13-2. The charges related to FSP 13-2 reflect the reallocation of lease income and will be recognized as income over the remaining term of the affected leases. The tax benefit associated with the lease transactions represents timing differences that do not impact total net income over the life of the transactions.
Furthermore, on August 6, 2008, the Commissioner of the IRS announced a settlement initiative for more than 45 corporations with similar leveraged lease transactions. Southern Company did not receive a formal offer to settle. In addition, the U.S. Senate continues to consider legislation that would disallow tax benefits after December 31, 2007 for SILO losses and other international leveraged lease transactions (such as lease-in, lease-out or LILO transactions). The ultimate impact on Southern Company’s net income and cash flow will be dependent on the outcome of its pending litigation, associated settlement discussions, and proposed legislation and cannot be determined at this time.
Legislation
On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. The States of Alabama, Florida, Georgia, and Mississippi do not allow the bonus depreciation deduction allowed by the Stimulus Act for state income tax purposes. Southern Company estimates the cash flow reduction to tax payments as a result of the Stimulus Act for 2008 to be between $120 million and $215 million.
On October 3, 2008, President Bush signed the Economic Stabilization Act of 2008 (Stabilization Act) into law. In addition to addressing financial issues, the Stabilization Act includes renewable energy incentives as well as accelerated depreciation for smart meters and smart grid systems. Southern Company is currently assessing the financial implications of the Stabilization Act. The ultimate impact cannot be determined at this time.
Construction Projects
Integrated Coal Gasification Combined Cycle
As part of the evaluation and screening of alternatives to meet its future generation needs, Mississippi Power is considering the construction of an advanced coal gasification facility to be located in Kemper County, Mississippi, that would use locally mined lignite coal. The plant would use an air-blown IGCC technology that generates power from low-rank coals and coals with high moisture or high ash content. These coals, which include lignite, make up approximately half the proven United States and worldwide coal reserves. The feasibility assessment of the project is currently underway. Mississippi Power filed an application in June 2006 with the DOE for certain tax credits available to projects using clean coal technologies under the Energy Policy Act of 2005. The DOE subsequently certified the project and in November 2006, the IRS allocated IRC Section 48A tax credits of $133 million to Mississippi Power. The utilization of these credits is dependent upon meeting the certification requirements for the project, including an in-service date no later than November 2013. On February 14, 2008, Mississippi Power also requested that the DOE transfer the remaining funds previously granted to a cancelled Southern Company project that would have been located in Orlando, Florida.
In December 2006, the Mississippi PSC approved Mississippi Power’s requested accounting treatment to defer the costs associated with Mississippi Power’s generation resource planning, evaluation, and screening activities as a regulatory asset. In December 2007, Mississippi Power reported to the Mississippi PSC an updated

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estimate and received an order directing Mississippi Power to continue charging all costs associated with the generation capacity assessment to the regulatory asset. At September 30, 2008, Mississippi Power had spent $36.2 million, of which $2.7 million related to land purchases capitalized. The remaining retail portion of $23.4 million was deferred in other regulatory assets.
The wholesale portion of $10.1 million was expensed, with $6.0 million through September 30, 2008 and $4.1 million during 2007. On August 29, 2008, Mississippi Power and its wholesale customers entered into an agreement regarding a wholesale rate increase. The FERC accepted the filing on October 24, 2008. This agreement will allow $9.3 million of the wholesale portion of the generation screening and evaluation costs associated with the IGCC project to be reclassified from expense to a regulatory asset in the fourth quarter 2008.
These costs will remain as a regulatory asset until the Mississippi PSC and the FERC determine the prudence and ultimate recovery of such costs. The balance of such regulatory asset is included in Mississippi Power’s rate base for ratemaking purposes. Approval by various regulatory agencies, including the Mississippi PSC, will also be required if the project proceeds. The Mississippi PSC, in its discretion, may exercise its additional rate authority granted to the Mississippi PSC in the Mississippi base load construction legislation if the project proceeds. See FUTURE EARNINGS POTENTIAL – “FERC and State PSC Matters – Mississippi Base Load Construction Legislation” herein for additional information.
The final outcome of this matter cannot now be determined.
Nuclear
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Construction Projects - Nuclear” of Southern Company in Item 7 of the Form 10-K for information regarding the potential expansion of Plant Vogtle.
In August 2006, Southern Nuclear, on behalf of Georgia Power, OPC, MEAG Power, and Dalton Utilities (collectively, Owners), filed an application with the NRC for an early site permit approving two additional nuclear units on the site of Plant Vogtle. On March 31, 2008, Southern Nuclear filed an application with the NRC for a combined construction and operating license (COL) for the new units.
On April 8, 2008, Georgia Power, acting for itself and as agent for the Owners, and a consortium consisting of Westinghouse and Stone & Webster (collectively, Consortium) entered into an engineering, procurement, and construction agreement to design, engineer, procure, construct, and test two AP1000 nuclear units with electric generating capacity of approximately 1,100 MWs each and related facilities, structures, and improvements at Plant Vogtle (Vogtle 3 and 4 Agreement).
The Vogtle 3 and 4 Agreement is an arrangement whereby the Consortium supplies and constructs the entire facility with the exception of certain items provided by the Owners. Under the terms of the Vogtle 3 and 4 Agreement, the Owners will pay a purchase price that will be subject to certain price escalation and adjustments, adjustments for change orders, and performance bonuses. Each Owner is severally (and not jointly) liable for its proportionate share, based on its ownership interest, of all amounts owed to the Consortium under the Vogtle 3 and 4 Agreement. Georgia Power’s proportionate share, based on its current ownership interest, is 45.7%. Under the terms of a separate joint development agreement, the Owners finalized their ownership percentages on July 2, 2008, except for allowed changes, under certain limited circumstances, during the Georgia PSC certification process.
Georgia Power submitted its self-build nuclear proposal to the Georgia PSC on May 1, 2008 in connection with its 2016-2017 base load capacity request for proposals (RFP). No other responses to the RFP were received.

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On August 1, 2008, Georgia Power submitted an application for the Georgia PSC to certify the project. Hearings began November 3, 2008 and a final certification decision is expected in March 2009.
If certified by the Georgia PSC and licensed by the NRC, Vogtle Units 3 and 4 are scheduled to be placed in service in 2016 and 2017, respectively. The total plant value to be placed in service will also include financing costs for each of the Owners, the impacts of inflation on costs, and transmission and other costs that are the responsibility of the Owners. Georgia Power’s proportionate share of the estimated in-service costs, based on its current ownership interest, is approximately $6.4 billion, subject to adjustments and performance bonuses under the Vogtle 3 and 4 Agreement.
The Owners and the Consortium have agreed to certain liquidated damages upon the Consortium’s failure to comply with the schedule and performance guarantees. The Owners and the Consortium also have agreed to certain bonuses payable to the Consortium for early completion and unit performance. The Consortium’s liability to the Owners for schedule and performance liquidated damages and warranty claims is subject to a cap.
The obligations of Westinghouse and Stone & Webster under the Vogtle 3 and 4 Agreement are guaranteed by Toshiba Corporation and The Shaw Group, Inc., respectively. In the event of certain credit rating downgrades of any Owner, such Owner will be required to provide a letter of credit or other credit enhancement.
The Vogtle 3 and 4 Agreement is subject to certification by the Georgia PSC. In addition, the Owners may terminate the Vogtle 3 and 4 Agreement at any time for their convenience, provided that the Owners will be required to pay certain termination costs and, at certain stages of the work, cancellation fees to the Consortium. The Consortium may terminate the Vogtle 3 and 4 Agreement under certain circumstances, including delays in receipt of the COL or delivery of full notice to proceed, certain Owner suspension or delays of work, action by a governmental authority to permanently stop work, certain breaches of the Vogtle 3 and 4 Agreement by the Owners, Owner insolvency, and certain other events.
Other Matters
Southern Company is involved in various other matters being litigated, regulatory matters, and certain tax-related issues that could affect future earnings. In addition, Southern Company is subject to certain claims and legal actions arising in the ordinary course of business. 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, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air and water quality standards, 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 pending or potential litigation against Southern Company and its subsidiaries cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Southern Company in Item 8 of the Form 10-K, 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.
On July 3, 2008, Georgia Power self-reported to the SERC Reliability Council (SERC) a potential violation of the North American Electric Reliability Council reliability standard for transmission vegetation management programs related to a single tree. The SERC can impose penalties ranging from $1,000 to $1,000,000 per day, per violation, which can be adjusted according to certain risk factors and other aggravating or mitigating factors. On September 10, 2008, Georgia Power submitted a proposed settlement agreement, including a proposed mitigation plan. The SERC has not responded to the proposed settlement agreement and the penalty that SERC may assess remains uncertain. The ultimate outcome of this matter cannot be determined at this

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time; however, it could have a significant and potentially material impact on the net income and cash flow of Southern Company.
See the Notes to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated 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. 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, Unbilled Revenues, and Leveraged Leases.
New Accounting Standards
Business Combinations
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), “Business Combinations (SFAS No. 141R). SFAS No. 141R, when adopted, will significantly change the accounting for business combinations, specifically the accounting for contingent consideration, contingencies, acquisition costs, and restructuring costs. Southern Company plans to adopt SFAS No. 141R on January 1, 2009. It is likely that the adoption of SFAS No. 141R will have a significant impact on the accounting for any business combinations completed by Southern Company after January 1, 2009.
In December 2007, the FASB issued FASB Statement No. 160, “Non-controlling Interests in Consolidated Financial Statements” (SFAS No. 160). SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary should be reported as equity in the consolidated financial statements and establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. Southern Company plans to adopt SFAS No. 160 on January 1, 2009. Southern Company is currently assessing its impact, if any.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Southern Company’s financial condition remained stable at September 30, 2008. Throughout the recent turmoil in the financial markets, Southern Company has maintained adequate access to capital without drawing any of its committed bank credit arrangements used to support its commercial paper programs and variable rate pollution control revenue bonds. Southern Company and the traditional operating companies have continued to issue commercial paper which has increased the balance of short-term debt while also increasing cash and cash equivalents as a precautionary measure. Since September 15, 2008, Southern Power has not needed to access

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the commercial paper market or draw on its committed bank credit arrangements. Due to the recent contraction in the credit market, Southern Power’s access to commercial paper could have been limited. During the third quarter 2008 and subsequent to September 30, 2008, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power purchased a total of approximately $133 million of variable rate pollution control revenue bonds that were tendered for purchase, of which $86 million were remarketed by Alabama Power and Georgia Power. Southern Company intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital needs. No material changes in bank credit arrangements have occurred. Southern Company’s interest cost for short-term debt has not changed materially. The impact on future financing costs as a result of the recent financial turmoil cannot be determined at this time. See “Sources of Capital” and “Financing Activities” herein for additional information.
As a result of the turmoil in the financial markets, Southern Company experienced no material counterparty credit losses. Southern Company’s investments in pension and nuclear decommissioning trust funds declined in value as of September 30, 2008. No material changes in funding requirements related to these funds are currently expected; however, the ultimate outcome cannot be determined at this time.
Net cash provided from operating activities totaled $2.59 billion for the first nine months of 2008 compared to $2.47 billion for the first nine months of 2007. The $119 million increase in net cash provided from operating activities in 2008 as compared to the prior period is primarily due to increased revenues as a result of retail rate increases at Alabama Power and Georgia Power and an increase in cash flow of $106 million in accrued taxes primarily due to a difference between the periods in payments for federal taxes and property taxes. Net cash used for investing activities totaled $2.98 billion for the first nine months of 2008, compared to $2.56 billion in the same period of the prior year, an increase of $420 million, primarily due to property additions to utility plant. Net cash provided from financing activities totaled $999 million for the first nine months of 2008 compared to $460 million for the corresponding period in 2007, primarily due to the increased levels of notes payable and the amount and timing of financings in 2008 compared to 2007.
Significant balance sheet changes for the first nine months of 2008 include an increase in total property, plant, and equipment of $1.79 billion, an increase in long-term debt, excluding amounts due within one year, of $1.64 billion used primarily for construction expenditures and general corporate purposes, and an increase of $605 million in cash.
The market price of Southern Company’s common stock at September 30, 2008 was $37.69 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $17.30 per share, representing a market-to-book ratio of 218%, compared to $38.75, $16.23, and 239%, respectively, at the end of 2007. The dividend for the third quarter 2008 was $0.42 per share compared to $0.4025 per share in the third quarter 2007.
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 and preference stock dividends, leases, trust funding requirements, other purchase commitments, unrecognized tax benefits and interest, and derivative obligations. Revised funding requirements associated with unrecognized tax benefits and interest for 2008 are $290 million and $142 million for years after 2008. Approximately $1.1 billion will be required through September 30, 2009 for maturities of long-term debt. In addition, in connection with Georgia Power’s entering into the Vogtle 3 and 4 Agreement, as described under FUTURE EARNINGS POTENTIAL – “Construction Projects” herein, the revised estimated total construction

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
program for Southern Company is $4.4 billion in 2008, $5.2 billion in 2009, and $4.8 billion in 2010. In November 2008, Georgia Power’s management plans to request approval by the Georgia Power Board of Directors of a revised capital budget of approximately $2.9 billion for 2009 and $2.6 billion for 2010. The increases are primarily a result of changes in the timing of expenditures for environmental controls at Plant Bowen and Yates and the new generating units at Plant McDonough, as well as other project scope and price changes. In October 2008, Alabama Power’s Board of Directors approved a new capital budget for 2009 and 2010. The construction program of Alabama Power is estimated to be $1.6 billion for 2009 and $1.1 billion for 2010. The Southern Company system financial plan, including the Southern Company system capital budget, is expected to be reviewed by the Southern Company Board of Directors in early 2009. Actual construction costs may vary from these estimates because of changes in such factors as: business conditions; environmental statutes and regulations; nuclear plant regulation; FERC rules and regulations; load projections; the cost and efficiency of construction labor, equipment, and materials; and the cost and availability of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.
Sources of Capital
Southern Company intends to meet its future capital needs through internal cash flow and external security issuances. Equity capital can be provided from any combination of Southern Company’s stock plans, private placements, or public offerings. The amount and timing of additional equity capital to be raised in 2008, as well as in subsequent years, will be contingent on Southern Company’s investment opportunities. The traditional 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, term loans, short-term borrowings, and equity contributions from Southern Company. However, the amount, type, and timing of any financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. 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.
Southern Company’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet cash needs as well as scheduled maturities of long-term debt. To meet short-term cash needs and contingencies, Southern Company has substantial cash flow from operating activities and access to capital markets, including commercial paper programs (which are backed by bank credit facilities) to meet liquidity needs. At September 30, 2008, Southern Company and its subsidiaries had approximately $806 million of cash and cash equivalents and approximately $4.3 billion of unused credit arrangements with banks, of which $234 million expire in 2008, $821 million expire in 2009, $25 million expire in 2011, and $3.2 billion expire in 2012. Approximately $79 million of the credit facilities expiring in 2008 and 2009 allow for the execution of term loans for an additional two-year period, and $584 million contain provisions allowing one-year term loans. At September 30, 2008, approximately $1.35 billion of the credit facilities were dedicated to providing liquidity support to the traditional operating companies’ variable rate pollution control revenue bonds, compared to $1.44 billion at June 30, 2008. During the third quarter 2008, Alabama Power, Georgia Power, and Mississippi Power were required to purchase a total of approximately $96 million of variable rate pollution control revenue bonds that were tendered by investors. Alabama Power remarketed all $11 million of its repurchased variable rate pollution control revenue bonds that were tendered by investors. Subsequent to September 30, 2008, Georgia Power and Gulf Power converted a total of approximately $134 million of variable rate pollution control revenue bonds to fixed interest rate modes. Also subsequent to September 30, 2008, Gulf Power purchased from investors $37 million of variable rate pollution control revenue bonds that were subject to mandatory tender. In addition, Georgia Power remarketed $75 million of its repurchased pollution control revenue bonds that were tendered by investors. Including the impact of the conversions, the tenders, and the remarketing of tendered bonds, $1.25 billion of the credit facilities are now dedicated to providing liquidity support to the traditional operating companies’ variable rate pollution control revenue

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
bonds. See Note 6 to the financial statements of Southern Company under “Bank Credit Arrangements” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under “Bank Credit Arrangements” herein for additional information. The traditional 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 traditional operating companies. At September 30, 2008, the Southern Company system had outstanding commercial paper of $1.2 billion and short-term bank notes of $102 million. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and cash.
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 of certain subsidiaries to BBB and Baa2, or BBB- and/or Baa3 or below. These contracts are for physical electricity purchases and sales, fuel purchases, fuel transportation and storage, emissions allowances, energy price risk management, and construction of new generation. At September 30, 2008, the maximum potential collateral requirements under these contracts at a BBB and Baa2 rating were approximately $9 million and at a BBB- or Baa3 rating were approximately $398 million. At September 30, 2008, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $1.7 billion. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash.
Market Price Risk
Southern Company’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2007 reporting period. Since a significant portion of outstanding indebtedness is at fixed rates, Southern Company is not aware of any facts or circumstances that would significantly affect exposures on existing indebtedness in the near term. However, the impact on future financing costs cannot now be determined.
Due to cost-based rate regulation, the traditional operating companies continue to 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. However, during 2008, Southern Power is exposed to market volatility in energy-related commodity prices as a result of sales of uncontracted generating capacity. To mitigate residual risks relative to movements in electricity prices, the traditional operating companies enter into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, into financial hedge contracts for natural gas purchases. The traditional operating companies continue to manage fuel-hedging programs implemented at the instruction of their respective state PSCs. As such, the traditional operating companies have no material change in market risk exposures when compared with the December 31, 2007 reporting period.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The changes in fair value of energy-related derivative contracts for the three months and nine months ended September 30, 2008 were as follows:
                 
    Third Quarter   Year-to-Date
    2008   2008
    Changes   Changes
    Fair Value
    (in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net
  $ 313.2     $ 4.4  
Contracts realized or settled
    (131.4 )     (179.0 )
Current period changes(a)
    (281.6 )     74.8  
     
Contracts outstanding at the end of the period, assets (liabilities), net
  $ (99.8 )   $ (99.8 )
     
(a) Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
The decreases in the fair value positions of the energy-related derivative contracts for the three months and nine months ended September 30, 2008 were $413 million and $104 million, respectively, substantially all of which is due to natural gas positions. These changes are attributable to both the volume and prices of natural gas. At September 30, 2008, Southern Company had a net hedge volume of 139.6 Bcf with a weighted average contract cost approximately $0.84 per mmBtu above market prices, compared to 106.5 Bcf at June 30, 2008 with a weighted average contract cost approximately $3.53 per mmBtu below market prices and compared to 99.0 Bcf at December 31, 2007 with a weighted average contract cost approximately $0.01 per mmBtu above market prices. The majority of the natural gas hedges are recovered through the traditional operating companies’ fuel cost recovery clauses.
At September 30, 2008 and December 31, 2007, the fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:
                 
    September 30,   December 31,
    2008   2007
    (in millions)
Regulatory hedges
  $ (111.3 )   $ (0.1 )
Cash flow hedges
    8.6       1.5  
Non-accounting hedges
    2.9       3.0  
     
Total fair value
  $ (99.8 )   $ 4.4  
     
Energy-related derivative contracts which are designated as regulatory hedges relate to the traditional operating companies’ fuel hedging programs, where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the fuel cost recovery clauses. Gains and losses on energy-related derivatives designated as cash flow hedges are mainly used by Southern Power to hedge anticipated purchases and sales and are initially deferred in other comprehensive income before being recognized in income in the same period as the hedged transaction. Gains and losses on energy-related derivative contracts that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.
Unrealized pre-tax gains/(losses) recognized in income for the three months and nine months ended September 30, 2008 for energy-related derivative contracts that are not hedges were $6.5 million and $(0.1) million, respectively. For the three months and nine months ended September 30, 2007, the unrealized losses recognized in income were $(2.2) million and $(0.7) million, respectively.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at September 30, 2008 are as follows:
                                 
    September 30, 2008
    Fair Value Measurements
    Total   Maturity
    Fair Value   Year 1   Years 2&3   Years 4 & 5
    (in millions)
Level 1
  $     $     $     $  
Level 2
    (99.8 )     (74.0 )     (24.0 )     (1.8 )
Level 3
                       
         
Fair value of contracts outstanding at end of period
  $ (99.8 )   $ (74.0 )   $ (24.0 )   $ (1.8 )
         
As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value measurements and related disclosures, the table above now uses the three-tier fair value hierarchy, as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously used descriptions “actively quoted,” “external sources,” and “models and other methods.” The three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the previous descriptions focused on the source of the inputs. Because Southern Company uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, the valuations of those contracts now appear in Level 2; previously they were shown as “actively quoted.”
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 nine months of 2008, Southern Company and its subsidiaries issued $1.7 billion of senior notes, and Southern Company issued $381 million of common stock through the Southern Investment Plan and employee and director stock plans. In addition, Georgia Power, Gulf Power, and Mississippi Power entered into long-term bank loans of $300 million, $110 million, and $80 million, respectively. Alabama Power and Georgia Power also incurred obligations related to the issuance of pollution control revenue bonds totaling $120 million and $53 million, respectively. The proceeds were primarily used to repay short-term indebtedness and to fund ongoing construction projects. Also in September 2008, Georgia Power paid at maturity $75 million of Series 2007C floating rate Senior Notes. See Southern Company’s Condensed Consolidated Statements of Cash Flows herein for further details on financing activities during the first nine months of 2008. Also during the first nine months of 2008, interest rate hedges of $405 million notional amount were settled at a loss of $25.7 million related to the issuances. These losses were deferred in other comprehensive income and will be amortized to income over the original term of the hedges. See Note (F) to the Condensed Financial Statements herein for further details. Also during the first nine months of 2008, Southern Company and its subsidiaries repaid at maturity $769.8 million of long-term debt and also redeemed $125 million of preferred stock.
Also in 2008, Southern Company’s subsidiaries converted their entire $1.2 billion of obligations related to auction rate pollution control revenue bonds from auction rate modes to other interest rate modes. Initially, approximately $696 million of the auction rate pollution control revenue bonds were converted to fixed interest rate modes and approximately $553 million were converted to daily floating rate modes. In June 2008, approximately $98 million of the daily floating rate pollution control revenue bonds were converted to fixed interest rate modes. During the third quarter 2008, Alabama Power, Georgia Power, and Mississippi Power were required to purchase a total of approximately $96 million of variable rate pollution control revenue bonds

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
that were tendered by investors. Alabama Power remarketed all $11 million of its repurchased variable rate pollution control revenue bonds that were tendered by investors. Subsequent to September 30, 2008, Georgia Power and Gulf Power converted a total of approximately $134 million of variable rate pollution control revenue bonds to fixed interest rate modes. Also subsequent to September 30, 2008, Gulf Power purchased from investors $37 million of variable rate pollution control revenue bonds that were subject to mandatory tender. In addition, Georgia Power remarketed $75 million of its repurchased pollution control revenue bonds that were tendered by investors.
During the first nine months of 2008, Southern Company and its subsidiaries entered into additional derivative transactions designed to hedge interest rate risk related to variable rate obligations. The total notional amount of these derivatives is $1.2 billion.
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 Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power 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.
As of the end of the period covered by this quarterly report, Southern Company conducted an evaluation under the supervision and with the participation of Southern 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 this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective.
     (b) Changes in internal controls.
There have been no changes in Southern Company’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 third quarter of 2008 that have materially affected or are reasonably likely to materially affect Southern Company’s internal control over financial reporting.
Item 4T. Controls and Procedures.
     (a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this quarterly report, 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.
     (b) Changes in internal controls.
There have been no changes in 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 third quarter of 2008 that have materially affected or are reasonably likely to materially affect Alabama Power’s, Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’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     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2008     2007     2008     2007  
    (in thousands)     (in thousands)  
Operating Revenues:
                               
Retail revenues
  $ 1,559,034     $ 1,394,539     $ 3,741,074     $ 3,444,282  
Wholesale revenues —
                               
Non-affiliates
    196,381       160,832       536,392       472,015  
Affiliates
    60,583       35,400       240,696       116,626  
Other revenues
    49,084       44,427       153,412       135,569  
 
                       
Total operating revenues
    1,865,082       1,635,198       4,671,574       4,168,492  
 
                       
Operating Expenses:
                               
Fuel
    651,673       506,933       1,628,170       1,353,914  
Purchased power —
                               
Non-affiliates
    104,238       71,622       153,907       94,330  
Affiliates
    121,651       100,054       286,147       249,261  
Other operations
    203,019       201,495       585,581       556,639  
Maintenance
    97,948       88,135       331,479       303,989  
Depreciation and amortization
    132,410       118,403       387,677       351,514  
Taxes other than income taxes
    76,200       72,503       227,585       216,752  
 
                       
Total operating expenses
    1,387,139       1,159,145       3,600,546       3,126,399  
 
                       
Operating Income
    477,943       476,053       1,071,028       1,042,093  
Other Income and (Expense):
                               
Allowance for equity funds used during construction
    11,730       9,600       32,269       24,562  
Interest income
    4,794       4,935       13,694       12,942  
Interest expense, net of amounts capitalized
    (71,166 )     (69,977 )     (209,787 )     (206,743 )
Other income (expense), net
    (5,731 )     (13,067 )     (19,661 )     (19,957 )
 
                       
Total other income and (expense)
    (60,373 )     (68,509 )     (183,485 )     (189,196 )
 
                       
Earnings Before Income Taxes
    417,570       407,544       887,543       852,897  
Income taxes
    156,109       152,956       323,335       319,840  
 
                       
Net Income
    261,461       254,588       564,208       533,057  
Dividends on Preferred and Preference Stock
    9,866       8,504       29,598       24,867  
 
                       
Net Income After Dividends on Preferred and Preference Stock
  $ 251,595     $ 246,084     $ 534,610     $ 508,190  
 
                       
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2008     2007     2008     2007  
    (in thousands)     (in thousands)  
Net Income After Dividends on Preferred and Preference Stock
  $ 251,595     $ 246,084     $ 534,610     $ 508,190  
Other comprehensive income (loss):
                               
Qualifying hedges:
                               
Changes in fair value, net of tax of $50, $(932), $(989), and $256, respectively
    83       (1,533 )     (1,627 )     420  
Reclassification adjustment for amounts included in net income, net of tax of $82, $74, $710, and $206, respectively
    135       121       1,168       339  
 
                       
Total other comprehensive income (loss)
    218       (1,412 )     (459 )     759  
 
                       
COMPREHENSIVE INCOME
  $ 251,813     $ 244,672     $ 534,151     $ 508,949  
 
                       
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 Nine Months  
    Ended September 30,  
    2008     2007  
    (in thousands)  
Operating Activities:
               
Net income
  $ 564,208     $ 533,057  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    451,182       410,695  
Deferred income taxes and investment tax credits, net
    109,459       10,545  
Allowance for equity funds used during construction
    (32,269 )     (24,562 )
Pension, postretirement, and other employee benefits
    (133 )     6,941  
Stock option expense
    2,822       4,533  
Tax benefit of stock options
    641       1,051  
Other, net
    22,717       11,465  
Changes in certain current assets and liabilities —
               
Receivables
    (92,773 )     (168,447 )
Fossil fuel stock
    (61,753 )     (17,123 )
Materials and supplies
    (19,915 )     (30,412 )
Other current assets
    (33,841 )     7,624  
Accounts payable
    (62,186 )     (53,611 )
Accrued taxes
    92,749       213,510  
Accrued compensation
    (27,786 )     (23,986 )
Other current liabilities
    22,248       17,130  
 
           
Net cash provided from operating activities
    935,370       898,410  
 
           
Investing Activities:
               
Property additions
    (1,024,668 )     (822,818 )
Investment in restricted cash from pollution control bonds
    (5,454 )     (96,049 )
Distribution of restricted cash from pollution control bonds
    24,585       44,550  
Nuclear decommissioning trust fund purchases
    (218,606 )     (201,523 )
Nuclear decommissioning trust fund sales
    218,606       201,523  
Cost of removal, net of salvage
    (33,579 )     (33,194 )
Other
    (26,839 )     (12,930 )
 
           
Net cash used for investing activities
    (1,065,955 )     (920,441 )
 
           
Financing Activities:
               
Increase (decrease) in notes payable, net
    94,891       (119,670 )
Proceeds —
               
Senior notes
    600,000       450,000  
Common stock issued to parent
    225,000       140,000  
Capital contributions
    15,095       (146 )
Gross excess tax benefit of stock options
    1,226       2,324  
Preference Stock
          150,000  
Pollution control revenue bonds
    131,100       246,500  
Redemptions —
               
Senior notes
    (250,000 )     (168,500 )
Preferred stock
    (125,000 )      
Pollution control revenue bonds
    (11,100 )      
Payment of preferred and preference stock dividends
    (31,024 )     (22,875 )
Payment of common stock dividends
    (368,475 )     (348,750 )
Other
    (6,467 )     (14,676 )
 
           
Net cash provided from financing activities
    275,246       314,207  
 
           
Net Change in Cash and Cash Equivalents
    144,661       292,176  
Cash and Cash Equivalents at Beginning of Period
    73,616       15,539  
 
           
Cash and Cash Equivalents at End of Period
  $ 218,277     $ 307,715  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $14,649 and $12,455 capitalized for 2008 and 2007, respectively)
  $ 183,218     $ 176,842  
Income taxes (net of refunds)
  $ 197,907     $ 157,501  
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 September 30,     At December 31,  
Assets   2008     2007  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 218,277     $ 73,616  
Restricted cash
    601       19,732  
Receivables —
               
Customer accounts receivable
    432,895       357,355  
Unbilled revenues
    108,775       95,278  
Under recovered regulatory clause revenues
    92,715       232,226  
Other accounts and notes receivable
    43,350       42,745  
Affiliated companies
    34,466       61,250  
Accumulated provision for uncollectible accounts
    (9,044 )     (7,988 )
Fossil fuel stock, at average cost
    248,706       182,963  
Materials and supplies, at average cost
    307,258       287,994  
Vacation pay
    50,616       50,266  
Prepaid expenses
    115,095       72,952  
Other
    48,677       19,610  
 
           
Total current assets
    1,692,387       1,487,999  
 
           
Property, Plant, and Equipment:
               
In service
    17,450,685       16,669,142  
Less accumulated provision for depreciation
    6,173,487       5,950,373  
 
           
 
    11,277,198       10,718,769  
Nuclear fuel, at amortized cost
    198,772       137,146  
Construction work in progress
    893,041       928,182  
 
           
Total property, plant, and equipment
    12,369,011       11,784,097  
 
           
Other Property and Investments:
               
Equity investments in unconsolidated subsidiaries
    51,002       48,664  
Nuclear decommissioning trusts, at fair value
    460,440       542,846  
Other
    40,995       31,146  
 
           
Total other property and investments
    552,437       622,656  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    359,519       347,193  
Prepaid pension costs
    1,034,226       989,085  
Deferred under recovered regulatory clause revenues
    247,382       81,650  
Other regulatory assets
    218,868       224,792  
Other
    261,530       209,153  
 
           
Total deferred charges and other assets
    2,121,525       1,851,873  
 
           
Total Assets
  $ 16,735,360     $ 15,746,625  
 
           
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 September 30,     At December 31,  
Liabilities and Stockholder’s Equity   2008     2007  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 410,117     $ 535,152  
Notes payable
    94,891        
Accounts payable —
               
Affiliated
    177,140       193,518  
Other
    277,275       308,177  
Customer deposits
    74,798       67,722  
Accrued taxes —
               
Income taxes
    7,935       45,958  
Other
    96,978       29,198  
Accrued interest
    68,240       55,263  
Accrued vacation pay
    42,138       42,138  
Accrued compensation
    67,728       92,385  
Other
    95,375       55,331  
 
           
Total current liabilities
    1,412,615       1,424,842  
 
           
Long-term Debt
    5,221,120       4,750,196  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    2,244,396       2,065,264  
Deferred credits related to income taxes
    90,949       93,709  
Accumulated deferred investment tax credits
    174,612       180,578  
Employee benefit obligations
    376,797       349,974  
Asset retirement obligations
    454,153       505,794  
Other cost of removal obligations
    632,364       613,616  
Other regulatory liabilities
    584,182       637,040  
Other
    39,764       31,417  
 
           
Total deferred credits and other liabilities
    4,597,217       4,477,392  
 
           
Total Liabilities
    11,230,952       10,652,430  
 
           
Preferred and Preference Stock
    685,127       683,512  
 
           
Common Stockholder’s Equity:
               
Common stock, par value $40 per share —
               
Authorized - 40,000,000 shares
               
Outstanding - September 30, 2008: 23,600,000 shares
               
- December 31, 2007: 17,975,000 shares
    944,000       719,000  
Paid-in capital
    2,084,904       2,065,298  
Retained earnings
    1,795,283       1,630,832  
Accumulated other comprehensive loss
    (4,906 )     (4,447 )
 
           
Total common stockholder’s equity
    4,819,281       4,410,683  
 
           
Total Liabilities and Stockholder’s Equity
  $ 16,735,360     $ 15,746,625  
 
           
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
THIRD QUARTER 2008 vs. THIRD QUARTER 2007
AND
YEAR-TO-DATE 2008 vs. YEAR-TO-DATE 2007
OVERVIEW
Alabama Power operates as a vertically integrated utility providing electricity 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 primary business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth, and to effectively manage and secure timely recovery of rising costs. These costs include those related to growing demand, increasingly stringent environmental standards, fuel costs, capital expenditures, and restoration following major storms. Appropriately balancing the need to recover these increasing costs with customer prices will continue to challenge Alabama Power for the foreseeable future.
Alabama Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income after dividends on preferred and preference stock. 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
Net Income
             
Third Quarter 2008 vs. Third Quarter 2007
  Year-to-Date 2008 vs. Year-to-Date 2007
 
(change in millions)   (% change)   (change in millions)   (% change)
$5.5   2.2   $26.4   5.2
 
Alabama Power’s net income after dividends on preferred and preference stock for the third quarter 2008 was $251.6 million compared to $246.1 million for the corresponding period in 2007. Alabama Power’s net income after dividends on preferred and preference stock for year-to-date 2008 was $534.6 million compared to $508.2 million for the corresponding period in 2007. Revenues increased for the third quarter and year-to-date 2008 primarily due to retail base rate increases resulting from an increase in rates under Rate RSE and Rate CNP for environmental costs (Rate CNP Environmental) effective in January 2008. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Rate Adjustments” 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 for additional information on Alabama Power’s rates. These increases in revenues were partially offset by increases in operations and maintenance expenses related to steam power associated with environmental mandates and scheduled outages, nuclear operation expenses, and depreciation and amortization resulting from additional plant in service.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
             
Third Quarter 2008 vs. Third Quarter 2007
  Year-to-Date 2008 vs. Year-to-Date 2007
 
(change in millions)   (% change)   (change in millions)   (% change)
$164.5   11.8   $296.8   8.6
 
In the third quarter 2008, retail revenues were $1.56 billion compared to $1.39 billion for the same period in 2007. For year-to-date 2008, retail revenues were $3.74 billion compared to $3.44 billion for the same period in 2007.
Details of the change to retail revenues are as follows:
                                 
    Third Quarter   Year-to-Date
    2008   2008
 
    (in millions)   (% change)   (in millions)   (% change)
Retail – prior year
  $ 1,394.5             $ 3,444.3          
Estimated change in —
                               
Rates and pricing
    76.4       5.5       187.7       5.4  
Sales growth
    (6.3 )     (0.4 )     23.0       0.7  
Weather
    (40.0 )     (2.9 )     (61.4 )     (1.8 )
Fuel and other cost recovery
    134.4       9.6       147.5       4.3  
 
Retail – current year
  $ 1,559.0       11.8 %   $ 3,741.1       8.6 %
 
Revenues associated with changes in rates and pricing increased in the third quarter and year-to-date 2008 when compared to the same periods in 2007 primarily due to the Rate RSE and Rate CNP Environmental increases effective in January 2008. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Rate Adjustments” 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 for additional information.
Revenues attributable to changes in sales growth decreased in the third quarter 2008 when compared to the same period in 2007. Weather-adjusted residential KWH energy sales decreased 2.0% due to a decline in customer demand due to customer energy efficiency efforts and a slowing economy. Industrial KWH energy sales decreased 2.7% due to a decline in sales demand in the chemical, forest products and textile sectors, partially offset by an increase in the primary metals sector. These decreases were partially offset by the 1.1% increase in weather-adjusted commercial KWH energy sales due to continued customer and demand growth. For year-to-date 2008, revenues attributable to changes in sales growth increased when compared to the same period in 2007, primarily due to increases in weather-adjusted residential and commercial KWH energy sales of 1.0% and 1.6%, respectively, related to customer and demand growth. These increases were partially offset by a 0.2% decrease in industrial KWH energy sales as a result of decreased sales demand in the chemical, forest products and textile sectors, partially offset by an increase in the primary metals sector.
Revenues resulting from changes in weather decreased due to normal weather conditions in the third quarter 2008 compared to favorable weather conditions in the third quarter 2007, which resulted in decreased KWH energy sales to residential and commercial customers of 7.7% and 4.7%, respectively. For year-to-date 2008, revenues resulting from changes in weather decreased due to normal weather conditions compared to favorable weather conditions in the same period in 2007, which resulted in decreased KWH energy sales to residential and commercial customers of 5.3% and 2.6%, respectively.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and other cost recovery revenues increased in the third quarter and year-to-date 2008 when compared to the same periods in 2007 due to increases in fuel and purchased power costs. These revenues were partially offset by a reduction in the Rate NDR customer billing rate due to the full recovery of the 2005 storm costs related to Hurricanes Dennis and Katrina. Electric rates include provisions to recognize the full recovery of fuel costs, purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with the natural disaster reserve. Under these provisions, fuel and other cost recovery revenues generally equal fuel and other cost recovery expenses and do not impact net income.
Wholesale Revenues – Non-Affiliates
             
Third Quarter 2008 vs. Third Quarter 2007
  Year-to-Date 2008 vs. Year-to-Date 2007
 
(change in millions)   (% change)   (change in millions)   (% change)
$35.5   22.1   $64.4   13.6
 
Wholesale revenues 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 third quarter 2008, wholesale revenues from non-affiliates were $196.4 million compared to $160.9 million for the same period in 2007. This increase was primarily due to a 28.5% increase related to higher fuel and purchased power cost, partially offset by a 5.0% decrease in KWH sales.
For year-to-date 2008, wholesale revenues from non-affiliates were $536.4 million compared to $472.0 million for the same period in 2007. This increase was primarily due to a 20.1% increase related to higher fuel and purchased power cost, partially offset by a 5.3% decrease in KWH sales.
Wholesale Revenues – Affiliates
             
Third Quarter 2008 vs. Third Quarter 2007
  Year-to-Date 2008 vs. Year-to-Date 2007
 
(change in millions)   (% change)   (change in millions)   (% change)
$25.2   71.1   $124.1   106.4
 
Wholesale revenues 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 are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since the energy is generally sold at marginal cost.
In the third quarter 2008, wholesale revenues from affiliates were $60.6 million compared to $35.4 million for the same period in 2007. This increase was due to a 59.1% increase in KWH sales and a 7.5% increase in price related to fuel.
For year-to-date 2008, wholesale revenues from affiliates were $240.7 million compared to $116.6 million for the same period in 2007. This increase was due to a 45.8% increase in KWH sales and a 41.6% increase in price related to fuel.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Revenues
             
Third Quarter 2008 vs. Third Quarter 2007
  Year-to-Date 2008 vs. Year-to-Date 2007
 
(change in millions)   (% change)   (change in millions)   (% change)
$4.7   10.5   $17.8   13.2
 
In the third quarter 2008, other revenues were $49.1 million compared to $44.4 million in the same period in 2007. This increase was primarily due to an increase of $5.3 million in revenues from gas-fueled co-generation steam facilities resulting from higher gas prices.
For year-to-date 2008, other revenues were $153.4 million compared to $135.6 million for the same period in 2007. This increase was primarily due to an increase of $14.5 million in revenues from gas-fueled co-generation steam facilities resulting from higher gas prices and a $2.5 million increase in revenues from the settlement of transmission service agreements with Calpine Corporation.
Co-generation steam fuel revenues do not have a significant impact on earnings since they are generally offset by fuel expense.
Fuel and Purchased Power Expenses
                                 
    Third Quarter 2008   Year-to-Date 2008
    vs.   vs.
    Third Quarter 2007   Year-to-Date 2007
 
    (change in millions)   (% change)   (change in millions)   (% change)
Fuel
  $ 144.7       28.6     $ 274.3       20.3  
Purchased power – non-affiliates
    32.6       45.5       59.6       63.2  
Purchased power – affiliates
    21.6       21.6       36.9       14.8  
                           
Total fuel and purchased power expenses
  $ 198.9             $ 370.8          
                           
In the third quarter 2008, total fuel and purchased power expenses were $877.5 million compared to $678.6 million in the same period in 2007. This increase was primarily due to a $221.0 million increase in the cost of energy resulting from an increase in the average cost of fuel and purchased power, partially offset by a $22.1 million decrease in total KWHs generated and purchased.
For year-to-date 2008, total fuel and purchased power expenses were $2.07 billion compared to $1.70 billion in the same period in 2007. This increase was primarily due to a $393.3 million increase in the cost of energy resulting from an increase in the average cost of fuel and purchased power, partially offset by a $22.6 million decrease in total KWHs generated and purchased.
Fuel and purchased power transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Rate ECR. See FUTURE EARNINGS POTENTIAL – “FERC and Alabama PSC Matters – Retail Fuel Cost Recovery” herein for additional information.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of Alabama Power’s cost of generation and purchased power are as follows:
                                                 
    Third Quarter   Third Quarter   Percent   Year-to-Date   Year-to-Date   Percent
Average Cost   2008   2007   Change   2008   2007   Change
    (cents per net KWH)           (cents per net KWH)        
Fuel
    3.29       2.35       40.0       2.88       2.35       22.6  
Purchased power
    9.21       7.57       21.7       7.95       6.30       26.2  
 
In the third quarter 2008, fuel expense was $651.6 million compared to $506.9 million for the same period in 2007. The increase was due to a 40.0% increase in the average cost of fuel per KWH generated, primarily due to an increase in fuel commodity prices resulting from global supply and demand conditions and increased transportation costs. The average cost of coal per KWH generated increased 53.2% primarily as a result of increases in commodity and transportation costs. The average cost of oil and natural gas per KWH generated increased 20.1% primarily as a result of increases in commodity prices.
For year-to-date 2008, fuel expense was $1.63 billion compared to $1.35 billion for the same period in 2007. The increase was due to a 22.6% increase in the average cost of fuel per KWH generated, resulting from global supply and demand conditions. The average cost of coal per KWH generated increased 30.5% primarily as a result of increases in commodity and transportation costs. The average cost of oil and natural gas per KWH generated increased 16.2% primarily as a result of increases in commodity prices.
Non-affiliates
In the third quarter 2008, purchased power from non-affiliates was $104.2 million compared to $71.6 million for the same period in 2007. This increase was primarily related to a 17.4% volume increase in the KWHs purchased from available, lower priced market energy alternatives and a 24.0% increase in price.
For year-to-date 2008, purchased power from non-affiliates was $153.9 million compared to $94.3 million for the same period in 2007. This increase was primarily related to a 31.2% volume increase in the KWHs purchased from available, lower priced market energy alternatives and a 24.4% increase in price.
Energy purchases from non-affiliates will vary depending on the market cost of available energy compared to the cost of Southern Company system-generated energy, demand for energy within the Southern Company system service territory, and availability of Southern Company system generation.
Affiliates
For the third quarter 2008, purchased power from affiliates was $121.7 million compared to $100.1 million for the same period in 2007. This increase was primarily related to a 27.5% increase in price, partially offset by a 4.6% decrease in the amount of energy purchased.
For year-to-date 2008, purchased power from affiliates was $286.2 million compared to $249.3 million for the same period in 2007. This increase was primarily related to a 25.7% increase in price, partially offset by an 8.7% decrease in the amount of energy purchased.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Energy purchases from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC, as approved by the FERC.
Other Operations and Maintenance Expenses
                                 
    Third Quarter 2008   Year-to-Date 2008
    vs.   vs.
    Third Quarter 2007   Year-to-Date 2007
 
    (change in millions)   (% change)   (change in millions)   (% change)
Other operations
  $ 1.5       0.8     $ 28.9       5.2  
Maintenance
    9.8       11.1       27.5       9.0  
                           
Total other operations and maintenance
  $ 11.3             $ 56.4          
                           
In the third quarter 2008, other operations and maintenance expenses were $300.9 million compared to $289.6 million for the corresponding period in 2007. This increase was primarily a result of an $11.4 million increase in steam power expense associated with compliance with environmental mandates, scheduled outages, and maintenance costs related to increases in contract labor and materials. Also contributing to the increase was a $6.8 million increase in nuclear production expense related to operations and a $1.0 million increase in customer accounts related to uncollectible accounts and supervision expense. These increases were partially offset by a $9.6 million decrease in administrative and general expenses primarily due to an adjustment in allocated overhead expenses and property insurance expense.
For year-to-date 2008, other operations and maintenance expenses were $917.0 million compared to $860.6 million for the corresponding period in 2007. This increase was primarily a result of a $34.4 million increase in steam power expense associated with compliance with environmental mandates, scheduled outages, and maintenance cost related to increases in contract labor and materials. Also contributing to the increase was a $16.8 million increase in nuclear production expense related to operations and a $5.2 million increase in customer accounts related to customer records expense and uncollectible accounts.
Depreciation and Amortization
             
Third Quarter 2008 vs. Third Quarter 2007
  Year-to-Date 2008 vs. Year-to-Date 2007
   
(change in millions)   (% change)   (change in millions)   (% change)
$14.0   11.8   $36.2   10.3
       
In the third quarter 2008, depreciation and amortization was $132.4 million compared to $118.4 million for the same period in 2007. For year-to-date 2008, depreciation and amortization was $387.7 million compared to $351.5 million for the same period in 2007. These increases were the result of an increase in plant in service due to additions to property, plant, and equipment primarily related to environmental mandates.
Taxes Other Than Income Taxes
             
Third Quarter 2008 vs. Third Quarter 2007
  Year-to-Date 2008 vs. Year-to-Date 2007
   
(change in millions)   (% change)   (change in millions)   (% change)
$3.7   5.1   $10.8   5.0
       

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the third quarter 2008, taxes other than income taxes were $76.2 million compared to $72.5 million for the same period in 2007. The third quarter 2008 variance when compared to the same period in 2007 was not material.
For year-to-date 2008, taxes other than income taxes were $227.5 million compared to $216.7 million for the same period in 2007. This increase was primarily due to increases in state and municipal public utility license taxes which are directly related to increased retail revenues.
Allowance for Equity Funds Used During Construction
             
Third Quarter 2008 vs. Third Quarter 2007
  Year-to-Date 2008 vs. Year-to-Date 2007
   
(change in millions)   (% change)   (change in millions)   (% change)
$2.1   22.2   $7.7   31.4
       
In the third quarter 2008, allowance for equity funds used during construction was $11.7 million compared to $9.6 million for the same period in 2007. The third quarter 2008 variance when compared to the same period in 2007 was not material.
For year-to-date 2008, allowance for equity funds used during construction was $32.3 million compared to $24.6 million for the same period in 2007. This increase was primarily due to increases in the amount of construction work in progress at generating facilities related to environmental mandates, as well as transmission and distribution projects, when compared to the same period in 2007.
Other Income (Expense), Net
             
Third Quarter 2008 vs. Third Quarter 2007
  Year-to-Date 2008 vs. Year-to-Date 2007
   
(change in millions)   (% change)   (change in millions)   (% change)
$7.3   56.1   $0.3   1.5
       
In the third quarter 2008, other income (expense), net was $(5.8) million compared to $(13.1) million for the same period in 2007. This decrease to other expense was primarily due to a $5.0 million write-off of the net book value of certain equipment due to the discontinuation of a non-utility marketing program during the third quarter 2007. Also contributing to the variance was a $2.5 million increase in other income primarily due to customers’ contributions in aid of construction.
For year-to-date 2008, other income (expense), net was $(19.7) million compared to $(20.0) million for the same period in 2007. The year-to-date 2008 variance when compared to the same period in 2007 was not material.
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 primary business of selling electricity. These factors include Alabama Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. 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

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 RISK FACTORS in Item 1A and 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 statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. 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 for additional information.
New Source Review Actions
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – New Source Review Actions” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding a civil action brought by the EPA alleging that Alabama Power had violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of its coal-fired generating facilities. On July 24, 2008, the U.S. District Court for the Northern District of Alabama granted partial summary judgment in favor of Alabama Power regarding the proper legal test for determining whether projects are routine maintenance, repair, and replacement and therefore are excluded from NSR permitting. The decision does not resolve the case. The ultimate outcome of this matter cannot be determined at this time.
Clean Air Interstate Rule
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Alabama Power in Item 7 of the Form 10-K for background regarding the Clean Air Interstate Rule (CAIR). On July 11, 2008, in response to petitions brought by certain states and regulated industries challenging particular aspects of CAIR, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating CAIR in its entirety and remanding it to the EPA for further action consistent with its opinion. Alabama Power’s overall environmental compliance strategy has been developed in response to numerous federal and state regulatory requirements, many of which remain unaffected by the court’s ruling; however, the court’s decision has the potential to impact future decision making regarding capital expenditures, the installation and operation of pollution control equipment, and the purchase, use, and associated carrying values of emissions allowances. The ultimate impact of the court’s decision cannot be determined at this time and may depend on subsequent legal action, including issuance of the court’s mandate, and future rulemaking and regulatory treatment.
Eight-Hour Ozone Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Alabama Power in Item 7 of the Form 10-K for additional information regarding revisions to the eight-hour ozone air quality standard. In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and new nonattainment areas

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
within Alabama Power’s service territory are expected. The ultimate outcome of this matter cannot be determined at this time and will depend on subsequent legal action and/or future nonattainment designations and regulatory plans.
Carbon Dioxide Litigation
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the U.S. District Court for the Northern District of California against several electric utilities (including Southern Company), several oil companies, and a coal company. The plaintiffs are the governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The plaintiffs assert claims for public and private nuisance and contend that the defendants have acted in concert and are therefore jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which is alleged to be $95 million to $400 million. On June 30, 2008, all defendants filed motions to dismiss this case. Southern Company believes that these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this time.
FERC and Alabama PSC Matters
Market-Based Rate Authority
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Market-Based Rate Authority” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information regarding market-based rate authority. In June 2007, the FERC issued its final rule in Order No. 697 regarding market-based rate authority. The FERC generally retained its current market-based rate standards. Responding to a number of requests for rehearing, the FERC issued Order No. 697-A on April 21, 2008. This order largely affirmed its prior revision and codification of the regulations governing market-based rates for public utilities. In accordance with the order, Southern Company submitted to the FERC an updated market power analysis on September 2, 2008 related to its continued market-based rate authority. The ultimate outcome of this matter cannot now be determined.
On October 17, 2008, Southern Company filed with the FERC a revised market-based rate (MBR) tariff and a new cost-based rate (CBR) tariff. The revised MBR tariff provides for a “must offer” energy auction whereby Southern Company offers all of its available energy for sale in a day-ahead auction and an hour-ahead auction, after considering Southern Company’s native load requirements, reliability obligations, and sales commitments to third parties. All sales under the energy auction would be at market clearing prices established under the auction rules. The new CBR tariff is designed to be an alternative means for conducting short-term transactions in the wholesale markets and provides for a cost-based cap for wholesale sales of less than a year. Both tariffs must be approved by the FERC. The final outcome of this matter cannot now be determined.
Retail Rate Adjustments
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Rate Adjustments” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters – Rate RSE” in Item 8 of the Form 10-K for additional

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
information. On October 7, 2008, the Alabama PSC approved a corrective rate package primarily providing for adjustments associated with customer charges to certain existing rate structures. This package, effective in January 2009, is expected to generate additional annual revenues of approximately $168 million. Alabama Power expects that these additional revenues will preclude the need for a rate adjustment under the Rate RSE in 2009 and agreed to a moratorium on any increase in 2009 under Rate RSE.
On October 7, 2008, Alabama Power agreed to defer collection during 2009 of any increase in rates under the portion of Rate CNP which permits recovery of costs associated with environmental laws and regulations until 2010.
Retail Fuel Cost Recovery
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Fuel Cost Recovery” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters – Fuel Cost Recovery” in Item 8 of the Form 10-K for information regarding Alabama Power’s fuel cost recovery. Alabama Power’s under recovered fuel costs as of September 30, 2008 totaled $300.8 million as compared to $279.8 million at December 31, 2007. Alabama Power classified $247.4 million of the under recovered regulatory clause revenues as deferred charges and other assets in the Condensed Balance Sheets as of September 30, 2008. This classification is based on an estimate which includes such factors as weather, generation availability, energy demand, and the price of energy. A change in any of these factors could have a material impact on the timing of the recovery of the under recovered fuel costs.
On October 7, 2008, the Alabama PSC approved an increase in Alabama Power’s Rate ECR factor to 3.983 cents per KWH for a 24-month period beginning with October 9, 2008 billings. Thereafter, the Rate ECR factor shall be 5.910 cents per KWH, absent a contrary order by the Alabama PSC. Rate ECR revenues, as recorded on the financial statements, are adjusted for the difference in actual recoverable costs and amounts billed in current regulated rates. During the 24-month period, Alabama Power will be allowed to continue to include a carrying charge associated with the under recovered fuel costs in the fuel expense calculation. In the event the application of this increased Rate ECR factor results in an over recovered position during this period, Alabama Power will pay interest on any such over recovered balance at the same rate used to derive the carrying cost. Accordingly, this approved increase in the billing factor will have no significant effect on Alabama Power’s revenues or net income, but will increase annual cash flow.
Natural Disaster Cost Recovery
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Natural Disaster Cost Recovery” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters – Natural Disaster Cost Recovery” in Item 8 of the Form 10-K for information regarding natural disaster cost recovery. At September 30, 2008, Alabama Power had accumulated a balance of $29.2 million in the target reserve for future storms, which is included in the Condensed Balance Sheets herein under “Other Regulatory Liabilities.”

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Tax Matters
Legislation
On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. The State of Alabama income tax law does not allow the bonus depreciation deduction allowed by the Stimulus Act for state income tax purposes. Alabama Power estimates the cash flow reduction to tax payments as a result of the Stimulus Act for 2008 to be between $55 million and $100 million.
On October 3, 2008, President Bush signed the Economic Stabilization Act of 2008 (Stabilization Act) into law. In addition to addressing financial issues, the Stabilization Act includes renewable energy incentives as well as accelerated depreciation for smart meters and smart grid systems. Alabama Power is currently assessing the financial implications of the Stabilization Act. The ultimate impact cannot be determined at this time.
Other Matters
Alabama Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Alabama Power is subject to certain claims and legal actions arising in the ordinary course of business. 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, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air and water quality standards, 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 pending or potential litigation against Alabama Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Alabama Power in Item 8 of the Form 10-K, 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 other contingencies, regulatory matters, and other matters being litigated 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.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Overview
Alabama Power’s financial condition remained stable at September 30, 2008. Throughout the recent turmoil in the financial markets, Alabama Power has maintained adequate access to capital without drawing any of its committed bank credit arrangements used to support its commercial paper programs and variable rate pollution control revenue bonds. Alabama Power has continued to issue commercial paper which has increased the balance of short-term debt while also increasing cash and cash equivalents as a precautionary measure. During the third quarter 2008, Alabama Power was required to purchase a total of approximately $11 million of variable rate pollution control revenue bonds that were tendered by investors, all of which were subsequently remarketed. Alabama Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital needs. No material changes in bank credit arrangements have occurred. Alabama Power’s interest cost for short-term debt has not changed materially. The impact on future financing costs as a result of the recent financial turmoil cannot be determined at this time. See “Sources of Capital” and “Financing Activities” herein for additional information.
As a result of the turmoil in the financial markets, Alabama Power experienced no material counterparty credit losses. Alabama Power’s investments in pension and nuclear decommissioning trust funds declined in value as of September 30, 2008. No material changes in funding requirements related to these funds are currently expected; however, the ultimate outcome cannot be determined at this time.
Net cash provided from operating activities totaled $935.4 million for the first nine months of 2008, compared to $898.4 million for the corresponding period in 2007. The $37.0 million increase in cash provided from operating activities in the first nine months of 2008 is primarily due to an increase in net income, as previously discussed, as well as a decrease in receivables and an increase in deferred income tax expense, partially offset by a decrease in accrued tax liability and an increase in fossil fuel inventory. Net cash used for investing activities totaled $1.1 billion primarily due to gross property additions to utility plant of $1.0 billion in the first nine months of 2008. These additions were primarily related to construction of transmission and distribution facilities, replacement of steam generation equipment, purchases of nuclear fuel, and construction related to environmental mandates. Net cash provided from financing activities totaled $275.2 million for the first nine months of 2008, compared to $314.2 million for the corresponding period in 2007. The $39.0 million decrease is primarily due to greater cash outflows relating to the redemptions of senior notes and preferred stock and decreased cash inflows from the issuance of long-term debt as compared to the first nine months of 2007, partially offset by an increase in notes payable.
Significant balance sheet changes for the first nine months of 2008 include an increase of $781.5 million in gross plant primarily due to an increase in environmental-related equipment, an increase of $470.9 million in long-term debt, and an increase of $225 million in common stock.

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ALABAMA POWER COMPANY
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 Alabama Power in Item 7 of the Form 10-K for a description of Alabama Power’s capital requirements for its construction program, scheduled maturities of long-term debt, as well as the related interest, derivative obligations, preferred and preference stock dividends, leases, purchase commitments, and trust funding requirements. Approximately $410.1 million will be required through September 30, 2009 for maturities of long-term debt.
In October 2008, Alabama Power’s Board of Directors approved a new capital budget for 2009 and 2010. The construction program of Alabama Power is estimated to be $1.57 billion for 2009 and $1.08 billion for 2010. Over the next two years, Alabama Power estimates spending $715 million on environmental-related additions, $391 million on Plant Farley (including $219 million for nuclear fuel), $704 million on distribution facilities, and $297 million on transmission facilities. The Southern Company system financial plan, including the Southern Company system capital budget, is expected to be reviewed by the Southern Company Board of Directors in early 2009. Actual construction costs may vary from these estimates because of changes in such factors as: business conditions; environmental statutes and regulations; nuclear plant regulations; FERC rules and regulations; load projections; the cost and efficiency of construction labor, equipment, and materials; and the cost and availability of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. See Note 7 to the financial statements of Alabama Power under “COMMITMENTS – Construction Program” in Item 8 of the Form 10-K for additional details.
Sources of Capital
Alabama Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Recently, Alabama Power has primarily utilized funds from operating cash flows, unsecured debt, common stock, preferred stock, and preference stock. However, the amount, type, and timing of any future financings, if needed, will depend upon 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.
Alabama Power’s current liabilities sometimes exceed current assets because of Alabama Power’s debt due within one year and the periodic use of short-term debt as a funding source primarily to meet scheduled maturities of long-term debt as well as cash needs which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Alabama Power had at September 30, 2008 cash and cash equivalents of approximately $218.3 million, unused committed lines of credit of approximately $1.3 billion (including $582.4 million of such lines which are dedicated to funding purchase obligations related to variable rate pollution control revenue bonds), a commercial paper program, and an extendible commercial note program. Of the unused credit facilities, $75 million will expire in 2008, $416.1 million will expire in 2009, and $25 million will expire in 2011 (of the facilities that expire in 2008 and 2009, $404 million allow for one-year term loans). The remaining $765 million of credit facilities will expire in 2012. 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 and Note (F) to the Condensed Financial Statements under “Bank Credit Arrangements” herein for additional information. During the third quarter 2008, Alabama Power was required to purchase a total of approximately $11 million of variable rate pollution control revenue bonds that were tendered by investors, all of which were subsequently remarketed. 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 $2.0 billion of

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
short-term borrowings. At September 30, 2008, Alabama Power had $94.9 million of commercial paper outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper, lines of credit, and cash.
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 certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- and/or Baa3 or below. These contracts are primarily for fuel purchases, fuel transportation and storage, emissions allowances, and energy price risk management. At September 30, 2008, the maximum potential collateral requirements under these contracts at a BBB- or Baa3 rating were approximately $4 million. At September 30, 2008, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $87 million. Included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash.
Market Price Risk
Alabama Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2007 reporting period. Since a significant portion of outstanding indebtedness is at fixed rates, Alabama Power is not aware of any facts or circumstances that would significantly affect exposures on existing indebtedness in the near term. However, the impact on future financing cost cannot now be determined.
Due to cost-based rate regulation, Alabama Power continues to have 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 physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Alabama Power continues to manage a retail fuel-hedging program implemented at the instruction of the Alabama PSC. As such, Alabama Power has no material change in market risk exposures when compared with the December 31, 2007 reporting period.
The changes in fair value of energy-related derivative contracts for the three months and nine months ended September 30, 2008 were as follows:
                 
    Third Quarter   Year-to-Date
    2008   2008
    Changes   Changes
 
    Fair Value
 
    (in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net
  $ 104.9     $ (0.4 )
Contracts realized or settled
    (45.8 )     (59.2 )
Current period changes(a)
    (97.7 )     21.0  
 
Contracts outstanding at the end of the period, assets (liabilities), net
  $ (38.6 )   $ (38.6 )
 
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The decrease in the fair value positions of the energy-related derivative contracts for the three months and nine months ended September 30, 2008 was $143.5 million and $38.2 million, respectively, substantially all of which is due to natural gas positions. These changes are attributable to both the volume and prices of natural gas. At September 30, 2008, Alabama Power had a net hedge volume of 45.2 Bcf with a weighted average contract cost approximately $0.87 per mmBtu above market prices, compared to 31.0 Bcf at June 30, 2008 with a weighted average contract cost approximately $3.45 per mmBtu below market prices and compared to 27.4 Bcf at December 31, 2007 with a weighted average contract cost approximately $0.02 per mmBtu above market prices. The majority of the natural gas hedges are recovered through the fuel cost recovery clauses.
At September 30, 2008 and December 31, 2007, the fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:
                 
    September 30,   December 31,
    2008   2007
    (in millions)
Regulatory hedges
  $ (38.7 )   $ (0.7 )
Cash flow hedges
    0.1       0.5  
Non-accounting hedges
          (0.2 )
 
Total fair value
  $ (38.6 )   $ (0.4 )
 
Energy-related derivative contracts which are designated as regulatory hedges relate to Alabama Power’s fuel hedging program where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the fuel cost recovery clauses. Certain other gains and losses on energy-related derivatives, designated as cash flow hedges, are initially deferred in other comprehensive income before being recognized in income in the same period as the hedged transaction. Gains and losses on energy-related derivative contracts that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.
Unrealized pre-tax gains and losses recognized in income for the three months and nine months ended September 30, 2008 and 2007 for energy-related derivative contracts that are not hedges were not material.
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at September 30, 2008 are as follows:
                                 
    September 30, 2008
    Fair Value Measurements
 
    Total   Maturity
    Fair Value   Year 1   Years 2&3   Years 4&5
 
    (in millions)
Level 1
  $     $     $     $  
Level 2
    (38.6 )     (31.9 )     (6.7 )      
Level 3
                       
 
Fair value of contracts outstanding at end of period
  $ (38.6 )   $ (31.9 )   $ (6.7 )   $  
 
As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value measurements and related disclosures, the table above now uses the three-tier fair value hierarchy, as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously used descriptions “actively quoted,” “external sources,” and “models and other methods.” The three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the previous descriptions focused on the source of the inputs. Because Alabama Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
which are actively quoted, the valuations of those contracts now appear in Level 2; previously they were shown as “actively quoted.” 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 January 2008, Alabama Power issued $300 million of additional Series 2007D 4.85% Senior Notes due December 15, 2012. The proceeds were used to repay short-term indebtedness and for other general corporate purposes. Additionally, Alabama Power redeemed 1,250 shares of its Flexible Money Market Class A Preferred Stock (Series 2003A), Stated Capital $100,000 Per Share ($125 million aggregate value).
In January 2008, Alabama Power also entered into $330 million notional amount of interest rate swaps related to variable rate tax-exempt debt to hedge changes in interest rates for the period February 2008 through February 2010. The weighted average fixed payment rate on these hedges is 2.49% and Alabama Power now has a total of $576 million of such hedges in place, with an overall weighted average fixed payment rate of 2.69%. See Note (F) to the Condensed Financial Statements herein for further details.
In February 2008, Alabama Power issued 3,750,000 shares of common stock to Southern Company at $40 a share ($150 million aggregate purchase price). The proceeds were used for general corporate purposes.
In March 2008, Alabama Power converted its $246.5 million obligations related to auction rate pollution control revenue bonds from an auction rate mode to fixed rate interest modes. With the completion of this conversion, none of the outstanding securities or obligations of Alabama Power is subject to an auction rate mode.
In May 2008, Alabama Power issued $300 million of Series 2008A 6.125% Senior Notes due May 15, 2038. The proceeds were used to repay short-term indebtedness and for other general corporate purposes. In addition, Alabama Power paid at maturity $250 million in aggregate principal amount of Series X 3.125% Senior Notes.
In July 2008, Alabama Power issued 1,875,000 shares of common stock to Southern Company at $40 a share ($75 million aggregate purchase price). The proceeds were used for general corporate purposes.
In July 2008, Alabama Power incurred obligations related to the issuance of $120 million of The Industrial Development Board of the City of Mobile Pollution Control Revenue Bonds (Alabama Power Barry Plant Project), Series 2008.
Subsequent to September 30, 2008, Alabama Power issued 1,875,000 shares of common stock to Southern Company at $40 a share ($75 million aggregate purchase price). The proceeds were used for general corporate purposes.
Also subsequent to September 30, 2008, Alabama Power paid at maturity $160 million in aggregate principal amount of Series G 5.375% Senior Notes.
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     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2008     2007     2008     2007  
    (in thousands)     (in thousands)  
Operating Revenues:
                               
Retail revenues
  $ 2,317,817     $ 2,143,511     $ 5,723,577     $ 5,141,403  
Wholesale revenues —
                               
Non-affiliates
    148,933       127,810       443,901       406,632  
Affiliates
    106,659       107,451       252,733       208,065  
Other revenues
    70,836       64,965       200,043       188,956  
 
                       
Total operating revenues
    2,644,245       2,443,737       6,620,254       5,945,056  
 
                       
Operating Expenses:
                               
Fuel
    859,778       786,021       2,181,000       2,030,745  
Purchased power —
                               
Non-affiliates
    192,293       168,358       358,047       282,121  
Affiliates
    247,845       196,700       748,622       560,897  
Other operations
    260,575       258,865       767,691       739,151  
Maintenance
    118,739       129,812       372,219       391,070  
Depreciation and amortization
    162,325       128,268       472,137       381,679  
Taxes other than income taxes
    91,587       87,708       242,358       231,659  
 
                       
Total operating expenses
    1,933,142       1,755,732       5,142,074       4,617,322  
 
                       
Operating Income
    711,103       688,005       1,478,180       1,327,734  
Other Income and (Expense):
                               
Allowance for equity funds used during construction
    20,887       17,846       72,625       45,712  
Interest income
    1,416       1,436       3,253       2,543  
Interest expense, net of amounts capitalized
    (86,201 )     (88,594 )     (256,266 )     (261,139 )
Other income (expense), net
    (3,671 )     11,291       (5,593 )     7,376  
 
                       
Total other income and (expense)
    (67,569 )     (58,021 )     (185,981 )     (205,508 )
 
                       
Earnings Before Income Taxes
    643,534       629,984       1,292,199       1,122,226  
Income taxes
    237,358       229,862       453,438       401,046  
 
                       
Net Income
    406,176       400,122       838,761       721,180  
Dividends on Preferred and Preference Stock
    4,345       689       13,036       2,067  
 
                       
Net Income After Dividends on Preferred and Preference Stock
  $ 401,831     $ 399,433     $ 825,725     $ 719,113  
 
                       
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2008     2007     2008     2007  
    (in thousands)     (in thousands)  
Net Income After Dividends on Preferred and Preference Stock
  $ 401,831     $ 399,433     $ 825,725     $ 719,113  
Other comprehensive income (loss):
                               
Qualifying hedges:
                               
Changes in fair value, net of tax of $(874), $(4,686), $(890), and $5,044, respectively
    (1,386 )     (7,430 )     (1,410 )     7,996  
Reclassification adjustment for amounts included in net income, net of tax of $574, $73, $1,269, and $75, respectively
    911       116       2,012       120  
Marketable securities:
                               
Change in fair value, net of tax of $-, $71, $-, and $107, respectively
          112             170  
 
                       
Total other comprehensive income (loss)
    (475 )     (7,202 )     602       8,286  
 
                       
COMPREHENSIVE INCOME
  $ 401,356     $ 392,231     $ 826,327     $ 727,399  
 
                       
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 Nine Months  
    Ended September 30,  
    2008     2007  
    (in thousands)  
Operating Activities:
               
Net income
  $ 838,761     $ 721,180  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    561,987       458,522  
Deferred income taxes and investment tax credits
    97,752       34,267  
Deferred revenues
    96,557       (719 )
Deferred expenses — affiliates
    (19,762 )     (19,460 )
Allowance for equity funds used during construction
    (72,625 )     (45,712 )
Pension, postretirement, and other employee benefits
    35,067       35,337  
Hedge settlements
    (20,486 )     12,121  
Other, net
    (21,598 )     2,980  
Changes in certain current assets and liabilities —
               
Receivables
    (284,993 )     (211,971 )
Fossil fuel stock
    5,302       1,827  
Prepaid income taxes
    5,185       42,047  
Other current assets
    (19,981 )     (15,155 )
Accounts payable
    (51,662 )     (1,122 )
Accrued taxes
    151,112       25,779  
Accrued compensation
    (18,839 )     (62,643 )
Other current liabilities
    30,285       31,179  
 
           
Net cash provided from operating activities
    1,312,062       1,008,457  
 
           
Investing Activities:
               
Property additions
    (1,419,885 )     (1,214,093 )
Distribution of restricted cash from pollution control bonds
    22,197        
Nuclear decommissioning trust fund purchases
    (362,565 )     (336,526 )
Nuclear decommissioning trust fund sales
    355,685       329,646  
Cost of removal, net of salvage
    (29,798 )     (28,811 )
Change in construction payables, net of joint owner portion
    (22,265 )     48,074  
Other
    (30,542 )     (11,553 )
 
           
Net cash used for investing activities
    (1,487,173 )     (1,213,263 )
 
           
Financing Activities:
               
Increase (decrease) in notes payable, net
    172,789       (166,951 )
Proceeds —
               
Senior notes
    500,000       1,400,000  
Pollution control revenue bonds
    94,935        
Capital contributions from parent company
    259,750       270,250  
Other long-term debt
    300,000        
Redemptions —
               
Capital leases
    (921 )     (2,073 )
Senior notes
    (122,427 )     (300,000 )
Pollution control revenue bonds
    (118,555 )      
Other long-term debt
          (453,608 )
Payment of preferred and preference stock dividends
    (12,668 )     (2,255 )
Payment of common stock dividends
    (540,900 )     (517,425 )
Other
    (8,436 )     (24,662 )
 
           
Net cash provided from financing activities
    523,567       203,276  
 
           
Net Change in Cash and Cash Equivalents
    348,456       (1,530 )
Cash and Cash Equivalents at Beginning of Period
    15,392       16,850  
 
           
Cash and Cash Equivalents at End of Period
  $ 363,848     $ 15,320  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $30,112 and $19,181 capitalized for 2008 and 2007, respectively)
  $ 216,572     $ 229,282  
Income taxes (net of refunds)
  $ 228,792     $ 254,742  
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 September 30,     At December 31,  
Assets   2008     2007  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 363,848     $ 15,392  
Restricted cash
    30,405       48,279  
Receivables —
               
Customer accounts receivable
    687,767       491,389  
Unbilled revenues
    200,990       137,046  
Under recovered regulatory clause revenues
    406,314       384,538  
Other accounts and notes receivable
    75,572       147,498  
Affiliated companies
    19,984       21,699  
Accumulated provision for uncollectible accounts
    (10,449 )     (7,636 )
Fossil fuel stock, at average cost
    387,920       393,222  
Materials and supplies, at average cost
    353,947       337,652  
Vacation pay
    68,881       69,394  
Prepaid income taxes
    45,917       51,101  
Other
    113,139       55,169  
 
           
Total current assets
    2,744,235       2,144,743  
 
           
Property, Plant, and Equipment:
               
In service
    23,457,294       22,011,215  
Less accumulated provision for depreciation
    9,031,348       8,696,668  
 
           
 
    14,425,946       13,314,547  
Nuclear fuel, at amortized cost
    262,076       198,983  
Construction work in progress
    1,625,598       1,797,642  
 
           
Total property, plant, and equipment
    16,313,620       15,311,172  
 
           
Other Property and Investments:
               
Equity investments in unconsolidated subsidiaries
    57,054       53,813  
Nuclear decommissioning trusts, at fair value
    518,010       588,952  
Other
    43,562       47,914  
 
           
Total other property and investments
    618,626       690,679  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    562,461       532,539  
Prepaid pension costs
    1,065,296       1,026,985  
Deferred under recovered regulatory clause revenues
    369,745       307,294  
Other regulatory assets
    669,131       541,014  
Other
    288,526       268,335  
 
           
Total deferred charges and other assets
    2,955,159       2,676,167  
 
           
Total Assets
  $ 22,631,640     $ 20,822,761  
 
           
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 September 30,     At December 31,  
Liabilities and Stockholder’s Equity   2008     2007  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 369,396     $ 198,576  
Notes payable
    888,381       715,591  
Accounts payable —
               
Affiliated
    259,676       236,332  
Other
    382,789       463,945  
Customer deposits
    183,483       171,553  
Accrued taxes —
               
Income taxes
    163,382       68,782  
Other
    241,346       219,585  
Accrued interest
    91,047       74,674  
Accrued vacation pay
    55,064       56,303  
Accrued compensation
    94,959       114,974  
Other
    130,320       103,225  
 
           
Total current liabilities
    2,859,843       2,423,540  
 
           
Long-term Debt
    6,418,570       5,937,792  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    2,989,439       2,850,655  
Deferred credits related to income taxes
    139,329       146,886  
Accumulated deferred investment tax credits
    259,445       269,125  
Employee benefit obligations
    737,994       678,826  
Asset retirement obligations
    677,351       663,503  
Other cost of removal obligations
    417,779       414,745  
Other regulatory liabilities
    687,781       577,642  
Other
    190,176       158,670  
 
           
Total deferred credits and other liabilities
    6,099,294       5,760,052  
 
           
Total Liabilities
    15,377,707       14,121,384  
 
           
Preferred and Preference Stock
    265,957       265,957  
 
           
Common Stockholder’s Equity:
               
Common stock, without par value—
               
Authorized - 20,000,000 shares
               
Outstanding - 9,261,500 shares
    398,473       398,473  
Paid-in capital
    3,641,907       3,374,777  
Retained earnings
    2,960,887       2,676,063  
Accumulated other comprehensive loss
    (13,291 )     (13,893 )
 
           
Total common stockholder’s equity
    6,987,976       6,435,420  
 
           
Total Liabilities and Stockholder’s Equity
  $ 22,631,640     $ 20,822,761  
 
           
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
THIRD QUARTER 2008 vs. THIRD QUARTER 2007
AND
YEAR-TO-DATE 2008 vs. YEAR-TO-DATE 2007
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, and to effectively manage and secure timely recovery of rising costs. These costs include those related to growing demand, increasingly stringent environmental standards, and fuel costs. Appropriately balancing the need to recover these increasing costs with customer prices will continue to challenge Georgia Power for the foreseeable future. In December 2007, the 2007 Retail Rate Plan was approved, which should provide earnings stability over its three-year term. This regulatory action enables the recovery of substantial capital investments to facilitate the continued reliability of the transmission and distribution networks, continued generation and other investments as well as the recovery of increased operating costs. The 2007 Retail Rate Plan also includes a tariff specifically for the recovery of costs related to environmental controls mandated by state and federal regulations. On May 20, 2008, Georgia Power received a final order from the Georgia PSC to increase its fuel cost recovery rate effective June 1, 2008. Georgia Power is required to file its next fuel cost recovery case by March 1, 2009.
Georgia Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income after dividends on preferred and preference stock. 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
Net Income
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$2.4   0.6   $106.6   14.8
 
Georgia Power’s net income after dividends on preferred and preference stock for the third quarter 2008 was $401.8 million compared to $399.4 million for the corresponding period in 2007. Georgia Power’s net income after dividends on preferred and preference stock for year-to-date 2008 was $825.7 million compared to $719.1 million for the corresponding period in 2007. These increases were primarily related to increased contributions from market-response rates to large commercial and industrial customers, higher retail base revenues resulting from the retail rate increase effective January 1, 2008, and the effects of the allowance for equity funds used during construction (AFUDC). These increases were partially offset by increased depreciation and amortization due to more plant in service and changes in depreciation rates.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$174.3   8.1   $582.2   11.3
 
In the third quarter 2008, retail revenues were $2.32 billion compared to $2.14 billion for the corresponding period in 2007. For year-to-date 2008, retail revenues were $5.72 billion compared to $5.14 billion for the corresponding period in 2007.
Details of the change to retail revenues are as follows:
                                 
    Third Quarter   Year-to-Date
    2008   2008
    (in millions)   (% change)   (in millions)   (% change)
Retail – prior year
  $ 2,143.5             $ 5,141.4          
Estimated change in —
                               
Rates and pricing
    109.2       5.1       336.2       6.5  
Sales growth
    (8.0 )     (0.4 )     (13.8 )     (0.3 )
Weather
    (43.3 )     (2.0 )     (41.1 )     (0.8 )
Fuel and other cost recovery
    116.4       5.4       300.9       5.9  
 
Retail – current year
  $ 2,317.8       8.1 %   $ 5,723.6       11.3 %
 
Revenues associated with changes in rates and pricing increased in the third quarter and year-to-date 2008 when compared to the corresponding periods in 2007 due to higher market-response rates for sales to large commercial and industrial customers and the application of new rates established in January 2008.
Revenues attributable to changes in sales growth decreased in the third quarter and year-to-date 2008 when compared to the corresponding periods in 2007. These decreases were primarily the result of a slowing economy within the Southeast. Weather-adjusted total retail KWH sales decreased 1.0% and 0.9% for the third quarter and year-to-date 2008, respectively. Weather-adjusted residential KWH sales decreased 1.3% and 1.2%, weather-adjusted commercial KWH sales increased 1.8% and 1.4%, and weather-adjusted industrial sales decreased 4.4% and 3.4% for the third quarter and year-to-date 2008, respectively, when compared to the corresponding periods in 2007.
Revenues attributable to changes in weather decreased in the third quarter and year-to-date 2008 when compared to the corresponding periods in 2007. The decline in the third quarter 2008 was primarily due to a significantly warmer August in 2007. The decline in year-to-date 2008 was primarily due to a significantly warmer August in 2007 partially offset by weather volatility in January and June 2008 compared to the corresponding periods in 2007.
Fuel cost recovery revenues increased by $116.4 million in the third quarter 2008 and by $300.9 million year-to-date 2008 when compared to the corresponding periods in 2007 as a result of higher fuel and purchased power expenses. Georgia Power’s electric rates include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the fuel component of purchased power costs, and do not affect net income.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale Revenues – Non-Affiliates
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$21.1
  16.5   $37.3   9.2
 
Wholesale revenues from non-affiliates will vary depending on the market cost of available energy compared to the cost of Georgia 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 third quarter 2008, wholesale revenues from non-affiliates were $148.9 million compared to $127.8 million for the corresponding period in 2007. For year-to-date 2008, wholesale revenues from non-affiliates were $443.9 million compared to $406.6 million for the corresponding period in 2007. These increases were primarily driven by the fuel component within non-affiliate wholesale prices which has increased with the effects of higher fuel and purchased power costs. These increases were partially offset by 1.6% and 1.8% decreases in KWH energy sales in the third quarter and year-to-date 2008, respectively, as well as decreased contributions from the emissions allowance component of market-based wholesale prices.
Wholesale Revenues – Affiliates
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$(0.8)   (0.7)   $44.6   21.5
 
Wholesale revenues 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 are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since the energy is generally sold at marginal cost.
In the third quarter 2008, wholesale revenues from affiliates were $106.7 million compared to $107.5 million for the corresponding period in 2007. This decrease was primarily due to a 35.7% decrease in KWH sales that was partially offset by higher Power Pool rates for these sales due to higher fuel and purchased power costs.
For year-to-date 2008, wholesale revenues from affiliates were $252.7 million compared to $208.1 million for the corresponding period in 2007. This increase in wholesale revenues was due to higher Power Pool rates for these sales due to higher fuel and purchased power costs, partially offset by a 17.2% decrease in KWH sales.
Fuel and Purchased Power Expenses
                                 
    Third Quarter 2008   Year-to-Date 2008
    vs.   vs.
    Third Quarter 2007   Year-to-Date 2007
    (change in millions)   (% change)   (change in millions)   (% change)
Fuel
  $ 73.8       9.4     $ 150.3       7.4  
Purchased power – non-affiliates
    23.9       14.2       75.9       26.9  
Purchased power – affiliates
    51.1       26.0       187.7       33.5  
                   
Total fuel and purchased power expenses
  $ 148.8             $ 413.9          
                   

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the third quarter 2008, total fuel and purchased power expenses were $1.30 billion compared to $1.15 billion for the corresponding period in 2007. These increases were due to a $201.0 million increase in the average cost of fuel and purchased power, partially offset by a $52.2 million decrease in total KWHs generated and purchased.
For year-to-date 2008, total fuel and purchased power expenses were $3.29 billion compared to $2.87 billion for the corresponding period in 2007. These increases were due to a $421.5 million increase in the average cost of fuel and purchased power, partially offset by a $7.6 million decrease in total KWHs generated and purchased.
Fuel and purchased power transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Georgia Power’s energy cost recovery clause. See FUTURE EARNINGS POTENTIAL – “FERC and Georgia PSC Matters – Retail Fuel Cost Recovery” herein for additional information.
Details of Georgia Power’s cost of generation and purchased power are as follows:
                                                 
    Third Quarter   Third Quarter   Percent   Year-to-Date   Year-to-Date   Percent
Average Cost   2008   2007   Change   2008   2007   Change
    (cents per net KWH)           (cents per net KWH)        
Fuel
    3.32       2.77       19.9       3.07       2.69       14.1  
Purchased power
    8.87       7.61       16.6       8.39       7.25       15.7  
 
In the third quarter 2008, fuel expense was $859.8 million compared to $786.0 million for the corresponding period in 2007. For year-to-date 2008, fuel expense was $2.18 billion compared to $2.03 billion for the corresponding period in 2007. The increases in fuel expense were the result of 19.9% and 14.1% increases in the average cost of fuel per KWH generated for the third quarter and year-to-date 2008, respectively. These increases were primarily due to an increase in fuel commodity prices resulting from global demand pressures. The average cost of coal per KWH generated increased 23.0% and 17.8% in the third quarter and year-to-date 2008, respectively. The average cost of oil and natural gas per KWH generated increased 16.3% in both the third quarter and year-to-date 2008.
Non-affiliates
In the third quarter 2008, purchased power from non-affiliates was $192.3 million compared to $168.4 million for the corresponding period in 2007. For year-to-date 2008, purchased power from non-affiliates was $358.0 million compared to $282.1 million for the corresponding period in 2007. These increases were primarily the result of 2.4% and 13.1% volume increases in KWHs purchased from available lower priced market energy alternatives in the third quarter and year-to-date 2008, respectively, and increases in the average cost per KWH purchased.
Energy purchases from non-affiliates will vary depending on the market cost of available energy compared to the cost of Southern Company system-generated energy, demand for energy within the Southern Company system service territory, and availability of Southern Company system generation.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Affiliates
In the third quarter 2008, purchased power from affiliates was $247.8 million compared with $196.7 million for the corresponding period in 2007. This increase was primarily the result of the higher average cost of KWHs purchased due to higher fuel costs within the purchase price partially offset by a 2.2% decrease in the volume of KWHs purchased.
For year-to-date 2008, purchased power from affiliates was $748.6 million compared with $560.9 million for the corresponding period in 2007. This increase was primarily the result of the higher average cost of KWHs purchased due to higher fuel costs within the purchase price and a 4.1% volume increase in KWHs purchased from available lower cost resources within the Power Pool.
Energy purchases from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC, as approved by the FERC.
Other Operations and Maintenance Expenses
                                 
    Third Quarter 2008   Year-to-Date 2008
    vs.   vs.
    Third Quarter 2007   Year-to-Date 2007
    (change in millions)   (% change)   (change in millions)   (% change)
Other operations
  $ 1.7       0.7     $ 28.5       3.9  
Maintenance
    (11.1 )     (8.5 )     (18.8 )     (4.8 )
                   
Total other operations and maintenance
  $ (9.4 )           $ 9.7          
                   
In the third quarter 2008, other operations and maintenance expenses were $379.3 million compared to $388.7 million for the corresponding period in 2007. The decrease was primarily due to an $8.1 million decrease in the timing of transmission and distribution maintenance activities.
For year-to-date 2008, other operations and maintenance expenses were $1.14 billion compared to $1.13 billion for the corresponding period in 2007. The increase was primarily the result of a $11.0 million increase in the accrual for property damage approved under the 2007 Retail Rate Plan. Also contributing to the increase were customer account expenses of $15.3 million primarily related to meter reading, records and collections, and uncollectible accounts, as well as $9.1 million related to medical expenses. These increases were partially offset by decreases of $22.8 million related to the timing of transmission and distribution operations and maintenance activities.
Depreciation and Amortization
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$34.0
  26.6   $90.4   23.7
 
In the third quarter 2008, depreciation and amortization was $162.3 million compared to $128.3 million for the corresponding period in 2007. For year-to-date 2008, depreciation and amortization was $472.1 million compared to $381.7 million for the corresponding period in 2007. These increases were primarily the result of increases in plant in service related to completed transmission, distribution, and environmental projects and changes in depreciation rates effective January 1, 2008, approved under the 2007 Retail Rate Plan.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Taxes Other Than Income Taxes
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$3.9   4.4   $10.7   4.6
 
In the third quarter 2008, taxes other than income taxes were $91.6 million compared with $87.7 million for the corresponding period in 2007. For year-to-date 2008, taxes other than income taxes were $242.4 million compared with $231.7 million for the corresponding period in 2007. These increases were primarily the result of higher municipal franchise fees resulting from retail revenue increases during these periods.
Allowance for Equity Funds Used During Construction
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$3.1   17.0   $26.9   58.9
 
In the third quarter 2008, AFUDC was $20.9 million compared with $17.8 million for the corresponding period in 2007. For year-to-date 2008, AFUDC was $72.6 million compared with $45.7 million for the corresponding period in 2007. These increases were primarily the result of increases in construction work in progress balances related to ongoing environmental and transmission projects as well as three combined cycle generating units at Plant McDonough.
Income Taxes
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$7.5   3.3   $52.4   13.1
 
In the third quarter 2008, income taxes were $237.4 million compared with $229.9 million for the corresponding period in 2007. For year-to-date 2008, income taxes were $453.4 million compared with $401.0 million for the corresponding period in 2007. These increases were primarily the result of increased pre-tax income, partially offset by increases in non-taxable items, particularly AFUDC, as well as additional state tax credits and an increase in the federal production activities deduction amount. See Note (H) to the Condensed Financial Statements herein for additional information.
Dividends on Preferred and Preference Stock
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$3.6   N/M   $10.9   N/M
 
N/M – Not Meaningful
In the third quarter 2008, dividends on preferred and preference stock were $4.3 million compared with $0.7 million for the corresponding period in 2007. For year-to-date 2008, dividends on preferred and preference stock were $13.0 million compared with $2.1 million for the corresponding period in 2007. These increases were primarily the result of the issuance of $225 million of preference stock in the fourth quarter 2007, which has quarterly dividends of approximately $3.7 million.

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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 that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. 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 RISK FACTORS in Item 1A 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 statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. 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 “Environmental Matters” in Item 8 of the Form 10-K for additional information.
New Source Review Actions
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – New Source Review Actions” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding civil actions brought by the EPA alleging that Georgia Power and Alabama Power had violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of their coal-fired generating facilities. The action against Georgia Power has been administratively closed since 2001, and the case has not been reopened. In the action involving Alabama Power, on July 24, 2008, the U.S. District Court for the Northern District of Alabama granted partial summary judgment in favor of Alabama Power regarding the proper legal test for determining whether projects are routine maintenance, repair, and replacement and therefore are excluded from NSR permitting. The decision does not resolve the case. The ultimate outcome of these matters cannot be determined at this time.
Clean Air Interstate Rule
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Georgia Power in Item 7 of the Form 10-K for background regarding the Clean Air Interstate Rule (CAIR). On July 11, 2008, in response to petitions brought by certain states and regulated industries challenging particular aspects of CAIR, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating CAIR in its entirety and remanding it to the EPA for further action consistent with its opinion. Georgia Power’s overall environmental compliance strategy has been developed in response to numerous federal and state regulatory requirements, many of which, including the State of Georgia’s Multi-Pollutant Rule, remain unaffected by the court’s ruling; however, the court’s decision has the potential to impact future decision making regarding capital expenditures, the installation and operation of pollution control equipment, and the purchase, use, and associated carrying values of emissions allowances. The ultimate impact of the court’s decision cannot be

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determined at this time and may depend on subsequent legal action, including issuance of the court’s mandate, and future rulemaking and regulatory treatment.
Eight-Hour Ozone Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Georgia Power in Item 7 of the Form 10-K for additional information regarding revisions to the eight-hour ozone air quality standard. In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and new nonattainment areas within Georgia Power’s service territory are expected. The ultimate outcome of this matter cannot be determined at this time and will depend on subsequent legal action and/or future nonattainment designations and regulatory plans.
Carbon Dioxide Litigation
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the U.S. District Court for the Northern District of California against several electric utilities (including Southern Company), several oil companies, and a coal company. The plaintiffs are the governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The plaintiffs assert claims for public and private nuisance and contend that the defendants have acted in concert and are therefore jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which is alleged to be $95 million to $400 million. On June 30, 2008, all defendants filed motions to dismiss this case. Southern Company believes that these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this time.
FERC and Georgia PSC Matters
Market-Based Rate Authority
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Market-Based Rate Authority” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information regarding market-based rate authority. In June 2007, the FERC issued its final rule in Order No. 697 regarding market-based rate authority. The FERC generally retained its current market-based rate standards. Responding to a number of requests for rehearing, the FERC issued Order No. 697-A on April 21, 2008. This order largely affirmed its prior revision and codification of the regulations governing market-based rates for public utilities. In accordance with the order, Southern Company submitted to the FERC an updated market power analysis on September 2, 2008 related to its continued market-based rate authority. The ultimate outcome of this matter cannot now be determined.
On October 17, 2008, Southern Company filed with the FERC a revised market-based rate (MBR) tariff and a new cost-based rate (CBR) tariff.   The revised MBR tariff provides for a “must offer” energy auction whereby Southern Company offers all of its available energy for sale in a day-ahead auction and an hour-ahead auction, after considering Southern Company’s native load requirements, reliability obligations, and sales commitments to third parties. All sales under the energy auction would be at market clearing prices established under the auction rules. The new CBR tariff is designed to be an alternative means for

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conducting short-term transactions in the wholesale markets and provides for a cost-based cap for wholesale sales of less than a year. Both tariffs must be approved by the FERC. The final outcome of this matter cannot now be determined.
Retail Fuel Cost Recovery
On February 6, 2007, the Georgia PSC approved an increase in Georgia Power’s total annual billings of approximately $383 million related to fuel cost recovery effective March 1, 2007. On February 29, 2008, the Georgia PSC approved an additional increase of approximately $222 million effective June 1, 2008. As of September 30, 2008, Georgia Power had an under recovered fuel balance of approximately $776 million as compared to $692 million at December 31, 2007. Georgia Power is required to file for a new fuel cost recovery rate no later than March 1, 2009. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Retail Regulatory Matters – Fuel Cost Recovery” in Item 8 of the Form 10-K for additional information. Fuel cost recovery revenues as recorded on the financial statements are adjusted for differences in actual recoverable costs and amounts billed in current regulated rates. Accordingly, any changes in the billing factor will not have a significant effect on Georgia Power’s revenues or net income, but will affect cash flow.
Nuclear
Nuclear Projects
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Nuclear – Nuclear Projects” of Georgia Power in Item 7 of the Form 10-K for information regarding the potential expansion of Plant Vogtle.
In August 2006, Southern Nuclear, on behalf of Georgia Power, OPC, MEAG Power, and Dalton Utilities (collectively, Owners), filed an application with the NRC for an early site permit approving two additional nuclear units on the site of Plant Vogtle. On March 31, 2008, Southern Nuclear filed an application with the NRC for a combined construction and operating license (COL) for the new units.
On April 8, 2008, Georgia Power, acting for itself and as agent for the Owners, and a consortium consisting of Westinghouse and Stone & Webster (collectively, Consortium) entered into an engineering, procurement, and construction agreement to design, engineer, procure, construct, and test two AP1000 nuclear units with electric generating capacity of approximately 1,100 MWs each and related facilities, structures, and improvements at Plant Vogtle (Vogtle 3 and 4 Agreement).
The Vogtle 3 and 4 Agreement is an arrangement whereby the Consortium supplies and constructs the entire facility with the exception of certain items provided by the Owners. Under the terms of the Vogtle 3 and 4 Agreement, the Owners will pay a purchase price that will be subject to certain price escalation and adjustments, adjustments for change orders, and performance bonuses. Each Owner is severally (and not jointly) liable for its proportionate share, based on its ownership interest, of all amounts owed to the Consortium under the Vogtle 3 and 4 Agreement. Georgia Power’s proportionate share, based on its current ownership interest, is 45.7%. Under the terms of a separate joint development agreement, the Owners finalized their ownership percentages on July 2, 2008, except for allowed changes under certain limited circumstances during the Georgia PSC certification process.
Georgia Power submitted its self-build nuclear proposal to the Georgia PSC on May 1, 2008 in connection with its 2016-2017 base load capacity request for proposals (RFP). No other responses to the RFP were received.

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On August 1, 2008, Georgia Power submitted an application for the Georgia PSC to certify the project. Hearings began November 3, 2008 and a final certification decision is expected in March 2009.
If certified by the Georgia PSC and licensed by the NRC, Vogtle Units 3 and 4 are scheduled to be placed in service in 2016 and 2017, respectively. The total plant value to be placed in service will also include financing costs for each of the Owners, the impacts of inflation on costs, and transmission and other costs that are the responsibility of the Owners. Georgia Power’s proportionate share of the estimated in-service costs, based on its current ownership interest, is approximately $6.4 billion, subject to adjustments and performance bonuses under the Vogtle 3 and 4 Agreement.
The Owners and the Consortium have agreed to certain liquidated damages upon the Consortium’s failure to comply with the schedule and performance guarantees. The Owners and the Consortium also have agreed to certain bonuses payable to the Consortium for early completion and unit performance. The Consortium’s liability to the Owners for schedule and performance liquidated damages and warranty claims is subject to a cap.
The obligations of Westinghouse and Stone & Webster under the Vogtle 3 and 4 Agreement are guaranteed by Toshiba Corporation and The Shaw Group, Inc., respectively. In the event of certain credit rating downgrades of any Owner, such Owner will be required to provide a letter of credit or other credit enhancement.
The Vogtle 3 and 4 Agreement is subject to certification by the Georgia PSC. In addition, the Owners may terminate the Vogtle 3 and 4 Agreement at any time for their convenience, provided that the Owners will be required to pay certain termination costs and, at certain stages of the work, cancellation fees to the Consortium. The Consortium may terminate the Vogtle 3 and 4 Agreement under certain circumstances, including delays in receipt of the COL or delivery of full notice to proceed, certain Owner suspension or delays of work, action by a governmental authority to permanently stop work, certain breaches of the Vogtle 3 and 4 Agreement by the Owners, Owner insolvency, and certain other events.  
Income Tax Matters
Legislation
On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. The State of Georgia does not allow the bonus depreciation deduction allowed by the Stimulus Act for state income tax purposes. Georgia Power estimates the cash flow reduction to tax payments as a result of the Stimulus Act for 2008 to be between $50 million and $90 million.
On October 3, 2008, President Bush signed the Economic Stabilization Act of 2008 (Stabilization Act) into law. In addition to addressing financial issues, the Stabilization Act includes renewable energy incentives as well as accelerated depreciation for smart meters and smart grid systems. Georgia Power is currently assessing the financial implications of the Stabilization Act. The ultimate impact cannot be determined at this time.
Other Matters
Georgia Power is involved in various other matters being litigated, regulatory matters, and certain tax-related issues that could affect future earnings. In addition, Georgia Power is subject to certain claims and legal actions arising in the ordinary course of business. Georgia Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and

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claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air and water quality standards, 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 pending or potential litigation against Georgia Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Georgia Power in Item 8 of the Form 10-K, 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.
On July 3, 2008, Georgia Power self-reported to the SERC Reliability Council (SERC) a potential violation of the North American Electric Reliability Council reliability standard for transmission vegetation management programs related to a single tree. The SERC can impose penalties ranging from $1,000 to $1,000,000 per day, per violation, which can be adjusted according to certain risk factors and other aggravating or mitigating factors. On September 10, 2008, Georgia Power submitted a proposed settlement agreement, including a proposed mitigation plan. The SERC has not responded to the proposed settlement agreement and the penalty that SERC may assess remains uncertain. The ultimate outcome of this matter cannot be determined at this time; however, it could have a significant and potentially material impact on the net income and cash flow of Georgia Power.
See the Notes to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated 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. 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.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Georgia Power’s financial condition remained stable at September 30, 2008. Throughout the recent turmoil in the financial markets, Georgia Power has maintained adequate access to capital without drawing any of its committed bank credit arrangements used to support its commercial paper programs and variable rate pollution control revenue bonds. Georgia Power has continued to issue commercial paper which has increased the balance of short-term debt while also increasing cash and cash equivalents as a precautionary measure. During the third quarter 2008 and subsequent to September 30, 2008, Georgia Power was required to purchase a total of $76.6 million of variable rate pollution control revenue bonds that were tendered by investors, of which $75 million were subsequently remarketed. Georgia Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital needs. No material changes in bank credit arrangements have occurred. Georgia Power’s interest cost for short-term debt

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has not changed materially. The impact on future financing costs as a result of the recent financial turmoil cannot be determined at this time. See “Sources of Capital” and “Financing Activities” herein for additional information.
As a result of the turmoil in the financial markets, Georgia Power experienced no material counterparty credit losses. Georgia Power’s investments in pension and nuclear decommissioning trust funds declined in value as of September 30, 2008. No material changes in funding requirements related to these funds are currently expected; however, the ultimate outcome cannot be determined at this time.
Net cash provided from operating activities totaled $1.3 billion for the first nine months of 2008, compared to $1.0 billion for the corresponding period in 2007. The $303.6 million increase in cash provided from operating activities in the first nine months of 2008 is primarily due to higher retail operating revenues. Net cash used for investing activities totaled $1.5 billion for the first nine months of 2008 primarily due to gross property additions to utility plant of $1.5 billion. Net cash provided from financing activities totaled $523.6 million for the first nine months of 2008 compared to $203.3 million for the corresponding period in 2007. This was primarily due to the issuance of notes payable and the timing of financings in 2008 compared to 2007.
Significant balance sheet changes for the first nine months of 2008 include a $1.4 billion increase in plant in service.
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, scheduled maturities of long-term debt, as well as related interest, derivative obligations, preferred and preference stock dividends, leases, purchase commitments, and trust funding requirements. Approximately $369 million will be required through September 30, 2009 to fund maturities of long-term debt. In addition, in connection with entering into the Vogtle 3 and 4 Agreement, as described under FUTURE EARNINGS POTENTIAL – “Nuclear – Nuclear Projects” herein, the Georgia Power Board of Directors approved revisions to Georgia Power’s capital budget of $600 million in 2009 and $700 million in 2010, for a revised estimated total construction program of $2.0 billion in 2008, $2.6 billion in 2009, and $2.5 billion in 2010. In November 2008, Georgia Power’s management plans to request approval by the Georgia Power Board of Directors of a revised capital budget of approximately $2.9 billion for 2009 and $2.6 billion for 2010. The increases are primarily a result of changes in the timing of expenditures for environmental controls at Plant Bowen and Yates and the new generating units at Plant McDonough, as well as other project scope and price changes. The Southern Company system financial plan, including the Southern Company system capital budget, is expected to be reviewed by the Southern Company Board of Directors in early 2009. Actual construction costs may vary from these estimates because of changes in such factors as: business conditions; environmental statutes and regulations; nuclear plant regulations; FERC rules and regulations; load projections; the cost and efficiency of construction labor, equipment, and materials; and the cost and availability of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.
Sources of Capital
Georgia Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Recently, Georgia Power has primarily utilized funds from operating cash flows, short-term debt, external security offerings, and equity contributions from Southern Company. However, the

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amount, type, and timing of any future financings, if needed, will depend upon 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.
Georgia Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt as well as 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 September 30, 2008 approximately $363.8 million of cash and cash equivalents and approximately $1.3 billion of unused credit arrangements with banks. See Note 6 to the financial statements of Georgia Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under “Bank Credit Arrangements” herein for additional information. Of the unused credit arrangements, $225 million expire in 2009 and $1.1 billion expire in 2012. Of the facilities that expire in 2009, $40 million contain provisions allowing two-year term loans executable at expiration. Georgia Power expects to renew its credit facilities, as needed, prior to expiration.
At September 30, 2008, substantially all of these credit arrangements provided liquidity support to Georgia Power’s commercial paper program and purchase obligations related to variable rate pollution control revenue bonds. At September 30, 2008, such purchase obligations totaled $666.4 million compared to $743 million in the second quarter 2008. The decrease is due to Georgia Power’s required purchase of $76.6 million of variable rate pollution control revenue bonds that were tendered by investors. Subsequent to September 30, 2008, Georgia Power converted $104.6 million of variable rate pollution control revenue bonds to a fixed interest rate mode. In addition, Georgia Power remarketed approximately $75 million of the bonds that were tendered by investors. The net effect of these transactions decreased the amount of liquidity support dedicated to funding purchase obligations to $636.3 million. 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 September 30, 2008, Georgia Power had approximately $788.4 million of commercial paper and $100 million of short-term bank loans outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and cash.
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- and/or Baa3 or below. These contracts are for physical electricity purchases and sales, fuel purchases, fuel transportation and storage, emissions allowances, energy price risk management and for construction of new generation. At September 30, 2008, the maximum potential collateral requirements under these contracts at a BBB- or Baa3 rating were approximately $28 million. At September 30, 2008, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $933 million. Included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash.
Market Price Risk
Georgia Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2007 reporting period. Since a significant portion of outstanding indebtedness is at fixed rates, Georgia Power is not aware of any facts or circumstances that would significantly affect exposures

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on existing indebtedness in the near term. However, the impact on future financing costs cannot now be determined.
Due to cost-based rate regulation, Georgia Power continues to have 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 physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Georgia Power continues to manage a fuel-hedging program implemented at the instruction of the Georgia PSC. As such, Georgia Power has no material change in market risk exposures when compared with the December 31, 2007 reporting period.
The changes in fair value of energy-related derivative contracts for the three months and nine months ended September 30, 2008 were as follows:
                 
    Third Quarter   Year-to-Date
    2008   2008
    Changes   Changes
    Fair Value
    (in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net  
  $ 168.5     $ (0.4 )
Contracts realized or settled 
    (65.4 )     (86.8 )
Current period changes(a)   
    (150.5 )     39.8  
 
Contracts outstanding at the end of the period, assets (liabilities), net  
  $ (47.4 )   $ (47.4 )
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
The decrease in the fair value positions of the energy-related derivative contracts for the three months and nine months ended September 30, 2008 was $215.9 million and $47.0 million, respectively, substantially all of which is due to natural gas positions. These changes are attributable to both the volume and prices of natural gas. At September 30, 2008, Georgia Power had a net hedge volume of 52.7 Bcf with a weighted average contract cost approximately $0.92 per mmBtu above market prices, compared to 51.3 Bcf at June 30, 2008 with a weighted average contract cost approximately $3.36 per mmBtu below market prices and compared to 44.1 Bcf at December 31, 2007 with a weighted average contract cost approximately $0.02 per mmBtu above market prices. The majority of the natural gas hedges are recovered through the fuel cost recovery mechanism.
At September 30, 2008 and December 31, 2007, the fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:
                 
    September 30,
2008
  December 31,
2007
    (in millions)
Regulatory hedges
  $ (47.4 )   $ (0.4 )
Cash flow hedges
           
Non-accounting hedges
           
 
Total fair value
  $ (47.4 )   $ (0.4 )
 
Energy-related derivative contracts which are designated as regulatory hedges relate to Georgia Power’s fuel hedging program where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the fuel cost recovery mechanism. Certain other gains and losses on energy-related derivatives, designated as cash flow hedges, are initially deferred in other comprehensive income before being recognized in income in the same period as the hedged transaction.

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Gains and losses on energy-related derivative contracts that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.
Unrealized pre-tax gains and losses recognized in income for the three months and nine months ended September 30, 2008 and 2007 for energy-related derivative contracts that are not hedges were not material.
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at September 30, 2008 are as follows:
                                 
    September 30, 2008
    Fair Value Measurements
    Total   Maturity
    Fair Value   Year 1   Years 2&3   Years 4&5
            (in millions)        
Level 1
  $     $     $     $  
Level 2
    (47.4 )     (35.5 )     (11.9 )      
Level 3
                       
 
Fair value of contracts outstanding at end of period
  $ (47.4 )   $ (35.5 )   $ (11.9 )   $  
 
As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value measurements and related disclosures, the table above now uses the three-tier fair value hierarchy, as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously used descriptions “actively quoted,” “external sources,” and “models and other methods.” The three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the previous descriptions focused on the source of the inputs. Because Georgia Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, the valuations of those contracts now appear in Level 2; previously they were shown as “actively quoted.”
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 the first nine months of 2008, Georgia Power issued $250 million of Series 2008A Floating Rate Senior Notes due March 17, 2010 and $250 million of Series 2008B 5.4% Senior Notes due June 1, 2018. In addition, Georgia Power entered into a three-year $300 million long-term floating rate bank loan that bears interest based on one-month LIBOR. Proceeds were used to repay a portion of Georgia Power’s short-term indebtedness, including the maturity of $45 million aggregate principal amount of its Savannah Electric and Power Company Series C 6.55% Senior Notes, and for other corporate purposes, including Georgia Power’s continuous construction activities. Georgia Power settled interest rate hedges of $225 million notional amount at a loss of $16 million. This loss will be amortized over the original term of the hedges. Georgia Power also terminated derivative contracts related to the issuance of $100 million of the Series 2008B Senior Notes at a loss of approximately $5 million, which will be amortized over the life of the Series 2008B Senior Notes. Also in 2008, Georgia Power entered into derivative transactions designed to mitigate interest rate risk related to floating rate obligations. The total notional amount of these derivatives was $901 million. See Note (F) to the Condensed Financial Statements herein for further details.
Also in the first nine months of 2008, Georgia Power converted its entire $819 million of obligations related to auction rate pollution control revenue bonds from auction rate modes to other interest rate modes.  Initially,

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
approximately $332 million of the auction rate pollution control revenue bonds were converted to fixed interest rate modes and approximately $487 million were converted to daily floating rate modes. Georgia Power converted approximately $98 million of its variable rate pollution control revenue bonds to fixed interest rate modes. In addition, Georgia Power incurred obligations related to the issuance of $53 million of pollution control revenue bonds for Georgia Power’s Plant Hammond Project. At September 30, 2008 the trustee held $30.4 million of the proceeds, which will be transferred to Georgia Power for reimbursement of project costs. In September 2008, Georgia Power was required to purchase a total of approximately $76.6 million of variable rate pollution control revenue bonds that were tendered by investors. Also in September 2008, Georgia Power paid at maturity $75 million of Series 2007C floating rate Senior Notes.
Subsequent to September 30, 2008, Georgia Power converted approximately $104.6 million of variable rate pollution control revenue bonds to a fixed interest rate mode.
Also subsequent to September 30, 2008, Georgia Power remarketed a total of approximately $75 million of variable rate pollution control revenue bonds that were tendered by investors.
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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GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2008     2007     2008     2007  
    (in thousands)     (in thousands)  
Operating Revenues:
                               
Retail revenues
  $ 359,652     $ 325,864     $ 871,834     $ 788,827  
Wholesale revenues —
                               
Non-affiliates
    26,194       20,892       76,902       65,296  
Affiliates
    20,036       13,297       89,500       74,190  
Other revenues
    15,959       16,503       45,007       42,870  
 
                       
Total operating revenues
    421,841       376,556       1,083,243       971,183  
 
                       
Operating Expenses:
                               
Fuel
    185,003       150,665       501,129       430,188  
Purchased power —
Non-affiliates
    14,057       7,110       23,269       10,453  
Affiliates
    41,136       36,737       66,564       54,247  
Other operations
    48,879       53,987       143,758       147,000  
Maintenance
    16,344       16,491       53,670       49,148  
Depreciation and amortization
    22,295       21,540       66,205       63,840  
Taxes other than income taxes
    25,088       25,027       66,587       65,516  
 
                       
Total operating expenses
    352,802       311,557       921,182       820,392  
 
                       
Operating Income
    69,039       64,999       162,061       150,791  
Other Income and (Expense):
                               
Allowance for equity funds used during construction
    2,673       539       6,196       1,403  
Interest income
    914       1,295       2,332       4,192  
Interest expense, net of amounts capitalized
    (10,489 )     (11,545 )     (32,164 )     (34,075 )
Other income (expense), net
    (357 )     (389 )     (1,366 )     (1,264 )
 
                       
Total other income and (expense)
    (7,259 )     (10,100 )     (25,002 )     (29,744 )
 
                       
Earnings Before Income Taxes
    61,780       54,899       137,059       121,047  
Income taxes
    22,886       19,911       48,542       44,271  
 
                       
Net Income
    38,894       34,988       88,517       76,776  
Dividends on Preference Stock
    1,551       825       4,652       2,475  
 
                       
Net Income After Dividends on Preference Stock
  $ 37,343     $ 34,163     $ 83,865     $ 74,301  
 
                       
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2008     2007     2008     2007  
    (in thousands)     (in thousands)  
Net Income After Dividends on Preference Stock
  $ 37,343     $ 34,163     $ 83,865     $ 74,301  
Other comprehensive income (loss):
                               
Qualifying hedges:
                               
Changes in fair value, net of tax of $-, $(976), $(1,077), and $1,561, respectively
          (1,554 )     (1,715 )     2,485  
Reclassification adjustment for amounts included in net income, net of tax of $104, $54, $261, and $214, respectively
    167       87       416       342  
 
                       
Total other comprehensive income (loss)
    167       (1,467 )     (1,299 )     2,827  
 
                       
COMPREHENSIVE INCOME
  $ 37,510     $ 32,696     $ 82,566     $ 77,128  
 
                       
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 Nine Months  
    Ended September 30,  
    2008     2007  
    (in thousands)  
Operating Activities:
               
Net income
  $ 88,517     $ 76,776  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    69,926       67,644  
Deferred income taxes
    24,850       (11,540 )
Allowance for equity funds used during construction
    (6,196 )     (1,403 )
Pension, postretirement, and other employee benefits
    1,413       1,809  
Stock option expense
    656       1,022  
Tax benefit of stock options
    200       268  
Hedge settlements
    (5,220 )     3,030  
Other, net
    (4,115 )     1,472  
Changes in certain current assets and liabilities —
               
Receivables
    (75,430 )     (18,793 )
Fossil fuel stock
    (26,408 )     (19,667 )
Materials and supplies
    7,135       (1,521 )
Prepaid income taxes
    (3,929 )     7,177  
Property damage cost recovery
    20,038       19,467  
Other current assets
    2,371       1,735  
Accounts payable
    (2,154 )     7,500  
Accrued taxes
    3,825       31,826  
Accrued compensation
    (3,063 )     (5,217 )
Other current liabilities
    (2,058 )     2,890  
 
           
Net cash provided from operating activities
    90,358       164,475  
 
           
Investing Activities:
               
Property additions
    (232,398 )     (164,217 )
Cost of removal, net of salvage
    (5,246 )     (7,890 )
Construction payables
    13,830       (6,354 )
Other
    (3,956 )     (232 )
 
           
Net cash used for investing activities
    (227,770 )     (178,693 )
 
           
Financing Activities:
               
Increase (decrease) in notes payable, net
    57,813       (94,881 )
Proceeds —
               
Senior Notes
          85,000  
Common stock issued to parent
          80,000  
Gross excess tax benefit of stock options
    283       646  
Capital contributions from parent company
    75,304        
Other long-term debt
    110,000        
Redemptions — Senior notes
    (974 )      
Payment of preference stock dividends
    (4,507 )     (2,475 )
Payment of common stock dividends
    (61,275 )     (55,575 )
Other
    (2,135 )     (1,104 )
 
           
Net cash provided from financing activities
    174,509       11,611  
 
           
Net Change in Cash and Cash Equivalents
    37,097       (2,607 )
Cash and Cash Equivalents at Beginning of Period
    5,348       7,526  
 
           
Cash and Cash Equivalents at End of Period
  $ 42,445     $ 4,919  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $2,470 and $619 capitalized for 2008 and 2007, respectively)
  $ 27,940     $ 24,875  
Income taxes (net of refunds)
  $ 37,353     $ 25,659  
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 September 30,     At December 31,  
Assets   2008     2007  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 42,445     $ 5,348  
Receivables —
               
Customer accounts receivable
    88,988       63,227  
Unbilled revenues
    54,455       39,000  
Under recovered regulatory clause revenues
    71,105       58,435  
Other accounts and notes receivable
    7,569       7,162  
Affiliated companies
    2,327       19,377  
Accumulated provision for uncollectible accounts
    (2,101 )     (1,711 )
Fossil fuel stock, at average cost
    97,739       71,012  
Materials and supplies, at average cost
    38,627       45,763  
Property damage cost recovery
          18,585  
Other regulatory assets
    22,146       10,220  
Other
    18,760       14,878  
 
           
Total current assets
    442,060       351,296  
 
           
Property, Plant, and Equipment:
               
In service
    2,755,543       2,678,952  
Less accumulated provision for depreciation
    966,499       931,968  
 
           
 
    1,789,044       1,746,984  
Construction work in progress
    291,455       150,870  
 
           
Total property, plant, and equipment
    2,080,499       1,897,854  
 
           
Other Property and Investments
    4,745       4,563  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    22,728       17,847  
Prepaid pension costs
    109,407       107,151  
Other regulatory assets
    134,462       97,492  
Other
    36,301       22,784  
 
           
Total deferred charges and other assets
    302,898       245,274  
 
           
Total Assets
  $ 2,830,202     $ 2,498,987  
 
           
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 September 30,     At December 31,  
Liabilities and Stockholder’s Equity   2008     2007  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 37,000     $  
Notes payable
    102,439       44,625  
Accounts payable —
               
Affiliated
    51,664       39,375  
Other
    66,916       56,823  
Customer deposits
    27,202       24,885  
Accrued taxes —
               
Income taxes
    44,039       30,026  
Other
    22,494       10,577  
Accrued interest
    10,025       7,698  
Accrued compensation
    12,034       15,096  
Other regulatory liabilities
    5,699       6,027  
Other
    30,447       32,023  
 
           
Total current liabilities
    409,959       267,155  
 
           
Long-term Debt
    812,429       740,050  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    248,502       240,101  
Accumulated deferred investment tax credits
    11,688       12,988  
Employee benefit obligations
    76,888       74,021  
Other cost of removal obligations
    179,467       172,876  
Other regulatory liabilities
    85,087       82,741  
Other
    80,460       79,802  
 
           
Total deferred credits and other liabilities
    682,092       662,529  
 
           
Total Liabilities
    1,904,480       1,669,734  
 
           
Preference Stock
    97,998       97,998  
 
           
Common Stockholder’s Equity:
               
Common stock, without par value—
               
Authorized - 20,000,000 shares
               
Outstanding - 1,792,717 shares
    118,060       118,060  
Paid-in capital
    511,400       435,008  
Retained earnings
    203,362       181,986  
Accumulated other comprehensive loss
    (5,098 )     (3,799 )
 
           
Total common stockholder’s equity
    827,724       731,255  
 
           
Total Liabilities and Stockholder’s Equity
  $ 2,830,202     $ 2,498,987  
 
           
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
THIRD QUARTER 2008 vs. THIRD QUARTER 2007
AND
YEAR-TO-DATE 2008 vs. YEAR-TO-DATE 2007
OVERVIEW
Gulf Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located in northwest Florida and to wholesale customers in the Southeast. 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, and to effectively manage and secure timely recovery of rising costs. These costs include those related to growing demand, increasingly stringent environmental standards, fuel costs, and storm restoration costs. Appropriately balancing the need to recover these increasing costs with customer prices will continue to challenge Gulf Power for the foreseeable future.
Gulf Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income after dividends on preference stock. 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
Net Income
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
 
(change in millions)   (% change)   (change in millions)   (% change)
$3.2   9.3   $9.6   12.9
 
Gulf Power’s net income after dividends on preference stock for the third quarter 2008 was $37.3 million compared to $34.1 million for the corresponding period in 2007. The increase was primarily due to higher wholesale revenues from non-affiliates and increased allowance for equity funds used during construction (AFUDC), partially offset by a decrease in sales growth.
Gulf Power’s net income after dividends on preference stock for year-to-date 2008 was $83.9 million compared to $74.3 million for the corresponding period in 2007. The increase was primarily due to higher wholesale revenues from non-affiliates and increased AFUDC.
Retail Revenues
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
 
(change in millions)   (% change)   (change in millions)   (% change)
$33.8   10.4   $83.0   10.5
 
In the third quarter 2008, retail revenues were $359.7 million compared to $325.9 million for the corresponding period in 2007. For year-to-date 2008, retail revenues were $871.8 million compared to $788.8 million for the corresponding period in 2007.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the change to retail revenues are as follows:
                                 
    Third Quarter   Year-to-Date
    2008   2008
    (in millions)   (% change)   (in millions)   (% change)
Retail – prior year
  $ 325.9             $ 788.8          
Estimated change in —
                               
Rates and pricing
    2.0       0.6       4.8       0.6  
Sales growth
    (4.3 )     (1.3 )     (3.9 )     (0.5 )
Weather
    0.1       0.0       4.5       0.6  
Fuel and other cost recovery
    36.0       11.1       77.6       9.8  
 
Retail – current year
  $ 359.7       10.4 %   $ 871.8       10.5 %
 
Revenues associated with changes in rates and pricing increased in the third quarter and year-to-date 2008 when compared to the same periods in 2007 primarily due to cost recovery provisions for energy conservation costs and environmental compliance costs. Annually, Gulf Power petitions the Florida PSC for recovery of projected costs including any true-up amount from prior periods, and approved rates are implemented each January. These recovery provisions include related expenses and a return on average net investment. See Note 1 to the financial statements of Gulf Power under “Revenues” and Note 3 to the financial statements of Gulf Power under “Environmental Remediation” and “Retail Regulatory Matters – Environmental Cost Recovery” in Item 8 of the Form 10-K for additional information.
Revenues attributable to changes in sales growth decreased in the third quarter 2008 when compared to the same period in 2007. Weather-adjusted KWH energy sales to residential customers and commercial customers decreased 7.2% and 1.9%, respectively. The decrease in weather-adjusted KWH energy sales to residential and commercial customers was primarily due to decreased customer usage mainly due to a slowing economy, which has negatively impacted the housing market, residential construction, and caused unemployment to rise in the past year in Gulf Power’s service area. Industrial KWH energy sales increased 11.3% primarily as a result of decreased customer co-generation due to the higher cost of natural gas.
Revenues attributable to changes in sales growth decreased year-to-date 2008 when compared to the same period in 2007. Weather-adjusted KWH energy sales to residential customers and commercial customers decreased 5.2% and 0.3%, respectively. The decrease in weather-adjusted KWH energy sales to residential customers was primarily due to decreased customer usage mainly due to a slowing economy, which has negatively impacted the housing market, residential construction, and caused unemployment to rise in the past year in Gulf Power’s service area. The decrease in weather-adjusted KWH energy sales to commercial customers was primarily due to a decrease in number of customers as a result of a slowing economy. Industrial KWH energy sales increased 11.7% primarily as a result of decreased customer co-generation due to the higher cost of natural gas.
Revenues attributable to changes in weather were immaterial in the third quarter 2008 and increased year-to-date 2008 when compared to the corresponding periods in 2007. The increase was due to more favorable weather in 2008 compared to 2007.
Fuel and other cost recovery revenues increased in the third quarter and year-to-date 2008 when compared to the corresponding periods in 2007 primarily due to higher fuel and purchased power expenses. Fuel and other cost recovery revenues include fuel expenses, the energy component of purchased power costs, purchased power capacity costs, and revenues related to the recovery of storm damage restoration costs. Annually, Gulf Power petitions the Florida PSC for recovery of projected fuel and purchased power costs including any true-up

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
amount from prior periods, and approved rates are implemented each January. Gulf Power received approval from the Florida PSC to increase the fuel factor for the period from September 2008 through December 2008 to recover a portion of the estimated December 31, 2008 fuel cost under-recovery balance. The recovery provisions generally equal the related expenses and have no material effect on net income. See FUTURE EARNINGS POTENTIAL – “FERC and Florida PSC Matters - Retail Fuel Cost Recovery” herein and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Gulf Power in Item 7 and Note 1 to the financial statements of Gulf Power under “Revenues” and “Property Damage Reserve” and Note 3 to the financial statements of Gulf Power under “Retail Regulatory Matters – Storm Damage Cost Recovery” in Item 8 of the Form 10-K for additional information.
Wholesale Revenues – Non-Affiliates
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
 
(change in millions)   (% change)   (change in millions)   (% change)
$5.3   25.4   $11.6   17.8
 
Wholesale revenues from non-affiliates are predominantly unit power sales under long-term contracts to other Florida utilities. Revenues from these contracts have both capacity and energy components. Capacity revenues reflect the recovery of fixed costs and a return on investment under the contracts. Energy is generally sold at variable cost.
In the third quarter 2008, wholesale revenues from non-affiliates were $26.2 million compared to $20.9 million for the corresponding period in 2007. For year-to-date 2008, wholesale revenues from non-affiliates were $76.9 million compared to $65.3 million for the corresponding period in 2007. These increases were primarily a result of higher capacity revenues associated with new and existing territorial wholesale contracts and higher energy revenues as a result of increased fuel costs.
Wholesale Revenues – Affiliates
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
 
(change in millions)   (% change)   (change in millions)   (% change)
$6.7   50.7   $15.3   20.6
 
Wholesale revenues 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 are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost.
In the third quarter 2008, wholesale revenues from affiliates were $20.0 million compared to $13.3 million for the corresponding period in 2007. The increase was due to a 67.9% increase in price related to fuel, partially offset by a 10.2% decrease in KWH sales.
For year-to-date 2008, wholesale revenues from affiliates were $89.5 million compared to $74.2 million for the corresponding period in 2007. The increase was due to a 54.6% increase in price related to fuel, partially offset by a 22.0% decrease in KWH sales.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
                                 
    Third Quarter 2008   Year-to-Date 2008
    vs.   vs.
    Third Quarter 2007   Year-to-Date 2007
    (change in millions)   (% change)   (change in millions)   (% change)
Fuel
  $ 34.3       22.8     $ 70.9       16.5  
Purchased power – non-affiliates
    6.9       97.7       12.8       122.6  
Purchased power – affiliates
    4.4       12.0       12.3       22.7  
                         
Total fuel and purchased power expenses
  $ 45.6             $ 96.0          
                         
In the third quarter 2008, total fuel and purchased power expenses were $240.1 million compared to $194.5 million for the corresponding period in 2007. The net increase in fuel and purchased power expenses was due to a $44.7 million increase in the average cost of fuel and purchased power as well as an $11.3 million increase in KWHs purchased, partially offset by a $10.4 million decrease in KWHs generated.
For year-to-date 2008, total fuel and purchased power expenses were $590.9 million compared to $494.9 million for the corresponding period in 2007. The net increase in fuel and purchased power expenses was due to a $106.9 million increase in the average cost of fuel and purchased power as well as an $11.6 million increase in KWHs purchased, partially offset by a $22.5 million decrease in KWHs generated.
Fuel and purchased power transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Gulf Power’s fuel cost recovery clause. See FUTURE EARNINGS POTENTIAL – “FERC and Florida PSC Matters – Retail Fuel Cost Recovery” herein for additional information.
Details of Gulf Power’s cost of generation and purchased power are as follows:
                                                 
    Third Quarter   Third Quarter   Percent   Year-to-Date   Year-to-Date   Percent
Average Cost   2008   2007   Change   2008   2007   Change
    (cents per net KWH)   (cents per net KWH)
Fuel
  4.54     3.44     32.0     4.20     3.42     22.8  
Purchased power
  13.09     13.08     0.1     11.07     9.41     17.6  
 
In the third quarter 2008, fuel expense was $185.0 million compared to $150.7 million in the same period in 2007. The increase was due to a $44.7 million increase in the average cost of fuel, partially offset by a $10.4 million decrease related to total KWHs generated. The average cost of coal per KWH generated increased 36.0% primarily as a result of increases in commodity and transportation costs. The average cost of oil and natural gas per KWH generated increased 20.3% primarily as a result of increases in commodity prices.
For year-to-date 2008, fuel expense was $501.1 million compared to $430.2 million in the same period in 2007. The increase was due to a $93.4 million increase in the average cost of fuel, partially offset by a $22.5 million decrease related to total KWHs generated. The average cost of coal per KWH generated increased 23.5% primarily as a result of increases in commodity and transportation costs. The average cost of oil and natural gas per KWH generated increased 18.4% primarily as a result of increases in commodity prices.

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Non-affiliates
In the third quarter 2008, purchased power from non-affiliates was $14.0 million compared to $7.1 million for the same period in 2007. The increase was due to a $4.1 million increase in total KWHs purchased and a $2.8 million increase resulting from the higher average cost per KWH.
For year-to-date 2008, purchased power from non-affiliates was $23.3 million compared to $10.5 million for the same period in 2007. The increase was due to a $10.0 million increase resulting from the higher average cost per KWH and a $2.8 million increase in total KWHs purchased.
Energy purchases from non-affiliates will vary depending on the market cost of available energy compared to the cost of Southern Company system-generated energy, demand for energy within the Southern Company system service territory, and availability of Southern Company system generation.
Affiliates
In the third quarter 2008, purchased power from affiliates was $41.1 million compared to $36.7 million for the corresponding period in 2007. The increase was due to a $7.2 million increase in total KWHs purchased, partially offset by a $2.8 million decrease resulting from the lower average cost per KWH.
For year-to-date 2008, purchased power from affiliates was $66.5 million compared to $54.2 million for the corresponding period in 2007. The increase was due to an $8.8 million increase in total KWHs purchased as well as a $3.5 million increase resulting from the higher average cost per KWH.
Energy purchases from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC, as approved by the FERC.
Other Operations and Maintenance Expenses
                                 
    Third Quarter 2008   Year-to-Date 2008
    vs.   vs.
    Third Quarter 2007   Year-to-Date 2007
    (change in millions)   (% change)   (change in millions)   (% change)
Other operations
  $ (5.1 )     (9.5 )   $ (3.2 )     (2.2 )
Maintenance
    (0.1 )     (0.9 )     4.5       9.2  
                         
Total other operations and maintenance
  $ (5.2 )           $ 1.3          
                         
In the third quarter 2008, other operations and maintenance expenses were $65.2 million compared to $70.4 million for the same period in 2007. The decrease was primarily due to a $1.6 million decrease in other energy services, a $1.1 million decrease due to an adjustment in allocated overhead expenses, a $0.8 million decrease in distribution contract labor costs, and a $0.7 million decrease in miscellaneous administrative and general expenses. This decrease was partially offset by a $1.3 million increase in unscheduled maintenance at generation facilities. The decreased expenses from other energy services did not have a material impact on earnings since they were offset by decreased associated revenues.
For year-to-date 2008, other operations and maintenance expenses were $197.4 million compared to $196.1 million for the same period in 2007. The increase was primarily due to a $3.7 million increase in scheduled

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and unscheduled maintenance at generation facilities. This increase was partially offset by a $1.3 million decrease in other energy services and a $1.1 million decrease due to an adjustment in allocated overhead expenses. The decreased expenses from other energy services did not have a material impact on earnings since they were offset by decreased associated revenues.
Allowance for Equity Funds Used During Construction
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
 
(change in millions)   (% change)   (change in millions)   (% change)
$2.2   395.9   $4.8   341.6
 
In the third quarter 2008, AFUDC was $2.7 million compared to $0.5 million for the corresponding period in 2007. For year-to-date 2008, AFUDC was $6.2 million compared to $1.4 million for the corresponding period in 2007. These increases were primarily due to the construction of environmental control projects.
Interest Income
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
 
(change in millions)   (% change)   (change in millions)   (% change)
$(0.4)   (29.4)   $(1.9)   (44.4)
 
In the third quarter 2008, interest income was $0.9 million compared to $1.3 million for the same period in 2007. For year-to-date 2008, interest income was $2.3 million compared to $4.2 million for the same period in 2007. These decreases were primarily a result of lower variable interest rates charged against the under recovered fuel balance and a decrease in the property damage reserve balance. The Florida PSC has authorized the calculation of interest on under recovered regulatory clause revenues at 30-day commercial paper rates.
Interest Expense, Net of Amounts Capitalized
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
 
(change in millions)   (% change)   (change in millions)   (% change)
$(1.0)   (9.1)   $(1.9)   (5.6)
 
In the third quarter 2008, interest expense was $10.5 million compared to $11.5 million for the same period in 2007. For year-to-date 2008, interest expense was $32.2 million compared to $34.1 million for the same period in 2007. These decreases were primarily due to a $0.8 million increase in third quarter 2008 and a $1.9 million increase year-to-date 2008 in capitalization of the allowance for debt funds used during construction related to the construction of environmental control projects.
Income Taxes
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
 
(change in millions)   (% change)   (change in millions)   (% change)
$3.0   14.9   $4.2   9.6
 
In the third quarter 2008, income taxes were $22.9 million compared to $19.9 million for the same period in 2007. The increase was primarily due to higher earnings before income taxes and a decrease in the federal production activities deduction, partially offset by the tax benefit associated with an increase in AFUDC. See

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Note (H) to the Condensed Financial Statements herein for additional information related to the federal production activities deduction.
For year-to-date 2008, income taxes were $48.5 million compared to $44.3 million for the same period in 2007. The increase was primarily a result of higher earnings before income taxes partially offset by the tax benefit associated with an increase in AFUDC.
Dividends on Preference Stock
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
 
(change in millions)   (% change)   (change in millions)   (% change)
$0.7   88.0   $2.2   88.0
 
In the third quarter 2008, dividends on preference stock were $1.5 million compared to $0.8 million for the same period in 2007. For year-to-date 2008, dividends on preference stock were $4.7 million compared to $2.5 million for the same period in 2007. These increases resulted from the issuance of $45 million of 6.45% Preference Stock in October 2007.
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 Gulf Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. 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 RISK FACTORS in Item 1A 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 statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. 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 for additional information.
New Source Review Actions
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – New Source Review Actions” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding notices of violation issued by the EPA relating to Gulf Power’s Plant Crist and a unit partially owned by Gulf Power at Plant Scherer and civil actions brought by the EPA against Alabama Power and Georgia Power alleging that these companies had violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of their coal-fired generating facilities. In the action involving Alabama Power, on July 24, 2008, the U.S. District Court for the Northern District of Alabama

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granted partial summary judgment in favor of Alabama Power regarding the proper legal test for determining whether projects are routine maintenance, repair, and replacement and therefore are excluded from NSR permitting. The decision does not resolve the case. The ultimate outcome of these matters cannot be determined at this time.
Clean Air Interstate Rule
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters - Environmental Statutes and Regulations – Air Quality” of Gulf Power in Item 7 of the Form 10-K for background regarding the Clean Air Interstate Rule (CAIR). On July 11, 2008, in response to petitions brought by certain states and regulated industries challenging particular aspects of CAIR, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating CAIR in its entirety and remanding it to the EPA for further action consistent with its opinion. Gulf Power’s overall environmental compliance strategy has been developed in response to numerous federal and state regulatory requirements, many of which remain unaffected by the court’s ruling; however, the court’s decision has the potential to impact future decision making regarding capital expenditures, the installation and operation of pollution control equipment, and the purchase, use, and associated carrying values of emissions allowances. The ultimate impact of the court’s decision cannot be determined at this time and may depend on subsequent legal action, including issuance of the court’s mandate, and future rulemaking and regulatory treatment.
Eight-Hour Ozone Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Gulf Power in Item 7 of the Form 10-K for additional information regarding revisions to the eight-hour ozone air quality standard. In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and new nonattainment areas within Gulf Power’s service territory are expected. The ultimate outcome of this matter cannot be determined at this time and will depend on subsequent legal action and/or future nonattainment designations and regulatory plans.
Carbon Dioxide Litigation
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the U.S. District Court for the Northern District of California against several electric utilities (including Southern Company), several oil companies, and a coal company. The plaintiffs are the governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The plaintiffs assert claims for public and private nuisance and contend that the defendants have acted in concert and are therefore jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which is alleged to be $95 million to $400 million. On June 30, 2008, all defendants filed motions to dismiss this case. Southern Company believes that these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this time.

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Global Climate Issues
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters - Global Climate Issues” of Gulf Power in Item 7 of the Form 10-K for additional information regarding executive orders issued by the Governor of the State of Florida addressing reduction of greenhouse gas emissions within the state. On June 25, 2008, Florida’s Governor signed comprehensive energy-related legislation that includes authorization for the Florida Department of Environmental Protection to adopt rules for a cap-and-trade regulatory program to address greenhouse gas emissions from electric utilities, conditioned upon their ratification by the legislature no sooner than the 2010 legislative session. This legislation also authorizes the Florida PSC to adopt a renewable portfolio standard for public utilities, subject to legislative ratification. The impact of this legislation on Gulf Power will depend on the development, adoption, legislative ratification, implementation, and potential legal challenges in connection with rules governing greenhouse gas emissions and mandates regarding the use of renewable energy, and the ultimate outcome cannot be determined at this time.
FERC and Florida PSC Matters
Market-Based Rate Authority
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Market-Based Rate Authority” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information regarding market-based rate authority. In June 2007, the FERC issued its final rule in Order No. 697 regarding market-based rate authority. The FERC generally retained its current market-based rate standards. Responding to a number of requests for rehearing, the FERC issued Order No. 697-A on April 21, 2008. This order largely affirmed its prior revision and codification of the regulations governing market-based rates for public utilities. In accordance with the order, Southern Company submitted to the FERC an updated market power analysis on September 2, 2008 related to its continued market-based rate authority. The ultimate outcome of this matter cannot now be determined.
On October 17, 2008, Southern Company filed with the FERC a revised market-based rate (MBR) tariff and a new cost-based rate (CBR) tariff. The revised MBR tariff provides for a “must offer” energy auction whereby Southern Company offers all of its available energy for sale in a day-ahead auction and an hour-ahead auction, after considering Southern Company’s native load requirements, reliability obligations, and sales commitments to third parties. All sales under the energy auction would be at market clearing prices established under the auction rules. The new CBR tariff is designed to be an alternative means for conducting short-term transactions in the wholesale markets and provides for a cost-based cap for wholesale sales of less than a year. Both tariffs must be approved by the FERC. The final outcome of this matter cannot now be determined.
Retail Fuel Cost Recovery
Gulf Power has established fuel cost recovery rates approved by the Florida PSC. In recent years, Gulf Power has experienced higher than expected fuel costs for coal and natural gas. If the projected fuel cost over or under recovery balance at year-end exceeds 10% of the projected fuel revenue applicable for the period, Gulf Power is required to notify the Florida PSC and indicate if an adjustment to the fuel cost recovery factor is being requested. Gulf Power filed a petition on June 20, 2008 with the Florida PSC requesting an adjustment to the fuel cost recovery factor. On July 29, 2008, the Florida PSC approved Gulf Power’s request for an increase of approximately 28.3% in the fuel factor for retail customers. This change represents an increase of 11.3% for a

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residential customer billing of 1,000 KWH per month. The increase will result in the recovery of $38.2 million of the projected under recovered balance during the period from September 2008 through December 2008. The remaining portion of the projected under recovered balance is expected to be recovered in 2009. On September 2, 2008, Gulf Power filed its 2009 projected fuel cost recovery filing with the Florida PSC which includes the fuel factors proposed for January through December 2009. The proposed 2009 fuel factor represents an increase of 12.9% over the fuel factor in place September 2008 through December 2008. This change represents an increase of 5.8% in the total bill for a residential customer using 1,000 KWH per month. The Florida PSC will hold hearings to address this filing in November 2008. On October 13, 2008, Gulf Power notified the Florida PSC that the projected fuel cost under recovery balance at year-end exceeds the 10% threshold, but no adjustment to the 2008 or the 2009 factor was requested.
Under recovered fuel costs at September 30, 2008 totaled $101.5 million, compared to $56.6 million at December 31, 2007. Approximately $64.5 million is included in under recovered regulatory clause revenues and approximately $37.0 million is included in deferred charges and other assets on Gulf Power’s Condensed Balance Sheets herein. Fuel cost recovery revenues, as recorded on the financial statements, are adjusted for differences in actual recoverable costs and amounts billed in current regulated rates. Accordingly, any change in the billing factor would have no significant effect on Gulf Power’s revenues or net income, but would affect cash flow. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Gulf Power in Item 7 and Note 1 to the financial statements of Gulf Power under “Revenues” in Item 8 of the Form 10-K for additional information.
Income Tax Matters
Legislation
On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. The State of Florida does not allow the bonus depreciation deduction allowed by the Stimulus Act for state income tax purposes. Gulf Power estimates the cash flow reduction to tax payments as a result of the Stimulus Act for 2008 to be between $7 million and $12 million.
On October 3, 2008, President Bush signed the Economic Stabilization Act of 2008 (Stabilization Act) into law. In addition to addressing financial issues, the Stabilization Act includes renewable energy incentives as well as accelerated depreciation for smart meters and smart grid systems. Gulf Power is currently assessing the financial implications of the Stabilization Act. The ultimate impact cannot be determined at this time.
Other Matters
Gulf Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Gulf Power is subject to certain claims and legal actions arising in the ordinary course of business. 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, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air and water quality standards, 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 pending or potential litigation against Gulf Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Gulf Power in Item 8 of the Form

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10-K, 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 other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
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. 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.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Gulf Power’s financial condition remained stable at September 30, 2008. Throughout the recent turmoil in the financial markets, Gulf Power has maintained adequate access to capital without drawing any of its committed bank credit arrangements used to support its commercial paper programs and variable rate pollution control revenue bonds. Gulf Power has continued to issue commercial paper which has increased the balance of short-term debt while also increasing cash and cash equivalents as a precautionary measure. Gulf Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital needs. No material changes in bank credit arrangements have occurred. Gulf Power’s interest cost for short-term debt has not changed materially. The impact on future financing costs as a result of the recent financial turmoil cannot be determined at this time. See “Sources of Capital” and “Financing Activities” herein for additional information.
As a result of the turmoil in the financial markets, Gulf Power experienced no material counterparty credit losses. Gulf Power’s investments in pension trust funds declined in value as of September 30, 2008. No material changes in funding requirements related to these funds are currently expected; however, the ultimate outcome cannot be determined at this time.
Net cash provided from operating activities totaled $90.4 million for the first nine months of 2008, compared to $164.5 million for the corresponding period in 2007. The $74.1 million decrease in cash provided from operating activities was primarily due to an increase in under recovered regulatory clauses related to fuel of $58.1 million, and a $28.0 million decrease in cash flows from accrued taxes liability, partially offset by a decrease in materials and supplies of $8.7 million. Net cash used for investing activities totaled $227.8 million primarily due to gross property additions to utility plant of $240.8 million in the first nine months of 2008. These additions were primarily related to installation of equipment to comply with environmental requirements. Net cash provided from financing activities totaled $174.5 million for the first nine months of 2008, compared to $11.6 million for the corresponding period in 2007. The $162.9 million increase in cash provided from

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financing activities was primarily due to increased cash flows of $152.7 million related to notes payable and the issuance of $110 million in long-term debt, partially offset by the issuance of $85.0 million in senior notes in 2007.
Significant balance sheet changes for the first nine months of 2008 include a net increase of $182.6 million in property, plant, and equipment, primarily related to environmental control projects, an $11.8 million change in energy-related derivative contracts, and a $44.9 million increase in under recovered regulatory clause revenues related to fuel. In the third quarter 2008, Gulf Power entered into an energy services contract. This contract is expected to result in an additional liability of $5.6 million through the third quarter 2009. Subsequent to September 30, 2008, Gulf Power sold a building and land resulting in a gain of $3.8 million which will be recognized in the fourth quarter 2008.
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, maturities of long-term debt, leases, derivative obligations, preference stock dividends, purchase commitments, and trust funding requirements. Gulf Power redeemed, prior to maturity, $1.0 million of senior notes in the first nine months of 2008. At September 30, 2008, Gulf Power had $37 million of securities due within one year.
Sources of Capital
Gulf Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Recently, Gulf Power has utilized funds from operating cash flows, short-term debt, external security offerings, a long term bank note, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon 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.
Gulf Power’s current liabilities frequently exceed 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 had at September 30, 2008 approximately $42.4 million of cash and cash equivalents and $130 million of unused committed lines of credit with banks. Of these credit agreements, $80 million expire in 2008, $50 million expire in 2009, and $105 million contain provisions allowing one-year term loans executable at expiration. Gulf Power expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Gulf Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under “Bank Credit Arrangements” herein for additional information. These credit arrangements provide liquidity support to Gulf Power’s obligations with respect to variable rate pollution control revenue 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 September 30, 2008, Gulf Power had approximately $98.6 million of commercial paper outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and cash.
Subsequent to September 30, 2008, Gulf Power renewed $60 million of the $80 million of credit facilities that were set to expire in 2008. In addition, Gulf Power entered into a new committed line of credit for $10 million

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that will expire in 2009. Subsequent to September 30, 2008, approximately $29 million of Gulf Power’s variable rate pollution control revenue bonds were converted to a fixed interest rate mode and no longer require committed credit support.
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- and/or Baa3 or below. These contracts are for physical electricity purchases and sales, fuel purchases, fuel transportation and storage, emissions allowances and energy price risk management. At September 30, 2008, the maximum potential collateral requirements under these contracts at a BBB- or Baa3 rating were approximately $44 million. At September 30, 2008, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $163 million. Included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash.
Market Price Risk
Gulf Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2007 reporting period. Since a significant portion of outstanding indebtedness is at fixed rates, Gulf Power is not aware of any facts or circumstances that would significantly affect exposures on existing indebtedness in the near term. However, the impact on future financing costs cannot now be determined.
Due to cost-based rate regulation, Gulf Power continues to have 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 physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Gulf Power continues to manage a fuel-hedging program implemented with the approval of the Florida PSC. As such, Gulf Power has no material change in market risk exposures when compared with the December 31, 2007 reporting period.
The changes in fair value of energy-related derivative contracts for the three months and nine months ended September 30, 2008 were as follows:
                 
    Third Quarter   Year-to-Date
    2008   2008
    Changes   Changes
    Fair Value
    (in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net
  $ 25.4     $ (0.2 )
Contracts realized or settled
    (9.4 )     (12.4 )
Current period changes(a)
    (28.0 )     0.6  
 
Contracts outstanding at the end of the period, assets (liabilities), net
  $ (12.0 )   $ (12.0 )
 
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The decrease in the fair value positions of the energy-related derivative contracts for the three months and nine months ended September 30, 2008 was $37.4 million and $11.8 million, respectively, substantially all of which is due to natural gas positions. These changes are attributable to both the volume and prices of natural gas. At September 30, 2008, Gulf Power had a net hedge volume of 15 Bcf with a weighted average contract cost approximately $0.81 per mmBtu above market prices, compared to 6.8 Bcf at June 30, 2008 with a weighted average contract cost approximately $3.82 per mmBtu below market prices and compared to 7.5 Bcf at December 31, 2007 with a weighted average contract cost approximately $0.03 per mmBtu above market prices. The majority of the natural gas hedges are recovered through the fuel cost recovery clause.
At September 30, 2008 and December 31, 2007, the fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:
                 
    September 30,   December 31,
    2008   2007
    (in millions)
Regulatory hedges
  $ (12.0 )   $ (0.2 )
Cash flow hedges
           
Non-accounting hedges
           
 
Total fair value
  $ (12.0 )   $ (0.2 )
 
Energy-related derivative contracts which are designated as regulatory hedges relate to Gulf Power’s fuel hedging program where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the fuel cost recovery clause. Certain other gains and losses on energy-related derivatives, designated as cash flow hedges, are initially deferred in other comprehensive income before being recognized in income in the same period as the hedged transaction. Gains and losses on energy-related derivative contracts that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.
Unrealized pre-tax gains and losses recognized in income for the three months and nine months ended September 30, 2008 and 2007 for energy-related derivative contracts that are not hedges were not material.
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at September 30, 2008 are as follows:
                                 
    September 30, 2008
    Fair Value Measurements
    Total   Maturity
    Fair Value   Year 1   Years 2&3   Years 4&5
    (in millions)
Level 1
  $     $     $     $  
Level 2
    (12.0 )     (11.1 )     (0.9 )      
Level 3
                       
 
Fair value of contracts outstanding at end of period
  $ (12.0 )   $ (11.1 )   $ (0.9 )   $  
 

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value measurements and related disclosures, the table above now uses the three-tier fair value hierarchy, as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously used descriptions “actively quoted,” “external sources,” and “models and other methods.” The three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the previous descriptions focused on the source of the inputs. Because Gulf Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, the valuations of those contracts now appear in Level 2; previously they were shown as “actively quoted.”
For additional information, 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.
Financing Activities
In April 2008, Gulf Power entered into a $110 million term loan agreement that bears interest based on one-month LIBOR and borrowed $80 million under such agreement. In June 2008, Gulf Power borrowed the remaining $30 million under the term loan agreement. Proceeds were used to repay a portion of Gulf Power’s short-term indebtedness and for other general corporate purposes, including Gulf Power’s continuous construction activities. In connection with the term loan agreement, Gulf Power terminated $80 million of derivative transactions at a loss of $5.2 million. The loss was deferred in accumulated other comprehensive income and will be amortized over the original life of the hedge, which is a 10-year period.
Also in 2008, Gulf Power converted its entire $141 million of obligations related to auction rate pollution control revenue bonds from auction rate modes to other interest rate modes. Approximately $75 million of the auction rate pollution control revenue bonds were converted to fixed interest rate modes and approximately $66 million were converted to daily floating rate modes.
Subsequent to September 30, 2008, approximately $29 million of the $66 million variable rate pollution control revenue bonds were converted to a fixed interest rate mode and no longer require committed credit support. Also subsequent to September 30, 2008, Gulf Power purchased from investors the remaining $37 million variable rate pollution control revenue bonds that were subject to mandatory tender.
In addition to any financings that may be necessary to meet capital requirements, contractual obligations, and storm-recovery, 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.

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MISSISSIPPI POWER COMPANY

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MISSISSIPPI POWER COMPANY
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2008     2007     2008     2007  
    (in thousands)     (in thousands)  
Operating Revenues:
                               
Retail revenues
  $ 241,788     $ 221,790     $ 597,298     $ 560,059  
Wholesale revenues —
                               
Non-affiliates
    106,595       93,750       274,996       247,746  
Affiliates
    28,908       13,657       79,833       42,229  
Other revenues
    4,124       3,826       12,636       13,031  
 
                       
Total operating revenues
    381,415       333,023       964,763       863,065  
 
                       
Operating Expenses:
                               
Fuel
    174,300       146,864       443,273       390,781  
Purchased power —
                               
Non-affiliates
    13,777       5,960       21,458       8,173  
Affiliates
    35,421       27,506       78,903       56,970  
Other operations
    45,302       46,264       137,605       133,220  
Maintenance
    19,526       14,941       55,364       46,219  
Depreciation and amortization
    17,229       15,302       52,327       44,683  
Taxes other than income taxes
    17,142       16,651       48,993       44,989  
 
                       
Total operating expenses
    322,697       273,488       837,923       725,035  
 
                       
Operating Income
    58,718       59,535       126,840       138,030  
Other Income and (Expense):
                               
Interest income
    403       538       996       1,537  
Interest expense, net of amounts capitalized
    (4,503 )     (4,593 )     (13,336 )     (14,030 )
Other income (expense), net
    1,506       184       6,025       5,161  
 
                       
Total other income and (expense)
    (2,594 )     (3,871 )     (6,315 )     (7,332 )
 
                       
Earnings Before Income Taxes
    56,124       55,664       120,525       130,698  
Income taxes
    19,474       20,781       42,832       49,033  
 
                       
Net Income
    36,650       34,883       77,693       81,665  
Dividends on Preferred Stock
    433       433       1,299       1,299  
 
                       
Net Income After Dividends on Preferred Stock
  $ 36,217     $ 34,450     $ 76,394     $ 80,366  
 
                       
 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2008     2007     2008     2007  
    (in thousands)     (in thousands)  
Net Income After Dividends on Preferred Stock
  $ 36,217     $ 34,450     $ 76,394     $ 80,366  
Other comprehensive income (loss):
                               
Qualifying hedges:
                               
Changes in fair value, net of tax of $1,285, $(200), $(169), and $(154),
respectively
    2,075       (322 )     (272 )     (249 )
 
                       
COMPREHENSIVE INCOME
  $ 38,292     $ 34,128     $ 76,122     $ 80,117  
 
                       
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 STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Nine Months  
    Ended September 30,  
    2008     2007  
    (in thousands)  
Operating Activities:
               
Net income
  $ 77,693     $ 81,665  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    56,025       51,809  
Deferred income taxes and investment tax credits, net
    5,112       (5,806 )
Plant Daniel capacity
          (4,244 )
Pension, postretirement, and other employee benefits
    6,088       6,877  
Stock option expense
    639       935  
Tax benefit of stock options
    473       253  
Hurricane Katrina grant proceeds-property reserve
          60,000  
Other, net
    (27,388 )     (14,443 )
Changes in certain current assets and liabilities —
               
Receivables
    (36,440 )     (2,501 )
Fossil fuel stock
    (26,810 )     (18,687 )
Materials and supplies
    (2,961 )     22  
Prepaid income taxes
    1,187       4,822  
Other current assets
    4,098       915  
Hurricane Katrina grant proceeds
          14,345  
Hurricane Katrina accounts payable
          3,309  
Other accounts payable
    10,195       (14,032 )
Accrued taxes
    (6,998 )     (9,897 )
Accrued compensation
    (8,066 )     (7,236 )
Other current liabilities
    17,355       (716 )
 
           
Net cash provided from operating activities
    70,202       147,390  
 
           
Investing Activities:
               
Property additions
    (100,490 )     (84,383 )
Cost of removal, net of salvage
    (3,497 )     6,274  
Construction payables
    (5,202 )     3,327  
Hurricane Katrina capital grant proceeds
    7,314       10,869  
Other
    2,423       (90 )
 
           
Net cash used for investing activities
    (99,452 )     (64,003 )
 
           
Financing Activities:
               
Increase in notes payable, net
    44,608       8,939  
Proceeds —
               
Capital contributions
    4,222       (3 )
Gross excess tax benefit of stock options
    892       508  
Other long-term debt
    80,000        
Redemptions —
               
Pollution control revenue bonds
    (7,900 )      
Other long-term debt
          (36,082 )
Payment of preferred stock dividends
    (1,299 )     (1,299 )
Payment of common stock dividends
    (51,300 )     (50,475 )
Other
    (1,475 )      
 
           
Net cash provided from (used for) financing activities
    67,748       (78,412 )
 
           
Net Change in Cash and Cash Equivalents
    38,498       4,975  
Cash and Cash Equivalents at Beginning of Period
    4,827       4,214  
 
           
Cash and Cash Equivalents at End of Period
  $ 43,325     $ 9,189  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $113 and $- capitalized for 2008 and 2007, respectively)
  $ 12,054     $ 13,098  
Income taxes (net of refunds)
  $ 38,710     $ 48,048  
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 September 30,     At December 31,  
Assets   2008     2007  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 43,325     $ 4,827  
Receivables —
               
Customer accounts receivable
    54,193       43,946  
Unbilled revenues
    25,850       23,163  
Under recovered regulatory clause revenues
    60,201       40,545  
Other accounts and notes receivable
    8,842       5,895  
Affiliated companies
    15,654       11,838  
Accumulated provision for uncollectible accounts
    (1,326 )     (924 )
Fossil fuel stock, at average cost
    74,276       47,466  
Materials and supplies, at average cost
    30,401       27,440  
Other regulatory assets
    34,871       32,234  
Other
    14,132       18,422  
 
           
Total current assets
    360,419       254,852  
 
           
Property, Plant, and Equipment:
               
In service
    2,171,087       2,130,835  
Less accumulated provision for depreciation
    914,207       880,148  
 
           
 
    1,256,880       1,250,687  
Construction work in progress
    86,328       50,015  
 
           
Total property, plant, and equipment
    1,343,208       1,300,702  
 
           
Other Property and Investments
    8,524       9,556  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    8,430       8,867  
Prepaid pension costs
    65,663       66,099  
Other regulatory assets
    81,210       62,746  
Other
    28,538       24,843  
 
           
Total deferred charges and other assets
    183,841       162,555  
 
           
Total Assets
  $ 1,895,992     $ 1,727,665  
 
           
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 September 30,     At December 31,  
Liabilities and Stockholder’s Equity   2008     2007  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 41,207     $ 1,138  
Notes payable
    54,551       9,944  
Accounts payable —
               
Affiliated
    48,089       40,394  
Other
    62,312       60,758  
Customer deposits
    10,128       9,640  
Accrued taxes —
               
Income taxes
    2,123        
Other
    40,661       48,853  
Accrued interest
    3,085       2,713  
Accrued compensation
    13,899       21,965  
Over recovered regulatory clause revenues
    17,555        
Other regulatory liabilities
    11,476       11,082  
Other
    27,024       23,882  
 
           
Total current liabilities
    332,110       230,369  
 
           
Long-term Debt
    313,170       281,963  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    209,896       206,818  
Deferred credits related to income taxes
    13,221       15,156  
Accumulated deferred investment tax credits
    14,393       15,254  
Employee benefit obligations
    91,023       88,300  
Other cost of removal obligations
    95,916       90,485  
Other regulatory liabilities
    105,564       119,458  
Other
    43,093       33,252  
 
           
Total deferred credits and other liabilities
    573,106       568,723  
 
           
Total Liabilities
    1,218,386       1,081,055  
 
           
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
    320,498       314,324  
Retained earnings
    286,336       261,242  
Accumulated other comprehensive income
    301       573  
 
           
Total common stockholder’s equity
    644,826       613,830  
 
           
Total Liabilities and Stockholder’s Equity
  $ 1,895,992     $ 1,727,665  
 
           
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
THIRD QUARTER 2008 vs. THIRD QUARTER 2007
AND
YEAR-TO-DATE 2008 vs. YEAR-TO-DATE 2007
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, and to effectively manage and secure timely recovery of rising costs. These costs include those related to growing demand, increasingly stringent environmental standards, fuel costs, and major storm restoration. Appropriately balancing the need to recover these increasing costs with customer prices will continue to challenge Mississippi Power for the foreseeable future.
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, plant availability, system reliability, and net income after dividends on preferred stock. 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
Net Income
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$1.8
  5.1   $(4.0)   (4.9)
 
Mississippi Power’s net income after dividends on preferred stock for the third quarter 2008 was $36.2 million compared to $34.4 million for the corresponding period in 2007. The increase was primarily due to increases in wholesale capacity revenues, retail revenues for System Restoration Rider (SRR), a retail base rate increase effective January 2008, and a decrease in income taxes primarily resulting from a State of Mississippi manufacturing investment tax credit. These increases were partially offset by an increase in other operations and maintenance expenses.
Mississippi Power’s net income after dividends on preferred stock for year-to-date 2008 was $76.4 million compared to $80.4 million for the corresponding period in 2007. The decrease in net income was primarily the result of increases in other operations and maintenance expenses, depreciation and amortization, and a decrease in retail revenues for SRR. These items were partially offset by an increase in territorial base revenues due to a retail base rate increase effective January 2008, an increase in wholesale capacity revenues, a decrease in income taxes primarily resulting from the amortization of a regulatory liability, and a State of Mississippi manufacturing investment tax credit.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For additional information on SRR, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – System Restoration Rider” of Mississippi Power in Item 7 of the Form 10-K.
Retail Revenues
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$20.0   9.0   $37.2   6.6
 
In the third quarter 2008, retail revenues were $241.8 million compared to $221.8 million for the same period in 2007. For year-to-date 2008, retail revenues were $597.3 million compared to $560.1 million for the same period in 2007.
Details of the change to retail revenues are as follows:
                                 
    Third Quarter   Year-to-Date
    2008   2008
    (in millions)   (% change)   (in millions)   (% change)
Retail – prior year
  $ 221.8             $ 560.1          
Estimated change in —
                               
Rates and pricing
    6.9       3.1       14.1       2.5  
Sales growth
    (2.8 )     (1.3 )     (3.3 )     (0.6 )
Weather
    (1.3 )     (0.6 )     0.1       0.0  
Fuel and other cost recovery
    17.2       7.8       26.3       4.7  
 
Retail – current year
  $ 241.8       9.0 %   $ 597.3       6.6 %
 
Revenues associated with changes in rates and pricing increased in the third quarter and year-to-date 2008 when compared to the same periods in 2007, primarily due to a base rate increase effective January 2008 of $5.8 million for the third quarter and $13.3 million year-to-date 2008. Revenues related to SRR increased $1.5 million for the third quarter 2008 and decreased $1.1 million year-to-date 2008. Revenues associated with the ECO Plan decreased $0.4 million for the third quarter 2008 due to the reduction in the ECO rate which became effective in June 2008. Revenues associated with the ECO Plan increased $1.8 million year-to-date 2008. See FUTURE EARNINGS POTENTIAL – “FERC and Mississippi PSC Matters – Retail Regulatory Matters” herein for additional information.
Revenues attributable to changes in sales growth decreased in the third quarter 2008 when compared to the same period in 2007 due to 6.4% and 2.3% decreases in weather-adjusted KWH sales to residential and commercial customers, respectively, and a 3.4% decrease in KWH sales to industrial customers. Revenues attributable to changes in sales growth decreased year-to-date 2008 when compared to the same period in 2007 due to a 1.9% decrease in weather-adjusted KWH sales to residential customers and a 3.0% decrease in KWH sales to industrial customers, which were partially offset by a 0.3% increase in weather-adjusted KWH sales to commercial customers. The decrease in industrial sales is primarily due to lower production levels and maintenance outages experienced by some industrial customers as well as the result of a slowing economy within the Southeast.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues resulting from changes in weather decreased primarily due to milder weather in the third quarter 2008 as compared to the same period in 2007. For year-to-date 2008 as compared to year-to-date 2007, revenues resulting from changes in weather increased slightly due to more favorable weather in 2008.
Fuel and other cost recovery revenues increased in the third quarter and year-to-date 2008 when compared to the same periods in 2007, primarily as a result of the increase in fuel and purchased power expenses. Electric rates include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the fuel component of purchased power costs, and do not affect net income.
Wholesale Revenues – Non-Affiliates
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$12.8
  13.7   $27.2   11.0
 
Wholesale revenues from non-affiliates will vary depending on the market cost of available energy compared to the cost of Mississippi 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 third quarter 2008, wholesale revenues from non-affiliates were $106.6 million compared to $93.8 million for the same period in 2007. The increase was due to increased revenues from customers inside Mississippi Power’s service territory of $7.3 million and increased revenues from customers outside Mississippi Power’s service territory of $5.5 million. The $7.3 million increase in revenues from customers inside Mississippi Power’s service territory was primarily due to a $7.9 million increase in fuel costs, partially offset by lower demand by customers of approximately $0.6 million. The $5.5 million increase in revenues from customers outside Mississippi Power’s service territory was primarily due to a $5.9 million increase associated with higher prices, partially offset by a $0.3 million decrease in sales and a $0.1 million decrease in capacity revenues. Increased prices were due to the higher marginal cost of fuel which resulted in fewer opportunity sales to customers outside of Mississippi Power’s service territory.
For year-to-date 2008, wholesale revenues from non-affiliates were $274.9 million compared to $247.7 million for the same period in 2007. The increase was due to increased revenues from customers outside Mississippi Power’s service territory of $15.7 million and increased revenues from customers inside Mississippi Power’s service territory of $11.5 million. The $15.7 million increase in revenues from customers outside Mississippi Power’s service territory was primarily due to a $17.6 million increase associated with higher prices, partially offset by decreased sales of approximately $1.5 million and a $0.4 million decrease in capacity revenues. Increased prices were due to the higher marginal cost of fuel which resulted in fewer opportunity sales to customers outside of Mississippi Power’s service territory. The $11.5 million increase in revenues from customers inside Mississippi Power’s service territory was primarily due to a $13.1 million increase in fuel costs, partially offset by lower demand by customers of approximately $1.6 million.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale Revenues – Affiliates
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$15.2   111.7   $37.6   89.0
 
Wholesale revenues 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 are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since the energy is generally sold at marginal cost.
In the third quarter 2008, wholesale revenues from affiliates were $28.9 million compared to $13.7 million for the same period in 2007. The increase was primarily due to a $12.2 million increase in energy revenues, of which $8.4 million was associated with higher fuel prices and $3.8 million was associated with increased sales. Capacity revenues increased $3.0 million.
For year-to-date 2008, wholesale revenues from affiliates were $79.8 million compared to $42.2 million for the same period in 2007. The increase was primarily due to a $34.0 million increase in energy revenues, of which $27.2 million was associated with higher fuel prices and $6.8 million was associated with increased sales. Capacity revenues increased $3.6 million.
Fuel and Purchased Power Expenses
                                 
    Third Quarter 2008   Year-to-Date 2008
    vs.   vs.
    Third Quarter 2007   Year-to-Date 2007
    (change in millions)   (% change)   (change in millions)   (% change)
Fuel
  $ 27.5       18.7     $ 52.5       13.4  
Purchased power – non-affiliates
    7.8       131.2       13.3       162.5  
Purchased power – affiliates
    7.9       28.8       21.9       38.5  
                     
Total fuel and purchased power expenses
  $ 43.2             $ 87.7          
                     
In the third quarter 2008, total fuel and purchased power expenses were $223.5 million compared to $180.3 million for the same period in 2007. The increase in fuel and purchased power expenses was primarily due to a $46.4 million increase in the cost of fuel and purchased power, partially offset by a $3.2 million decrease related to total KWHs generated and purchased.
For year-to-date 2008, total fuel and purchased power expenses were $543.6 million compared to $455.9 million for the same period in 2007. The increase in fuel and purchased power expenses was primarily due to an $88.4 million increase in the cost of fuel and purchased power, partially offset by a $0.7 million decrease related to total KWHs generated and purchased.
Fuel and purchased power transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Mississippi Power’s fuel cost recovery clauses. See FUTURE EARNINGS POTENTIAL – “FERC and Mississippi PSC Matters – Retail Regulatory Matters” herein for additional information.

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Details of Mississippi Power’s cost of generation and purchased power are as follows:
                                                 
    Third Quarter   Third Quarter   Percent   Year-to-Date   Year-to-Date   Percent
Average Cost   2008   2007   Change   2008   2007   Change
    (cents per net KWH)           (cents per net KWH)        
Fuel
    4.99       3.94       26.7       4.32       3.74       15.5  
Purchased power
    7.64       6.15       24.2       6.66       4.71       41.4  
 
In the third quarter 2008, fuel expense was $174.3 million compared to $146.9 million for the same period for 2007. The increase was due to a 26.7% increase in the price of coal and gas, partially offset by a 6.4% decrease in generation from Mississippi Power-owned facilities.
For year-to-date 2008, fuel expense was $443.3 million compared to $390.8 million for the same period for 2007. The increase was due to a 15.5% increase in the price of coal and gas, partially offset by a 1.7% decrease in generation from Mississippi Power-owned facilities.
Non-affiliates
In the third quarter 2008, purchased power expense from non-affiliates was $13.8 million compared to $6.0 million for the same period in 2007. The increase was primarily the result of a 78.4% increase in the average cost of purchased power per KWH and a 29.6% increase in KWH volume purchased. The increase in prices was due to a higher marginal cost of fuel, while the increase in volume was a result of lower cost opportunity purchases.
For year-to-date 2008, purchased power expense from non-affiliates was $21.5 million compared to $8.2 million for the same period in 2007. The increase was primarily the result of a 106.8% increase in the average cost of purchased power per KWH and a 27.0% increase in KWH volume purchased. The increase in prices was due to a higher marginal cost of fuel, while the increase in volume was a result of lower cost opportunity purchases.
Energy purchases from non-affiliates will vary depending on the market cost of available energy compared to the cost of Southern Company system-generated energy, demand for energy within the Southern Company system service territory, and availability of Southern Company system generation.
Affiliates
In the third quarter 2008, purchased power from affiliates was $35.4 million compared to $27.5 million for the same period in 2007. The increase was primarily due to a 15.7% increase in the average cost of purchased power per KWH and an 11.3% increase in KWH volume purchased.
For year-to-date 2008, purchased power from affiliates was $78.9 million compared to $57.0 million for the same period in 2007. The increase was primarily due to a 35.7% increase in the average cost of purchased power per KWH and a 2.1% increase in KWH volume purchased.
Energy purchases from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC, as approved by the FERC.

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Other Operations and Maintenance Expenses
                                 
    Third Quarter 2008   Year-to-Date 2008
    vs.   vs.
    Third Quarter 2007   Year-to-Date 2007
    (change in millions)   (% change)   (change in millions)   (% change)
Other operations
  $ (1.0 )     (2.1 )   $ 4.4       3.3  
Maintenance
    4.6       30.7       9.1       19.8  
                     
Total other operations and maintenance
  $ 3.6             $ 13.5          
                     
In the third quarter 2008, other operations and maintenance expenses were $64.8 million compared to $61.2 million for the same period in 2007. The increase in other operations and maintenance expenses was primarily due to scheduled and unplanned outage work of $3.1 million and a $1.6 million increase in transmission and distribution maintenance, partially offset by a $1.1 million decrease in administrative expenses.
For year-to-date 2008, other operations and maintenance expenses were $192.9 million compared to $179.4 million for the same period in 2007. The increase in other operations and maintenance expenses was primarily due to a $6.9 million increase in transmission and distribution maintenance, a $4.2 million increase in generation screening and evaluation, and a $2.6 million increase in environmental projects.
Depreciation and Amortization
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$1.9
  12.6   $7.6   17.1
 
In the third quarter 2008, depreciation and amortization was $17.2 million compared to $15.3 million for the same period in 2007. The increase was primarily due to a $1.4 million increase in amortization related to a regulatory liability recorded in 2003 that ended in December 2007 in connection with the Mississippi PSC’s accounting order on Plant Daniel capacity, a $0.6 million increase for amortization of certain reliability-related maintenance costs deferred in 2007 in accordance with a Mississippi PSC order, and a $0.3 million increase in depreciation for transmission and distribution expenditures, partially offset by a $0.7 million decrease in amortization primarily related to environmental costs associated with the ECO Plan.
For year-to-date 2008, depreciation and amortization was $52.3 million compared to $44.7 million for the same period in 2007. The increase was primarily due to a $4.2 million increase in amortization related to a regulatory liability recorded in 2003 that ended in December 2007 in connection with the Mississippi PSC’s accounting order on Plant Daniel capacity, a $1.8 million increase for amortization of certain reliability-related maintenance costs deferred in 2007 in accordance with a Mississippi PSC order, and a $1.7 million increase in depreciation for production, transmission, and distribution expenditures, partially offset by a $0.3 million decrease in amortization primarily related to environmental costs associated with the ECO Plan.
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.

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Taxes Other Than Income Taxes
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$0.5   2.9   $4.0   8.9
 
In the third quarter 2008, taxes other than income taxes were $17.1 million compared to $16.6 million for the same period in 2007. The increase was primarily due to a $0.4 million increase in municipal franchise taxes and a $0.1 million increase in ad valorem taxes.
For year-to-date 2008, taxes other than income taxes were $49.0 million compared to $45.0 million for the same period in 2007. The increase was primarily due to a $2.5 million increase in ad valorem taxes, a $0.9 million increase in municipal franchise taxes, and a $0.5 million increase in corporate franchise taxes.
The retail portion of the increase in ad valorem taxes is recoverable under Mississippi Power’s ad valorem tax cost recovery clause and, therefore, does not impact net income.
Other Income (Expense), Net
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$1.3   718.5   $0.8   16.7
 
In the third quarter 2008, other income (expense), net was $1.5 million compared to $0.2 million for the same period in 2007. The increase was primarily due to a $2.4 million increase in income associated with customer projects, partially offset by a $1.2 million decrease due to mark to market losses on energy related derivative positions.
For year-to-date 2008, other income (expense), net was $6.0 million compared to $5.2 million for the same period in 2007. The increase was primarily due to a $1.5 million increase in customer projects, a $0.4 million increase due to mark to market gains on energy related derivative positions, and a $0.4 million increase in the allowance for equity funds used during construction, partially offset by a $1.5 million decrease in amounts collected from customers for contributions in aid of construction.
Income Taxes
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$(1.3)   (6.3)   $(6.2)   (12.6)
 
In the third quarter 2008, income taxes were $19.5 million compared to $20.8 million for the same period in 2007. The decrease was primarily due to a $0.9 million State of Mississippi manufacturing investment tax credit.

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For year-to-date 2008, income taxes were $42.8 million compared to $49.0 million for the same period in 2007. The decrease was primarily due to a $3.9 million decrease in pre-tax income, the amortization of a regulatory liability of $1.0 million pursuant to a December 2007 regulatory accounting order from the Mississippi PSC, and a $0.9 million increase in a State of Mississippi manufacturing investment tax credit. 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.
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 Mississippi Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. 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 in the aftermath of Hurricane Katrina. For additional information relating to these issues, see RISK FACTORS in Item 1A 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 statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. 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 for additional information.
New Source Review Actions
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – New Source Review Actions” of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding a civil action brought by the EPA alleging that Alabama Power had violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of its coal-fired generating facilities, including one facility co-owned by Mississippi Power. On July 24, 2008, the U.S. District Court for the Northern District of Alabama granted partial summary judgment in favor of Alabama Power regarding the proper legal test for determining whether projects are routine maintenance, repair, and replacement and therefore are excluded from NSR permitting. The decision does not resolve the case. The ultimate outcome of this matter cannot be determined at this time.
Clean Air Interstate Rule
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Mississippi Power in Item 7 of the Form 10-K for background regarding the Clean Air Interstate Rule (CAIR). On July 11, 2008, in response to petitions brought by certain states and regulated industries challenging particular aspects of CAIR, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating CAIR in its entirety and remanding it to the EPA for further action consistent with its opinion. Mississippi Power’s overall

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environmental compliance strategy has been developed in response to numerous federal and state regulatory requirements, many of which remain unaffected by the court’s ruling; however, the court’s decision has the potential to impact future decision making regarding capital expenditures, the installation and operation of pollution control equipment, and the purchase, use, and associated carrying values of emissions allowances. The ultimate impact of the court’s decision cannot be determined at this time and may depend on subsequent legal action, including issuance of the court’s mandate, and future rulemaking and regulatory treatment.
Eight-Hour Ozone Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Mississippi Power in Item 7 of the Form 10-K for additional information regarding revisions to the eight-hour ozone air quality standard. In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and new nonattainment areas within Mississippi Power’s service territory are expected. The ultimate outcome of this matter cannot be determined at this time and will depend on subsequent legal action and/or future nonattainment designations and regulatory plans.
Carbon Dioxide Litigation
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the U.S. District Court for the Northern District of California against several electric utilities (including Southern Company), several oil companies, and a coal company. The plaintiffs are the governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The plaintiffs assert claims for public and private nuisance and contend that the defendants have acted in concert and are therefore jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which is alleged to be $95 million to $400 million. On June 30, 2008, all defendants filed motions to dismiss this case. Southern Company believes that these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this time.
FERC and Mississippi PSC Matters
Market-Based Rate Authority
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Market-Based Rate Authority” of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information regarding market-based rate authority. In June 2007, the FERC issued its final rule in Order No. 697 regarding market-based rate authority. The FERC generally retained its current market-based rate standards. Responding to a number of requests for rehearing, the FERC issued Order No. 697-A on April 21, 2008. This order largely affirmed its prior revision and codification of the regulations governing market-based rates for public utilities. In accordance with the order, Southern Company submitted to the FERC an updated market power analysis on September 2, 2008 related to its continued market-based rate authority. The ultimate outcome of this matter cannot now be determined.

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On October 17, 2008, Southern Company filed with the FERC a revised market-based rate (MBR) tariff and a new cost-based rate (CBR) tariff. The revised MBR tariff provides for a “must offer” energy auction whereby Southern Company offers all of its available energy for sale in a day-ahead auction and an hour-ahead auction, after considering Southern Company’s native load requirements, reliability obligations, and sales commitments to third parties. All sales under the energy auction would be at market clearing prices established under the auction rules. The new CBR tariff is designed to be an alternative means for conducting short-term transactions in the wholesale markets and provides for a cost-based cap for wholesale sales of less than a year. Both tariffs must be approved by the FERC. The final outcome of this matter cannot now be determined.
Wholesale Rate Filing
On August 29, 2008, Mississippi Power filed with the FERC a request for revised wholesale electric tariff and rates. Prior to making this filing, Mississippi Power reached a settlement with all of its customers who take service under the tariff. This settlement agreement was filed with the FERC as part of the request. The settlement provides for an increase in annual base wholesale revenues in the amount of $5.8 million, effective January 1, 2009. In addition, Mississippi Power would be allowed to increase its annual accrual for the wholesale portion of property damage to $303,000 per year, to defer any property damage costs prudently incurred in excess of the wholesale property damage reserve balance, and to defer the wholesale portion of the generation screening and evaluation costs associated with the IGCC project. The settlement agreement also provides that Mississippi Power will not seek a change in wholesale full-requirements rates before November 1, 2010, except for changes associated with the fuel adjustment clause and the energy cost management clause, changes associated with property damages that exceed the amount in the wholesale property damage reserve, and changes associated with costs and expenses associated with environmental requirements affecting fossil fuel generating facilities. On October 24, 2008, Mississippi Power received notice that the FERC had accepted the filing effective November 1, 2008, with the revised monthly charges being applied beginning January 1, 2009. Other than the reversal of previously expensed generation screening and evaluation costs related to the IGCC project, the impact on net income is not expected to be material. See “FERC and Mississippi PSC Matters – Integrated Coal Gasification Combined Cycle” herein for additional information.
Retail Regulatory Matters
Environmental Compliance Overview Plan
See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters - Environmental Compliance Overview Plan” in Item 8 of the Form 10-K for information on Mississippi Power’s annual environmental filing with the Mississippi PSC. On February 1, 2008, Mississippi Power filed with the Mississippi PSC its annual ECO Plan evaluation for 2008.
Since the filing of the ECO Plan evaluation on February 1, 2008, the regulations addressing mercury emissions were altered by a decision issued by the U.S. Court of Appeals for the District of Columbia Circuit on February 8, 2008. On April 7, 2008, Mississippi Power filed with the Mississippi PSC a supplemental ECO Plan evaluation in which the projects included in the ECO Plan evaluation on February 1, 2008 being undertaken primarily for mercury control were removed. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters - Environmental Statutes and Regulations – Air Quality” of Mississippi Power in Item 7 of the Form 10-K for a discussion regarding the Clean Air Mercury Rule. In this supplemental ECO Plan filing, Mississippi Power requested a 15 cent per 1,000 KWH decrease for retail residential customers. The Mississippi PSC approved the supplemental ECO Plan evaluation on June 11, 2008, with the new rates effective in June 2008.

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Performance Evaluation Plan
See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters – Performance Evaluation Plan” in Item 8 of the Form 10-K for information on Mississippi Power’s base rates. In a May 2004 order establishing Mississippi Power’s forward-looking rate schedule PEP, the Mississippi PSC ordered that the Mississippi Public Utilities Staff and Mississippi Power review the operations of the PEP in 2007. By mutual agreement, this review was deferred and is scheduled to occur in 2008.
In December 2007, Mississippi Power submitted its annual PEP filing for 2008, which resulted in a rate increase of 1.983%, or $15.5 million annually, effective January 2008. In March 2008, Mississippi Power submitted its annual PEP lookback filing for 2007, which recommended no surcharge or refund. The filing is under review by the Mississippi Public Utilities Staff; therefore, the ultimate outcome of this filing cannot now be determined.
Fuel Cost Recovery
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Mississippi Power in Item 7 of the Form 10-K for information regarding Mississippi Power’s fuel cost recovery. At September 30, 2008, the under recovered balance of the fuel and energy cost management clauses for territorial customers recorded in Mississippi Power’s Condensed Balance Sheets herein was $42.6 million compared to $40.5 million at December 31, 2007. Mississippi Power’s operating revenues are adjusted for differences in actual recoverable fuel cost and amounts billed in accordance with the currently approved cost recovery rate. Accordingly, changes to the billing factor will have no significant effect on Mississippi Power’s revenues or net income, but will affect cash flow.
Fuel Adjustment Clause Hearing
On October 7, 2008, the Mississippi PSC opened a docket to investigate and review interest and carrying charges under the fuel adjustment clause for utilities within the State of Mississippi including Mississippi Power. A hearing has been scheduled for November 6, 2008 to hear testimony regarding the method of calculating carrying charges on over and under recoveries of fuel-related costs. The ultimate outcome of this matter cannot now be determined.
Statewide Electric Generation Needs Review
On April 30, 2008, in accordance with the Mississippi Public Utility Act, the Mississippi PSC issued an order to develop, publicize, and keep current an analysis of the five-year long-range needs for expansion of facilities for the generation of electricity in the State of Mississippi. In its order, the Mississippi PSC directed all affected utilities to submit evidence in support of their forecasts and plans in accordance with the Mississippi PSC’s Public Utilities Rules of Practice and Procedure. Comments were filed on June 10, 2008, and hearings were held in August 2008. The ultimate outcome of this matter cannot now be determined.
Mississippi Base Load Construction Legislation
In the 2008 regular session of the Mississippi legislature, a bill was passed and signed by the Governor on May 9, 2008 to enhance the Mississippi PSC’s authority to facilitate development and construction of base load generation in the State of Mississippi. The bill authorizes, but does not require, the Mississippi PSC to include in retail base rates, prior to and during construction, all or a portion of the prudently incurred pre-construction and construction costs incurred by a utility in constructing a base load electric generating plant. The bill also provides for periodic prudence reviews by the Mississippi PSC and prohibits the cancellation of

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any such generating plant without the approval of the Mississippi PSC. In the event of cancellation of the construction of the plant without approval of the Mississippi PSC, the bill authorizes the Mississippi PSC to make a public interest determination as to whether and to what extent the utility will be afforded rate recovery for costs incurred in connection with such cancelled generating plant. The effect of this legislation on Mississippi Power cannot now be determined.
Integrated Coal Gasification Combined Cycle
As part of the evaluation and screening of alternatives to meet its future generation needs, Mississippi Power is considering the construction of an advanced coal gasification facility to be located in Kemper County, Mississippi, that would use locally mined lignite coal. The plant would use an air-blown IGCC technology that generates power from low-rank coals and coals with high moisture or high ash content. These coals, which include lignite, make up approximately half the proven United States and worldwide coal reserves. The feasibility assessment of the project is currently underway. Mississippi Power filed an application in June 2006 with the DOE for certain tax credits available to projects using clean coal technologies under the Energy Policy Act of 2005. The DOE subsequently certified the project and in November 2006, the IRS allocated IRC Section 48A tax credits of $133 million to Mississippi Power. The utilization of these credits is dependent upon meeting the certification requirements for the project, including an in-service date no later than November 2013. On February 14, 2008, Mississippi Power also requested that the DOE transfer the remaining funds previously granted to a cancelled Southern Company project that would have been located in Orlando, Florida.
In December 2006, the Mississippi PSC approved Mississippi Power’s requested accounting treatment to defer the costs associated with Mississippi Power’s generation resource planning, evaluation, and screening activities as a regulatory asset. In December 2007, Mississippi Power reported to the Mississippi PSC an updated estimate and received an order directing Mississippi Power to continue charging all costs associated with the generation capacity assessment to the regulatory asset. At September 30, 2008, Mississippi Power had spent $36.2 million, of which $2.7 million related to land purchases capitalized. The remaining retail portion of $23.4 million was deferred in other regulatory assets.
The wholesale portion of $10.1 million was expensed, with $6.0 million through September 30, 2008 and $4.1 million during 2007. On August 29, 2008, Mississippi Power and its wholesale customers entered into an agreement regarding a wholesale rate increase. The FERC accepted the filing on October 24, 2008. This agreement will allow $9.3 million of the wholesale portion of the generation screening and evaluation costs associated with the IGCC project to be reclassified from expense to a regulatory asset in the fourth quarter 2008. See “FERC and Mississippi PSC Matters - Wholesale Rate Filing” herein for additional information.
These costs will remain as a regulatory asset until the Mississippi PSC and the FERC determine the prudence and ultimate recovery of such costs. The balance of such regulatory asset is included in Mississippi Power’s rate base for ratemaking purposes. Approval by various regulatory agencies, including the Mississippi PSC, will also be required if the project proceeds. The Mississippi PSC, in its discretion, may exercise its additional rate authority granted to the Mississippi PSC in the Mississippi base load construction legislation if the project proceeds. See “FERC and Mississippi PSC Matters - Mississippi Base Load Construction Legislation” herein for additional information.
The final outcome of this matter cannot now be determined.

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Income Tax Matters
Legislation
On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. The State of Mississippi does not allow the bonus depreciation deduction allowed by the Stimulus Act for state income tax purposes. Mississippi Power estimates the cash flow reduction to tax payments as a result of the Stimulus Act for 2008 to be between $6 million and $9 million.
On October 3, 2008, President Bush signed the Economic Stabilization Act of 2008 (Stabilization Act) into law. In addition to addressing financial issues, the Stabilization Act includes renewable energy incentives as well as accelerated depreciation for smart meters and smart grid systems. Mississippi Power is currently assessing the financial implications of the Stabilization Act. The ultimate impact cannot be determined at this time.
Other Matters
Mississippi Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Mississippi Power is subject to certain claims and legal actions arising in the ordinary course of business. 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, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air and water quality standards, 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 pending or potential litigation against Mississippi Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Mississippi Power in Item 8 of the Form 10-K, 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 other contingencies, regulatory matters, and other matters being litigated 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. 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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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Overview
Mississippi Power’s financial condition remained stable at September 30, 2008. Throughout the recent turmoil in the financial markets, Mississippi Power has maintained adequate access to capital without drawing any of its committed bank credit arrangements used to support its commercial paper programs and variable rate pollution control revenue bonds. Mississippi Power has continued to issue commercial paper which has increased the balance of short-term debt while also increasing cash and cash equivalents as a precautionary measure. During the third quarter 2008, Mississippi Power was required to purchase a total of approximately $7.9 million of variable rate pollution control revenue bonds that were tendered by investors. Mississippi Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital needs. No material changes in bank credit arrangements have occurred. Mississippi Power’s interest cost for short-term debt has not changed materially. The impact on future financing costs as a result of the recent financial turmoil cannot be determined at this time. See “Sources of Capital” and “Financing Activities” herein for additional information.
As a result of the turmoil in the financial markets, Mississippi Power experienced no material counterparty credit losses. Mississippi Power’s investments in pension trust funds declined in value as of September 30, 2008. No material changes in funding requirements related to these funds are currently expected; however, the ultimate outcome cannot be determined at this time.
Net cash provided from operating activities totaled $70.2 million for the first nine months of 2008, compared to $147.4 million net cash provided from operating activities for the corresponding period in 2007. The $77.2 million decrease in net cash provided from operating activities in the first nine months of 2008 was primarily due to the receipt of grant proceeds of $74.3 million in June 2007. The $35.4 million increase in net cash used for investing activities in the first nine months of 2008 was primarily due to a $16.1 million increase in property additions, a $9.8 million increase in cost of removal, net of salvage, and an $8.5 million increase in construction payables due to new construction projects. Net cash provided from financing activities totaled $67.7 million for the first nine months of 2008, compared to $78.4 million used in financing for the corresponding period in 2007. The $146.2 million increase in net cash provided from financing activities was primarily due to the $80 million long-term bank loan made to Mississippi Power on March 5, 2008 and the $36 million redemption of the long-term debt to an affiliated trust in the first nine months of 2007. Notes payable increased by $35.7 million primarily due to additional borrowings from commercial paper.
Significant balance sheet changes for the first nine months of 2008 include an increase in cash and cash equivalents of $38.5 million primarily due to an increase of $36 million in temporary cash investments. Under recovered regulatory clause revenues increased by $19.7 million primarily due to higher fuel costs. Fossil fuel inventory increased $26.8 million primarily due to increases in coal and coal in transit of $14.2 million and $4.2 million, respectively. Other regulatory assets increased $18.5 million primarily due to an increase of $12 million in generation resource planning, evaluation, and screening activities and an increase of $8.1 million in gas hedges. Securities due within one year increased by $40.1 million due to the current portion of the senior note maturing in 2009. Notes payable increased by $44.6 million primarily due to additional borrowings from commercial paper. Also, long-term debt increased by $31.2 million primarily due to an $80 million long-term bank loan made in 2008, partially offset by the $36 million redemption of the long-term debt to an affiliated trust in 2007 and the required purchase of $7.9 million variable rate pollution control revenue bonds in September 2008 that were tendered by investors.

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MISSISSIPPI POWER COMPANY
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 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, derivative obligations, preferred stock dividends, and trust funding requirements. Approximately $41.2 million will be required through September 30, 2009 for maturities of long-term debt.
Sources of Capital
Mississippi Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Mississippi Power has primarily utilized funds from operating cash flows, short-term debt, external security offerings, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon 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.
Mississippi Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt as well as 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 September 30, 2008 approximately $43.3 million of cash and cash equivalents and $149.2 million of unused committed credit arrangements with banks. Of these facilities, $69.2 million expire in 2008 and $80 million expire in 2009. Approximately $39 million of these credit arrangements contain provisions allowing two-year term loans executable at expiration and $15 million contain provisions allowing one-year term loans executable at expiration. Mississippi Power expects to renew its credit facilities, as needed, prior to expiration. Subsequent to September 30, 2008, $55.7 million of the credit facilities expiring in 2008 were terminated. These facilities were put in place to fund storm damage costs related to Hurricane Katrina and are now no longer required. See Note 6 to the financial statements of Mississippi Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under “Bank Credit Arrangements” herein for additional information. These credit arrangements provide liquidity support to Mississippi Power’s commercial paper program and have $32.2 million dedicated to funding purchase obligations related to variable rate pollution control revenue bonds. 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 September 30, 2008, Mississippi Power had $54.6 million of commercial paper outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper, lines of credit, and cash.
Off-Balance Sheet Financing Arrangements
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Off-Balance Sheet Financing Arrangements” of Mississippi Power 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. There are certain contracts that could require

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
collateral, but not accelerated payment, in the event of a credit rating change to BBB- and/or Baa3 or below. These contracts are for physical electricity sales, fuel purchases, fuel transportation and storage, emissions allowances and energy price risk management. At September 30, 2008, the maximum potential collateral requirements under these contracts at a BBB- or Baa3 rating were approximately $8 million. At September 30, 2008, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $135 million. Included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash.
Market Price Risk
Mississippi Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2007 reporting period. Since a significant portion of outstanding indebtedness is at fixed rates, Mississippi Power is not aware of any facts or circumstances that would significantly affect exposures on existing indebtedness in the near term. However, the impact on future financing costs cannot now be determined.
Due to cost-based rate regulation, Mississippi Power continues to have 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 physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Mississippi Power continues to manage retail fuel-hedging programs implemented at the instruction of the Mississippi PSC and wholesale fuel-hedging programs under agreements with wholesale customers. As such, Mississippi Power has no material change in market risk exposures when compared with the December 31, 2007 reporting period.
The changes in fair value of energy-related derivative contracts for the three months and nine months ended September 30, 2008 were as follows:
                 
    Third Quarter   Year-to-Date
    2008   2008
    Changes   Changes
    Fair Value
    (in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net
  $ 44.1     $ 2.0  
Contracts realized or settled
    (23.0 )     (32.4 )
Current period changes(a)
    (33.2 )     18.3  
 
Contracts outstanding at the end of the period, assets (liabilities), net
  $ (12.1 )   $ (12.1 )
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
The decrease in the fair value positions of the energy-related derivative contracts for the three months and nine months ended September 30, 2008 was $56.2 million and $14.1 million, respectively, substantially all of which is due to natural gas positions. These changes are attributable to both the volume and prices of natural gas. At September 30, 2008, Mississippi Power had a net hedge volume of 25.5 Bcf with a weighted average contract cost approximately $0.56 per mmBtu above market prices, compared to 10.8 Bcf at June 30, 2008 with a weighted average contract cost approximately $4.23 per mmBtu below market prices and compared to 15.6 Bcf at December 31, 2007 with a weighted average contract cost approximately $0.09 per mmBtu below market prices. The majority of the natural gas hedges are recovered through the energy cost management clause.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At September 30, 2008 and December 31, 2007, the fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:
                 
    September 30,   December 31,
    2008   2007
    (in millions)
Regulatory hedges
  $ (13.2 )   $ 1.3  
Cash flow hedges
    0.8       0.9  
Non-accounting hedges
    0.3       (0.2 )
 
Total fair value
  $ (12.1 )   $ 2.0  
 
Energy-related derivative contracts which are designated as regulatory hedges relate to Mississippi Power’s fuel hedging program where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the energy cost management clause. Certain other gains and losses on energy-related derivatives, designated as cash flow hedges, are initially deferred in other comprehensive income before being recognized in income in the same period as the hedged transaction. Gains and losses on energy-related derivative contracts that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.
Unrealized pre-tax gains and losses recognized in income for the three months and nine months ended September 30, 2008 and 2007 for energy-related derivative contracts that are not hedges were not material.
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at September 30, 2008 are as follows:
                                 
    September 30, 2008
    Fair Value Measurements
    Total   Maturity
    Fair Value   Year 1   Years 2 & 3   Years 4 & 5
    (in millions)
Level 1
  $     $     $     $  
Level 2
    (12.1 )     (5.2 )     (5.1 )     (1.8 )
Level 3
                       
 
Fair value of contracts outstanding at end of period
  $ (12.1 )   $ (5.2 )   $ (5.1 )   $ (1.8 )
 
As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value measurements and related disclosures, the table above now uses the three-tier fair value hierarchy, as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously used descriptions “actively quoted,” “external sources,” and “models and other methods.” The three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the previous descriptions focused on the source of the inputs. Because Mississippi Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, the valuations of those contracts now appear in Level 2; previously they were shown as “actively quoted.”
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 of Mississippi 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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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financing Activities
In March 2008, Mississippi Power entered into an $80 million long-term bank loan that bears interest based on one-month LIBOR with a three-year maturity. Proceeds were used to repay a portion of Mississippi Power’s short-term indebtedness and for other corporate purposes, including Mississippi Power’s continuous construction activities.
Also in 2008, Mississippi Power converted its entire $42.6 million of obligations related to auction rate pollution control revenue bonds from an auction rate mode to a fixed rate mode.
In September 2008, Mississippi Power was required to purchase a total of approximately $7.9 million of variable rate pollution control revenue bonds that were tendered by investors.
In addition to any financings that may be necessary to meet capital requirements, contractual obligations, and storm restoration costs, 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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SOUTHERN POWER COMPANY
AND SUBSIDIARY COMPANIES

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2008     2007     2008     2007  
    (in thousands)     (in thousands)  
Operating Revenues:
                               
Wholesale revenues —
                               
Non-affiliates
  $ 296,743     $ 159,951     $ 548,119     $ 339,121  
Affiliates
    216,622       185,310       494,008       438,737  
Other revenues
    2,506       2,490       5,860       6,403  
 
                       
Total operating revenues
    515,871       347,751       1,047,987       784,261  
 
                       
Operating Expenses:
                               
Fuel
    221,735       115,669       334,123       201,814  
Purchased power —
                               
Non-affiliates
    56,312       28,291       107,180       50,502  
Affiliates
    59,539       42,350       175,210       110,477  
Other operations
    25,136       27,267       73,573       69,711  
Maintenance
    6,413       4,872       28,661       18,375  
Depreciation and amortization
    24,014       18,424       64,944       55,120  
Taxes other than income taxes
    4,130       3,670       13,311       11,697  
 
                       
Total operating expenses
    397,279       240,543       797,002       517,696  
 
                       
Operating Income
    118,592       107,208       250,985       266,565  
Other Income and (Expense):
                               
Interest expense, net of amounts capitalized
    (22,162 )     (19,602 )     (61,414 )     (60,954 )
Other income (expense), net
    674       (2,029 )     13,289       (926 )
 
                       
Total other income and (expense)
    (21,488 )     (21,631 )     (48,125 )     (61,880 )
 
                       
Earnings Before Income Taxes
    97,104       85,577       202,860       204,685  
Income taxes
    37,542       34,139       78,903       81,357  
 
                       
Net Income
  $ 59,562     $ 51,438     $ 123,957     $ 123,328  
 
                       
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2008     2007     2008     2007  
    (in thousands)     (in thousands)  
Net Income
  $ 59,562     $ 51,438     $ 123,957     $ 123,328  
Other comprehensive income (loss):
                               
Qualifying hedges:
                               
Changes in fair value, net of tax of $11,534, $(548), $3,703, and $(619), respectively
    17,830       (827 )     5,714       (949 )
Reclassification adjustment for amounts included in net income, net of tax of $979, $1,357, $3,669, and $3,762, respectively
    1,513       2,062       5,671       6,020  
 
                       
Total other comprehensive income (loss)
    19,343       1,235       11,385       5,071  
 
                       
COMPREHENSIVE INCOME
  $ 78,905     $ 52,673     $ 135,342     $ 128,399  
 
                       
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 AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Nine Months  
    Ended September 30,  
    2008     2007  
    (in thousands)  
Operating Activities:
               
Net income
  $ 123,957     $ 123,328  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    75,985       66,791  
Deferred income taxes and investment tax credits, net
    13,952       19,289  
Deferred revenues
    27,493       24,083  
Mark-to-market adjustments
    701       875  
Accumulated billings on construction contract
    62,045       45,293  
Accumulated costs on construction contract
    (77,534 )     (15,979 )
Gain on sale of property
    (6,015 )      
Other, net
    178       3,575  
Changes in certain current assets and liabilities —
               
Receivables
    (82,449 )     (57,504 )
Fossil fuel stock
    (2,658 )     (3,974 )
Materials and supplies
    6,246       (287 )
Other current assets
    2,102       (1,439 )
Accounts payable
    34,116       19,630  
Accrued taxes
    43,438       43,334  
Accrued interest
    (12,448 )     (11,722 )
Other current liabilities
    (3,516 )      
 
           
Net cash provided from operating activities
    205,593       255,293  
 
           
Investing Activities:
               
Property additions
    (45,114 )     (109,629 )
Sale of property
    5,009        
Change in construction payables, net
    (4,393 )     (1,682 )
Payments pursuant to long-term service agreements
    (24,130 )     (39,994 )
Other
    (1,083 )     (7,557 )
 
           
Net cash used for investing activities
    (69,711 )     (158,862 )
 
           
Financing Activities:
               
Decrease in notes payable, net
    (49,748 )     (33,848 )
Proceeds — Capital contributions
    3,215       76  
Redemptions — Long-term debt
          (1,209 )
Payment of common stock dividends
    (70,875 )     (67,350 )
Other
          (24 )
 
           
Net cash used for financing activities
    (117,408 )     (102,355 )
 
           
Net Change in Cash and Cash Equivalents
    18,474       (5,924 )
Cash and Cash Equivalents at Beginning of Period
    5       29,929  
 
           
Cash and Cash Equivalents at End of Period
  $ 18,479     $ 24,005  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $7,009 and $11,771 capitalized for 2008 and 2007, respectively)
  $ 63,311     $ 61,484  
Income taxes (net of refunds)
  $ 33,109     $ 31,064  
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                 
    At September 30,     At December 31,  
Assets   2008     2007  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 18,479     $ 5  
Receivables —
               
Customer accounts receivable
    31,196       19,100  
Other accounts receivable
    1,421       1,025  
Affiliated companies
    99,129       27,004  
Fossil fuel stock, at average cost
    17,818       15,160  
Materials and supplies, at average cost
    19,667       19,284  
Prepaid service agreements — current
    41,096       14,233  
Assets from risk management activities
    18,097       16,079  
Other
    11,134       7,066  
 
           
Total current assets
    258,037       118,956  
 
           
Property, Plant, and Equipment:
               
In service
    2,841,002       2,534,507  
Less accumulated provision for depreciation
    339,634       280,962  
 
           
 
    2,501,368       2,253,545  
Construction work in progress
    5,387       283,084  
 
           
Total property, plant, and equipment
    2,506,755       2,536,629  
 
           
Deferred Charges and Other Assets:
               
Prepaid long-term service agreements
    80,560       87,058  
Other—
               
Affiliated
    3,905       4,138  
Other
    18,595       21,993  
 
           
Total deferred charges and other assets
    103,060       113,189  
 
           
Total Assets
  $ 2,867,852     $ 2,768,774  
 
           
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                 
    At September 30,     At December 31,  
Liabilities and Stockholder’s Equity   2008     2007  
    (in thousands)  
Current Liabilities:
               
Notes payable
  $     $ 49,748  
Accounts payable —
               
Affiliated
    86,428       48,475  
Other
    12,353       20,322  
Accrued taxes —
               
Income taxes
    38,999       392  
Other
    14,103       2,658  
Accrued interest
    17,720       30,168  
Liabilities from risk management activities
    8,381       12,639  
Billings in excess of cost on construction contract
    20,895       36,384  
Other
    283       9,523  
 
           
Total current liabilities
    199,162       210,309  
 
           
Long-term Debt
    1,297,289       1,297,099  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    155,657       138,123  
Deferred capacity revenues — Affiliated
    59,564       34,801  
Other—
               
Affiliated
    6,718       7,754  
Other
    4,574       2,801  
 
           
Total deferred credits and other liabilities
    226,513       183,479  
 
           
Total Liabilities
    1,722,964       1,690,887  
 
           
Common Stockholder’s Equity:
               
Common stock, par value $.01 per share —
               
Authorized - 1,000,000 shares
               
Outstanding - 1,000 shares
           
Paid-in capital
    861,681       858,466  
Retained earnings
    305,532       253,131  
Accumulated other comprehensive loss
    (22,325 )     (33,710 )
 
           
Total common stockholder’s equity
    1,144,888       1,077,887  
 
           
Total Liabilities and Stockholder’s Equity
  $ 2,867,852     $ 2,768,774  
 
           
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 AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2008 vs. THIRD QUARTER 2007
AND
YEAR-TO-DATE 2008 vs. YEAR-TO-DATE 2007
OVERVIEW
Southern Power and its wholly-owned subsidiaries construct, acquire, own, and manage generation assets and sell electricity at market-based prices in the southeastern wholesale market. Southern Power continues to execute its regional strategy through a combination of acquiring and constructing new power plants and by entering into PPAs with investor owned utilities, independent power producers, municipalities, and electric cooperatives.
To evaluate operating results and to ensure Southern Power’s ability to meet its contractual commitments to customers, Southern Power focuses on several key performance indicators. These indicators include peak season equivalent forced outage rate (EFOR) and net income. EFOR 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
Net Income
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$8.2
  15.8   $0.7   0.5
 
Southern Power’s net income for the third quarter 2008 was $59.6 million compared to $51.4 million for the corresponding period of 2007. This increase is primarily due to increased capacity sales to requirements service customers, income from the operation of Plant Oleander Unit 5, and mark to market gains on sales of uncontracted generating capacity. This increase was partially offset by increased depreciation associated with the implementation of a new depreciation study, increased depreciation associated with Plant Oleander Unit 5 and Plant Franklin Unit 3 being placed into commercial operation in December 2007 and June 2008, respectively, and increased interest expense due to completion of the Plant Oleander Unit 5 and Plant Franklin Unit 3 construction projects. Interest expense was capitalized on these construction projects during the corresponding period in 2007. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Power Sales Agreements” of Southern Power in Item 7 of the Form 10-K for information regarding requirements service customers.
Southern Power’s net income for year-to-date 2008 was $124.0 million compared to $123.3 million for the corresponding period of 2007. This increase was primarily due to increased capacity sales to requirements service customers, a gain on the sale of an undeveloped tract of land, and the receipt of a fee for participating in an asset auction during the first quarter 2008. Southern Power was not the successful bidder in the asset auction. These favorable impacts were partially offset by transmission service expenses and tariff penalties incurred during the first quarter 2008, timing of plant maintenance activities, increased general and administrative expenses related to the implementation of the FERC

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separation order, increased depreciation associated with the implementation of a new depreciation study, and increased depreciation associated with Plant Oleander Unit 5 and Plant Franklin Unit 3 being placed into commercial operation in December 2007 and June 2008, respectively. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Intercompany Interchange Contract” of Southern Power in Item 7 and Note 3 to the financial statements of Southern Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for information regarding the FERC separation order.
Wholesale Revenues Non-Affiliates
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$136.7   85.5   $209.0   61.6
 
Wholesale energy sales to non-affiliates will vary depending on the energy demand of those customers and their generation capacity, as well as the market cost of available energy compared to the cost of Southern Power.
Wholesale revenues from non-affiliates for the third quarter 2008 were $296.7 million compared to $160.0 million for the corresponding period in 2007. This increase was primarily due to an increase in short-term market energy revenues from uncontracted generating units of $78.8 million, mark to market gains on sales of uncontracted generating capacity of $44.5 million arising from a decrease in market prices since June 30, 2008 and settlement of third quarter 2008 transactions, increased energy revenues of $22.9 million due to higher natural gas prices, increased capacity sales of $13.8 million to requirements service customers, and revenues from the operation of Plant Oleander Unit 5 of $2.5 million. These increases were partially offset by a decrease of $25.8 million due to decreased energy sales in 2008 compared to the corresponding period in 2007.
Wholesale revenues from non-affiliates for year-to-date 2008 were $548.1 million compared to $339.1 million for the corresponding period in 2007. This increase was primarily due to an increase in short-term market energy revenues from uncontracted generating units of $125.9 million, increased energy revenues of $64.7 million due to higher natural gas prices, increased capacity sales of $22.2 million to requirements service customers, mark to market gains on sales of uncontracted generating capacity of $10.5 million arising from a decrease in market prices, and revenues from the operation of Plant Oleander Unit 5 of $7.7 million. These increases were partially offset by a decrease of $22.1 million due to decreased energy sales in the second and third quarters of 2008 compared to the corresponding periods in 2007.
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Power Sales Agreements” of Southern Power in Item 7 of the Form 10-K for additional information.
Wholesale Revenues Affiliates
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$31.3   16.9   $55.3   12.6
 
Wholesale energy sales to affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. Sales to affiliate companies that are not covered by PPAs are made in accordance with the IIC, as approved by the FERC.

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Wholesale revenues from affiliates for the third quarter 2008 were $216.6 million compared to $185.3 million for the corresponding period in 2007. This increase was primarily due to an increase in energy revenues of $44.9 million resulting from higher natural gas prices, partially offset by a decrease of $15.8 million primarily due to decreased energy sales in the third quarter 2008 compared to the corresponding period in 2007.
Wholesale revenues from affiliates for year-to-date 2008 were $494.0 million compared to $438.7 million for the corresponding period in 2007. This increase was primarily due to an increase in energy revenues of $92.3 million resulting from higher natural gas prices, partially offset by a decrease of $40.9 million primarily due to decreased energy sales in the second and third quarters of 2008 compared to the corresponding periods in 2007.
Fuel and Purchased Power Expenses
                                 
    Third Quarter 2008   Year-to-Date 2008
    vs.   vs.
    Third Quarter 2007   Year-to-Date 2007
    (change in millions)   (% change)   (change in millions)   (% change)
Fuel
  $ 106.1       91.7     $ 132.3       65.6  
Purchased power – non-affiliates
    28.0       99.0       56.7       112.2  
Purchased power – affiliates
    17.2       40.6       64.7       58.6  
                         
Total fuel and purchased power expenses
  $ 151.3             $ 253.7          
                         
In the third quarter 2008, total fuel and purchased power expenses were $337.6 million compared to $186.3 million for the corresponding period in 2007. These increases were primarily due to higher fuel and purchased power costs of $104.5 million due to an increase in the average cost of fuel and purchased power, mark to market losses of $36.8 million on natural gas and power derivatives, and a $10.0 million increase due to increased generation for market sales of uncontracted generating capacity.
For year-to-date 2008, total fuel and purchased power expenses were $616.5 million compared to $362.8 million for the corresponding period in 2007. These increases were primarily due to higher fuel and purchased power costs of $210.4 million due to an increase in the average cost of fuel and purchased power, mark to market losses of $11.2 million on natural gas and power derivatives, and a $32.1 million increase due to increased generation for market sales of uncontracted generating capacity.
Other Operations and Maintenance Expenses
                                 
    Third Quarter 2008   Year-to-Date 2008
    vs.   vs.
    Third Quarter 2007   Year-to-Date 2007
    (change in millions)   (% change)   (change in millions)   (% change)
Other operations
  $ (2.1 )     (7.8 )   $ 3.8       5.5  
Maintenance
    1.5       31.6       10.3       56.0  
                         
Total other operations and maintenance
  $ (0.6 )           $ 14.1          
                         
In the third quarter 2008, other operations and maintenance expenses were $31.5 million compared to $32.1 million for the same period in 2007. This decrease was primarily due to a $1.7 million write-down of surplus inventory to its estimated salvage value in 2007 and expenses related to the implementation of

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the FERC separation order in 2007. This decrease was partially offset by timing of plant maintenance activities of $1.3 million and an increase in transmission expenses of $1.1 million.
For year-to-date 2008, other operations and maintenance expenses were $102.2 million compared to $88.1 million for the same period in 2007. This increase was primarily due to timing of plant maintenance activities of $10.0 million, general and administrative expenses of $2.4 million primarily related to the implementation of the FERC separation order and transmission service expenses and tariff penalties of $3.5 million. This increase was partially offset by a $1.7 million write-down of surplus inventory to its estimated salvage value in 2007.
Depreciation and Amortization
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$5.6
  30.3   $9.8   17.8
 
In the third quarter 2008, depreciation and amortization was $24.0 million compared to $18.4 million for the corresponding period in 2007. For year-to-date 2008, depreciation and amortization was $64.9 million compared to $55.1 million for the corresponding period in 2007. These increases were primarily due to the completion of Plant Oleander Unit 5 in December 2007 and Plant Franklin Unit 3 in June 2008 and higher depreciation rates implemented in January 2008.
See Note (J) to the Condensed Financial Statements herein for additional information.
Taxes Other Than Income Taxes
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$0.4   12.5   $1.6   13.8
 
In the third quarter 2008, taxes other than income taxes were $4.1 million compared to $3.7 million for the corresponding period in 2007. For year-to-date 2008, taxes other than income taxes were $13.3 million compared to $11.7 million for the corresponding period in 2007. These increases were primarily due to property taxes related to the completion of Plant Oleander Unit 5 and Plant Franklin Unit 3 in December 2007 and June 2008, respectively.
Interest Expense, Net of Amounts Capitalized
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$2.6   13.1   $0.4   0.7
 
In the third quarter 2008, interest expense, net of amounts capitalized was $22.2 million compared to $19.6 million for the corresponding period in 2007. For year-to-date 2008, interest expense, net of amounts capitalized was $61.4 million compared to $61.0 million for the corresponding period in 2007. These increases were primarily the result of a decrease in capitalized interest as a result of the completion of Plant Oleander Unit 5 in December 2007 and Plant Franklin Unit 3 in June 2008, partially offset by a decrease in short-term borrowing levels in 2008.

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Other Income (Expense), Net
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$2.7   N/M   $14.2   N/M
 
N/M — Not Meaningful
In the third quarter 2008, the change in other income (expense) was not material.
For year-to-date 2008, other income (expense), net was $13.3 million as compared to $(0.9) million for the corresponding period in 2007. This change was primarily due to a $6.0 million gain on the sale of an undeveloped tract of land and a $6.4 million fee received for participating in an asset auction. Southern Power was not the successful bidder in the asset auction.
Income Taxes
             
Third Quarter 2008 vs. Third Quarter 2007   Year-to-Date 2008 vs. Year-to-Date 2007
(change in millions)   (% change)   (change in millions)   (% change)
$3.4   10.0   $(2.5)   (3.0)
 
In the third quarter 2008, income taxes were $37.5 million compared to $34.1 million for the corresponding period in 2007. This increase was primarily due to increases in earnings before taxes.
For year-to-date 2008, income taxes were $78.9 million compared to $81.4 million for the corresponding period in 2007. This decrease was primarily due to a decrease in earnings before taxes and an increase in the estimated federal production activities deduction amount.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Southern Power’s future earnings potential. A number of 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, including regulatory matters (such as 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 RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Power in Item 7 of the Form 10-K.
FERC Matters
Market-Based Rate Authority
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Market-Based Rate Authority” of Southern Power in Item 7 and Note 3 to the financial statements of Southern Power under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information regarding market-based rate authority. In June 2007, the FERC issued its final rule in Order No. 697 regarding market-based rate authority. The FERC generally retained its

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current market-based rate standards. Responding to a number of requests for rehearing, the FERC issued Order No. 697-A on April 21, 2008. This order largely affirmed its prior revision and codification of the regulations governing market-based rates for public utilities. In accordance with the order Southern Company submitted to the FERC an updated market power analysis on September 2, 2008 related to its continued market-based rate authority. The ultimate outcome of this matter cannot now be determined.
On October 17, 2008, Southern Company filed with the FERC a revised market-based rate (MBR) tariff and a new cost-based rate (CBR) tariff. The revised MBR tariff provides for a “must offer” energy auction whereby Southern Company offers all of its available energy for sale in a day-ahead auction and an hour-ahead auction, after considering Southern Company’s native load requirements, reliability obligations, and sales commitments to third parties. All sales under the energy auction would be at market clearing prices established under the auction rules. The new CBR tariff is designed to be an alternative means for conducting short-term transactions in the wholesale markets and provides for a cost-based cap for wholesale sales of less than a year. Both tariffs must be approved by the FERC. The final outcome of this matter cannot now be determined.
Construction Projects
Plant Franklin Unit 3
Southern Power completed construction of Plant Franklin Unit 3 in June 2008. Costs incurred through September 30, 2008 were $309.2 million. The unit is a natural gas-fueled combined cycle located in Smiths, Alabama with a nameplate capacity of 648 MW. The unit will be used to provide annual capacity for a PPA with Constellation Energy Group, Inc. from 2009 through 2015.
Power Sales Agreements
In July 2008, Southern Power signed extensions of existing contracts with 10 Georgia Electric Membership Corporations (EMCs). Eight contracts were extended beginning in 2010 through 2031 and two contracts were extended beginning in 2013 through 2034. The EMCs are currently projected to purchase 500 MWs in 2008 under these agreements. Their purchases are projected to grow to more than 1400 MWs during the extension.
In August 2008, Southern Power entered into a PPA with The Energy Authority, Inc. to sell 151 MW from January 2011 through December 2014 from Plant Rowan.
Environmental Matters
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 with possible additional federal or state legislation or regulations related to global climate change, air quality, or other environmental and health concerns could also affect earnings. While Southern Power’s PPAs generally contain provisions that permit charging the counterparty with some of the new costs incurred as a result of changes in environmental laws and regulations, the full impact of any such regulatory or legislative changes cannot be determined at this time.

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Carbon Dioxide Litigation
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the U.S. District Court for the Northern District of California against several electric utilities (including Southern Company), several oil companies, and a coal company. The plaintiffs are the governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The plaintiffs assert claims for public and private nuisance and contend that the defendants have acted in concert and are therefore jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which is alleged to be $95 million to $400 million. On June 30, 2008, all defendants filed motions to dismiss this case. Southern Company believes that these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this time.
Other Matters
Southern Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Southern Power is subject to certain claims and legal actions arising in the ordinary course of business. 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, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air and water quality standards, 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 potential litigation against Southern Power and its subsidiaries cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Southern Power in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from any such proceedings would have a material adverse effect on Southern Power’s financial statements.
See Note (B) to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Power 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 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. 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, Normal Sale and Non-Derivative Transactions, Cash Flow Hedge Transactions, Mark-to-Market Transactions, Percentage of Completion, Asset Impairments, Acquisition Accounting, and Contingent Obligations.

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Depreciation
Depreciation of the original cost of assets is computed under the straight-line method and applies a composite depreciation rate based on the assets’ estimated useful lives determined by management. The primary assets in property, plant, and equipment are power plants, all of which have an estimated composite life ranging from 29 to 37 years. These lives reflect a weighted average of the significant components (retirement units) that make up the plants. Depreciation studies are conducted periodically to update the component depreciable lives and salvage values. See Note (J) to the Condensed Financial Statements herein for a discussion of changes in depreciation assumptions made by Southern Power effective January 1, 2008. Southern Power is currently undertaking an additional review of the estimated useful lives of its assets and further changes may be warranted which could increase depreciation.
When property subject to composite depreciation is retired or otherwise disposed of in the normal course of business, its cost is charged to accumulated depreciation. For other property dispositions, the applicable cost and accumulated depreciation is removed from the accounts and a gain or loss is recognized.
New Accounting Standards
Business Combinations
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), “Business Combinations” (SFAS No. 141R). SFAS No. 141R, when adopted, will significantly change the accounting for business combinations, specifically the accounting for contingent consideration, contingencies, acquisition costs, and restructuring costs. Southern Power plans to adopt SFAS No. 141R on January 1, 2009. It is likely that the adoption of SFAS No. 141R will have a significant impact on the accounting for any business combinations completed by Southern Power after January 1, 2009.
In December 2007, the FASB issued FASB Statement No. 160, “Non-controlling Interests in Consolidated Financial Statements” (SFAS No. 160). SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary should be reported as equity in the consolidated financial statements and establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. Southern Power plans to adopt SFAS No. 160 on January 1, 2009 and is currently assessing its impact, if any.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Southern Power’s financial condition remained stable at September 30, 2008. Since September 15, 2008, Southern Power has not needed to access the commercial paper market or draw on its committed bank credit arrangements. Due to the recent contraction in the credit market, access to commercial paper could have been limited. Southern Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements as needed to meet its future capital needs. No material changes in bank credit arrangements were experienced. See “Sources of Capital” herein for additional information on lines of credit. The impact on future financing costs as a result of the recent financial turmoil cannot be determined at this time. Further, Southern Power experienced no material counterparty credit losses.

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Net cash provided from operating activities totaled $205.6 million for the first nine months of 2008, compared to $255.3 million for the corresponding period in 2007. The $49.7 million decrease in cash provided from operating activities in the first nine months of 2008 is primarily due to costs incurred on the construction of the combined cycle unit for the Orlando Utilities Commission and increased receivables due to higher energy prices in 2008. Net cash used for investing activities totaled $69.7 million for the first nine months of 2008, compared to $158.9 million for the corresponding period in 2007 due to completion of Plant Oleander Unit 5 in December 2007 and Plant Franklin Unit 3 in June 2008. Net cash used for financing activities totaled $117.4 million for the first nine months of 2008, compared to net cash used for financing activities of $102.4 million for the corresponding period in 2007. This increase was due to changes in levels of short-term debt.
Significant asset changes in the balance sheet for the first nine months of 2008 include increases in accounts receivable due to seasonality and higher energy revenues due to an increase in natural gas prices, increases in prepaid long-term service agreements due to the timing of outage activities, and an increase in cash due to a reduction of investing activities of Southern Power in 2008 due to the completion of construction projects at Plant Oleander Unit 5 in December 2007 and Plant Franklin Unit 3 in June 2008.
Significant liability and stockholder’s equity changes in the balance sheet for the first nine months of 2008 include the payment of short-term debt obligations, increases in affiliate payables due to an increase in natural gas prices and seasonality, increases in accrued taxes due to timing of tax payments, a reduction of other current liabilities due to payment of IGCC termination costs, and an increase in deferred capacity revenues due to seasonality.
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, interest, leases, derivative obligations, purchase commitments, and long-term service agreements.
During 2008, Southern Power entered into agreements to purchase power from 2009 to 2015. The purchase commitments will be $13.6 million in 2009, $14.0 million in 2010, $6.7 million in 2011, $13.8 million in 2012, $14.3 million in 2013, $14.8 million in 2014, and $16.0 million in 2015.
Sources of Capital
Southern Power may use operating cash flows, external funds, equity contributions from Southern Company, or loans from Southern Company to finance any new projects, acquisitions, 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. However, the amount, type, and timing of any financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. 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.
Southern Power’s current liabilities frequently exceed current assets due to the use of short-term indebtedness as a funding source, as well as cash needs which can fluctuate significantly due to the seasonality of the business. To meet liquidity and capital resource requirements, Southern Power had at

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September 30, 2008 approximately $400 million in committed credit arrangements with banks that expire in 2012. Proceeds from these credit arrangements may be used for working capital and general corporate purposes as well as liquidity support for Southern Power’s commercial paper program. See Note 6 to the financial statements of Southern Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under “Bank Credit Arrangements” herein for additional information.
Southern Power’s commercial paper program is used to finance acquisition and construction costs related to electric generating facilities and for general corporate purposes. At September 30, 2008, Southern Power had no commercial paper outstanding.
Management believes that the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and cash.
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 and Baa2, or BBB- and/or Baa3 or below. These contracts are for physical electricity sales, fuel purchases, fuel transportation and storage, and energy price risk management. At September 30, 2008, the maximum potential collateral requirements under these contracts at a BBB and Baa2 rating were approximately $9 million and at a BBB- or Baa3 rating were approximately $343 million. At September 30, 2008, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $668 million. Included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash.
In addition, Southern Power is party to a PPA that could require collateral, but not accelerated payment, in the event of a downgrade to Southern Power’s credit rating to below BBB- or Baa3. The amount of collateral required would depend upon actual losses, if any, resulting from a credit downgrade.
Market Price Risk
Southern Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2007 reporting period. Since a significant portion of outstanding indebtedness is at fixed rates, Southern Power is not aware of any facts or circumstances that would significantly affect exposures on existing indebtedness in the near term. However, the impact on future financing costs cannot now be determined.
Southern Power is exposed to market risks, including changes in interest rates, certain energy-related commodity prices, and, occasionally, currency exchange rates. To manage the volatility attributable to these exposures, Southern Power nets the exposures to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to Southern Power’s policies in areas such as counterparty exposure and hedging practices. Southern Power’s policy is that derivatives are to be used primarily for hedging purposes. Derivative positions are monitored using techniques that include market valuation and sensitivity analysis.
Because energy from Southern Power’s facilities is primarily sold under long-term PPAs with tolling agreements and provisions shifting substantially all of the responsibility for fuel cost to the counterparties, Southern Power’s exposure to market volatility in commodity fuel prices and prices of

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electricity is generally limited. However, during 2008, Southern Power is exposed to market volatility in energy-related commodity prices as a result of sales of uncontracted generating capacity.
The changes in fair value of energy-related derivative contracts for the three months and nine months ended September 30, 2008 were as follows:
                 
    Third Quarter   Year-to-Date
    2008   2008
    Changes   Changes
    Fair Value
    (in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net
  $ (29.7 )   $ 3.4  
Contracts realized or settled
    12.1       11.9  
Current period changes(a)
    27.9       (5.0 )
 
Contracts outstanding at the end of the period, assets (liabilities), net
  $ 10.3     $ 10.3  
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
The increase in the fair value positions of the energy-related derivative contracts for the three months and nine months ended September 30, 2008 was $40.0 million and $6.9 million, respectively, which is due to both power and natural gas positions. This change is attributable to both the volume and prices of power and natural gas as follows:
                         
    September 30,   June 30,   December 31,
    2008   2008   2007
 
Power (net sold)
                       
 
MWHs (in millions)
    0.7       2.4       1.7  
Weighted average contract cost per MWH above/(below) market prices (in dollars)
  $ 21.26     $ (22.37 )   $ 1.76  
 
Natural gas (net purchase)
                       
 
Bcf
    1.2       6.6       3.9  
Weighted average contract cost per mmBtu above/(below) market prices (in dollars)
  $ 2.38     $ (3.74 )   $ 0.09  
 
At September 30, 2008 and December 31, 2007, the fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:
                 
    September 30,   December 31,
    2008   2007
    (in millions)
Cash flow hedges
  $ 7.7     $ 0.1  
Non-accounting hedges
    2.6       3.3  
 
Total fair value
  $ 10.3     $ 3.4  
 
Unrealized pre-tax gains/(losses) recognized in income for the three months and nine months ended September 30, 2008 for energy-related derivative contracts that are not hedges were $7.8 million and $(0.7) million, respectively, and will continue to be marked to market until the settlement date. Unrealized pre-tax gains/(losses) for the three months and nine months ended September 30, 2007 were $(2.1) million and $(1.0) million, respectively.

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SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at September 30, 2008 are as follows:
                                 
    September 30, 2008
    Fair Value Measurements
    Total   Maturity
    Fair Value   Year 1   Years 2&3   Years 4&5
    (in millions)
Level 1
  $     $     $     $  
Level 2
    10.3       9.7       0.6        
Level 3
                       
 
Fair value of contracts outstanding at end of period
  $ 10.3     $ 9.7     $ 0.6     $  
 
As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value measurements and related disclosures, the table above now uses the three-tier fair value hierarchy, as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously used descriptions “actively quoted,” “external sources,” and “models and other methods.” The three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the previous descriptions focused on the source of the inputs. Because Southern Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, the valuations of those contracts now appear in Level 2; previously they were shown as “actively quoted.”
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 6 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.
Financing Activities
Southern Power did not issue or redeem any long-term securities during the nine months ended September 30, 2008.

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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
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
INDEX TO APPLICABLE NOTES TO
FINANCIAL STATEMENTS BY REGISTRANT
     
Registrant
  Applicable Notes
 
   
Southern Company
  A, B, C, D, E, F, G, H, I, K
 
   
Alabama Power
  A, B, C, D, F, G, H, I
 
   
Georgia Power
  A, B, C, D, F, G, H, I
 
   
Gulf Power
  A, B, C, F, G, H
 
   
Mississippi Power
  A, B, C, D, F, G, H
 
   
Southern Power
  A, B, C, F, H, J

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
NOTES TO THE CONDENSED FINANCIAL STATEMENTS:
  (A)   INTRODUCTION
 
      The condensed quarterly financial statements of each registrant included herein have been prepared by such registrant, without audit, pursuant to the rules and regulations of the SEC. The Condensed Balance Sheets as of December 31, 2007 have been derived from the audited financial statements of each registrant. In the opinion of each registrant’s management, the information regarding such registrant furnished herein reflects all adjustments, which, except as otherwise disclosed, are of a normal recurring nature, necessary to present fairly the results of operations for the periods ended September 30, 2008 and 2007. Certain information and footnote disclosures normally included in annual 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. Disclosures which would substantially duplicate the disclosures 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 generally 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. Due to the seasonal variations in the demand for energy, operating results for the periods presented do not necessarily indicate operating results for the entire year.
 
      Certain prior period amounts have been reclassified to conform to current period presentation. Where applicable, each registrant’s statements of income for the three months and nine months ended September 30, 2007 were modified to report “Interest expense to affiliate trusts” together with “Interest expense, net of amounts capitalized.” In addition, where applicable, the financing activities section of each registrant’s statement of cash flows for the nine months ended September 30, 2007 was modified to report “Long-term debt to affiliate trust” together with “Long-term debt.”
 
      Southern Company’s current liability section of the balance sheet at December 31, 2007 was modified to reflect the amount of “Unrecognized tax benefits” as a separate line item previously included within “Accrued taxes – Income taxes.” Also, Southern Company’s statement of cash flows for the prior period was modified within the operating activities section to present a separate line item for “Deferred revenues” previously included in “Other, net.”
 
      Georgia Power’s statement of cash flows for the prior period was modified within the operating activities section to present separate line items for “Deferred revenues” and “Hedge settlements” previously included in “Other, net.” Additionally, the line item “Materials and supplies” was combined into “Other current assets.”
 
      Gulf Power modified its statements of income for the three months and nine months ended September 30, 2007 to report a separate line item for “Allowance for equity funds used during construction” previously included in “Other income and expense, net.” In conjunction with such modification, Gulf Power modified its statement of cash flows within the operating activities section to present a separate line item for “Allowance for equity funds used during construction” previously included in “Other, net.” In addition, the operating activities section now includes a separate line item to present “Hedge settlements” previously included in “Other, net” in the prior period.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      Due to the relative insignificance of the amount reported at September 30, 2008, the balance sheet at December 31, 2007 of Mississippi Power was modified to combine assets in “Prepaid income taxes” into “Other.”
 
      Southern Power modified its statement of cash flows for the nine months ended September 30, 2007 to present a separate line within the investing section for “Payments pursuant to long-term service agreements” previously included in “Property additions.” The amount of assets in “Other prepaid expenses” was collapsed into “Other.”
 
      These reclassifications had no effect on total assets, net income, cash flows, or earnings per share.
 
      In the first quarter 2008, Gulf Power sold a turbine rotor assembly to Southern Power for $9.4 million. In the second quarter 2008, Southern Power sold a turbine rotor assembly to Alabama Power for $8.2 million. These affiliate transactions were made in accordance with FERC and state PSC rules and guidelines and were eliminated in consolidation for Southern Company.
 
  (B)   CONTINGENCIES AND REGULATORY MATTERS
 
      See Note 3 to the financial statements of the registrants in Item 8 of the Form 10-K for information relating to various lawsuits, other contingencies, and regulatory matters.
 
      General Litigation Matters
 
      Each registrant is subject to certain claims and legal actions arising in the ordinary course of business. In addition, each registrant’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, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air and water quality standards, 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 pending or potential litigation against the registrants and any of their subsidiaries cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of each registrant in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on such registrant’s financial statements.
 
      Mirant Matters
 
      Mirant was an energy company with businesses that included independent power projects and energy trading and risk management companies in the United States and selected other countries. It was a wholly-owned subsidiary of Southern Company until its initial public offering in October 2000. In April 2001, Southern Company completed a spin-off to its shareholders of its remaining ownership, and Mirant became an independent corporate entity.
 
      Mirant Bankruptcy
 
      In July 2003, Mirant and certain of its affiliates filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Texas. The Bankruptcy Court entered an order confirming Mirant’s plan of reorganization in December 2005, and Mirant announced that this plan became effective in January 2006. As part of the plan, Mirant transferred substantially all of its assets and its restructured debt to a new corporation that adopted the name Mirant Corporation (Reorganized Mirant).

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      Southern Company has certain contingent liabilities associated with guarantees of contractual commitments made by Mirant’s subsidiaries discussed under “Guarantees” in Note 7 to the financial statements of Southern Company in Item 8 of the Form 10-K and with various lawsuits related to Mirant discussed below. Also, Southern Company has joint and several liability with Mirant regarding the joint consolidated federal income tax returns through 2001, as discussed in Note 5 to the financial statements of Southern Company in Item 8 of the Form 10-K. In December 2004, as a result of concluding an IRS audit for the tax years 2000 and 2001, Southern Company paid approximately $39 million in additional tax and interest related to Mirant tax items and filed a claim in Mirant’s bankruptcy case for that amount. Through December 2007, Southern Company received from the IRS approximately $36 million in refunds related to Mirant. Southern Company believes it has a right to recoup the $39 million tax payment owed by Mirant from such tax refunds. As a result, Southern Company intends to retain the tax refunds and reduce its claim against Mirant for the payment of Mirant taxes by the amount of such refunds. MC Asset Recovery, a special purpose subsidiary of Reorganized Mirant, has objected to and sought to equitably subordinate the Southern Company tax claim in its fraudulent transfer litigation against Southern Company. Southern Company has reserved the approximately $3 million amount remaining with respect to its Mirant tax claim.
 
      Under the terms of the separation agreements entered into in connection with the spin-off, Mirant agreed to indemnify Southern Company for costs associated with these guarantees, lawsuits, and additional IRS assessments. Southern Company has sought reimbursement by filing claims as an unsecured creditor in Mirant’s Chapter 11 proceeding. As part of the pending fraudulent transfer litigation, MC Asset Recovery objected to and sought equitable subordination of these and other Southern Company claims, and Mirant moved in the bankruptcy court to reject the separation agreements entered into in connection with the spin-off. If Southern Company’s claims for indemnification are allowed, then Mirant’s indemnity obligations to Southern Company would constitute unsecured claims against Mirant entitled to stock in Reorganized Mirant. The final outcome of this matter cannot now be determined.
 
      MC Asset Recovery Litigation
 
      In June 2005, Mirant, as a debtor in possession, and the Official Committee of Unsecured Creditors’ of Mirant Corporation filed a complaint against Southern Company in the U.S. Bankruptcy Court for the Northern District of Texas, which was amended in July 2005, February 2006, May 2006, and March 2007.
 
      In December 2005, the Bankruptcy Court entered an order authorizing the transfer of this proceeding, along with certain other actions, to MC Asset Recovery. Under that order, Reorganized Mirant is obligated to fund up to $20 million in professional fees in connection with the lawsuits, as well as certain additional amounts. Any net recoveries from these lawsuits will be distributed to, and shared equally by, certain unsecured creditors and the original equity holders. In January 2006, the U.S. District Court for the Northern District of Texas substituted MC Asset Recovery as plaintiff.
 
      The complaint, as amended in March 2007, alleges that Southern Company caused Mirant to engage in certain fraudulent transfers and to pay illegal dividends to Southern Company prior to the spin-off. The alleged fraudulent transfers and illegal dividends include without limitation: (1) certain dividends from Mirant to Southern Company in the aggregate amount of $668 million, (2) the repayment of certain intercompany loans and accrued interest in an aggregate amount of $1.035 billion, and (3) the dividend distribution of one share of Series B Preferred Stock and its subsequent redemption in exchange for Mirant’s 80% interest in a holding company that owned SE Finance Capital Corporation and Southern Company Capital Funding, Inc., which transfer plaintiff asserts is valued at over $200 million. The complaint also seeks to recharacterize certain advances from Southern Company to Mirant for investments in energy facilities from debt to equity. The complaint further alleges that

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      Southern Company is liable to Mirant’s creditors for the full amount of Mirant’s liability under an alter ego theory of recovery and that Southern Company breached its fiduciary duties to Mirant and its creditors, caused Mirant to breach its fiduciary duties to creditors, and aided and abetted breaches of fiduciary duties by Mirant’s directors and officers. The complaint also seeks recoveries under the theories of restitution and unjust enrichment. In addition, the complaint alleges a claim under the Federal Debt Collection Procedure Act (FDCPA) to void certain transfers from Mirant to Southern Company. MC Asset Recovery claims to have standing to assert violations of the FDCPA and to recover property on behalf of the Mirant debtors’ estates. On July 7, 2008, the court ruled that the FDCPA does not apply and that Georgia law should apply instead. The complaint seeks monetary damages in excess of $2 billion plus interest, punitive damages, attorneys’ fees, and costs. Finally, the complaint includes an objection to Southern Company’s pending claims against Mirant in the Bankruptcy Court (which relate to reimbursement under the separation agreements of payments such as income taxes, interest, legal fees, and other guarantees described in Note 7 to the financial statements of Southern Company in Item 8 of the Form 10-K) and seeks equitable subordination of Southern Company’s claims to the claims of all other creditors. Southern Company served an answer to the complaint in April 2007.
 
      In January 2006, the U.S. District Court for the Northern District of Texas granted Southern Company’s motion to withdraw this action from the Bankruptcy Court and, in February 2006, granted Southern Company’s motion to transfer the case to the U.S. District Court for the Northern District of Georgia. In May 2006, Southern Company filed a motion for summary judgment seeking entry of judgment against the plaintiff as to all counts of the complaint. In December 2006, the U.S. District Court for the Northern District of Georgia granted in part and denied in part the motion. As a result, certain breach of fiduciary duty claims alleged in earlier versions of the complaint are barred. On August 6, 2008, Southern Company filed a second motion for summary judgment. MC Asset Recovery filed its response to Southern Company’s motion for summary judgment on October 20, 2008. Southern Company believes there is no meritorious basis for the claims in the complaint and is vigorously defending itself in this action. However, the final outcome of this matter cannot now be determined.
 
      Mirant Securities Litigation
 
      In November 2002, Southern Company, certain former and current senior officers of Southern Company, and 12 underwriters of Mirant’s initial public offering were added as defendants in a class action lawsuit that several Mirant shareholders originally filed against Mirant and certain Mirant officers in May 2002. Several other similar lawsuits filed subsequently were consolidated into this litigation in the U.S. District Court for the Northern District of Georgia. The amended complaint is based on allegations related to alleged improper energy trading and marketing activities involving the California energy market, alleged false statements and omissions in Mirant’s prospectus for its initial public offering and in subsequent public statements by Mirant, and accounting-related issues previously disclosed by Mirant. The lawsuit purports to include persons who acquired Mirant securities between September 26, 2000 and September 5, 2002.
 
      In July 2003, the court dismissed all claims based on Mirant’s alleged improper energy trading and marketing activities involving the California energy market. The other claims did not allege any improper trading and marketing activity, accounting errors, or material misstatements or omissions on the part of Southern Company but seek to impose liability on Southern Company based on allegations that Southern Company was a “control person” as to Mirant prior to the spin-off date. Southern Company filed an answer to the consolidated amended class action complaint in September 2003. The plaintiffs seek monetary damages for the diminished value of Mirant stock through the putative class period. Because the proposed class period extends to after Southern Company ceased to own any interest in Mirant, it is not possible to calculate the damage claims with reasonable certainty.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      During Mirant’s Chapter 11 proceeding, the securities litigation was stayed, with the exception of limited discovery. Since Mirant’s plan of reorganization has become effective, the stay has been lifted. In March 2006, the plaintiffs filed a motion for reconsideration requesting that the court vacate that portion of its July 2003 order dismissing the plaintiffs’ claims based upon Mirant’s alleged improper energy trading and marketing activities involving the California energy market. Southern Company and the other defendants opposed the plaintiffs’ motion. In March 2007, the court granted plaintiffs’ motion for reconsideration, reinstated the California energy market claims, and granted in part and denied in part defendants’ motion to compel certain class certification discovery. In March 2007, defendants filed renewed motions to dismiss the California energy claims on grounds originally set forth in their 2003 motions to dismiss, but which were not addressed by the court. In July 2007, certain defendants, including Southern Company, filed motions for reconsideration of the court’s denial of a motion seeking dismissal of certain federal securities laws claims based upon, among other things, certain alleged errors included in financial statements issued by Mirant. On August 6, 2008, the court entered an order in regard to the defendants’ motions to dismiss and for partial summary judgment. The court granted the defendants’ motion for partial summary judgment in two respects concluding that certain holders of Mirant stock do not have standing under the securities laws. The court denied the defendants’ other motions and granted leave to the plaintiffs to re-plead their claims against defendants. In accordance with the court’s order, the plaintiffs filed an amended complaint. Southern Company and the remaining defendants filed motions to dismiss the amended complaint on October 9, 2008.
 
      The plaintiffs have also stated that they intend to request that the court grant leave for them to amend the complaint to add allegations based upon claims asserted against Southern Company in the MC Asset Recovery litigation.
 
      Under certain circumstances, Southern Company will be obligated under its by-laws to indemnify the four former Southern Company officers who served as directors of Mirant at the time of its initial public offering through the date of the spin-off and who are also named as defendants in this lawsuit.
 
      The ultimate outcome of these matters cannot be determined at this time.
 
      Environmental Matters
 
      New Source Review Actions
 
      In November 1999, the EPA brought a civil action in the U.S. District Court for the Northern District of Georgia against certain Southern Company subsidiaries, including Alabama Power and Georgia Power, alleging that these subsidiaries had violated the NSR provisions of the Clean Air Act and related state laws at certain coal-fired generating facilities. Through subsequent amendments and other legal procedures, the EPA filed a separate action in January 2001 against Alabama Power in the U.S. District Court for the Northern District of Alabama after Alabama Power was dismissed from the original action. In these lawsuits, the EPA alleged that NSR violations occurred at eight coal-fired generating facilities operated by Alabama Power and Georgia Power, including one co-owned by Mississippi Power. The civil actions request penalties and injunctive relief, including an order requiring the installation of the best available control technology at the affected units. The EPA concurrently issued notices of violations relating to Gulf Power’s Plant Crist and a unit partially owned by Gulf Power at Plant Scherer. In early 2000, the EPA filed a motion to amend its complaint to add the allegations in the notice of violation and to add Gulf Power as a defendant. However, in March 2001, the court denied the motion based on lack of jurisdiction, and the EPA has not refiled. The action against Georgia Power has been administratively closed since the spring of 2001, and the case has not been reopened.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      In June 2006, the U.S. District Court for the Northern District of Alabama entered a consent decree between Alabama Power and the EPA, resolving the alleged NSR violations at Plant Miller. The consent decree required Alabama Power to pay $100,000 to resolve the government’s claim for a civil penalty and to donate $4.9 million of sulfur dioxide emission allowances to a nonprofit charitable organization and formalized specific emissions reductions to be accomplished by Alabama Power, consistent with other Clean Air Act programs that require emissions reductions. In August 2006, the district court in Alabama granted Alabama Power’s motion for summary judgment and entered final judgment in favor of Alabama Power on the EPA’s claims related to all of the remaining plants: Plants Barry, Gaston, Gorgas, and Greene County.
 
      The plaintiffs appealed the district court’s decision to the U.S. Court of Appeals for the Eleventh Circuit, and the appeal was stayed by the Appeals Court pending the U.S. Supreme Court’s decision in a similar case against Duke Energy. The Supreme Court issued its decision in the Duke Energy case in April 2007. In October 2007, the U.S. District Court for the Northern District of Alabama issued an order in the Alabama Power case indicating a willingness to re-evaluate its previous decision in light of the Supreme Court’s Duke Energy opinion. In December 2007, the Eleventh Circuit vacated the district court’s decision in the Alabama Power case and remanded the case back to the district court for consideration of the legal issues in light of the Supreme Court’s decision in the Duke Energy case. On July 24, 2008, the U.S. District Court for the Northern District of Alabama granted partial summary judgment in favor of Alabama Power regarding the proper legal test for determining whether projects are routine maintenance, repair, and replacement and therefore are excluded from NSR permitting. The decision does not resolve the case, the ultimate outcome of which cannot be determined at this time.
 
      Southern Company and the traditional operating companies believe they complied with applicable laws and the EPA regulations and interpretations in effect at the time the work in question took place. The Clean Air Act authorizes maximum civil penalties of $25,000 to $32,500 per day, per violation at each generating unit, depending on the date of the alleged violation. An adverse outcome in either of these cases could require substantial capital expenditures or affect the timing of currently budgeted capital expenditures that cannot be determined at this time and could possibly require payment of substantial penalties. Such expenditures could affect future results of operations, cash flows, and financial condition if such costs are not recovered through regulated rates.
 
      Carbon Dioxide Litigation
 
      New York Case
 
      In July 2004, attorneys general from eight states, each outside of Southern Company’s service territory, and the corporation counsel for New York City filed a complaint in the U.S. District Court for the Southern District of New York against Southern Company and four other electric power companies. A nearly identical complaint was filed by three environmental groups in the same court. The complaints allege that the companies’ emissions of carbon dioxide, a greenhouse gas, contribute to global warming, which the plaintiffs assert is a public nuisance. Under common law public and private nuisance theories, the plaintiffs seek a judicial order (1) holding each defendant jointly and severally liable for creating, contributing to, and/or maintaining global warming and (2) requiring each of the defendants to cap its emissions of carbon dioxide and then reduce those emissions by a specified percentage each year for at least a decade. The plaintiffs have not, however, requested that damages be awarded in connection with their claims. Southern Company believes these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. In September 2005, the U.S. District Court for the Southern District of New York granted Southern Company’s and the other defendants’ motions to dismiss these cases. The plaintiffs filed an appeal to the U.S. Court of Appeals for the Second Circuit in October 2005 and no decision has been issued. The ultimate outcome of these matters cannot be determined at this time.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      Kivalina Case
 
      On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the U.S. District Court for the Northern District of California against several electric utilities (including Southern Company), several oil companies, and a coal company. The plaintiffs are the governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The plaintiffs assert claims for public and private nuisance and contend that the defendants have acted in concert and are therefore jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which is alleged to be $95 million to $400 million. On June 30, 2008, all defendants filed motions to dismiss this case. Southern Company believes that these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this time.
 
      Environmental Remediation
 
      The registrants must comply with environmental laws and regulations that cover the handling and disposal of waste and releases of hazardous substances. Under these various laws and regulations, the subsidiaries may also incur substantial costs to clean up properties. The traditional operating companies have each received authority from their respective state PSCs to recover approved environmental compliance costs through regulatory mechanisms. Within limits approved by the state PSCs, these rates are adjusted annually or as necessary.
 
      Georgia Power has been designated or identified as a potentially responsible party (PRP) at sites governed by the Georgia Hazardous Site Response Act and/or by the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), including a large site in Brunswick, Georgia on the CERCLA National Priorities List (NPL). The parties have completed the removal of wastes from the Brunswick site as ordered by the EPA. Additional claims for recovery of natural resource damages at this site or for the assessment and potential cleanup of other sites on the Georgia Hazardous Sites Inventory and CERCLA NPL are anticipated. By letter dated September 30, 2008, the EPA advised Georgia Power that it has been designated as a PRP at the Ward Transformer Superfund site located in Raleigh, North Carolina. Numerous other entities have also received notices from the EPA. Georgia Power, along with other named PRPs, will participate in negotiations with the EPA to address cleanup of the site and reimbursement for the EPA’s past expenditures related to work performed at the site. The ultimate outcome of this matter will depend upon further environmental assessment and the ultimate number of PRPs and cannot be determined at this time; however, it is not expected to have a material impact on Georgia Power’s financial statements. The balance of Georgia Power’s environmental remediation liability at September 30, 2008 was $10.6 million.
 
      Gulf Power’s environmental remediation liability includes estimated costs of environmental remediation projects of approximately $66.8 million as of September 30, 2008. These estimated costs relate to site closure criteria by the Florida Department of Environmental Protection (FDEP) for potential impacts to soil and groundwater from herbicide applications at Gulf Power substations. The schedule for completion of the remediation projects will be subject to FDEP approval. The projects have been approved by the Florida PSC for recovery through Gulf Power’s environmental cost recovery clause; therefore, there was no impact on net income as a result of these estimates.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      In 2003, the Texas Commission on Environmental Quality (TCEQ) designated Mississippi Power as a potentially responsible party at a site in Texas. The site was owned by an electric transformer company that handled Mississippi Power’s transformers as well as those of many other entities. The site owner is now in bankruptcy and the State of Texas has entered into an agreement with Mississippi Power and several other utilities to investigate and remediate the site. Amounts expensed during 2005, 2006, and 2007 related to this work were not material. Hundreds of entities have received notices from the TCEQ requesting their participation in the anticipated site remediation. The final impact of this matter on Mississippi Power will depend upon further environmental assessment and the ultimate number of potentially responsible parties. The remediation expenses incurred by Mississippi Power are expected to be recovered through the ECO Plan. See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters – Environmental Compliance Overview Plan” in Item 8 of the Form 10-K for additional information.
 
      The final outcome of these matters cannot now be determined. However, based on the currently known conditions at these sites and the nature and extent of activities relating to these sites, Southern Company, Georgia Power, Gulf Power, and Mississippi Power do not believe that additional liabilities, if any, at these sites would be material to their respective financial statements.
 
      FERC Matters
 
      Market-Based Rate Authority
 
      Each of the traditional operating companies and Southern Power has authorization from the FERC to sell power to non-affiliates, including short-term opportunity sales, at market-based prices. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate.
 
      In December 2004, the FERC initiated a proceeding to assess Southern Company’s generation dominance within its retail service territory. The ability to charge market-based rates in other markets is not an issue in the proceeding. Any new market-based rate sales by any subsidiary of Southern Company in Southern Company’s retail service territory entered into during a 15-month refund period that ended in May 2006 could be subject to refund to a cost-based rate level.
 
      In November 2007, the presiding administrative law judge issued an initial decision regarding the methodology to be used in the generation dominance tests. The proceedings are ongoing. The ultimate outcome of this generation dominance proceeding cannot now be determined, but an adverse decision by the FERC in a final order could require the traditional operating companies and Southern Power 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 and could also result in total refunds of up to $19.7 million, plus interest. The potential refunds include $3.9 million for Alabama Power, $5.8 million for Georgia Power, $0.8 million for Gulf Power, $8.4 million for Mississippi Power, and $0.7 million for Southern Power, in each case plus interest. Southern Company and its subsidiaries believe that there is no meritorious basis for an adverse decision in this proceeding and are vigorously defending themselves in this matter.
 
      In June 2007, the FERC issued its final rule in Order No. 697 regarding market-based rate authority. The FERC generally retained its current market-based rate standards. Responding to a number of requests for rehearing, the FERC issued Order No. 697-A on April 21, 2008. This order largely affirmed its prior revision and codification of the regulations governing market-based rates for public utilities. In accordance with the order, Southern Company submitted to the FERC an updated market power analysis on September 2, 2008 related to its continued market-based rate authority. The ultimate outcome of this matter cannot now be determined.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      On October 17, 2008, Southern Company filed with the FERC a revised market-based rate (MBR) tariff and a new cost-based rate (CBR) tariff. The revised MBR tariff provides for a “must offer” energy auction whereby Southern Company offers all of its available energy for sale in a day-ahead auction and an hour-ahead auction, after considering Southern Company’s native load requirements, reliability obligations, and sales commitments to third parties. All sales under the energy auction would be at market clearing prices established under the auction rules. The new CBR tariff is designed to be an alternative means for conducting short-term transactions in the wholesale markets and provides for a cost-based cap for wholesale sales of less than a year. Both tariffs must be approved by the FERC. The final outcome of this matter cannot now be determined.
 
      Intercompany Interchange Contract
 
      Southern Company’s generation fleet in its retail service territory is operated under the IIC as approved by the FERC. In May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among the traditional operating companies, Southern Power, and SCS, as agent, under the terms of which the Power Pool is operated, (2) whether any parties to the IIC have violated the FERC’s standards of conduct applicable to utility companies that are transmission providers, and (3) whether Southern Company’s code of conduct defining Southern Power as a “system company” rather than a “marketing affiliate” is just and reasonable. In connection with the formation of Southern Power, the FERC authorized Southern Power’s inclusion in the IIC in 2000. The FERC also previously approved Southern Company’s code of conduct.
 
      In October 2006, the FERC issued an order accepting a settlement resolving the proceeding subject to Southern Company’s agreement to accept certain modifications to the settlement’s terms and Southern Company notified the FERC that it accepted the modifications. The modifications largely involve functional separation and information restrictions related to marketing activities conducted on behalf of Southern Power. Southern Company filed with the FERC in November 2006 a compliance plan in connection with the order. In April 2007, the FERC approved, with certain modifications, the plan submitted by Southern Company. Implementation of the plan is not expected to have a material impact on the financial statements of Southern Company or the traditional operating companies. Southern Power’s cost of implementing the compliance plan, including the modifications, is expected to be approximately $8 million annually. In November 2007, Southern Company notified the FERC that the plan had been implemented and the FERC division of audits subsequently began an audit pertaining to compliance implementation and related matters, which is ongoing. The audit report is expected to be submitted to the FERC in November 2008.
 
      Generation Interconnection Agreements
 
      In November 2004, generator company subsidiaries of Tenaska, Inc. (Tenaska), as counterparties to three previously executed interconnection agreements with subsidiaries of Southern Company, filed complaints at the FERC requesting that the FERC modify the agreements and that those Southern Company subsidiaries refund a total of $19 million previously paid for interconnection facilities of which $11 million would be refunded by Alabama Power and $8 million by Georgia Power. No other similar complaints are pending with the FERC.
 
      In January 2007, the FERC issued an order granting Tenaska’s requested relief. Although the FERC’s order required the modification of Tenaska’s interconnection agreements, under the provisions of the order, Southern Company determined that no refund was payable to Tenaska. Southern Company requested rehearing asserting that the FERC retroactively applied a new principle to existing interconnection agreements. Tenaska requested rehearing of FERC’s methodology for determining the amount of refunds. The requested rehearings were denied, and Southern Company and Tenaska have appealed the orders to the U.S. Circuit Court for the District of Columbia. The final outcome of this matter cannot now be determined.

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      Right of Way Litigation
 
      Southern Company and certain of its subsidiaries, including Gulf Power, Mississippi Power, and Southern Telecom, Inc. (a subsidiary of SouthernLINC Wireless), have been named as defendants in numerous lawsuits brought by landowners since 2001. The plaintiffs’ lawsuits claim that the defendants may not use, or sublease to third parties, some or all of the fiber optic communications lines on the rights of way that cross the plaintiffs’ properties and that such actions exceed the easements or other property rights held by the defendants. The plaintiffs assert claims for, among other things, trespass and unjust enrichment and seek compensatory and punitive damages and injunctive relief. Management of Southern Company and its subsidiaries believe that they have complied with applicable laws and that the plaintiffs’ claims are without merit.
 
      In November 2003, the Second Circuit Court in Gadsden County, Florida, ruled in favor of the plaintiffs on their motion for partial summary judgment concerning liability in one such lawsuit brought by landowners regarding the installation and use of fiber optic cable over Gulf Power rights of way located on the landowners’ property. The complaint was subsequently amended in January 2005. In November 2005, the trial court ruled in favor of the plaintiffs and against Gulf Power on their respective motions for partial summary judgment. In that same order, the trial court also denied Gulf Power’s motion to dismiss certain claims. Following an appeal to the Florida First District Court of Appeals by Gulf Power, the case was returned to the trial court for further proceedings. The parties reached agreement on a proposed settlement plan that was subject to approval by the trial court. At a hearing on April 30, 2008, the trial court granted final approval of the settlement agreement. The appeal period for that order has since expired. On September 29, 2008, in accordance with the approved settlement agreement, the settlement administrator issued payments to all approved claims and a refund of unclaimed funds to Gulf Power and its co-defendant. The impact on Southern Company’s and Gulf Power’s financial statements was not material.
 
      To date, Mississippi Power has entered into agreements with the plaintiffs in approximately 90% of the actions pending against Mississippi Power to clarify its easement rights in the State of Mississippi. These agreements have been approved by the Circuit Courts of Harrison County and Jasper County, Mississippi (First Judicial Circuit), and dismissals of the related cases are in progress. These agreements have not resulted in any material effects on Southern Company’s or Mississippi Power’s financial statements.
 
      In addition, in late 2001, certain subsidiaries of Southern Company, including Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Telecom, Inc. (a subsidiary of SouthernLINC Wireless), were named as defendants in a lawsuit brought in Troup County, Georgia, Superior Court by Interstate Fiber Network, a subsidiary of telecommunications company ITC DeltaCom, Inc. that uses certain of the defendants’ rights of way. This lawsuit alleges, among other things, that the defendants are contractually obligated to indemnify, defend, and hold harmless the telecommunications company from any liability that may be assessed against it in pending and future right of way litigation. The defendants believe that the plaintiff’s claims are without merit. In the fall of 2004, the trial court stayed the case until resolution of the underlying landowner litigation discussed above. In January 2005, the Georgia Court of Appeals dismissed the telecommunications company’s appeal of the trial court’s order for lack of jurisdiction. An adverse outcome in this matter, combined with an adverse outcome against the telecommunications company in one or more of the right of way lawsuits, could result in substantial judgments; however, the final outcome of these matters cannot now be determined.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      Income Tax Matters
 
      Leveraged Lease Transactions
 
      See Note 1 to the financial statements of Southern Company under “Income and Other Taxes,” Note 3 to the financial statements of Southern Company under “Income Tax Matters,” and Note 5 to the financial statements of Southern Company under “Unrecognized Tax Benefits” in Item 8 of the Form 10-K. The IRS challenged Southern Company’s deductions related to three international lease transactions (so-called SILO or sale-in-lease-out transactions), in connection with its audits of Southern Company’s 2000 through 2003 tax returns. In the third quarter 2006, Southern Company paid the full amount of the disputed tax and the applicable interest on the SILO issue for tax years 2000 – 2001 and filed a claim for refund which has now been denied by the IRS. The disputed tax amount is $79 million and the related interest is approximately $24 million for these tax years. This payment, and the subsequent IRS disallowance of the refund claim, closed the issue with the IRS and Southern Company has initiated litigation in the U.S. District Court for the Northern District of Georgia for a complete refund of tax and interest paid for the 2000 – 2001 tax years. The IRS also challenged the SILO deductions for the tax years 2002 and 2003. The estimated amount of disputed tax and interest for these tax years was approximately $83 million and $15 million, respectively. The tax and interest for these tax years was paid to the IRS in the fourth quarter 2006. Southern Company has accounted for both payments in 2006 as deposits. For tax years 2000 through 2007, Southern Company has claimed approximately $284 million in tax benefits related to these SILO transactions challenged by the IRS. These tax benefits relate to timing differences and do not impact total net income over the life of the transactions. Southern Company believes these transactions are valid leases for U.S. tax purposes and the related deductions are allowable.
 
      During the second quarter 2008, decisions in favor of the IRS were reached in several court cases involving other tax payers with similar leveraged lease investments. Pursuant to the application of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) and FASB Staff Position No. 13-2, “Accounting for a Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” (FSP 13-2), management is required to assess, on a periodic basis, the likely outcome of the uncertain tax positions related to the SILO transactions. Based on these accounting standards and management’s review of the recent court decisions, Southern Company recorded an after tax charge of approximately $67 million in the second quarter 2008. Of the total, approximately $16 million is associated with the application of FIN 48 and represents additional interest expense related to tax returns for years 2000 through 2007 and approximately $51 million represents non-cash charges related to the application of FSP 13-2. The charges related to FSP 13-2 reflect the reallocation of lease income and will be recognized as income over the remaining term of the affected leases. The tax benefit associated with the lease transactions represents timing differences that do not impact total net income over the life of the transactions. In accordance with the requirements of FIN 48 and FSP 13-2, Southern Company will continue to evaluate the SILO transactions and the projected timing of income tax cash flows.
 
      Furthermore, on August 6, 2008, the Commissioner of the IRS announced a settlement initiative for more than 45 corporations with similar leveraged lease transactions. Southern Company did not receive a formal offer to settle. In addition, the U.S. Senate continues to consider legislation that would disallow tax benefits after December 31, 2007 for SILO losses and other international leveraged lease transactions (such as lease-in, lease-out, or LILO transactions). The ultimate impact on Southern Company’s net income and cash flow will be dependent on the outcome of its pending litigation, associated settlement discussions, and proposed legislation and cannot be determined at this time.

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      Georgia State Income Tax Credits
 
      Georgia Power’s 2005 through 2008 income tax filings for the State of Georgia include state income tax credits for increased activity through Georgia ports. Georgia Power has also filed similar claims for the years 2002 through 2004. The Georgia Department of Revenue has not responded to these claims. On July 24, 2007, Georgia Power filed a complaint in the Superior Court of Fulton County to recover the credits claimed for the years 2002 through 2004. An unrecognized tax benefit has been recorded related to these credits. If Georgia Power prevails, these claims could have a significant, and possibly material, positive effect on Southern Company’s and Georgia Power’s net income. If Georgia Power is not successful, payment of the related state tax could have a significant, and possibly material, negative effect on Southern Company’s and Georgia Power’s cash flow. The ultimate outcome of this matter cannot now be determined.
 
      IRC Section 199 Domestic Production Deduction
 
      The American Jobs Creation Act of 2004 created a tax deduction for a portion of income attributable to U.S. production activities as defined in the IRC Section 199 (production activities deduction). The deduction is equal to a stated percentage of qualified production activities net income. The percentage is phased in over the years 2005 through 2010 with a 3% rate applicable to the years 2005 and 2006, a 6% rate applicable for years 2007 through 2009, and a 9% rate applicable for all years after 2009. The IRS has not clearly defined a methodology for calculating this deduction. However, Southern Company has tentatively agreed with the IRS on a calculation methodology. Therefore, Southern Company reversed the unrecognized tax benefit and adjusted the deduction to conform with the tentative agreement. The net impact of the reversal of unrecognized tax benefits combined with the true-up to the new methodology was immaterial. See Note (H) to the Condensed Financial Statements herein for additional information.
 
      Other Matters
 
      On July 3, 2008, Georgia Power self-reported to the SERC Reliability Council (SERC) a potential violation of the North American Electric Reliability Council reliability standard for transmission vegetation management programs related to a single tree. The SERC can impose penalties ranging from $1,000 to $1,000,000 per day, per violation, which can be adjusted according to certain risk factors and other aggravating or mitigating factors. On September 10, 2008, Georgia Power submitted a proposed settlement agreement, including a proposed mitigation plan. The SERC has not responded to the proposed settlement agreement and the penalty that SERC may assess remains uncertain. The ultimate outcome of this matter cannot be determined at this time; however, it could have a significant and potentially material impact on the net income and cash flow of Southern Company and Georgia Power.
 
  (C)   FAIR VALUE MEASUREMENT
 
      On January 1, 2008, the registrants adopted FASB Statement No. 159, “Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (SFAS No. 159). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Southern Company, Alabama Power, and Georgia Power have elected the fair value option only for investment securities held in nuclear decommissioning trust funds (Funds). See Note 1 to the financial statements of Southern Company, Alabama Power, and Georgia Power under “Nuclear Decommissioning” in Item 8 of the Form 10-K for information on these trusts funds.
 
      Management elected the fair value option for the Funds because management believes that fair value best represents the nature of the Funds. Management has delegated day-to-day management of the investments in the Funds to unrelated third party managers with oversight by Southern

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      Company, Alabama Power, and Georgia Power management. The managers of the Funds are authorized, within broad limits, to actively buy and sell securities at their own discretion in order to maximize the investment return on the Funds’ investments.
 
      The adoption of SFAS No. 159 had no impact on the results of operations, cash flows, or financial condition of Southern Company, Alabama Power, and Georgia Power as all gains, losses, and other-than-temporary impairments, whether realized or unrealized, continue to be recorded through a regulatory liability. For the three months and nine months ended September 30, 2008, the reduction in fair value of the Funds, which includes reinvested interest and dividends, was $41.9 million and $78.5 million, respectively, for Alabama Power, and was $30.5 million and $73.9 million, respectively, for Georgia Power, and which totals $72.4 million and $152.4 million, respectively, for Southern Company.
 
      Also on January 1, 2008, the registrants adopted SFAS No. 157 which defines fair value, establishes a framework for measuring fair value, and requires additional disclosures about fair value measurements. The criterion that is set forth in this standard is applicable to fair value measurement where it is permitted or required under other accounting pronouncements.
 
      SFAS No. 157 defines fair value as the exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on inputs of observable and unobservable market data that a market participant would use in pricing the asset or liability. The use of observable inputs is maximized where available and the use of unobservable inputs is minimized for fair value measurement. As a means to illustrate the inputs used, SFAS No. 157 establishes a three-tier fair value hierarchy that prioritizes inputs to valuation techniques used for fair value measurement.
    Level 1 consists of observable market data in an active market for identical assets or liabilities.
 
    Level 2 consists of observable market data, other than that included in Level 1, that is either directly or indirectly observable.
 
    Level 3 consists of unobservable market data. The input may reflect the assumptions of the registrant of what a market participant would use in pricing an asset or liability. If there is little available market data, then the registrant’s own assumptions are the best available information.
      In the case of multiple inputs being used in a fair value measurement, the lowest level input that is significant to the fair value measurement represents the level in the fair value hierarchy in which the fair value measurement is reported.
 
      The adoption of SFAS No. 157 has not resulted in any significant changes to the methodologies used for fair value measurement. Primarily all the changes in the fair value of assets and liabilities are recorded in other comprehensive income or regulatory assets and liabilities, and thus the impact on earnings is limited to derivatives that do not qualify for hedge accounting. See Note 1 to the financial statements of Southern Company, Alabama Power, and Georgia Power under “Nuclear Decommissioning” in Item 8 of the Form 10-K for additional information and Note 6 to the financial statements of the registrants in Item 8 of the Form 10-K for information on financial instruments.

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      The fair value measurements performed on a recurring basis and the level of the fair value hierarchy in which they fall as of September 30, 2008 are as follows:
                                 
As of September 30, 2008:   Level 1   Level 2   Level 3   Total
            (in millions)        
Southern Company
                               
Assets
                               
Energy-related derivatives
  $     $ 35.0     $     $ 35.0  
Interest rate derivatives
          8.8             8.8  
Nuclear decommissioning trusts
    614.4       359.7             974.1 (a)
Cash equivalents
    650.3                   650.3  
Other
    1.7       46.3       44.7       92.7  
 
Total fair value
  $ 1,266.4     $ 449.8     $ 44.7     $ 1,760.9  
 
Liabilities
                               
Energy-related derivatives
  $     $ 134.8     $     $ 134.8  
Interest rate derivatives
          9.9             9.9  
 
Total fair value
  $     $ 144.7     $     $ 144.7  
 
Alabama Power
                               
Assets:
                               
Energy-related derivatives
  $     $ 4.7     $     $ 4.7  
Interest rate derivatives
          2.3             2.3  
Nuclear decommissioning trusts
    279.0       179.6             458.6  (a)
Cash equivalents
    136.2                   136.2  
 
Total fair value
  $ 415.2     $ 186.6     $     $ 601.8  
 
Liabilities:
                               
Energy-related derivatives
  $     $ 43.3     $     $ 43.3  
Interest rate derivatives
          3.9             3.9  
 
Total fair value
  $     $ 47.2     $     $ 47.2  
 
Georgia Power
                               
Assets:
                               
Energy-related derivatives
  $     $ 5.9     $     $ 5.9  
Interest rate derivatives
          6.5             6.5  
Nuclear decommissioning trusts
    335.4       180.1             515.5  (a)
Cash equivalents
    343.8                   343.8  
 
Total fair value
  $ 679.2     $ 192.5     $     $ 871.7  
 
Liabilities:
                               
Energy-related derivatives
  $     $ 53.3     $     $ 53.3  
Interest rate derivatives
          6.0             6.0  
 
Total fair value
  $     $ 59.3     $     $ 59.3  
 

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
                                 
As of September 30, 2008:   Level 1   Level 2   Level 3   Total
            (in millions)        
Gulf Power
                               
Assets:
                               
Energy-related derivatives total fair value
  $     $ 1.4     $     $ 1.4  
 
Liabilities:
                               
Energy-related derivatives total fair value
  $     $ 13.4     $     $ 13.4  
 
Mississippi Power
                               
Assets:
                               
Energy-related derivatives
  $     $ 4.2     $     $ 4.2  
Cash equivalents
    38.4                   38.4  
 
Total fair value
  $ 38.4     $ 4.2     $     $ 42.6  
 
Liabilities:
                               
Energy-related derivatives total fair value
  $     $ 16.3     $     $ 16.3  
 
Southern Power
                               
Assets:
                               
Energy-related derivatives
  $     $ 18.8     $     $ 18.8  
Cash equivalents
    18.5                   18.5  
 
Total fair value
  $ 18.5     $ 18.8     $     $ 37.3  
 
Liabilities:
                               
Energy-related derivatives total fair value
  $     $ 8.5     $     $ 8.5  
 
(a)   Excludes receivables related to investment income and pending investment sales, and payables related to pending investment purchases.
      Energy-related derivatives and interest rate derivatives significantly comprise over-the-counter contracts. The nuclear decommissioning trust funds are invested in a diversified mix of equity and fixed income securities. The cash equivalents consist of securities with original maturities of 90 days or less. “Other” represents marketable securities and funds set aside to fund deferred compensation for certain management and are also invested in various marketable securities. All of these financial instruments and investments are valued primarily using the market approach.
 
      Changes in the fair value measurement of the Level 3 items for Southern Company at September 30, 2008 are as follows:
                 
    Southern Company
    Three Months Ended   Nine Months Ended
Other   September 30, 2008   September 30, 2008
    (in millions)  
Beginning balance
    $44.3     $50.4  
Total gains/(losses) — realized/unrealized:
               
Included in other comprehensive income
    0.2       (5.9 )
Purchases, issuances and settlements
    0.2       0.2  
Transfers in and/or out of Level 3
           
 
Ending balance as of September 30, 2008
    $44.7       $44.7  
 

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  (D)   CONSTRUCTION PROJECTS
 
      Construction Program
 
      In connection with Georgia Power’s entering into an engineering, procurement, and construction agreement to design, engineer, procure, construct, and test two AP 1000 nuclear units with electric generating capacity of approximately 1,100 MWs each and related facilities, structures, and improvements at Plant Vogtle, the revised estimated total construction program for Southern Company is $4.4 billion in 2008, $5.2 billion in 2009, and $4.8 billion in 2010 and for Georgia Power is $2.0 billion in 2008, $2.6 billion in 2009, and $2.5 billion in 2010. In November 2008, Georgia Power’s management plans to request approval by the Georgia Power Board of Directors of a revised capital budget of approximately $2.9 billion for 2009 and $2.6 billion for 2010. The increases are primarily a result of changes in the timing of expenditures for environmental controls at Plant Bowen and Yates and the new generating units at Plant McDonough, as well as other project scope and price changes. In October 2008, Alabama Power’s Board of Directors approved a new capital budget for 2009 and 2010. The construction program of Alabama Power is estimated to be $1.6 billion for 2009 and $1.1 billion for 2010. Over the next two years, Alabama Power estimates spending $715 million on environmental-related additions, $391 million on Plant Farley (including $219 million for nuclear fuel), $704 million on distribution facilities, and $297 million on transmission facilities. The Southern Company system financial plan, including the Southern Company system capital budget, is expected to be reviewed by the Southern Company Board of Directors in early 2009. Actual construction costs may vary from these estimates because of changes in such factors as: business conditions; environmental statutes and regulations; nuclear plant regulation; FERC rules and regulations; load projections; the cost and efficiency of construction labor, equipment, and materials; and the cost and availability of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. See Note 7 to the financial statements of Southern Company, Georgia Power, and Alabama Power under “COMMITMENTS – Construction Program” in Item 8 of the Form 10-K for additional information.
 
      Integrated Coal Gasification Combined Cycle
 
      As part of the evaluation and screening of alternatives to meet its future generation needs, Mississippi Power is considering the construction of an advanced coal gasification facility to be located in Kemper County, Mississippi, that would use locally mined lignite coal. The plant would use an air-blown IGCC technology that generates power from low-rank coals and coals with high moisture or high ash content. These coals, which include lignite, make up approximately half the proven United States and worldwide coal reserves. The feasibility assessment of the project is currently underway. Mississippi Power filed an application in June 2006 with the DOE for certain tax credits available to projects using clean coal technologies under the Energy Policy Act of 2005. The DOE subsequently certified the project and in November 2006, the IRS allocated IRC Section 48A tax credits of $133 million to Mississippi Power. The utilization of these credits is dependent upon meeting the certification requirements for the project, including an in-service date no later than November 2013. On February 14, 2008, Mississippi Power also requested that the DOE transfer the remaining funds previously granted to a cancelled Southern Company project that would have been located in Orlando, Florida.
 
      In December 2006, the Mississippi PSC approved Mississippi Power’s requested accounting treatment to defer the costs associated with Mississippi Power’s generation resource planning, evaluation, and screening activities as a regulatory asset. In December 2007, Mississippi Power reported to the Mississippi PSC an updated estimate and received an order directing Mississippi Power to continue charging all costs associated with the generation capacity assessment to the regulatory asset. At September 30, 2008, Mississippi Power had spent $36.2 million, of which $2.7

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      million related to land purchases capitalized. The remaining retail portion of $23.4 million was deferred in other regulatory assets.
 
      The wholesale portion of $10.1 million was expensed, with $6.0 million through September 30, 2008 and $4.1 million during 2007. On August 29, 2008, Mississippi Power and its wholesale customers entered into an agreement regarding a wholesale rate increase. The FERC accepted the filing on October 24, 2008. This agreement will allow $9.3 million of the wholesale portion of the generation screening and evaluation costs associated with the IGCC project to be reclassified from expense to a regulatory asset in the fourth quarter 2008.
 
      These costs will remain as a regulatory asset until the Mississippi PSC and the FERC determine the prudence and ultimate recovery of such costs. The balance of such regulatory asset is included in Mississippi Power’s rate base for ratemaking purposes. Approval by various regulatory agencies, including the Mississippi PSC, will also be required if the project proceeds. The Mississippi PSC, in its discretion, may exercise its additional rate authority granted to the Mississippi PSC in the Mississippi base load construction legislation if the project proceeds.
 
      The final outcome of this matter cannot now be determined.
 
  (E)   COMMON STOCK
 
      For Southern Company, the only difference in computing basic and diluted earnings per share is attributable to exercised options and 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 (in thousands):
                                 
    Three Months   Three Months   Nine Months   Nine Months
    Ended   Ended   Ended   Ended
    September 30,   September 30,   September 30,   September 30,
    2008   2007   2008   2007
     
As reported shares
    772,622       758,308       769,298       754,568  
Effect of options
    4,281       4,084       4,153       4,614  
     
Diluted shares
    776,903       762,392       773,451       759,182  
     
  (F)   FINANCING
 
      Bank Credit Arrangements
 
      Southern Company maintained unused committed lines of credit in the amount of $4.3 billion as of September 30, 2008 (including $1.35 billion of such lines which were dedicated to providing liquidity support to the traditional operating companies’ variable rate pollution control revenue bonds), of which $234 million will expire in 2008, $821 million expire in 2009, $25 million expire in 2011, and $3.2 billion expire in 2012. Approximately $79 million of the credit facilities expiring in 2008 and 2009 allow for the execution of term loans for an additional two-year period, and $584 million contain provisions allowing one-year term loans. See Note 6 to the financial statements of Southern Company under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      Alabama Power maintained unused committed lines of credit in the amount of $1.3 billion as of September 30, 2008 (including $582.4 million of such lines which were dedicated to providing liquidity support to its variable rate pollution control revenue bonds), of which $75 million will expire in 2008, $416.1 million expire in 2009, $25 million expire in 2011, and $765 million expire in 2012. Of the facilities that expire in 2008 and 2009, $404 million allow for one-year term loans. See Note 6 to the financial statements of Alabama Company under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information.
 
      Georgia Power maintained unused committed lines of credit in the amount of $1.3 billion as of September 30, 2008. Of the unused credit arrangements, $225 million will expire in 2009, and $1.1 billion expire in 2012. Of the facilities that expire in 2009, $40 million contain provisions allowing two-year term loans executable at expiration. At September 30, 2008, substantially all of these credit arrangements provided liquidity support to Georgia Power’s commercial paper program and purchase obligations related to $666.4 million of variable rate pollution control revenue bonds compared to $743 million in the second quarter 2008. The decrease is due to Georgia Power’s required purchase of $76.6 million of variable rate pollution control revenue bonds that were tendered by investors. Subsequent to September 30, 2008, Georgia Power converted $104.6 million of variable rate pollution control revenue bonds to a fixed interest rate mode. In addition, Georgia Power remarketed approximately $75 million of bonds that were tendered by investors. The net effect of these transactions decreased the amount of liquidity support dedicated to funding purchase obligations to $636.3 million. See Note 6 to the financial statements of Georgia Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information.
 
      Gulf Power maintained unused committed lines of credit in the amount of $130 million as of September 30, 2008 (which were dedicated to providing liquidity support to Gulf Power’s obligations with respect to variable rate pollution control revenue bonds and commercial paper), of which $80 million either expired or will expire in 2008, $50 million expire in 2009, and $105 million contain provision allowing one-year term loans executable at expiration. Subsequent to September 30, 2008, Gulf Power renewed $60 million of its credit facilities that were set to expire in 2008 and entered into a new committed line of credit for $10 million that will expire in 2009. Also subsequent to September 30, 2008, Gulf Power purchased from investors $37 million of variable rate pollution control revenue bonds that were subject to mandatory tender. See Note 6 to the financial statements of Gulf Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information.
 
      Mississippi Power maintained unused committed lines of credit in the amount of $149.2 million as of September 30, 2008 (which were dedicated to providing liquidity support to Mississippi Power’s commercial paper program and $32.2 million dedicated to funding purchase obligations related to variable rate pollution control revenue bonds), of which $69.2 million will expire in 2008, and $80 million expire in 2009. Approximately $39 million of these credit facilities contain provisions allowing two-year loans executable at expiration and $15 million contain provisions allowing one-year term loans executable at expiration. Subsequent to September 30, 2008, Mississippi Power terminated $55.7 million of the credit facilities expiring in 2008. These facilities were put in place to fund storm damage costs related to Hurricane Katrina and are now no longer required. See Note 6 to the financial statements of Mississippi Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information.
 
      Southern Power maintained unused committed lines of credit in the amount of approximately $400 million as of September 30, 2008, all of which expire in 2012. See Note 6 to the financial statements of Southern Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      Financial Instruments
 
      See Note 6 to the financial statements of the registrants under “Financial Instruments” in Item 8 of the Form 10-K. The fair value gain/(loss) arising on energy-related derivative contracts outstanding at September 30, 2008 was reflected in the financial statements as follows (in millions):
                                                 
    Southern   Alabama   Georgia   Gulf   Mississippi   Southern
    Company   Power   Power   Power   Power   Power
     
Regulatory (assets)/ liabilities, net
  $ (111.3 )   $ (38.7 )   $ (47.4 )   $ (12.0 )   $ (13.2 )   $  
Accumulated other comprehensive income (loss)
    8.6       0.1                   0.8       7.7  
Cumulative net income (loss)
    2.9                         0.3       2.6  
 
Total fair value gain/(loss)
  $ (99.8 )   $ (38.6 )   $ (47.4 )   $ (12.0 )   $ (12.1 )   $ 10.3  
 
      For the three months and nine months ended September 30, 2008, the unrealized gain/(loss) recognized in income for energy-related derivative contracts that are not hedges was $6.5 million and $(0.1) million, respectively, for Southern Company, was $7.8 million and $(0.7) million, respectively, for Southern Power, and was immaterial for all other registrants. For the three months and nine months ended September 30, 2007, the unrealized loss recognized in income was $(2.2) million and $(0.7) million, respectively, for Southern Company, was $(2.1) million and $(1.0) million, respectively, for Southern Power, and was immaterial for all other registrants.
 
      The amounts reclassified from other comprehensive income to revenue and fuel expense for the three months and nine months ended September 30, 2008 and 2007 were immaterial for each registrant. Additionally, no material ineffectiveness has been recorded in net income for the three months and nine months ended September 30, 2008 and 2007. The amounts expected to be reclassified from other comprehensive income to revenue for the next twelve-month period to September 30, 2009 are gains of $7.2 million for Southern Company, $8.0 million for Southern Power, and immaterial for all other registrants. All other expected reclassifications to income are immaterial for each registrant.
 
      During 2007, Southern Company had derivatives in place to reduce its exposure to a phase-out of certain income tax credits related to synthetic fuel production in 2007. In accordance with Section 45K of the IRC, these tax credits were subject to limitation as the annual average price of oil increases. These derivatives settled on January 1, 2008 and thus there was no income statement impact in the nine months ended September 30, 2008. For the three months and nine months ended September 30, 2007, the fair value gain recognized in income to mark the derivatives to market was $23.6 million and $23.4 million, respectively.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      At September 30, 2008, Southern Company had a total of $1.5 billion notional amount of interest rate derivatives outstanding with net fair value losses of approximately $1.1 million as follows:
Cash Flow Hedges
                                         
                    Weighted   Hedge   Fair Value
    Notional   Variable Rate   Average   Maturity   Gain/(Loss)
    Amount   Received   Fixed Rate Paid   Date   September 30, 2008
 
 
  (in millions)                           (in millions)
Alabama Power*
  $ 576     SIFMA Index     2.69 %   February 2010   $ (1.6 )
Georgia Power*
    301     SIFMA Index     2.22 %   December 2009     0.7  
Georgia Power
    75     1-month LIBOR     2.61 %   November 2008      
Georgia Power
    150     3-month LIBOR     2.63 %   February 2009     0.6  
Georgia Power
    100     3-month LIBOR     5.28 %   February 2019     (6.0 )
Georgia Power
    300     1-month LIBOR     2.43 %   April 2010     5.2  
 
*   Hedged using the Securities Industry and Financial Markets Association Municipal Swap Index (SIFMA) (formerly the Bond Market Association/PSA Municipal Swap Index)
      The amounts reclassified from other comprehensive income to interest expense for the three months and nine months ended September 30, 2008 were losses of $(4.6) million and $(15.4) million, respectively, for Southern Company and $(2.6) million and $(9.6) million, respectively, for Southern Power, and were immaterial for all other registrants. For the three months and nine months ended September 30, 2007, the losses reclassified to interest expense were $(3.9) million and $(11.2) million, respectively, for Southern Company and $(3.4) million and $(9.9) million, respectively, for Southern Power, and were immaterial for all other registrants. No material ineffectiveness has been recorded in net income for any of the periods reported.
 
      For the next twelve-month period ending September 30, 2009, the following table reflects the estimated pre-tax gains/(losses) that will be reclassified from other comprehensive income to interest expense (in millions):
         
Southern Company
  $ (7.9 )
Alabama Power
    3.0  
Georgia Power
     
Gulf Power
    (1.1 )
Southern Power
    (9.9 )
  (G)   RETIREMENT BENEFITS
 
      Southern Company accounts for pension and other postretirement obligations in accordance with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which is an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158). SFAS No. 158 requires recognition of an asset for a plan’s over funded status or a liability for a plan’s under funded status in Southern Company’s statement of financial position. In addition, the measurement date (the date at which plan assets and the benefit obligation are measured) is required to be the same as Southern Company’s fiscal year end. As permitted, Southern Company adopted the measurement date provisions of SFAS No. 158 effective January 1, 2008. Southern Company’s pension and postretirement plans previously used a September 30 measurement date. All plans are now measured as of December 31, consistent with Southern Company’s fiscal year end. The adoption of the measurement date provisions of SFAS No. 158 increased long-term liabilities by

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      approximately $28 million and prepaid pension costs by approximately $16 million. There was no effect on Southern Company’s results of operations or cash flows.
 
      See Note 2 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power in Item 8 of the Form 10-K. Components of the pension plans’ and postretirement plans’ net periodic costs for the three- and nine-month periods ended September 30, 2008 and 2007 are as follows (in millions):
                                         
    Southern   Alabama   Georgia   Gulf   Mississippi
pension plans   Company   Power   Power   Power   Power
 
Three Months Ended September 30, 2008
                                       
Service cost
  $ 36     $ 9     $ 12     $ 2     $ 2  
Interest cost
    87       21       33       4       4  
Expected return on plan assets
    (131 )     (40 )     (52 )     (6 )     (6 )
Net amortization
    12       4       5             1  
 
Net cost (income)
  $ 4     $ (6 )   $ (2 )   $     $ 1  
 
 
                                       
Nine Months Ended September 30, 2008
                                       
Service cost
  $ 109     $ 26     $ 37     $ 5     $ 5  
Interest cost
    261       65       100       12       12  
Expected return on plan assets
    (394 )     (120 )     (158 )     (18 )     (16 )
Net amortization
    35       10       13       1       2  
 
Net cost (income)
  $ 11     $ (19 )   $ (8 )   $     $ 3  
   
 
Three Months Ended September 30, 2007
                                       
Service cost
  $ 37     $ 9     $ 13     $ 2     $ 2  
Interest cost
    81       20       31       4       4  
Expected return on plan assets
    (120 )     (36 )     (49 )     (5 )     (5 )
Net amortization
    12       3       5              
 
Net cost (income)
  $ 10     $ (4 )   $     $ 1     $ 1  
 
 
                                       
Nine Months Ended September 30, 2007
                                       
Service cost
  $ 110     $ 26     $ 38     $ 5     $ 5  
Interest cost
    242       61       94       11       11  
Expected return on plan assets
    (361 )     (109 )     (146 )     (16 )     (14 )
Net amortization
    34       9       13       1       1  
 
Net cost (income)
  $ 25     $ (13 )   $ (1 )   $ 1     $ 3  
 

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
                                         
    Southern   Alabama   Georgia   Gulf   Mississippi
postretirement plans   Company   Power   Power   Power   Power
 
Three Months Ended September 30, 2008
                                       
Service cost
  $ 7     $ 1     $ 3     $     $  
Interest cost
    28       7       12       1       1  
Expected return on plan assets
    (15 )     (6 )     (8 )            
Net amortization
    8       3       4              
 
Net cost (income)
  $ 28     $ 5     $ 11     $ 1     $ 1  
 
 
                                       
Nine Months Ended September 30, 2008
                                       
Service cost
  $ 21     $ 5     $ 8     $ 1     $ 1  
Interest cost
    83       22       37       3       4  
Expected return on plan assets
    (44 )     (17 )     (23 )     (1 )     (1 )
Net amortization
    23       7       12       1        
 
Net cost (income)
  $ 83     $ 17     $ 34     $ 4     $ 4  
 
 
                                       
Three Months Ended September 30, 2007
                                       
Service cost
  $ 6     $ 1     $ 3     $     $  
Interest cost
    27       7       12       1       2  
Expected return on plan assets
    (13 )     (4 )     (7 )            
Net amortization
    9       2       4              
 
Net cost (income)
  $ 29     $ 6     $ 12     $ 1     $ 2  
 
 
                                       
Nine Months Ended September 30, 2007
                                       
Service cost
  $ 20     $ 5     $ 8     $ 1     $ 1  
Interest cost
    80       21       35       3       4  
Expected return on plan assets
    (39 )     (14 )     (20 )     (1 )     (1 )
Net amortization
    29       8       14       1       1  
 
Net cost (income)
  $ 90     $ 20     $ 37     $ 4     $ 5  
 
  (H)   EFFECTIVE TAX RATE AND UNRECOGNIZED TAX BENEFITS
 
      Effective Tax Rate
 
      Southern Company’s effective tax rate was 34.3% for the nine months ended September 30, 2008, as compared to 34.1% for the same period in 2007. See Note 5 to the financial statements of each registrant in Item 8 of the Form 10-K for information on the effective income tax rate. Southern Company recorded net synthetic fuel tax credits for the nine months ended September 30, 2008 that are $33.6 million less than the net synthetic fuel tax credits recorded for the same period in 2007, which resulted in an increase in income tax expense. The credits are not allowed under IRC Section 45K for any production after December 31, 2007. Southern Company’s effective tax rate was also impacted by decreases in the effective tax rate due to additional allowance for equity funds used during construction (which is not taxable) recorded by Alabama Power, Georgia Power, and Gulf Power.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      Unrecognized Tax Benefits
 
      Changes during the year for unrecognized tax benefits are as follows:
                                                         
    Southern   Alabama   Georgia   Gulf   Mississippi   Southern    
    Company   Power   Power   Power   Power   Power   Total
 
    (in millions)
Unrecognized tax benefits as of December 31, 2007
  $ 167.1     $ 4.8     $ 89.2     $ 0.9     $ 0.9     $ 1.4     $ 264.3  
Tax positions from current periods
    0.2       1.3       32.1       0.3       0.7       0.5       35.1  
Tax positions from prior periods
    77.9       0.5       7.8       0.7       1.0       (0.3 )     87.6  
Reductions due to settlements
    (0.3 )     (4.1 )     (8.3 )     (1.6 )     (1.0 )     (1.2 )     (16.5 )
Reductions due to expired statute of limitations
                                         
 
Balance as of September 30, 2008
  $ 244.9     $ 2.5     $ 120.8     $ 0.3     $ 1.6     $ 0.4     $ 370.5  
 
      The tax positions from current periods increase relate primarily to the Georgia state tax credits litigation and other miscellaneous uncertain tax positions. The tax positions from prior periods increase relate primarily to the SILO litigation issue that was remeasured during the second quarter 2008. The reduction due to settlements relates to the tentative agreement with the IRS regarding the production activities deduction methodology. See Note (B) to the Condensed Financial Statements under “Leveraged Lease Transactions,” “Georgia State Income Tax Credits,” and “IRC Section 199 Domestic Production Deduction” herein for further information regarding these matters.
 
      Impact on Southern Company’s effective tax rate, if recognized, is as follows:
                                                 
                            As of   As of    
    Southern   Georgia   Other   September 30,   December 31,    
    Company   Power   Registrants   2008   2007   Change
 
    (in millions)
Tax positions impacting the effective tax rate
  $ 3.2     $ 117.9     $ 4.8     $ 125.9     $ 96.6     $ 29.3  
Tax positions not impacting the effective tax rate
    241.7       2.9             244.6       167.7       76.9  
 
Balance of unrecognized tax benefits
  $ 244.9     $ 120.8     $ 4.8     $ 370.5     $ 264.3     $ 106.2  
 
      The tax positions impacting the effective tax rate increase of $29.3 million primarily relate to Georgia state tax credit litigation at Georgia Power. The $76.9 million increase in tax positions not impacting the effective tax rate relates to the SILO litigation uncertain tax position.
 
      Accrued interest for unrecognized tax benefits:
         
 
  (in millions)
Interest accrued as of December 31, 2007
  $ 31  
Interest accrued during the period
    30  
 
Balance as of September 30, 2008
  $ 61  
 
      The increase to accrued interest during the period is primarily associated with the SILO litigation and Georgia state tax credit litigation.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      It is reasonably possible that the amount of the unrecognized benefit with respect to a majority of Georgia Power’s and Southern Company’s unrecognized tax positions will significantly increase or decrease within the next 12 months. The possible settlement of the SILO litigation, the Georgia state tax credits litigation, and/or the conclusion or settlement of federal or state audits could impact the balances significantly. At this time, other than the SILO litigation, an estimate of the range of reasonably possible outcomes cannot be determined. Southern Company’s unrecognized tax benefit related to the SILO litigation could decrease by $242 million within the next 12 months. However, since the unrecognized tax benefits related to the SILO litigation are related to timing differences only, the $242 million decrease would have no impact on income.
 
  (I)   NUCLEAR FUEL DISPOSAL COST LITIGATION
 
      See Note 1 to the financial statements of Southern Company, Alabama Power, and Georgia Power under “Nuclear Fuel Disposal Costs” in Item 8 of the Form 10-K for information regarding the litigation brought by Alabama Power and Georgia Power against the government for breach of contracts related to the disposal of spent nuclear fuel. In July 2007, the U.S. Court of Federal Claims awarded Georgia Power a total of $30 million, based on its ownership interests, and awarded Alabama Power $17.3 million, representing all of the direct costs of the expansion of spent nuclear fuel storage facilities from 1998 through 2004. In August 2007, the government filed a motion for reconsideration, which was denied in November 2007. On January 2, 2008, the government filed a notice of appeal. On February 29, 2008, the government filed a motion to stay the appeal pending the court’s decisions in three other cases already on appeal. On April 1, 2008, the court granted the government’s motion to stay the appeal. A claim against the government was also filed for damages incurred after December 31, 2004 (the court-mandated cut-off in the original claim), due to the government’s continuing breach of contract. This claim was filed without including any dollar amount for recovery of damages. The final outcome of this matter cannot be determined at this time, but no material impact on net income is expected as any damage amounts collected from the government are expected to be returned to customers.
 
  (J)   SOUTHERN POWER DEPRECIATION STUDY
 
      Southern Power revised its depreciation rates in January 2008. This change in estimate arises from changes in useful life assumptions of certain components of plant in service based on an engineering study completed in the first quarter of 2008. Depreciation rates by generating facility changed from a range of 2.7% to 3.8% to a range of 1.8% to 4.1%. These changes increased depreciation and reduced income from continuing operations and net income by $3.4 million and $2.0 million, respectively for the first nine months of 2008. The expected total impact on Southern Power’s income from continuing operations and net income for 2008 is a decrease of $4.5 million and $2.7 million, respectively.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
  (K)   SEGMENT AND RELATED INFORMATION
 
      Southern Company’s reportable business segments are the sale of electricity in the Southeast by the traditional 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 leveraged lease projects, telecommunications, and energy-related services. Southern Power’s revenues from sales to the traditional operating companies were $217 million and $494 million for the three months and nine months ended September 30, 2008, respectively, and $185 million and $439 million for the three months and nine months ended September 30, 2007, respectively. All other intersegment revenues are not material. Financial data for business segments and products and services are as follows:
                                                         
    Electric Utilities            
    Traditional                                
    Operating   Southern                   All        
    Companies   Power   Eliminations   Total   Other   Eliminations   Consolidated
     
    (in millions)
Three Months Ended September 30, 2008:
                                                       
Operating revenues
  $ 5,156     $ 516     $ (276 )   $ 5,396     $ 46     $ (15 )   $ 5,427  
Segment net income (loss)
    727       60             787       (7 )           780  
Nine Months Ended September 30, 2008:
                                                       
Operating revenues
  $ 12,849     $ 1,048     $ (669 )   $ 13,228     $ 141     $ (44 )   $ 13,325  
Segment net income (loss)
    1,520       124             1,644       (88 )           1,556  
Total assets at September 30, 2008
  $ 45,252     $ 2,868     $ (256 )   $ 47,864     $ 1,636     $ (488 )   $ 49,012  
                                                         
    Electric Utilities            
    Traditional                                
    Operating   Southern                   All        
    Companies   Power   Eliminations   Total   Other   Eliminations   Consolidated
     
    (in millions)
Three Months Ended September 30, 2007:
                                                       
Operating revenues
  $ 4,660     $ 347     $ (227 )   $ 4,780     $ 95     $ (43 )   $ 4,832  
Segment net income (loss)
    714       51             765       (4 )     1       762  
Nine Months Ended September 30, 2007:
                                                       
Operating revenues
  $ 11,612     $ 784     $ (549 )   $ 11,847     $ 294     $ (128 )   $ 12,013  
Segment net income (loss)
    1,381       123             1,504       26             1,530  
Total assets at December 31, 2007
  $ 41,812     $ 2,769     $ (122 )   $ 44,459     $ 1,767     $ (437 )   $ 45,789  
 
Products and Services
                                 
    Electric Utilities’ Revenues
Period   Retail   Wholesale   Other   Total
    (in millions)
Three Months Ended September 30, 2008
  $ 4,479     $ 775     $ 142     $ 5,396  
Three Months Ended September 30, 2007
  $ 4,086     $ 563     $ 131     $ 4,780  
 
                               
Nine Months Ended September 30, 2008
  $ 10,934     $ 1,880     $ 414     $ 13,228  
Nine Months Ended September 30, 2007
  $ 9,935     $ 1,531     $ 381     $ 11,847  
 

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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 the registrants are involved.
Item 1A. Risk Factors.
    See RISK FACTORS in Item 1A of the Form 10-K for a discussion of the risk factors of the registrants. There have been no material changes to these risk factors from those previously disclosed in the Form 10-K.

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Item 6. Exhibits.
(4) Instruments Describing Rights of Security Holders, Including Indentures
         
Southern Company
 
       
(a)1
  -   Third Supplemental Indenture to Senior Note Indenture dated as of August 21, 2008, providing for the issuance of the Series 2008A Floating Rate Senior Notes. (Designated in Form 8-K dated August 13, 2008, File No. 1-3526, as Exhibit 4.2.)
 
(10) Material Contracts
 
       
Southern Company
 
       
(a)1
  -   Compensation and Retention Agreement between Southern Company Services, Inc. and C. Alan Martin effective as of February 1, 2008.
 
       
(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, 2007, 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, 2007, 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, 2007, File No. 1-6468 as Exhibit 24(c) and incorporated herein by reference.)
 
       
Gulf Power
 
       
(d)1
  -   Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2007, File No. 0-2429 as Exhibit 24(d) and incorporated herein by reference.)
 
       
(d)2
  -   Power of Attorney for Philip C. Raymond. (Designated in the Form 10-Q for the quarter ended March 31, 2008, File No. 0-2429 as Exhibit 24(d)2 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, 2007, File No. 001-11229 as Exhibit 24(e) and incorporated herein by reference.)
 
       
Southern Power
 
       
(f)1
  -   Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2007, File No. 333-98553 as Exhibit 24(f) and incorporated herein by reference.)

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(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.
 
       
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.
 
       
Southern Power
 
       
(f)1
  -   Certificate of Southern Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
 
       
(f)2
  -   Certificate of Southern Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

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(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.
 
       
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.
 
       
Southern Power
 
       
(f)
  -   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, President, and Chief Executive Officer    
 
      (Principal Executive Officer)    
 
           
 
  By   W. Paul Bowers    
 
      Executive Vice President and Chief Financial Officer    
 
      (Principal Financial Officer)    
 
           
 
  By   /s/ Wayne Boston
 
(Wayne Boston, Attorney-in-fact)
   
Date: November 6, 2008

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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: November 6, 2008

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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: November 6, 2008

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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   Philip C. Raymond    
 
      Vice President and Chief Financial Officer    
 
      (Principal Financial Officer)    
 
           
 
  By   /s/ Wayne Boston
 
(Wayne Boston, Attorney-in-fact)
   
Date: November 6, 2008

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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 Turnage    
 
      Vice President, Treasurer, and Chief Financial Officer    
 
      (Principal Financial Officer)    
 
           
 
  By   /s/ Wayne Boston
 
(Wayne Boston, Attorney-in-fact)
   
Date: November 6, 2008

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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, Treasurer, and Chief Financial Officer    
 
      (Principal Financial Officer)    
 
           
 
  By   /s/ Wayne Boston
 
(Wayne Boston, Attorney-in-fact)
   
Date: November 6, 2008

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