10-Q

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 June 30, 2006

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

     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, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

	Large
	Accelerated		Accelerated	Non-accelerated
Registrant	Filer		Filer	Filer
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 June 30, 2006
The Southern Company	Par Value $5 Per Share		742,286,154
Alabama Power Company	Par Value $40 Per Share		10,250,000
Georgia Power Company	Without Par Value		7,761,500	*
Gulf Power Company	Without Par Value		992,717
Mississippi Power Company	Without Par Value		1,121,000
Southern Power Company	Par Value $0.01 Per Share		1,000

* On July 1, 2006, Georgia Power Company issued an additional 1,500,000 common shares, without par value, in conjunction with the merger of Savannah Electric and Power Company into Georgia Power Company.

     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. Savannah Electric and Power Company was merged into Georgia Power Company on July 1, 2006. Savannah Electric and Power Company’s separate SEC reporting obligations were terminated following the merger. Savannah Electric and Power Company’s business and operations for the second quarter and year-to-date are now reflected only in The Southern Company portion of this report. This information will be incorporated into the Georgia Power Company Quarterly Report on Form 10-Q for the third quarter 2006 and for subsequent reporting periods. 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.

2

INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2006

	Page
	Number
DEFINITIONS		5
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION		6
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Southern Company and Subsidiary Companies		7
Condensed Consolidated Statements of Income		8
Condensed Consolidated Statements of Cash Flows		9
Condensed Consolidated Balance Sheets		10
Condensed Consolidated Statements of Comprehensive Income		12
Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Alabama Power Company		30
Condensed Statements of Income		31
Condensed Statements of Comprehensive Income		31
Condensed Statements of Cash Flows		32
Condensed Balance Sheets		33
Management’s Discussion and Analysis of Financial Condition and Results of Operations		35
Georgia Power Company		47
Condensed Statements of Income		48
Condensed Statements of Comprehensive Income		48
Condensed Statements of Cash Flows		49
Condensed Balance Sheets		50
Management’s Discussion and Analysis of Financial Condition and Results of Operations		52
Gulf Power Company		63
Condensed Statements of Income		64
Condensed Statements of Comprehensive Income		64
Condensed Statements of Cash Flows		65
Condensed Balance Sheets		66
Management’s Discussion and Analysis of Financial Condition and Results of Operations		68
Mississippi Power Company		79
Condensed Statements of Income		80
Condensed Statements of Comprehensive Income		80
Condensed Statements of Cash Flows		81
Condensed Balance Sheets		82
Management’s Discussion and Analysis of Financial Condition and Results of Operations		84
Southern Power Company and Subsidiary Companies		95
Condensed Consolidated Statements of Income		96
Condensed Consolidated Statements of Comprehensive Income		96
Condensed Consolidated Statements of Cash Flows		97
Condensed Consolidated Balance Sheets		98
Management’s Discussion and Analysis of Financial Condition and Results of Operations		100
Notes to the Condensed Financial Statements		108
Item 3. Quantitative and Qualitative Disclosures about Market Risk		29
Item 4. Controls and Procedures		29

3

INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2006

	Page
	Number
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		125
Item 1A. Risk Factors		125
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		125
Item 5. Other Information		127
Item 6. Exhibits		128
Signatures		133

4

DEFINITIONS

TERM	MEANING
AFUDC	Allowance for funds used during construction
Alabama Power	Alabama Power Company
ALJ	Administrative law judge
BMA	Bond Market Association
Clean Air Act	Clean Air Act Amendments of 1990
DOE	U.S. Department of Energy
ECO Plan	Environmental Compliance Overview Plan
EPA	U.S. Environmental Protection Agency
ERISA	Employee Retirement Income Security Act of 1974, as amended
FASB	Financial Accounting Standards Board
FERC	Federal Energy Regulatory Commission
Form 10-K	Combined Annual Report on Form 10-K of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, and Southern Power for the year ended December 31, 2005 and, with respect to Southern Company, Amendment No. 1 and Amendment No. 2 thereto
Georgia Power	Georgia Power Company
Gulf Power	Gulf Power Company
IIC	Intercompany Interchange Contract
IRC	Internal Revenue Code of 1986, as amended
IRS	Internal Revenue Service
KWH	Kilowatt-hour
LIBOR	London Interbank Offered Rate
Mirant	Mirant Corporation
Mississippi Power	Mississippi Power Company
Moody’s	Moody’s Investors Service, Inc
MW	Megawatt
NRC	Nuclear Regulatory Commission
NSR	New Source Review
PEP	Performance Evaluation Plan
PPA	Power Purchase Agreement
PSC	Public Service Commission
retail operating companies	Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric (merged into Georgia Power on July 1, 2006)
S&P	Standard and Poor’s, a division of The McGraw-Hill Companies, Inc.
Savannah Electric	Savannah Electric and Power Company (merged into Georgia Power on July 1, 2006)
SCS	Southern Company Services, Inc.
SEC	Securities and Exchange Commission
Southern Company	The Southern Company
Southern Company system	Southern Company, the retail operating companies, Southern Power, and other subsidiaries
Southern Power	Southern Power Company
Super Southeast	Southern Company’s traditional service territory, Alabama, Florida, Georgia, and Mississippi, plus the surrounding states of Kentucky, Louisiana, North Carolina, South Carolina, Tennessee, and Virginia

5

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, storm damage cost recovery and repairs, fuel cost recovery, environmental regulations and expenditures, synthetic fuel investments, financing activities, completion of construction projects, impacts of adoption of new accounting rules, access to sources of capital, 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, and also changes in environmental, tax, and other laws and regulations to which Southern Company and its subsidiaries are subject, including proposed legislation relating to tax credits associated with synthetic fuel investments (and the timing of adoption of any such legislation), 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 and population, and business growth (and declines);

• available sources and costs of fuels;

• ability to control costs;

• investment performance of Southern Company’s employee benefit plans;

• advances in technology;

• state and federal rate regulations and the impact of pending and future rate cases and negotiations, including rate actions relating to fuel and storm restoration cost recovery;

• the performance of projects undertaken by the non-utility businesses and the success of efforts to invest in and develop new opportunities;

• fluctuations in the level of oil prices;

• the level of production, if any, by the synthetic fuel operations at Carbontronics Synfuels Investors LP and Alabama Fuel Products, LLC for the remainder of fiscal year 2006;

• internal restructuring or other restructuring options that may be pursued;

• potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial to Southern Company or its subsidiaries;

• the ability of counterparties of Southern Company and its subsidiaries to make payments as and when due;

• the ability to obtain new short- and long-term contracts with neighboring utilities;

• the direct or indirect effect on Southern Company’s business resulting from terrorist incidents and the threat of terrorist incidents;

• interest rate fluctuations and financial market conditions and the results of financing efforts, including Southern Company’s and its subsidiaries’ credit ratings;

• the ability of Southern Company and its subsidiaries to obtain additional generating capacity at competitive prices;

• catastrophic events such as fires, earthquakes, explosions, floods, hurricanes, or other similar occurrences;

• the direct or indirect effects on Southern Company’s business resulting from incidents similar to the August 2003 power outage in the Northeast;

• the effect of accounting pronouncements issued periodically by standard setting bodies; and

• other factors discussed elsewhere herein and in other reports filed by the registrants from time to time with the SEC.

Each registrant expressly disclaims any obligation to update any forward-looking statements.

6

THE SOUTHERN COMPANY
AND SUBSIDIARY COMPANIES

7

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006			2005
	(in thousands)						(in thousands)
Operating Revenues:
Retail revenues	$	2,970,387		$	2,555,091		$	5,441,800		$	4,823,900
Sales for resale		439,902			384,997			854,771			732,122
Other electric revenues		116,095			109,348			227,085			210,443
Other revenues		65,119			70,210			131,107			140,211
Total operating revenues		3,591,503			3,119,646			6,654,763			5,906,676
Operating Expenses:
Fuel		1,307,650			993,241			2,356,195			1,857,862
Purchased power		138,843			123,677			243,254			221,893
Other operations		587,921			572,191			1,150,373			1,088,619
Maintenance		273,292			259,975			556,922			554,067
Depreciation and amortization		297,532			286,374			596,458			577,484
Taxes other than income taxes		179,200			162,798			354,203			325,682
Total operating expenses		2,784,438			2,398,256			5,257,405			4,625,607
Operating Income		807,065			721,390			1,397,358			1,281,069
Other Income and (Expense):
Allowance for equity funds used during construction		10,398			14,011			21,925			30,870
Interest income		6,237			6,223			12,909			11,495
Equity in losses of unconsolidated subsidiaries		(12,277	)		(29,574	)		(44,852	)		(52,678	)
Leveraged lease income		17,599			18,677			35,702			36,925
Impairment loss on equity method investments		(15,274	)		—			(15,274	)		—
Interest expense, net of amounts capitalized		(180,695	)		(154,215	)		(357,070	)		(293,202	)
Interest expense to affiliate trusts		(30,640	)		(31,931	)		(61,269	)		(63,861	)
Preferred and preference dividends of subsidiaries		(8,006	)		(7,402	)		(17,021	)		(14,804	)
Other income (expense), net		15,372			(1,916	)		4,507			(7,123	)
Total other income and (expense)		(197,286	)		(186,127	)		(420,443	)		(352,378	)
Earnings From Continuing Operations Before Income Taxes		609,779			535,263			976,915			928,691
Income taxes		222,249			146,447			329,271			222,334
Earnings From Continuing Operations		387,530			388,816			647,644			706,357
Earnings from discontinued operations, net of income taxes of $(1,467), $(1,259), $(525), and $2,176, respectively		(2,307	)		(1,995	)		(814	)		3,424
Consolidated Net Income	$	385,223		$	386,821		$	646,830		$	709,781
Common Stock Data:
Earnings per share from continuing operations-
Basic	$	0.52		$	0.52		$	0.87		$	0.95
Diluted	$	0.52		$	0.52		$	0.87		$	0.94
Earnings per share including discontinued operations-
Basic	$	0.52		$	0.52		$	0.87		$	0.95
Diluted	$	0.52		$	0.52		$	0.87		$	0.95
Average number of basic shares of common stock outstanding (in thousands)		742,515			746,823			742,355			745,424
Average number of diluted shares of common stock outstanding (in thousands)		746,387			751,016			746,725			749,360
Cash dividends paid per share of common stock	$	0.3875		$	0.3725		$	0.7600		$	0.7300

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

8

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months
	Ended June 30,
	2006			2005
	(in thousands)
Operating Activities:
Consolidated net income	$	646,830		$	709,781
Adjustments to reconcile consolidated net income to net cash provided from operating activities —
Depreciation and amortization		696,048			687,205
Deferred income taxes and investment tax credits		262,870			175,751
Allowance for equity funds used during construction		(21,925	)		(30,870	)
Equity in losses of unconsolidated subsidiaries		44,852			52,678
Leveraged lease income		(35,702	)		(36,925	)
Pension, postretirement, and other employee benefits		23,672			21,656
Stock option expense		22,186			—
Tax benefit of stock options		1,103			36,963
Hedge settlements		18,502			(19,860	)
Storm damage accounting order		—			45,000
Other, net		(20,547	)		(38,741	)
Changes in certain current assets and liabilities —
Receivables		(140,438	)		(360,973	)
Fossil fuel stock		(120,420	)		(115,221	)
Materials and supplies		(42,493	)		(19,362	)
Other current assets		(21,734	)		42,244
Accounts payable		(285,434	)		(109,448	)
Accrued taxes		(27,938	)		(80,978	)
Accrued compensation		(263,409	)		(210,061	)
Other current liabilities		7,605			47,384
Net cash provided from operating activities		743,628			796,223
Investing Activities:
Property additions		(1,167,696	)		(1,141,771	)
Nuclear decommissioning trust fund purchases		(384,850	)		(324,849	)
Nuclear decommissioning trust fund sales		377,970			316,150
Proceeds from property sales		151,760			9,468
Investment in unconsolidated subsidiaries		(52,273	)		(51,870	)
Cost of removal net of salvage		(40,328	)		(41,485	)
Other		(45,417	)		(57,162	)
Net cash used for investing activities		(1,160,834	)		(1,291,519	)
Financing Activities:
Increase in notes payable, net		594,563			510,947
Proceeds —
Long-term debt		960,125			870,695
Common stock		19,652			148,609
Gross excess tax benefit of stock options		2,506			—
Redemptions —
Long-term debt		(423,408	)		(436,470	)
Long-term debt to affiliate trusts		(67,457	)		—
Preferred and preference stock		(14,569	)		—
Common stock repurchased		(117	)		(62,321	)
Special deposits — redemption funds		—			(102,481	)
Payment of common stock dividends		(564,146	)		(543,637	)
Other		(29,154	)		(21,737	)
Net cash provided from financing activities		477,995			363,605
Net Change in Cash and Cash Equivalents		60,789			(131,691	)
Cash and Cash Equivalents at Beginning of Period		202,111			368,449
Cash and Cash Equivalents at End of Period	$	262,900		$	236,758
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $9,151 and $12,589 capitalized for 2006 and 2005, respectively)	$	423,312		$	312,975
Income taxes (net of refunds)	$	52,153		$	45,896

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

9

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Assets	2006			2005
	(in thousands)
Current Assets:
Cash and cash equivalents	$	262,900		$	202,111
Receivables —
Customer accounts receivable		941,661			868,665
Unbilled revenues		377,313			303,782
Under recovered regulatory clause revenues		614,882			754,522
Other accounts and notes receivable		330,323			409,685
Accumulated provision for uncollectible accounts		(34,243	)		(37,510	)
Fossil fuel stock, at average cost		538,208			402,579
Vacation pay		117,356			116,699
Materials and supplies, at average cost		694,925			665,754
Assets from risk management activities		70,699			124,607
Prepaid expenses		188,499			131,324
Other		217,859			262,659
Total current assets		4,320,382			4,204,877
Property, Plant, and Equipment:
In service		44,599,652			43,578,501
Less accumulated depreciation		16,184,593			15,727,300
		28,415,059			27,851,201
Nuclear fuel, at amortized cost		265,370			261,997
Construction work in progress		1,281,027			1,367,255
Total property, plant, and equipment		29,961,456			29,480,453
Other Property and Investments:
Nuclear decommissioning trusts, at fair value		972,965			953,554
Leveraged leases		1,106,644			1,082,100
Other		319,805			337,236
Total other property and investments		2,399,414			2,372,890
Deferred Charges and Other Assets:
Deferred charges related to income taxes		925,670			936,729
Prepaid pension costs		1,025,064			1,021,797
Unamortized debt issuance expense		173,242			161,583
Unamortized loss on reacquired debt		299,194			309,409
Deferred under recovered regulatory clause revenues		731,913			530,668
Other regulatory assets		537,198			519,005
Other		427,682			339,294
Total deferred charges and other assets		4,119,963			3,818,485
Total Assets	$	40,801,215		$	39,876,705

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

10

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

	At June 30,			At December 31,
Liabilities and Stockholders’ Equity		2006			2005
	(in thousands)
Current Liabilities:
Securities due within one year	$	993,325		$	900,699
Notes payable		1,851,991			1,257,428
Accounts payable		867,352			1,229,253
Customer deposits		237,282			219,781
Accrued taxes —
Income taxes		203,504			103,925
Other		294,888			318,978
Accrued interest		225,390			204,292
Accrued vacation pay		143,454			143,816
Accrued compensation		196,204			458,573
Other		386,805			403,606
Total current liabilities		5,400,195			5,240,351
Long-term Debt		11,296,969			10,957,903
Long-term Debt Payable to Affiliated Trusts		1,893,187			1,888,469
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		6,000,558			5,735,502
Deferred credits related to income taxes		301,448			311,083
Accumulated deferred investment tax credits		515,124			527,172
Employee benefit obligations		971,435			929,908
Asset retirement obligations		1,144,672			1,117,280
Other cost of removal obligations		1,292,836			1,295,215
Other regulatory liabilities		262,717			323,180
Other		280,148			265,838
Total deferred credits and other liabilities		10,768,938			10,505,178
Total Liabilities		29,359,289			28,591,901
Preferred and Preference Stock of Subsidiaries		595,612			595,626
Common Stockholders’ Equity:
Common stock, par value $5 per share —
Authorized — 1 billion shares
Issued — June 30, 2006: 751,861,212 Shares;
— December 31, 2005: 751,810,927 Shares
Treasury — June 30, 2006: 9,575,058 Shares;
— December 31, 2005: 10,362,970 Shares
Par value		3,759,306			3,759,055
Paid-in capital		1,101,602			1,084,799
Treasury, at cost		(331,771	)		(358,892	)
Retained earnings		6,414,930			6,332,023
Accumulated other comprehensive loss		(97,753	)		(127,807	)
Total Common Stockholders’ Equity		10,846,314			10,689,178
Total Liabilities and Stockholders’ Equity	$	40,801,215		$	39,876,705

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

11

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006		2005
	(in thousands)						(in thousands)
Consolidated Net Income	$	385,223		$	386,821		$	646,830	$	709,781
Other comprehensive income (loss) — continuing operations:
Change in fair value of marketable securities, net of tax of $2,798, $(346), $4,407, and $(2,075), respectively		4,334			(598	)		6,855		(3,924	)
Changes in fair value of qualifying hedges, net of tax of $7,255, $(12,321), $14,385, and $(11,386), respectively		11,519			(19,805	)		22,911		(18,370	)
Reclassification adjustment for amounts included in net income, net of tax of $65, $1,083, $306, and $2,400, respectively		(2	)		1,351			288		3,405
Total other comprehensive income — continuing operations		15,851			(19,052	)		30,054		(18,889	)
Other comprehensive income — discontinued operations:
Changes in fair value of qualifying hedges, net of tax of $(448) and $642, respectively		—			(710	)		—		1,018
Reclassification adjustment for amounts included in net income, net of tax of $(95) and $598, respectively		—			(149	)		—		948
Total other comprehensive income — discontinued operations		—			(859	)		—		1,966
COMPREHENSIVE INCOME	$	401,074		$	366,910		$	676,884	$	692,858

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

12

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

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

SECOND QUARTER 2006 vs. SECOND QUARTER 2005
AND
YEAR-TO-DATE 2006 vs. YEAR-TO-DATE 2005

OVERVIEW

Discussion of the results of operations is focused on Southern Company’s primary business of electricity sales in the Southeast by the retail operating companies – Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric – and Southern Power. Southern Power is an electric wholesale generation subsidiary with market-based rate authority. Southern Company’s other business activities include investments in synthetic fuels and leveraged lease projects, telecommunications, and energy-related services. For additional information on these businesses, see BUSINESS – The SOUTHERN System – “Retail Operating Companies,” “Southern Power,” and “Other Business” in Item 1 of the Form 10-K. For information regarding the synthetic fuel investments, see Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein.

     Hurricanes Dennis and Katrina hit Southern Company’s service territory in July and August 2005, respectively. As a result of these storms, as well as Hurricane Ivan in September 2004, Southern Company has incurred significant restoration costs. In addition, fuel costs at each of the retail operating companies rose significantly during 2005 and the first six months of 2006. Southern Company continues to make significant progress in working with its regulators to develop methods to enable the timely recovery of these costs. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Storm Damage Cost Recovery” of Southern Company in Item 7 of the Form 10-K and FUTURE EARNINGS POTENTIAL – “FERC and State PSC Matters – Storm Damage Cost Recovery” and Notes (H), (I), and (K) to the Condensed Financial Statements herein for additional information.

     Effective July 1, 2006, Savannah Electric was merged into Georgia Power. Prior to the merger, Southern Company was the sole common shareholder of both Georgia Power and Savannah Electric. At the time of the merger, each outstanding share of Savannah Electric common stock was cancelled, and Southern Company was issued an additional 1,500,000 shares of Georgia Power common stock, no par value per share. Also in July 2006, Savannah Electric’s separate SEC reporting obligations were terminated following the merger. Savannah Electric’s results of operations and cash flows for the three and six months ended June 30, 2006 and 2005 and assets and liabilities as of June 30, 2006 and December 31, 2005 are included in the Southern Company condensed consolidated financial statements herein. Georgia Power will account for the merger in a manner similar to a pooling of interests, and Georgia Power’s financial statements will reflect the merger effective July 1, 2006.

     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

Earnings

Southern Company’s second quarter and year-to-date 2006 earnings were $385.2 million ($0.52 per share) and $646.8 million ($0.87 per share) compared with $386.8 million ($0.52 per share) and $709.8 million ($0.95 per share), respectively, for the corresponding periods in 2005. Earnings were flat in the second quarter of 2006 when compared to the same period in 2005. The decrease in earnings year-to-date 2006 resulted primarily from higher other operations and maintenance expenses, a reduction in tax credits and impairments associated with synthetic fuel investments, and higher interest expense, compared to year-to-date 2005. These decreases to earnings were partially offset by an increase in revenues resulting from sustained economic strength and

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customer growth in the Southern Company service area and warmer weather in the second quarter of 2006 compared to the same period in 2005.

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Second Quarter					Year-to-Date
	(in thousands)			%		(in thousands)			%
Retail revenues	$	415,296		16.3		$	617,900		12.8
Sales for resale		54,905		14.3			122,649		16.8
Other electric revenues		6,747		6.2			16,642		7.9
Fuel expense		314,409		31.7			498,333		26.8
Purchased power expense		15,166		12.3			21,361		9.6
Other operations expense		15,730		2.7			61,754		5.7
Maintenance expense		13,317		5.1			2,855		0.5
Depreciation and amortization expense		11,158		3.9			18,974		3.3
Taxes other than income taxes		16,402		10.1			28,521		8.8
Allowance for equity funds used during construction		(3,613	)	(25.8	)		(8,945	)	(29.0	)
Equity in losses of unconsolidated subsidiaries		(17,297	)	(58.5	)		(7,826	)	(14.9	)
Impairment loss on equity method investments		15,274		N/M			15,274		N/M
Interest expense, net of amounts capitalized		26,480		17.2			63,868		21.8
Other income (expense), net		17,288		N/M			11,630		N/M
Income taxes		75,802		51.8			106,937		48.1

N/M – Not meaningful

     Retail revenues. The chart below reflects the primary drivers of the 16.3% and 12.8% increases in retail revenues in the second quarter and year-to-date 2006 when compared to the same periods in 2005. Changes in revenue related to certain cost recovery mechanisms such as fuel and storm damage have no effect on net income. In the second quarter and year-to-date 2006, retail KWH sales increased by 4.6% and 2.5%, respectively, from the same periods a year ago, primarily due to warmer weather in the second quarter of 2006 and continued customer and demand growth from sustained economic strength in the Southeast. The number of retail customers increased by 1.3% as of June 2006 compared to June 2005, and weather-adjusted average consumption by retail customers increased by 0.9% and 0.8%, respectively, for the second quarter and year-to-date 2006 when compared with the same periods in 2005.

     Details of retail revenues are as follows:

	Second Quarter					Year-to-Date
	2006					2006
	(in millions)		% change			(in millions)		% change
Retail – prior year	$	2,555				$	4,824
Change in —
Base rates		17		0.7			28		0.6
Sales growth		25		1.0			60		1.3
Weather		61		2.4			55		1.1
Fuel cost recovery		293		11.5			435		9.0
Other cost recovery		19		0.7			40		0.8
Retail – current year	$	2,970		16.3	%	$	5,442		12.8	%

     Sales for resale. In the second quarter and year-to-date 2006, sales for resale increased $54.9 million and $122.6 million, respectively, over the same periods in 2005. The second quarter and year-to-date 2006 increases reflect a rise in fuel revenues due to increases of 22.4% and 21.2%, respectively, in the average unit cost of fuel

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per net KWH generated when compared to the same periods in the prior year. New wholesale contracts also contributed to the increase.

     Other electric revenues. In the second quarter and year-to-date 2006, other electric revenues increased $6.7 million and $16.6 million, respectively, primarily due to higher transmission revenues of $7.0 million and $11.1 million, respectively, and higher outdoor lighting revenues of $1.6 million and $3.0 million, respectively, compared to the same periods in 2005.

     Fuel expense and purchased power expense. Fuel expense and purchased power expense increased $329.6 million in the second quarter 2006 over the second quarter 2005 due to an increase of $243.0 million in the cost of fuel and $86.6 million related to an increase in total KWHs generated and purchased. Year-to-date 2006 fuel expense and purchased power expense increased $519.7 million over the same period in 2005 due to an increase of $454.2 million in the cost of fuel and $65.5 million related to an increase in total KWHs generated and purchased. Increases in fuel expense at the retail 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.

     Other operations expense. Other operations expense increased $15.7 million and $61.8 million in the second quarter and year-to-date 2006, respectively, compared with the same periods in the prior year due to increases in administrative and general expense of $2.4 million and $23.9 million, respectively, primarily additional compensation related to expensing of stock options in the first quarter of 2006; increases of $7.3 million and $15.6 million, respectively, in customer service and sales expense, primarily technology costs, promotional expenses for energy efficiency programs; and an increase in bad debt expense. The second quarter and year-to-date 2006 increases were also attributable to increases of $8.8 million and $15.6 million, respectively, in transmission and distribution expense, and a $6.7 million year-to-date 2006 increase in other production expense when compared to the same periods in 2005. The second quarter 2006 increase was partially offset by a $2.8 million decrease in other production expense. Other production, transmission, and distribution expenses fluctuate from year to year due to timing of plant outages and system maintenance projects as well as normal increases in costs.

     Maintenance expense. In the first quarter of 2005, Alabama Power recorded $45 million of expenses in accordance with an accounting order approved by the Alabama PSC to offset the costs of Hurricane Ivan and restore the natural disaster reserve. In accordance with the accounting order, Alabama Power also returned certain regulatory liabilities related to deferred taxes to its retail customers; therefore, the combined effects of this accounting order had no impact on net income. See Note 3 to the financial statements of Southern Company under “Storm Damage Cost Recovery” in Item 8 of the Form 10-K for additional information. In the second quarter and year-to-date 2006, when compared to the same periods in 2005, maintenance expense increased $13.3 million and $2.9 million, respectively. Excluding the impact of the $45 million Alabama Power accounting order, year-to-date 2006 maintenance expense increased $47.9 million over the same period in 2005. These increases are primarily due to higher administrative and general expense of $1.7 million and $2.6 million, respectively, increases of $17.4 million and $32.7 million, respectively, in transmission and distribution expense, and a $12.6 million year-to-date 2006 increase in other production expense when compared to the same periods in 2005. The second quarter 2006 increase was partially offset by a $5.8 million decrease in other production expense. Other production, transmission, and distribution expenses fluctuate from year to year due to timing of plant outages and system maintenance projects as well as normal increases in costs.

     Depreciation and amortization expense. The $11.2 million and $19.0 million increases in depreciation and amortization expense in the second quarter and year-to-date 2006, respectively, when compared with the same periods in 2005 are primarily a result of an increase in depreciable property, plant, and equipment, including Southern Power’s Plant Oleander and Plant Desoto, acquired in June 2005 and June 2006, respectively, as well as increases in depreciation rates and changes in the estimated lives of depreciable assets. These increases are partially offset by a decrease in amortization expense at Georgia Power related to the inclusion of new certified

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PPAs in retail rates on a levelized basis over a three-year period as ordered by the Georgia PSC under the terms of the retail order effective January 1, 2005.

     Taxes other than income taxes. The $16.4 million and $28.5 million increases in taxes other than income taxes in the second quarter and year-to-date 2006, respectively, compared with the same periods in 2005 are primarily a result of increases in municipal franchise and gross receipts taxes associated with increases in revenues from energy sales and an increase in property taxes associated with changes in property tax rates, changes in the assessed value of properties, and increases in total property value.

     Allowance for equity funds used during construction. In the second quarter and year-to-date 2006, when compared to the same periods in 2005, AFUDC equity decreased $3.6 million and $8.9 million, respectively, due to the completion of the Plant McIntosh combined cycle units 10 and 11 by Georgia Power in June 2005. AFUDC equity is non-taxable.

     Equity in losses of unconsolidated subsidiaries. Southern Company has made investments in two synfuel production facilities that generate operating losses. These investments also allow Southern Company to claim federal income tax credits that offset these operating losses and make the projects profitable. The $17.3 million and $7.8 million decreases in equity in losses of unconsolidated subsidiaries in the second quarter and year-to-date 2006, respectively, compared with the same periods in 2005 are primarily a result of terminating Southern Company’s membership interest in one of the synthetic fuel entities which reduced the amount of funding obligation for the second quarter 2006. These decreases were partially offset by higher operating losses at the other synthetic fuel entity due to higher production levels before it was idled on May 11, 2006. See “Impairment loss on equity method investments” below and FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Synthetic Fuel Tax Credits” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein for further information.

     Impairment loss on equity method investments. In June 2006, Southern Company recorded a $15.3 million impairment associated with its investments in synthetic fuels. On May 11, 2006, production at one of the synthetic fuel investments was idled due to a projected phase out of tax credits because of high oil prices. Effective July 1, 2006, Southern Company terminated its membership interest in the other synthetic fuel investment. Southern Company will not be entitled to any further tax credits from this investment. As a result of these actions and the projected continued phase out of tax credits due to high oil prices, the investments in these two synthetic fuel entities were considered fully impaired. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Synthetic Fuel Tax Credits” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein for further information.

     Interest expense, net of amounts capitalized. Interest charges and other financing costs increased by $26.5 million and $63.9 million in the second quarter and year-to-date 2006, respectively, associated with increases in notes payable and long-term debt outstanding for the second quarter and year-to-date 2006, respectively, compared to the same periods in 2005 as well as an increase in average interest rates on variable rate debt. Variable rates on pollution control bonds are highly correlated with the BMA Municipal Swap Index, which averaged 3.6%, and 3.3% in the second quarter and year-to-date 2006, respectively, compared to 2.6% and 2.3% in the second quarter and year-to-date 2005, respectively. Variable rates on commercial paper and senior notes are highly correlated with the one-month LIBOR, which averaged 5.1% and 4.8% in the second quarter and year-to-date 2006, respectively, compared to 3.1% and 2.9% in the second quarter and year-to-date 2005, respectively. The year-to-date increase in interest expense was also the result of $5.0 million related to early redemption of trust preferred securities. 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.

     Other income (expense), net. The $17.3 million and $11.6 million increases in other income (expense), net, in the second quarter and year-to-date 2006, respectively, compared to the same periods in 2005 are primarily due to a $1.5 million gain on the sale of an investment, a $5.1 million increase due to changes in the value of economic hedges associated with synthetic fuel investments, and the release of $6.3 million in certain

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obligations associated with Southern Company’s synthetic fuel investments in 2006. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Synthetic Fuel Tax Credits” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein for further information. The year-to-date 2006 increase is partially offset by Alabama Power’s recognition of $5.0 million associated with the consent decree entered in the NSR litigation. See Note 3 to the financial statements of Southern Company under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under “NEW SOURCE REVIEW ACTIONS – New Source Review Litigation” herein for further information.

     Income taxes. Income taxes increased $75.8 million and $106.9 million, respectively, in the second quarter and year-to-date 2006 when compared to the same periods in 2005 due to higher taxable earnings and $21.2 million and $39.7 million of synthetic fuel tax credit reserves recorded in the second quarter and year-to-date 2006, respectively. The second quarter and year-to-date 2006 increases in income taxes are also the result of decreases in synthetic fuel tax credits of $17.7 million and $8.3 million, respectively, as a result of terminating the membership interest in one of the synthetic fuel entities which reduced the allocated credits available to Southern Company for the second quarter 2006. These increases were partially offset by higher synthetic fuel tax credit production at the other synthetic fuel entity before it was idled on May 11, 2006. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Synthetic Fuel Tax Credits” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein for further information. Also contributing to the year-to-date 2006 increase is the $45 million Alabama PSC accounting order recorded in the first quarter 2005, discussed under “Maintenance expense” above.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Southern Company’s future earnings potential. The level of future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Company’s primary business of selling electricity. These factors include the retail operating companies’ ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs. Another major factor is the profitability of the competitive market-based wholesale generating business and associated federal regulatory policy, which may impact Southern Company’s level of participation in this market. Future earnings for the electricity business in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in the service area. For additional information relating to these issues, see 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 regulations could affect earnings if such costs cannot be fully recovered in rates on a timely basis. As discussed in the Form 10-K, environmental compliance spending over the next several years may exceed amounts estimated. Some of the factors driving the anticipated increase are higher commodity costs, market demand for labor, and scope additions and clarifications. The timing, specific requirements, and estimated costs could also change as environmental regulations are modified. 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 Litigation

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 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 June 19, 2006, the U.S. District Court for the Northern District of Alabama entered a consent decree between Alabama Power and the EPA, resolving alleged NSR violations at Plant Miller. The consent decree requires Alabama Power to pay $100,000 to resolve the government’s claim for a civil penalty and donate $4.9 million of sulfur dioxide emission allowances to a nonprofit charitable organization. As a result, Alabama Power has recognized $5 million in other income (expense), net related to the consent decree. The consent decree also formalizes specific emissions reductions to be accomplished by Alabama Power, consistent with other Clean Air Act programs that require emissions reductions. On May 31, 2006, Alabama Power filed a motion for summary judgment and entry of a final order on claims related to Plants Barry, Gaston, Gorgas, and Greene County, based on the district court’s previous ruling regarding the correct legal tests and stipulations entered between the parties. The final resolution of these claims is dependent on further court action and subject to possible appeals and, therefore, cannot be determined at this time.

New Source Review Reform Rules

On October 20, 2005, the EPA published a proposed rule clarifying the test for determining when an emissions increase is subject to the NSR requirements. On March 17, 2006, the U.S. Court of Appeals for the District of Columbia Circuit vacated the EPA’s proposed rule which sought to clarify the scope of the existing Routine Maintenance, Repair, and Replacement Exclusion. Because this rule was not yet in effect, the court’s ruling is not anticipated to have any impact on Southern Company or its subsidiaries. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters – New Source Review Actions” of Southern Company in Item 7 of the Form 10-K for additional information.

Plant Wansley Environmental Litigation

On March 30, 2006, the U.S. Court of Appeals for the Eleventh Circuit ruled in favor of Georgia Power on its appeal and reversed the district court’s order regarding certain alleged opacity violations at Plant Wansley. The court of appeals remanded the case to the U.S. District Court for the Northern District of Georgia for further proceedings consistent with its decision. The ultimate outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS - - FUTURE EARNINGS POTENTIAL — “Environmental Matters — Plant Wansley Environmental Litigation” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters — Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K for additional information.

Birmingham Area Eight-Hour Ozone Attainment Redesignation

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 non-attainment designations for the eight-hour ozone air quality standard. On May 12, 2006, the EPA published a final rule approving the State of Alabama’s request to redesignate the Birmingham eight-hour ozone non-attainment area to attainment under the standard. The EPA also approved a revision to the Alabama state implementation plan, containing a maintenance plan to ensure the area’s continued compliance with the standard and to address any future exceedances of the standard. The EPA’s redesignation determination became effective on June 12, 2006.

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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 on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Each of the retail operating companies and Southern Power has authorization from the FERC to sell power to non-affiliates at market-based prices. The retail operating companies and Southern Power also have FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. On February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. A hearing before an ALJ originally scheduled for March 2006 has been held in abeyance to allow the parties to explore settlement. Any new market-based rate transactions in its retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. Such sales through May 27, 2006, the end of the 15-month refund period, were approximately $20 million for the Southern Company system. In the event that the FERC’s default mitigation measures for entities that are found to have market power are ultimately applied, the retail operating companies and Southern Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

     In addition, in May 2005, the FERC initiated an investigation to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing. The FERC established a new 15-month refund period related to this expanded investigation. Any new market-based rate transactions involving any Southern Company subsidiary will be subject to refund to the extent the FERC orders lower rates as a result of this new investigation, with the refund period beginning July 19, 2005. The impact of all such sales through June 30, 2006 is not expected to exceed $43 million, of which $17 million relates to sales inside the retail service territory discussed above. The FERC also directed that this expanded proceeding be held in abeyance pending the outcome of the proceeding on the IIC discussed below.

     Southern Company and its subsidiaries believe that there is no meritorious basis for this proceeding and are vigorously defending themselves in this matter. However, the final outcome of this matter, including any remedies to be applied in the event of an adverse ruling in this proceeding, cannot now be determined.

Intercompany Interchange Contract

Also in May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the power pool of Southern Company is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (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. The FERC order directs that the ALJ who

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presided over a proceeding involving approval of PPAs between Southern Power and Georgia Power and Savannah Electric be assigned to preside over the hearing in this proceeding and that the testimony and exhibits presented in that proceeding be preserved to the extent appropriate. Effective July 19, 2005, revenues from transactions under the IIC involving any Southern Company subsidiaries will be subject to refund to the extent the FERC orders any changes to the IIC. On April 11, 2006, Southern Company, Calpine Corporation, Coral Energy, and Dalton Utilities filed a settlement offer that would resolve the proceeding, and does not require any refunds. The ALJ has certified the settlement to the FERC, where it is pending. Since the offer is pending, the final outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS– FUTURE EARNINGS POTENTIAL – “FERC Matters – Intercompany Interchange Contract” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for additional information.

Retail Fuel Cost Recovery

The retail operating companies each have established fuel cost recovery rates approved by their respective state PSCs. In 2005 and the first six months of 2006, the retail operating companies have experienced higher than expected fuel costs for coal and gas. These higher fuel costs have increased the under recovered fuel costs included in the balance sheets to approximately $1.3 billion at June 30, 2006. 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 retail operating companies will continue to 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 March 17, 2006, Georgia Power and Savannah Electric filed a combined request for fuel cost recovery rate changes with the Georgia PSC to be effective July 1, 2006. On June 15, 2006, the Georgia PSC ruled on the combined request and approved an increase in Georgia Power’s total annual fuel billings of approximately $400 million. The Georgia PSC order provided for a combined ongoing fuel forecast but reduced the requested increase related to such forecast by $200 million. The Georgia PSC order included no disallowances of previously incurred fuel costs. Estimated under recovered fuel costs as of June 30, 2006 are to be recovered over 35 months for customers in the former Georgia Power territory and over 41 months for customers in the former Savannah Electric territory. The order also requires Georgia Power to file for a new fuel cost recovery rate on a semi-annual basis, beginning September 30, 2006. As of June 30, 2006, Savannah Electric had an under recovered fuel balance of $82 million and Georgia Power had an under recovered fuel balance of approximately $850 million. See Note (H) to the Condensed Financial Statements herein for additional information.

Storm Damage Cost Recovery

In July and August 2005, Hurricanes Dennis and Katrina, respectively, hit the Gulf Coast of the United States and caused significant damage within Southern Company’s service area, including portions of Gulf Power, Alabama Power, and Mississippi Power. Hurricane Ivan hit the Gulf coast of Florida and Alabama in September 2004, causing significant damage to the service areas of both Gulf Power and Alabama Power. Each retail operating company maintains a reserve to cover the cost of damages from major storms to its transmission and distribution lines and the cost of uninsured damages to its generation facilities and other property. In addition, each of the affected retail operating companies has been authorized by its state PSC to defer the portion of the hurricane restoration costs that exceeded the balance in its storm damage reserve account. As of June 30, 2006, the deficit balance in Southern Company’s storm damage reserve accounts totaled approximately

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

$374 million, of which approximately $68 million and $306 million, respectively, are included in the Condensed Balance Sheets herein under “Other Current Assets” and “Other Regulatory Assets.” See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters — Storm Damage Cost Recovery” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Storm Damage Cost Recovery” in Item 8 of the Form 10-K for additional information.

     In June 2006, the Mississippi PSC approved an order based upon a stipulation between Mississippi Power and the Mississippi Public Utilities Staff. The stipulation and the associated order certified actual storm restoration costs relating to Hurricane Katrina through April 30, 2006 of $267.9 million and affirmed estimated additional costs through December 31, 2007 of $34.5 million, for total storm restoration costs of $302.4 million, without offset for the property damage reserve of $3.0 million. Of the total amount, $292.8 million applies to Mississippi Power’s retail jurisdiction. The order directs Mississippi Power to file an application with the Mississippi Development Authority (MDA) for Community Development Block Grants (CDBG). The MDA has indicated that $360 million of CDBG will be available to utilities within the State of Mississippi impacted by Hurricane Katrina. All CDBG proceeds received by Mississippi Power will be applied to both retail and wholesale storm restoration costs. The retail portion of any certified restoration costs not covered by the CDBG program are expected to be funded through the state bond program previously approved by the State of Mississippi legislature. The Mississippi PSC order also indicated that the state bond program would be appropriate funding for all or a portion of a new storm operations center if approved and for an appropriate storm reserve, both of which require additional Mississippi PSC action. If state bonds are used for any portion of the Hurricane Katrina restoration costs, periodic true-up mechanisms will be structured to comply with terms and requirements from the legislation. Mississippi Power expects to file the CDBG application with the MDA in the third quarter 2006, at which time the MDA is expected to assess applications and award grants. Mississippi Power filed an application for a financing order with the Mississippi PSC on July 3, 2006 for restoration costs under the state bond program, including the property damage reserve funding and the construction of the storm operations center. The final outcome of these matters cannot now be determined. See Note (I) to the Condensed Financial Statements herein for additional information.

     In July 2006, the Florida PSC issued its order approving a stipulation and settlement between Gulf Power and several consumer groups that resolved all matters relating to Gulf Power’s request for recovery of incurred costs for storm-recovery activities, the replenishment of Gulf Power’s property damage reserve, and the related request for permission to issue $87.2 million in securitized storm-recovery bonds. The order provides for an extension of the storm-recovery surcharge currently being collected by Gulf Power for an additional 27 months, expiring in June 2009, in lieu of the requested issuance of storm-recovery bonds. According to the stipulation, the funds resulting from the extension of the current surcharge will first be credited to the unrecovered balance of storm-recovery costs associated with Hurricane Ivan until these costs have been fully recovered. The funds will then be credited to the property reserve for recovery of the storm-recovery costs of $53.3 million associated with Hurricanes Dennis and Katrina that were previously charged to the reserve. Should revenues collected by Gulf Power through the extension of the storm-recovery surcharge exceed the storm-recovery costs associated with Hurricanes Dennis and Katrina, the excess revenues will be credited to the reserve. See Note (K) to the Condensed Financial Statements herein for additional information.

Mirant Matters

Mirant was an energy company with businesses that included independent power projects and energy trading and risk management companies in the U.S. 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. In July 2003, Mirant filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code. See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Bankruptcy” in Item 8 of the Form 10-K for information regarding Southern Company’s contingent liabilities

21

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

associated with Mirant, including guarantees of contractual commitments, litigation, and joint and several liabilities in connection with the consolidated federal income tax return.

Mirant Bankruptcy Litigation

See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Bankruptcy Litigation” in Item 8 of the Form 10-K for information regarding the complaint filed in June 2005 against Southern Company alleging fraudulent activities and payments of illegal dividends prior to the spin-off. In May 2006, Southern Company filed a motion for summary judgment on all claims in the case. The ultimate outcome of this matter cannot be determined at this time.

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. 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. On March 24, 2006, the plaintiffs filed a Motion for Reconsideration requesting that the court vacate that portion of its July 14, 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 have opposed the plaintiffs’ motion. 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 Mirant bankruptcy litigation. See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Bankruptcy Litigation” in Item 8 of the Form 10-K for additional information. The ultimate outcome of these matters cannot be determined at this time.

Southern Company Employee Savings Plan Litigation

See Note 3 to the financial statements of Southern Company under “Mirant Matters – Southern Company Employee Savings Plan Litigation” in Item 8 of the Form 10-K for information related to the class action complaint filed under ERISA in June 2004, and amended in December 2004 and November 2005, on behalf of a purported class of participants in or beneficiaries of The Southern Company Employee Savings Plan at any time since April 2, 2001 and whose plan accounts included investments in Mirant common stock. In April 2006, the U.S. District Court for the Northern District of Georgia granted summary judgment in favor of Southern Company and all individually named defendants in the case. The plaintiff has filed an appeal of the ruling. The final outcome of this matter cannot be determined at this time.

Income Tax Matters

Leveraged Lease Transactions

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Income Tax Matters - Leveraged Lease Transactions” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Income Tax Matters — Leveraged Lease Transactions” in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Leveraged Lease Transactions” herein for information regarding IRS challenges to Southern Company’s transactions related to international leveraged leases that could have material impacts on Southern Company’s financial statements. In July 2006, the FASB released new guidance for the accounting for both leveraged leases and uncertain tax positions that will be effective beginning in 2007. For the lease-in-lease-out (LILO) transaction settled with the IRS in February 2005, the new standard for leveraged leases will require Southern

22

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Company to change the timing of income recognized under the lease, including a cumulative effect upon adoption of the change. Southern Company estimates such cumulative effect will reduce Southern Company’s retained earnings by approximately $17 million. The impact of these proposed changes related to the sale-in-lease-out transactions would be dependent on the outcome of pending litigation, but could be significant, and potentially material, to Southern Company’s net income. Southern Company believes these transactions are valid leases for U.S. tax purposes and the related deductions are allowable.

     In the third quarter 2006, Southern Company will pay the full amount of the disputed tax and the applicable interest and will file a claim for refund. The disputed tax amount is $79 million and the related interest is approximately $27 million. Southern Company has accounted for this payment as a deposit, and recorded the liability in the second quarter 2006. This payment will close the issue with the IRS and Southern Company will then proceed to litigate this matter. The ultimate outcome of these matters cannot now be determined.

Synthetic Fuel Tax Credits

As discussed in MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Income Tax Matters — Synthetic Fuel Tax Credits” of Southern Company in Item 7 of the Form 10-K, Southern Company has made investments in two entities that produce synthetic fuel and receive tax credits under Section 45K (formerly Section 29) of the IRC. In accordance with Section 45K of the IRC, these tax credits are subject to limitation as the annual average price of oil (as determined by the DOE) increases over a specified, inflation-adjusted dollar amount published in the spring of the subsequent year. Southern Company, along with its partners in these investments, has continued to monitor oil prices. Reserves against these tax credits of $36 million have been recorded in the first half of 2006 due to projected phase-outs of the credits in 2006 as a result of current and projected future oil prices. See Note (J) to the Condensed Financial Statements herein for additional information regarding the impact of these reserves on the effective tax rate.

     On May 11, 2006, production at one of the synthetic fuel investments was idled due to continued uncertainty over the value of tax credits. In addition, Southern Company entered into an agreement in June 2006 which terminated its ownership interest in its other synthetic fuel investment effective July 1, 2006. Also in June 2006, Southern Company entered into derivative transactions designed to reduce its exposure to changes in the value of tax credits associated with its synthetic fuel investments. The derivative transactions will be marked to market over the remainder of the year through other income (expense), net. As a result of these actions and the projected continued phase out of tax credits because of high oil prices, the investments in these two synthetic fuel entities were considered fully impaired and approximately $15.3 million was written off at June 30, 2006. This write-off is reflected in the line item “Impairment loss on equity method investments” on the income statement herein. See Note (F) to the Condensed Financial Statements herein for additional information regarding the impact of these derivatives. The final outcome of these matters cannot now be determined.

Other Matters

See Note 3 to the financial statements of Southern Company under “Plant Franklin Construction Project” in Item 8 of the Form 10-K for information on the suspension of construction activities. On May 6, 2006, Southern Power signed a PPA with Progress Ventures, Inc. for 621 MW of capacity from Plant Franklin. The PPA term is from 2009 through 2015. To provide this capacity, Southern Power expects to complete construction of Franklin Unit 3 at a total cost of approximately $351 million, of which $172 million had been spent as of June 30, 2006. Construction is expected to be complete in 2008.

     On March 16, 2006, a subsidiary of Southern Company entered into a development agreement with Duke Energy Corporation (Duke) to evaluate the potential construction of a new two-unit nuclear plant at a jointly owned site in Cherokee County, South Carolina. If constructed, Southern Company would own an interest in

23

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unit 1, representing approximately 500 MW. Duke will be the developer and licensed operator of any plant built at the site.

     Southern Company is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Southern Company’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements such as opacity and other air 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.

     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. Also see MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES - “Application of Critical Accounting Policies and Estimates” of Southern Company in Item 7 of the Form 10-K for a complete discussion of Southern Company’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.

New Accounting Standards

Stock Options

On January 1, 2006, Southern Company adopted FASB Statement No. 123(R), “Share-Based Payment,” using the modified prospective method. This statement requires that compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. Although the compensation expense required under the revised statement differs slightly, the impacts on Southern Company’s financial statements are similar to the pro forma disclosures previously included in Note 1 to the financial statements of Southern Company under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein.

Income Taxes

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” This interpretation requires that tax benefits must be “more likely than not” of being sustained in order to be recognized. The provisions of FIN 48 must be applied to all tax positions beginning January 1, 2007. Southern Company is currently assessing the impact of FIN 48. The impact on Southern Company’s financial statements has not yet been determined.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Leveraged Leases

Also in July 2006, the FASB issued FASB Staff Position No. FAS 13-2 (FSP 13-2), “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction.” This staff position amends SFAS No. 13, “Accounting for Leases” to require recalculation of the rate of return and the allocation of income whenever the projected timing of the income tax cash flows generated by a leveraged lease is revised. Southern Company plans to adopt FSP 13-2 on January 1, 2007. This adoption will require Southern Company to recognize a cumulative effect of $17 million to retained earnings as of January 1, 2007 related to the LILO transaction settled with the IRS in February 2005. See FUTURE EARNINGS POTENTIAL under “Income Tax Matters” above and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Leveraged Lease Transactions” herein for further details about the effect of FSP 13-2.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Net cash flow from operating activities totaled $744 million for first six months of 2006, compared to $796 million for the corresponding period in 2005. The $53 million decrease is primarily due to increases in fuel and storm damage costs and discontinued operations associated with the sale of Southern Company Gas assets. For additional information regarding the sale of Southern Company Gas assets, see Note (B) to the Condensed Financial Statements herein under “SOUTHERN COMPANY GAS SALE.” Gross property additions to utility plant were $1.2 billion in the first six months of 2006.

     Significant balance sheet changes include a $339 million increase in long-term debt for the first six months of 2006 primarily for general corporate purposes. Property, plant, and equipment increased $481 million during the first six months of 2006 primarily from routine additions and plant acquisitions. See Note (L) to the Condensed Financial Statements herein for additional information on the DeSoto acquisition.

     The market price of Southern Company’s common stock at June 30, 2006 was $32.05 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $14.62 per share, representing a market-to-book ratio of 219%, compared to $34.53, $14.42, and 240%, respectively, at the end of 2005. The dividend for the second quarter 2006 was $0.3875 per share compared to $0.3725 per share in the second quarter 2005.

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

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Capital Requirements and Contractual Obligations” of Southern Company in Item 7 of the Form 10-K for a description of Southern Company’s capital requirements for its construction program and other funding requirements associated with scheduled maturities of long-term debt, as well as the related interest, preferred and preference stock dividends, leases, trust funding requirements, and other purchase commitments. Approximately $993 million will be required by June 30, 2007 for redemptions and maturities of long-term debt.

25

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 amounts and timing of additional equity capital to be raised will be contingent on Southern Company’s investment opportunities. The retail operating companies and Southern Power plan to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from operating cash flows, with short-term debt and external security issuances providing additional funds. However, the amount, type, and timing of any financings, if needed, will depend upon maintenance of adequate earnings, prevailing market conditions, regulatory approval, and other factors. Mississippi Power is considering other sources of funding for storm recovery costs. 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, the Southern Company system had at June 30, 2006 approximately $263 million of cash and cash equivalents and approximately $3.3 billion of unused credit arrangements with banks, of which $495 million expire in 2006 and $2.8 billion expire in 2007 and beyond. Of the facilities maturing in 2006, $275 million contain provisions allowing one-year term loans executable at the expiration date and $148 million contain provisions allowing two-year term loans executable at the expiration date. These unused credit arrangements also provide liquidity support to variable rate pollution control bonds and commercial paper programs. Subsequent to June 30, 2006, Southern Company and its subsidiaries refinanced a portion of these facilities with approximately $2.4 billion of facilities maturing in 2011, increasing total unused credit arrangements to approximately $3.5 billion. Southern Company expects to renew its credit facilities, as needed, prior to expiration. 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. The retail operating companies may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of each of the retail operating companies. At June 30, 2006, the Southern Company system had outstanding commercial paper of $1.4 billion, bank notes of $375 million, and extendible commercial notes of $74 million. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.

Off-Balance Sheet Financing Arrangements

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

Credit Rating Risk

Southern Company does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB and Baa2, or BBB- or Baa3 or below. These contracts are primarily for physical electricity purchases and sales. At June 30, 2006, the maximum potential collateral requirements at a BBB and Baa2 rating were approximately $9 million and at a BBB- or Baa3 rating were approximately $239 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $662 million. Generally, collateral may be provided by a

26

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Southern Company guaranty, letter of credit, or cash. Southern Company’s operating subsidiaries are also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas price risk management activities. At June 30, 2006, Southern Company’s total exposure to these types of agreements was approximately $14.2 million.

Market Price Risk

Southern Company’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2005 reporting period. In addition, Southern Company is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

     Due to cost-based rate regulations, the retail operating companies have limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. In addition, Southern Power’s exposure to market volatility in commodity fuel prices and prices of electricity is limited because its long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. To mitigate residual risks relative to movements in electricity prices, the retail operating companies and Southern Power enter into 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 retail operating companies have implemented fuel-hedging programs at the instruction of their respective state PSCs. The fair value of derivative energy contracts at June 30, 2006 was as follows:

	Second Quarter			Year-to-Date
	2006			2006
	Changes			Changes
	Fair Value
	(in millions)
Contracts beginning of period	$	(35.0	)	$	100.5
Contracts realized or settled		28.3			12.4
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		(50.9	)		(170.5	)
Contracts at June 30, 2006	$	(57.6	)	$	(57.6	)

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

	Source of June 30, 2006
	Valuation Prices
	Total			Maturity
	Fair Value			Year 1			1-3 Years
	(in millions)
Actively quoted	$	(60.0	)	$	(64.8	)	$	4.8
External sources		2.4			2.4			—
Models and other methods		—			—			—
Contracts at June 30, 2006	$	(57.6	)	$	(62.4	)	$	4.8

     Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to the retail operating companies’ fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through the retail operating companies’ fuel cost recovery clauses. In addition, unrealized gains and losses on energy-related derivatives used by Southern Power to hedge anticipated purchases and sales are deferred in other comprehensive income. Gains and losses on derivative contracts that are not designated as hedges are recognized in the income

27

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

statement as incurred. At June 30, 2006, the fair value gain / (loss) of derivative energy contracts was reflected in the financial statements as follows:

	Amounts
	(in millions)
Regulatory assets, net	$	(60.2	)
Accumulated other comprehensive income		1.6
Net income		1.0
Total fair value loss	$	(57.6	)

     Unrealized pre-tax gains and losses recognized in income were not material for any period presented.

     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 six months of 2006, Southern Company and its subsidiaries issued $950 million of senior notes and $10 million of obligations related to pollution control revenue bonds, settled $630 million notional amount of related interest rate hedges at a gain of $20 million, and issued $20 million of common stock, including treasury stock, through employee and director stock plans. The proceeds were primarily used to refund senior notes and pollution control revenue bonds and to fund ongoing construction projects. The remainder was used to repay short-term indebtedness. Approximately $18 million of the hedge gain will be deferred in other comprehensive income and amortized to income over a 10-year period. The remaining $2 million related to a discontinued hedge and was recognized immediately in income through interest expense. See Southern Company’s Condensed Consolidated Statements of Cash Flows herein for further details on financing activities during the first six months of 2006.

     In July 2006, Georgia Power incurred obligations in connection with the issuance of $67 million 4.40% Pollution Control Revenue Bonds and $48.7 million 4.90% Pollution Control Revenue Bonds. Proceeds from the sales will be used for the legal defeasance and redemption in August 2006 of $67 million of 5.0% and $48.7 million of 5.25% Pollution Control Revenue Bonds.

     During the second quarter 2006, Southern Company and its subsidiaries entered into derivative transactions designed to hedge interest rate risk of future debt issuances. The total notional amount of these derivatives was $480 million. See Note (F) to the Condensed Financial Statements herein for further details.

     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, Notes 1 and 6 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power and Notes 1 and 5 to the financial statements of 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, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power conducted separate evaluations under the supervision and with the participation of each company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon these evaluations, the Chief Executive Officer and the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures are effective in alerting them in a timely manner to material information relating to their company (including its consolidated subsidiaries, if any) required to be included in periodic filings with the SEC.

     (b) Changes in internal controls.

     There have been no changes in Southern Company’s, Alabama Power’s, Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the second quarter of 2006 that have materially affected or are reasonably likely to materially affect Southern Company’s, Alabama Power’s, Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s internal control over financial reporting.

29

ALABAMA POWER COMPANY

30

ALABAMA POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006			2005
	(in thousands)						(in thousands)
Operating Revenues:
Retail revenues	$	1,026,643		$	863,155		$	1,828,852		$	1,572,241
Sales for resale —
Non-affiliates		156,328			130,598			302,682			245,012
Affiliates		26,098			47,934			105,413			155,220
Other revenues		40,355			44,152			85,184			83,102
Total operating revenues		1,249,424			1,085,839			2,322,131			2,055,575
Operating Expenses:
Fuel		419,176			323,328			760,943			623,148
Purchased power —
Non-affiliates		32,618			34,316			54,704			58,182
Affiliates		89,073			61,487			145,738			109,785
Other operations		176,059			168,987			345,072			315,277
Maintenance		96,947			80,858			206,447			204,412
Depreciation and amortization		112,295			101,019			222,157			209,510
Taxes other than income taxes		65,286			62,985			130,943			125,534
Total operating expenses		991,454			832,980			1,866,004			1,645,848
Operating Income		257,970			252,859			456,127			409,727
Other Income and (Expense):
Allowance for equity funds used during construction		3,835			4,785			9,364			10,439
Interest income		3,868			4,001			8,042			7,569
Interest expense, net of amounts capitalized		(59,074	)		(50,415	)		(112,293	)		(96,722	)
Interest expense to affiliate trusts		(4,060	)		(4,060	)		(8,119	)		(8,119	)
Other income (expense), net		(728	)		(1,032	)		(9,733	)		(3,837	)
Total other income and (expense)		(56,159	)		(46,721	)		(112,739	)		(90,670	)
Earnings Before Income Taxes		201,811			206,138			343,388			319,057
Income taxes		77,634			78,573			130,997			92,018
Net Income		124,177			127,565			212,391			227,039
Dividends on Preferred Stock		6,072			6,072			12,144			12,144
Net Income After Dividends on Preferred Stock	$	118,105		$	121,493		$	200,247		$	214,895

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006			2005
	(in thousands)						(in thousands)
Net Income After Dividends on Preferred Stock	$	118,105		$	121,493		$	200,247		$	214,895
Other comprehensive income (loss):
Changes in fair value of qualifying hedges, net of tax of $910, $(4,490), $2,383, and $(5,203), respectively		1,497			(7,386	)		3,920			(8,558	)
Reclassification adjustment for amounts included in net income, net of tax of $(1,009), $(347), $(2,015), and $(281), respectively		(1,660	)		(569	)		(3,314	)		(461	)
COMPREHENSIVE INCOME	$	117,942		$	113,538		$	200,853		$	205,876

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

31

ALABAMA POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months
	Ended June 30,
	2006			2005
	(in thousands)
Operating Activities:
Net income	$	212,391		$	227,039
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		257,676			247,403
Deferred income taxes and investment tax credits, net		(6,511	)		17,335
Deferred revenues		(599	)		(6,689	)
Allowance for equity funds used during construction		(9,364	)		(10,439	)
Pension, postretirement, and other employee benefits		(3,134	)		(5,973	)
Stock option expense		4,002			—
Tax benefit of stock options		184			13,373
Hedge settlements		18,006			(21,445	)
Storm damage accounting order		—			45,000
Other, net		(20,864	)		(10,632	)
Changes in certain current assets and liabilities —
Receivables		33,917			(41,345	)
Fossil fuel stock		(33,100	)		(61,777	)
Materials and supplies		(2	)		(5,975	)
Other current assets		(6,877	)		6,086
Accounts payable		(156,487	)		(92,512	)
Accrued taxes		41,031			(11,344	)
Accrued compensation		(53,489	)		(29,589	)
Other current liabilities		23,924			26,527
Net cash provided from operating activities		300,704			285,043
Investing Activities:
Property additions		(416,892	)		(365,016	)
Nuclear decommisioning trust fund purchases		(143,829	)		(119,588	)
Nuclear decommisioning trust fund sales		143,829			119,588
Cost of removal net of salvage		(22,296	)		(25,453	)
Other		(14,547	)		(4,934	)
Net cash used for investing activities		(453,735	)		(395,403	)
Financing Activities:
Decrease in notes payable, net		(315,278	)		—
Proceeds —
Common stock issued to parent		40,000			40,000
Senior notes		950,000			250,000
Gross excess tax benefit of stock options		368			—
Redemptions —
Pollution control bonds		(2,950	)		—
Senior notes		(196,500	)		—
Payment of preferred stock dividends		(12,140	)		(10,815	)
Payment of common stock dividends		(220,300	)		(204,950	)
Other		(21,866	)		(2,438	)
Net cash provided from financing activities		221,334			71,797
Net Change in Cash and Cash Equivalents		68,303			(38,563	)
Cash and Cash Equivalents at Beginning of Period		22,472			79,711
Cash and Cash Equivalents at End of Period	$	90,775		$	41,148
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $3,988 and $4,133 capitalized for 2006 and 2005, respectively)	$	127,055		$	81,932
Income taxes (net of refunds)	$	122,089		$	84,604

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

32

ALABAMA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Assets	2006			2005
	(in thousands)
Current Assets:
Cash and cash equivalents	$	90,775		$	22,472
Receivables —
Customer accounts receivable		322,304			275,702
Unbilled revenues		110,969			95,039
Under recovered regulatory clause revenues		104,956			132,139
Other accounts and notes receivable		48,339			50,008
Affiliated companies		21,192			77,304
Accumulated provision for uncollectible accounts		(7,753	)		(7,560	)
Fossil fuel stock, at average cost		150,715			102,420
Vacation pay		45,094			44,893
Materials and supplies, at average cost		229,955			244,417
Prepaid expenses		79,341			58,845
Other regulatory assets		66,571			43,621
Other		19,435			54,885
Total current assets		1,281,893			1,194,185
Property, Plant, and Equipment:
In service		15,774,064			15,300,346
Less accumulated provision for depreciation		5,483,598			5,313,731
		10,290,466			9,986,615
Nuclear fuel, at amortized cost		116,766			127,199
Construction work in progress		359,731			469,018
Total property, plant, and equipment		10,766,963			10,582,832
Other Property and Investments:
Equity investments in unconsolidated subsidiaries		47,561			46,913
Nuclear decommissioning trusts, at fair value		473,097			466,963
Other		40,608			41,457
Total other property and investments		561,266			555,333
Deferred Charges and Other Assets:
Deferred charges related to income taxes		381,355			388,634
Prepaid pension costs		527,141			515,281
Deferred under recovered regulatory clause revenues		194,640			186,864
Other regulatory assets		104,894			122,378
Other		160,670			144,400
Total deferred charges and other assets		1,368,700			1,357,557
Total Assets	$	13,978,822		$	13,689,907

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

33

ALABAMA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Liabilities and Stockholder’s Equity		2006			2005
	(in thousands)
Current Liabilities:
Securities due within one year	$	518,674		$	546,645
Notes payable		—			315,278
Accounts payable —
Affiliated		164,624			190,744
Other		150,727			266,174
Customer deposits		60,609			56,709
Accrued taxes —
Income taxes		21,619			63,844
Other		73,533			31,692
Accrued interest		55,808			46,018
Accrued vacation pay		37,646			37,646
Accrued compensation		39,295			92,784
Other		78,117			72,991
Total current liabilities		1,200,652			1,720,525
Long-term Debt		4,335,465			3,560,186
Long-term Debt Payable to Affiliated Trusts		309,279			309,279
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		2,100,519			2,070,746
Deferred credits related to income taxes		99,810			101,678
Accumulated deferred investment tax credits		192,583			196,585
Employee benefit obligations		221,993			208,663
Asset retirement obligations		458,753			446,268
Other cost of removal obligations		588,050			600,104
Other regulatory liabilities		161,452			194,135
Other		27,293			23,966
Total deferred credits and other liabilities		3,850,453			3,842,145
Total Liabilities		9,695,849			9,432,135
Preferred Stock		465,046			465,046
Common Stockholder’s Equity:
Common stock, par value $40 per share —
Authorized — June 30, 2006: 25,000,000 shares
— December 31, 2005: 15,000,000 shares
Outstanding — June 30, 2006: 10,250,000 shares
— December 31, 2005: 9,250,000 shares		410,000			370,000
Paid-in capital		1,999,700			1,995,056
Retained earnings		1,419,095			1,439,144
Accumulated other comprehensive loss		(10,868	)		(11,474	)
Total common stockholder’s equity		3,817,927			3,792,726
Total Liabilities and Stockholder’s Equity	$	13,978,822		$	13,689,907

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

34

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SECOND QUARTER 2006 vs. SECOND QUARTER 2005
AND
YEAR-TO-DATE 2006 vs. YEAR-TO-DATE 2005

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 business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover rising costs related to growing demand and increasingly stringent environmental standards.

     Alabama Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS — OVERVIEW — “Key Performance Indicators” of Alabama Power in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Alabama Power’s net income after dividends on preferred stock for the second quarter and year-to-date 2006 was $118.1 million and $200.2 million, respectively, compared to $121.5 million and $214.9 million, respectively, for the corresponding periods of 2005. Earnings in the second quarter 2006 decreased by $3.4 million, or 2.8%, and earnings year-to-date 2006 decreased by $14.7 million, or 6.8%. Excluding the offsetting natural disaster reserve impacts recorded in the first quarter 2005 (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), the decrease in year-to-date earnings was primarily due to increases in other operations expense, interest expense, and depreciation and amortization expense and the consent decree agreement with the EPA (as described in “Other income (expense), net” below). These increases in expense were partially offset by an increase in retail base-rate revenues due to favorable weather conditions during 2006 and a 1.2% increase in retail rates that took effect January 1, 2006 under Alabama Power’s environmental rate order approved by the Alabama PSC. See 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.

35

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

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Second Quarter						Year-to-Date
	(in thousands)			%			(in thousands)			%
Retail revenues	$	163,488			18.9		$	256,611			16.3
Sales for resale-non-affiliates		25,730			19.7			57,670			23.5
Sales for resale-affiliates		(21,836	)		(45.6	)		(49,807	)		(32.1	)
Fuel expense		95,848			29.6			137,795			22.1
Purchased power-non-affiliates		(1,698	)		(4.9	)		(3,478	)		(6.0	)
Purchased power-affiliates		27,586			44.9			35,953			32.7
Other operations expense		7,072			4.2			29,795			9.5
Maintenance expense		16,089			19.9			2,035			1.0
Depreciation and amortization		11,276			11.2			12,647			6.0
Interest expense, net of amounts capitalized.		8,659			17.2			15,571			16.1
Other income (expense), net		304			29.5			(5,896	)		(153.7	)
Income taxes		(939	)		(1.2	)		38,979			42.4

     Retail revenues. The chart below reflects the primary drivers of the 18.9% increase in retail revenues in the second quarter 2006 compared to the same period in the prior year and the 16.3% increase in retail revenues year-to-date compared to the corresponding period in 2005. Energy and other cost recovery revenues which include the recovery of costs associated with fuel, purchased power and PPAs certified by the Alabama PSC, and revenues associated with the replenishment of Alabama Power’s natural disaster reserve, generally do not affect net income. Excluding these revenues, retail revenues increased by $30.0 million, or 5.2%, for the second quarter 2006 and $62 million, or 5.6%, year-to-date 2006 when compared to the corresponding periods in 2005. These increases were primarily due to a 4.0% increase and a 2.6% increase in KWH energy sales for the second quarter and year-to-date 2006 when compared to corresponding periods in 2005, as well as the retail rate increase implemented in January 2006 to recover environmental costs. 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 CNP” in Item 8 of the Form 10-K. KWH energy sales to residential and commercial customers increased 10.7% and 4.9%, respectively, for the second quarter 2006 and increased 6.0% and 3.5%, respectively, year-to-date 2006 when compared to the corresponding periods in 2005 due to favorable weather conditions. KWH energy sales to industrial customers decreased 1.0% for the second quarter 2006 and decreased 0.3% year-to-date 2006 when compared to the corresponding periods of 2005 as a result of decreased sales demand in the textile and chemical sectors.

     Details of retail revenues are as follows:

	Second Quarter						Year-to-Date
	2006						2006
	(in millions)			% change			(in millions)		% change
Retail – prior year	$	863					$	1,572
Change in —
Base rates		9			1.0			19		1.2
Sales growth		(4	)		(0.5	)		19		1.2
Weather		25			2.9			24		1.5
Energy cost recovery		119			13.8			169		10.7
Other cost recovery		15			1.7			26		1.7
Retail – current year	$	1,027			18.9	%	$	1,829		16.3	%

36

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

     Sales for resale — non-affiliates. Energy sales to 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 second quarter 2006, revenues from sales for resale to non-affiliates increased $25.7 million when compared to the same period in 2005 primarily due to a 7.7% increase in price and an 11.2% increase in KWH sales. Year-to-date 2006, revenues from sales for resale to non-affiliates increased $57.7 million primarily due to a 20.2% increase in price while KWH sales remained relatively flat. The 2006 price increases are generally the result of increased costs for both coal and natural gas. These transactions did not have a significant impact on earnings since energy is usually sold at variable cost.

     Sales for resale — affiliates. Energy sales to affiliated companies within the Southern Company system vary from period to period depending on demand and the availability and cost of generating resources at each company. These sales are made in accordance with the IIC, as approved by the FERC. In the second quarter 2006, revenues from sales for resale to affiliates decreased $21.8 million when compared to the same period in 2005 primarily due to a 51.7% decrease in KWH sales to affiliates offset by a 12.8% increase in price. Year-to-date 2006, revenues from sales for resale to affiliates decreased $49.8 million due to a 35.9% decrease in KWH sales to affiliates offset by a 5.9% increase in price. These decreases in revenues from sales to affiliates are a result of a decrease in availability of Alabama Power’s generating resources for such sales due to increased KWH sales growth in Alabama Power’s service territory during 2006. These transactions did not have a significant impact on earnings since energy is generally sold at marginal cost.

     Fuel expense, purchased power — non-affiliates, and purchased power – affiliates. Total fuel and purchased power expense increased $121.7 million in the second quarter 2006 and $170.3 million year-to-date 2006 when compared to the corresponding periods in 2005. These increases are due to $74.8 million and $156.2 million increases in the cost of fuel, respectively, and $46.9 million and $14.1 million increases related to greater KWHs generated and purchased, respectively. Details of the individual components follow.

Fuel expense was $95.8 million higher in the second quarter of 2006 when compared to the corresponding period in 2005 due to a 26.6% increase in natural gas prices, a 12.0% increase in the average cost of coal, and a 3.9% increase in overall generation from Alabama Power-owned facilities. The year-to-date 2006 increase in fuel expense of $137.8 million is mainly due to a 27.6% increase in natural gas prices and a 14.4% increase in the average cost of coal. Overall generation from Alabama Power-owned facilities remained relatively flat for the first six months of 2006 compared to 2005. These transactions did not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Alabama Power’s energy cost recovery clause.

Purchased power from non-affiliates will vary depending on market cost of available energy being lower than Southern Company system generated energy, demand for energy within the service territory, and availability of Southern Company system generation. Year-to-date 2006, purchased power from non-affiliates decreased $3.5 million when compared to the same period in 2005 mainly due to a 14.0% decrease in energy purchased partially offset by a 9.3% increase in price. These transactions did not have a significant impact on earnings since energy purchases are generally offset by energy revenues through Alabama Power’s energy cost recovery clause.

Purchased power 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. Purchased power from affiliates increased $27.6 million in the second quarter 2006 compared to the same period in 2005 due to a 44.8% increase in the amount of energy purchased as a result of increased demand within Alabama Power’s service territory. Year-to-date 2006, purchased power

37

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

from affiliates increased $36.0 million when compared to the same period in 2005 mainly due to a 24.2% increase in the amount of energy purchased as a result of increased demand and a 6.9% increase in price primarily resulting from increased fuel costs. These transactions did not have a significant impact on earnings since energy purchases are generally offset by energy revenues through Alabama Power’s energy cost recovery clause.

     Other operations expense. The year-to-date 2006 increase in other operations expense of $29.8 million is primarily due to an $11.8 million increase in administrative and general expenses chiefly related to a $6.0 million increase in outside service expenses and a $4.1 million increase in employee benefits. In addition, year-to-date 2006 other operations expense increased due to a $4.3 million increase in steam power expenses related primarily to engineering and supervision charges and rent expense, a $4.3 million increase in nuclear power expenses related to regulatory fees and labor costs, a $2.9 million increase in transmission expense associated with external electric purchases and system planning, and a $1.9 million increase in distribution expenses related to engineering and supervision charges.

     Maintenance expense. Maintenance expense increased $16.1 million for the second quarter 2006 when compared to the same period in 2005 due to a $14.3 million increase in transmission and distribution expenses primarily associated with the 2006 natural disaster reserve accrual and amortization of deferred storm expense. Year-to-date 2006, maintenance expense only increased $2.0 million when compared to the same period in 2005 primarily due to the recording of $45 million additional transmission and distribution expense in 2005 as a result of the Alabama PSC accounting order to offset the costs of the damage from Hurricane Ivan in September 2004 and to restore a balance in the natural disaster reserve. See 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 “Natural Disaster Cost Recovery” in Item 8 of the Form 10-K. Excluding the natural disaster reserve impacts of the 2005 accounting order, maintenance expense increased $47.0 million year-to-date 2006 when compared to the same period in 2005. This increase was due to a $28.2 million increase in transmission and distribution expenses primarily associated with the 2006 natural disaster reserve accrual, amortization of deferred storm expense, and maintenance of station equipment, and an $8.6 million increase in steam expense associated with outage maintenance cost at various coal-fired facilities. In addition, nuclear power maintenance expense increased $5.1 million, administrative and general maintenance expense increased $2.2 million, other power generation maintenance expense increased $2.0 million, and hydro maintenance expense increased $1.0 million.

     Depreciation and amortization. The increases of $11.3 million and $12.6 million in depreciation and amortization expense for the second quarter and year-to-date 2006, respectively, when compared to the same periods in 2005 are primarily attributed to an increase in the 2006 property, plant, and equipment related to steam and distribution capital projects.

     Interest expense, net of amounts capitalized. The increases of $8.7 million and $15.6 million in interest expense, net of amounts capitalized for the second quarter and year-to-date 2006, respectively, when compared to the same periods in 2005 are primarily due to a $426 million increase of long-term debt outstanding at June 30, 2006 when compared to June 30, 2005. For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Financing Activities” of Alabama Power in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY – “Financing Activities” herein.

     Other income (expense), net. Year-to-date 2006, other income, net decreased $5.9 million when compared to year-to-date 2005 mainly due to the consent decree entered into in June 2006 with the EPA in the NSR litigation. See FUTURE EARNINGS POTENTIAL — “Environmental Matters — New Source Review Litigation” and Note (B) to the Condensed Financial Statements herein for additional information.

38

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

     Income taxes. Year-to-date 2006, income tax expense increased $39.0 million when compared to the corresponding period in 2005. In accordance with the Alabama PSC accounting order described above under “Maintenance expense,” Alabama Power returned $27.7 million of regulatory liabilities related to deferred income taxes to its retail customers in 2005. The remainder of the increase in income tax expense for year-to-date 2006 compared to the same period in 2005 primarily reflects the $17.3 million tax effect of the additional maintenance expenses recorded under the accounting order in 2005. 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 Form 10-K and Note (J) to the Condensed Financial Statements herein for additional information.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Alabama Power’s future earnings potential. The level of future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Alabama Power’s business of selling electricity. These factors include Alabama Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred 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 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 regulations could affect earnings if such costs cannot be fully recovered in rates on a timely basis. As discussed in the Form 10-K, environmental compliance spending over the next several years may exceed amounts estimated. Some of the factors driving the anticipated increase are higher commodity costs, market demand for labor, and scope additions and clarifications. The timing, specific requirements, and estimated costs could also change as environmental regulations are modified. 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 Litigation

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 June 19, 2006, the U.S. District Court for the Northern District of Alabama entered a consent decree between Alabama Power and the EPA, resolving alleged NSR violations at Plant Miller. The consent decree requires Alabama Power to pay $100,000 to resolve the government’s claim for a civil penalty and donate $4.9 million of sulfur dioxide emission allowances to a nonprofit charitable organization. As a result, Alabama Power has recognized $5 million in other income (expense), net related to the consent decree. The consent decree also formalizes specific emissions reductions to be accomplished by Alabama Power, consistent with other Clean Air Act programs that require emissions reductions. On May 31,

39

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

2006, Alabama Power filed a motion for summary judgment and entry of a final order on claims related to Plants Barry, Gaston, Gorgas, and Greene County, based on the district court’s previous ruling regarding the correct legal tests and stipulations entered between the parties. The final resolution of these claims is dependent on further court action and subject to possible appeals and, therefore, cannot be determined at this time.

New Source Review Reform Rules

On October 20, 2005, the EPA published a proposed rule clarifying the test for determining when an emissions increase is subject to the NSR requirements. On March 17, 2006, the U.S. Court of Appeals for the District of Columbia Circuit vacated the EPA’s proposed rule which sought to clarify the scope of the existing Routine Maintenance, Repair, and Replacement Exclusion. Because this rule was not yet in effect, the court’s ruling is not anticipated to have any impact on Alabama Power. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters – New Source Review Actions” of Alabama Power in Item 7 of the Form 10-K for additional information.

Birmingham Area Eight-Hour Ozone Attainment Redesignation

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 non-attainment designations for the eight-hour ozone air quality standard. On May 12, 2006, the EPA published a final rule approving the State of Alabama’s request to redesignate the Birmingham eight-hour ozone non-attainment area to attainment under the standard. The EPA also approved a revision to the Alabama state implementation plan, containing a maintenance plan to ensure the area’s continued compliance with the standard and to address any future exceedances of the standard. The EPA’s redesignation determination became effective on June 12, 2006.

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 on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Alabama Power has authorization from the FERC to sell power to non-affiliates at market-based prices. Alabama Power also has FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. On February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. A hearing before an ALJ originally scheduled for March 2006 has been held in abeyance to allow the parties to explore settlement. Any new market-based rate transactions in its retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. Such sales through May 27, 2006, the end of the 15-month refund period, were approximately $4 million for Alabama Power. In the event that the FERC’s default mitigation measures for entities that are found to have market power are ultimately applied, Alabama Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

40

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

     In addition, in May 2005, the FERC initiated an investigation to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing. The FERC established a new 15-month refund period related to this expanded investigation. Any new market-based rate transactions involving any Southern Company subsidiary will be subject to refund to the extent the FERC orders lower rates as a result of this new investigation, with the refund period beginning July 19, 2005. The impact of such sales involving Alabama Power through June 30, 2006 is not expected to exceed $11.6 million, of which $3.4 million relates to sales inside the retail service territory discussed above. The FERC also directed that this expanded proceeding be held in abeyance pending the outcome of the proceeding on the IIC discussed below.

     Alabama Power believes that there is no meritorious basis for this proceeding and is vigorously defending itself in this matter. However, the final outcome of this matter, including any remedies to be applied in the event of an adverse ruling in this proceeding, cannot now be determined.

Intercompany Interchange Contract

Also in May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the power pool of Southern Company is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (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. The FERC order directs that the ALJ who presided over a proceeding involving approval of PPAs between Southern Power and Georgia Power and Savannah Electric be assigned to preside over the hearing in this proceeding and that the testimony and exhibits presented in that proceeding be preserved to the extent appropriate. Effective July 19, 2005, revenues from transactions under the IIC involving any Southern Company subsidiaries will be subject to refund to the extent the FERC orders any changes to the IIC. On April 11, 2006, Southern Company, Calpine Corporation, Coral Energy, and Dalton Utilities filed a settlement offer that would resolve the proceeding, and does not require any refunds. The ALJ has certified the settlement to the FERC, where it is pending. Since the offer is pending, the final outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS— FUTURE EARNINGS POTENTIAL — “FERC Matters – Intercompany Interchange Contract” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for additional information.

Retail Fuel Cost Recovery

Alabama Power has established fuel cost recovery rates approved by the Alabama PSC. Alabama Power’s under recovered fuel costs as of June 30, 2006 totaled $278.0 million as compared to $285.1 million at December 31, 2005. Alabama Power increased its fuel billing factor in January 2006 in accordance with Rate ECR. Alabama Power will continue to monitor the under recovered fuel cost balance to determine if an additional adjustment to billing rates should be requested from the Alabama PSC. See MANAGEMENT’S DISCUSSION AND ANALYSIS — 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 additional information.

41

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

Other Matters

Alabama Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Alabama Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements such as opacity and other air 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 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

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

New Accounting Standards

Stock Options

On January 1, 2006, Alabama Power adopted FASB Statement No. 123(R), “Share-Based Payment,” using the modified prospective method. This statement requires that compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. Although the compensation expense required under the revised statement differs slightly, the impacts on Alabama Power’s financial statements are similar to the pro forma disclosures previously included in Note 1 to the financial statements of Alabama Power under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein.

Income Taxes

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” This interpretation requires that tax benefits must be “more likely than not” of being sustained in order to be recognized. The provisions of FIN 48 must be applied to all tax positions beginning January 1, 2007. Alabama Power is currently assessing the impact of FIN 48. The impact on Alabama Power’s financial statements has not yet been determined.

42

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 June 30, 2006. Net cash flows from operating activities totaled $300.7 million for the first six months of 2006, compared to $285.0 million for the first six months of 2005. The $15.7 million increase in the first six months of 2006 relates to a decrease in under recovered fuel cost receivable due to higher recovery rates, favorable financial hedge settlements, and an increase in the accrued tax liability. These positive changes were partially offset by a decrease in accounts payable resulting from increased expenditures accrued in the fourth quarter 2005 that were paid in the first quarter 2006 and a decrease in deferred income tax expense. The changes in the accrued tax liability and deferred income tax expense are due to the reversal of prior favorable timing differences. Property additions to utility plant were $416.9 million in the first six months of 2006 and are included in the balance sheets herein.

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 related interest, preferred stock dividends, lease obligations, purchase commitments, and trust funding requirements. In the second quarter, Alabama Power renewed railcar leases representing 33% of the total railcar fleet. These leases have an estimated minimum rental commitment of $27 million over the additional four-year term and contain residual value guarantees with a potential maximum obligation of $49 million. Approximately $519 million will be required through June 30, 2007 for redemptions and maturities of long-term debt.

     Alabama Power has entered into three new contracts for the purchase of uranium concentrates and uranium enrichment services at Plant Farley that result in additional obligations of approximately $23 million in 2007 through 2008, $34 million in 2009 through 2010, and $64 million thereafter. These costs are expected to be recovered through Alabama Power’s fuel cost recovery clause. See Note 7 to the financial statements of Alabama Power under “Fuel Commitments” in Item 8 of the Form 10-K for additional information.

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, which were primarily operating cash flows, with capital contributions from Southern Company, short-term debt, and external security issuances providing additional funds. However, the amount, type, and timing of any future financings — if needed — will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Sources of Capital” of Alabama Power in Item 7 of the Form 10-K for additional information.

     To meet short-term cash needs and contingencies, Alabama Power had at June 30, 2006 approximately $91 million of cash and cash equivalents, unused committed lines of credit of approximately $865 million, and an extendible commercial note program. Subsequent to June 30, 2006, Alabama Power has modified and replaced certain committed lines of credit and the unused committed lines currently total approximately $964 million (including $563 million of such lines which are dedicated to funding purchase obligations relating to variable rate pollution control bonds). Of the current credit facilities, $364 million will expire at various times in 2006 and 2007 (of which $201 million allow for one-year term loans). The remaining $600 million of credit facilities expire in 2011. 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

43

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

for additional information. Alabama Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Alabama Power and other Southern Company subsidiaries. Alabama Power has regulatory authority for up to $1.4 billion of short-term borrowings. At June 30, 2006, Alabama Power had no commercial paper, bank notes, or extendible commercial notes outstanding. Management believes that the need for working capital can be adequately met by issuing commercial paper or utilizing lines of credit without maintaining large cash balances.

Credit Rating Risk

Alabama Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. However, Alabama Power, along with all members of the Southern Company power pool, is party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for it and/or Georgia Power. These agreements are primarily for natural gas price risk management activities. At June 30, 2006, Alabama Power’s total exposure to these types of agreements was approximately $14.2 million.

Market Price Risk

Alabama Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2005 reporting period. In addition, Alabama Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

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

     The fair value of derivative energy contracts at June 30, 2006 was as follows:

	Second Quarter			Year-to-Date
	2006			2006
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	(22,448	)	$	28,978
Contracts realized or settled		13,580			7,664
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		(20,806	)		(66,316	)
Contracts at June 30, 2006	$	(29,674	)	$	(29,674	)

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

44

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

	Source of June 30, 2006
	Valuation Prices
	Total			Maturity
	Fair Value			Year 1			1-3 Years
	(in thousands)
Actively quoted	$	(29,795	)	$	(30,375	)	$	580
External sources		121			121			—
Models and other methods		—			—			—
Contracts at June 30, 2006	$	(29,674	)	$	(30,254	)	$	580

     Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to Alabama Power’s fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through Alabama Power’s fuel cost recovery clause. Certain other energy related derivatives, designated as hedges, are deferred in other comprehensive income. Gains and losses on derivative contracts that are not designated as hedges are recognized in the statements of income as incurred. At June 30, 2006, the fair value gain/(loss) of derivative energy contracts was reflected in the financial statements as follows:

	Amounts
	(in thousands)
Regulatory assets, net	$	(29,731	)
Accumulated other comprehensive income		121
Net income		(64	)
Total fair value loss	$	(29,674	)

     Unrealized pre-tax gains (losses) on energy contracts recognized in income were not material for any period presented.

     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

Alabama Power issued a total of $800 million of senior notes in the first quarter of 2006. The proceeds were used to repay a portion of Alabama Power’s outstanding short-term indebtedness and for other general corporate purposes, including Alabama Power’s continuing construction activities. Alabama Power settled interest rate swaps related to the transactions at a gain of $18 million, which was recorded in other comprehensive income. The gain will be amortized to interest expense over a 10-year period. Also in the first quarter 2006, $170 million in aggregate principal amount of Series U 2.65% Senior Notes matured.

     In April 2006, $26.5 million in aggregate principal amount of Series W Senior Notes matured.

     In May 2006, Alabama Power redeemed $2.95 million of The Industrial Development Board of the Town of Parish (Alabama) 5 1/2% Pollution Control Revenue Refunding Bonds, Series 1994 (Alabama Power Company Project) due January 1, 2024 issued for the benefit of Alabama Power.

45

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

     In June 2006, Alabama Power issued $150 million of Series JJ 6.375% Senior Notes due June 15, 2046. The proceeds from this issuance were used to repay a portion of Alabama Power’s outstanding short-term indebtedness and for other general corporate purposes, including Alabama Power’s continuing construction activities.

     Also in June 2006, Alabama Power issued a total of 1,000,000 shares of common stock to Southern Company at $40.00 a share ($40 million aggregate purchase price). The proceeds from the sale were used by Alabama Power for general corporate purposes.

     In June 2006, Alabama Power entered into a series of interest rate derivatives designed to hedge interest rate risk of anticipated senior note issuances in late 2007. Alabama Power utilized collar transactions with a notional amount of $200 million. See Note (F) to the Condensed Financial Statements herein for further details.

     In June 2006, Alabama Power satisfied and discharged its first mortgage bond indenture. As a result, there are no longer any first mortgage bond liens on Alabama Power’s fixed property and franchises.

     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.

46

GEORGIA POWER COMPANY

47

GEORGIA POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006			2005
	(in thousands)						(in thousands)
Operating Revenues:
Retail revenues	$	1,420,762		$	1,227,087		$	2,687,718		$	2,412,323
Sales for resale —
Non-affiliates		132,557			126,000			265,921			238,852
Affiliates		85,674			54,743			120,616			80,374
Other revenues		59,745			51,358			111,932			98,069
Total operating revenues		1,698,738			1,459,188			3,186,187			2,829,618
Operating Expenses:
Fuel		556,691			412,050			991,465			721,316
Purchased power —
Non-affiliates		82,321			64,523			138,876			117,497
Affiliates		145,518			140,800			336,037			360,804
Other operations		226,256			223,471			444,976			425,550
Maintenance		119,876			123,575			239,176			240,225
Depreciation and amortization		117,590			124,999			235,447			248,099
Taxes other than income taxes		68,945			58,648			136,090			119,407
Total operating expenses		1,317,197			1,148,066			2,522,067			2,232,898
Operating Income		381,541			311,122			664,120			596,720
Other Income and (Expense):
Allowance for equity funds used during construction		6,338			7,935			12,123			17,192
Interest income		199			31			515			502
Interest expense, net of amounts capitalized		(61,322	)		(55,174	)		(121,529	)		(105,594	)
Interest expense to affiliate trusts		(14,877	)		(14,877	)		(29,755	)		(29,755	)
Other income (expense), net		3,370			2,821			2,376			(21	)
Total other income and (expense)		(66,292	)		(59,264	)		(136,270	)		(117,676	)
Earnings Before Income Taxes		315,249			251,858			527,850			479,044
Income taxes		119,059			94,140			199,003			178,794
Net Income		196,190			157,718			328,847			300,250
Dividends on Preferred Stock		—			167			1,010			335
Net Income After Dividends on Preferred Stock	$	196,190		$	157,551		$	327,837		$	299,915

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006			2005
	(in thousands)						(in thousands)
Net Income After Dividends on Preferred Stock	$	196,190		$	157,551		$	327,837		$	299,915
Other comprehensive income (loss):
Change in fair value of marketable securities, net of tax of $(66), $28, $(163), and $103, respectively		(103	)		46			(258	)		164
Changes in fair value of qualifying hedges, net of tax of $6,026, $(7,260), $11,241, and $(5,890), respectively		9,554			(11,510	)		17,821			(9,338	)
Reclassification adjustment for amounts included in net income, net of tax of $(58), $345, $52, and $521, respectively		(93	)		246			82			526
COMPREHENSIVE INCOME	$	205,548		$	146,333		$	345,482		$	291,267

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

48

GEORGIA POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months
	Ended June 30,
	2006			2005
	(in thousands)
Operating Activities:
Net income	$	328,847		$	300,250
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		276,048			292,447
Deferred income taxes and investment tax credits		13,433			89,724
Deferred expenses — affiliates		18,717			20,302
Allowance for equity funds used during construction		(12,123	)		(17,192	)
Pension, postretirement, and other employee benefits		(1,225	)		5,318
Stock option expense		4,330			—
Tax benefit of stock options		282			10,854
Other, net		8,447			(12,437	)
Changes in certain current assets and liabilities —
Receivables		(89,773	)		(247,466	)
Fossil fuel stock		(80,881	)		(23,692	)
Materials and supplies		(28,885	)		(16,024	)
Prepaid income taxes		61,519			17,892
Other current assets		(11,520	)		(3,837	)
Accounts payable		(128,890	)		(59,236	)
Accrued taxes		38,209			43,098
Accrued compensation		(83,215	)		(64,952	)
Other current liabilities		6,382			22,357
Net cash provided from operating activities		319,702			357,406
Investing Activities:
Property additions		(448,857	)		(381,191	)
Nuclear decommissioning trust fund purchases		(241,021	)		(205,261	)
Nuclear decommissioning trust fund sales		234,141			196,562
Cost of removal net of salvage		(10,658	)		(10,359	)
Change in construction payables, net of joint owner portion		(7,136	)		(39,400	)
Other		(1,963	)		6,126
Net cash used for investing activities		(475,494	)		(433,523	)
Financing Activities:
Increase in notes payable, net		389,817			171,669
Proceeds —
Senior notes		—			375,000
Capital contributions from parent company		232,328			100,000
Pollution control bonds		10,125			185,000
Gross excess tax benefit of stock options		611			—
Redemptions —
Senior notes		(150,000	)		(300,000	)
Pollution control bonds		(10,125	)		(85,000	)
Preferred stock		(14,569	)		—
Special deposit — redemption funds		—			(100,000	)
Payment of preferred stock dividends		(12	)		(211	)
Payment of common stock dividends		(301,250	)		(278,050	)
Other		(347	)		(16,494	)
Net cash provided from financing activities		156,578			51,914
Net Change in Cash and Cash Equivalents		786			(24,203	)
Cash and Cash Equivalents at Beginning of Period		10,636			33,497
Cash and Cash Equivalents at End of Period	$	11,422		$	9,294
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $4,904 and $6,996 capitalized for 2006 and 2005, respectively)	$	157,809		$	123,323
Income taxes (net of refunds)	$	26,441		$	3,310

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

49

GEORGIA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Assets	2006			2005
	(in thousands)
Current Assets:
Cash and cash equivalents	$	11,422		$	10,636
Receivables —
Customer accounts receivable		416,118			418,154
Unbilled revenues		176,184			141,875
Under recovered regulatory clause revenues		372,587			454,683
Other accounts and notes receivable		85,136			110,397
Affiliated companies		55,814			84,597
Accumulated provision for uncollectible accounts		(8,521	)		(8,647	)
Fossil fuel stock, at average cost		262,620			181,739
Vacation pay		59,646			59,190
Materials and supplies, at average cost		352,866			323,908
Prepaid expenses		13,973			70,825
Other		101,087			50,248
Total current assets		1,898,932			1,897,605
Property, Plant, and Equipment:
In service		19,957,393			19,603,249
Less accumulated provision for depreciation		7,775,166			7,575,926
		12,182,227			12,027,323
Nuclear fuel, at amortized cost		148,604			134,798
Construction work in progress		599,874			563,155
Total property, plant, and equipment		12,930,705			12,725,276
Other Property and Investments:
Equity investments in unconsolidated subsidiaries		68,470			68,188
Nuclear decommissioning trusts, at fair value		499,868			486,591
Other		70,800			71,468
Total other property and investments		639,138			626,247
Deferred Charges and Other Assets:
Deferred charges related to income taxes		497,775			500,882
Prepaid pension costs		487,462			476,458
Deferred under recovered regulatory clause revenues		477,611			295,116
Other regulatory assets		330,752			330,483
Other		174,519			195,716
Total deferred charges and other assets		1,968,119			1,798,655
Total Assets	$	17,436,894		$	17,047,783

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

50

GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Liabilities and Stockholder’s Equity	2006			2005
	(in thousands)
Current Liabilities:
Securities due within one year	$	2,822		$	167,317
Notes payable		657,559			267,743
Accounts payable —
Affiliated		207,585			285,019
Other		292,313			360,455
Customer deposits		140,292			129,293
Accrued taxes —
Income taxes		313,302			150,896
Other		146,254			204,778
Accrued interest		74,533			88,885
Accrued vacation pay		45,692			45,602
Accrued compensation		55,416			137,303
Other		155,354			120,312
Total current liabilities		2,091,122			1,957,603
Long-term Debt		4,177,916			4,179,218
Long-term Debt Payable to Affiliated Trusts		969,073			969,073
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		2,693,006			2,730,303
Deferred credits related to income taxes		153,196			158,759
Accumulated deferred investment tax credits		281,581			287,726
Employee benefit obligations		379,656			358,137
Asset retirement obligations		647,003			627,465
Other cost of removal obligations		403,322			404,614
Other regulatory liabilities		78,709			97,015
Other		65,992			63,335
Total deferred credits and other liabilities		4,702,465			4,727,354
Total Liabilities		11,940,576			11,833,248
Common Stockholder’s Equity:
Common stock, without par value—
Authorized — June 30, 2006: 20,000,000 shares               — December 31, 2005: 15,000,000 shares
Outstanding - 7,761,500 shares		344,250			344,250
Paid-in capital		2,880,563			2,643,012
Retained earnings		2,288,285			2,261,698
Accumulated other comprehensive loss		(16,780	)		(34,425	)
Total common stockholder’s equity		5,496,318			5,214,535
Total Liabilities and Stockholder’s Equity	$	17,436,894		$	17,047,783

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

SECOND QUARTER 2006 vs. SECOND QUARTER 2005
AND
YEAR-TO-DATE 2006 vs. YEAR-TO-DATE 2005

OVERVIEW

Georgia Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the State of Georgia and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Georgia Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover rising costs related to growing demand and increasingly stringent environmental standards. In addition, fuel costs rose significantly during 2005 and the first half of 2006. Georgia Power has received a Georgia PSC order to increase its fuel recovery rate effective July 1, 2006 and will continue to work with the Georgia PSC to enable the timely recovery of these costs.

     Effective July 1, 2006, Savannah Electric was merged into Georgia Power. Prior to the merger, Southern Company was the sole common shareholder of both Georgia Power and Savannah Electric. At the time of the merger, each outstanding share of Savannah Electric common stock was cancelled and Southern Company was issued an additional 1,500,000 shares of Georgia Power common stock, no par value per share. In addition, at the time of the merger, each outstanding share of Savannah Electric’s preferred stock was cancelled and converted into the right to receive one share of Georgia Power 6 1/8% Series Class A Preferred Stock, Non-Cumulative, Par Value $25 Per Share, resulting in the issuance by Georgia Power of 1,800,000 shares of such Class A Preferred Stock in July 2006. Following completion of the merger, the outstanding capital stock of Georgia Power consists of 9,261,500 shares of common stock, all of which are held by Southern Company, and 1,800,000 shares of preferred stock. Georgia Power will account for the merger in a manner similar to a pooling of interests, and Georgia Power’s financial statements will reflect the merger effective July 1, 2006.

     Georgia Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS — OVERVIEW — “Key Performance Indicators” of Georgia Power in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Georgia Power’s net income after dividends on preferred stock for the second quarter and year-to-date 2006 was $196.2 million and $327.8 million, respectively, compared to $157.6 million and $299.9 million, respectively, for the corresponding periods in 2005. The $38.6 million, or 24.5%, increase and $27.9 million, or 9.3%, increase in the second quarter and year-to-date 2006, respectively, over the corresponding periods in 2005 are primarily attributed to higher base retail revenues and wholesale non-fuel revenues, partially offset by higher non-fuel operating expenses and higher financing costs.

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

     Significant income statement items appropriate for discussion include the following:

	Increase(Decrease)
	Second Quarter						Year-to-Date
	(in thousands)			%			(in thousands)			%
Retail revenues	$	193,675			15.8		$	275,395			11.4
Sales for resale – non-affiliates		6,557			5.2			27,069			11.3
Sales for resale – affiliates		30,931			56.5			40,242			50.1
Other revenues		8,387			16.3			13,863			14.1
Fuel expense		144,641			35.1			270,149			37.5
Purchased power expense – non-affiliates		17,798			27.6			21,379			18.2
Purchased power expense – affiliates		4,718			3.4			(24,767	)		(6.9	)
Depreciation and amortization		(7,409	)		(5.9	)		(12,652	)		(5.1	)
Taxes other than income taxes		10,297			17.6			16,683			14.0
Allowance for equity funds used during construction		(1,597	)		(20.1	)		(5,069	)		(29.5	)
Interest expense, net of amounts capitalized		6,148			11.1			15,935			15.1

     Retail revenues. The chart below reflects the primary drivers of the 15.8% and 11.4% increases in retail revenues in the second quarter and year-to-date 2006, respectively, compared to the same periods in the prior year. Excluding fuel cost recovery revenues, which generally do not affect net income, retail sales revenue increased by $57.2 million, or 6.9%, and $63.5 million, or 4.0%, in the second quarter and year-to-date 2006, respectively, compared to the corresponding periods in 2005, primarily due to customer growth of 2.0%, more favorable weather and sustained economic growth. In the second quarter 2006, KWH energy sales to residential, commercial, and industrial customers increased by 11.9%, 5.5%, and 0.9%, respectively, which resulted in total KWH energy sales increasing 5.6%. Year-to-date KWH energy sales to residential and commercial customers increased 7.1% and 4.9%, respectively, while KWH energy sales to industrial customers decreased by 1.0%. The decrease in KWH energy sales to industrial customers was primarily the result of a 1.7% decrease in industrial customers resulting from the reclassification of customers from industrial to commercial when compared to the same period in 2005.

     Details of retail revenues are as follows:

	Second Quarter					Year-to-Date
	2006					2006
	(in millions)		% change			(in millions)		% change
Retail – prior year	$	1,227				$	2,412
Change in —
Base rates		—		—			—		—
Sales growth		35		2.8			47		1.9
Weather		22		1.8			17		0.7
Fuel cost recovery		137		11.2			212		8.8
Retail – current year	$	1,421		15.8	%	$	2,688		11.4	%

     Sales for resale — non-affiliates. Energy revenues from sales for resale to non-affiliates increased in the second quarter and year-to-date 2006 when compared to the same periods in 2005 as a result of 4.6% and 3.4% increases in the demand for KWH energy sales, respectively. In addition, for year-to-date 2006, $10.4 million in higher costs for sulfur dioxide emission allowances increased the price for these sales. Energy sales do not have a significant impact on earnings since energy is usually sold at variable cost. The capacity component of these transactions remained relatively constant in the second quarter and year-to-date 2006 when compared to the corresponding periods in 2005.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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     Sales for resale — affiliates. 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. These sales are made in accordance with the IIC, as approved by the FERC. These transactions did not have a significant impact on earnings since this energy is generally sold at marginal cost. In the second quarter and year-to-date 2006, revenues from sales for resale increased primarily due to 39.3% and 37.0% increases in KWH sales, respectively, due to the lower cost of Georgia Power-owned generation compared to its affiliates as well as higher fuel costs.

     Other revenues. During the second quarter and year-to-date 2006, other revenues increased when compared with the same periods in 2005 primarily due to increased transmission revenues of $7.0 million and $11.1 million, respectively, related to work performed for the other owners of the integrated transmission system in the State of Georgia and higher outdoor lighting revenues of $1.6 million and $3.0 million, respectively, due to a 6.0% increase in customers.

     Fuel expense and purchased power expense. Fuel expense and purchased power expense together increased $167.2 million in the second quarter and $266.8 million year-to-date 2006 when compared to the same periods in the prior year due to $95.8 million and $232.8 million increases in the cost of fuel, respectively, and $71.4 million and $34.0 million increases related to more KWHs generated and purchased, respectively. Details of the individual components follow.

Fuel expense in the second quarter and year-to-date 2006 increased $144.6 million and $270.1 million, respectively, when compared to the same periods in 2005 primarily due to an increase in the average cost of fuel per net KWH generated of 22.2% and 24.7%, respectively, due to higher coal and natural gas prices. These expenses do not have a significant impact on earnings since fuel expenses are generally offset by fuel revenues through Georgia Power’s fuel cost recovery clause. See FUTURE EARNINGS POTENTIAL — “PSC Matters — Fuel Cost Recovery” and Note (H) to the Condensed Financial Statements herein for additional information.

Purchased power from affiliates increased in the second quarter 2006 mainly due to a 15.2% increase in KWH to meet higher demand when compared to the same period in 2005. Purchased power from affiliates decreased year-to-date 2006 due to a 10.6% decrease in KWH due to the lower cost of Georgia Power-owned generation compared to its affiliates, partially offset by an increase of 12.0% in the average cost of purchased power per net KWH when compared to the corresponding period in 2005. Energy purchases from affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. These purchases are made in accordance with the IIC, as approved by the FERC. These transactions did not have a significant impact on earnings since the energy purchases are generally offset by energy revenues through Georgia Power’s fuel cost recovery clause.

Purchased power expense — non-affiliates increased 27.6% and 18.2%, respectively, during the second quarter and year-to-date 2006 due to higher demand of 27.2% and 9.3%, respectively, as a result of the warmer weather and 0.2% and 7.9% increases in the average cost of purchased power per net KWH when compared to the corresponding periods in 2005. These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Georgia Power’s fuel cost recovery clause.

     Depreciation and amortization expense. Depreciation and amortization expense in the second quarter and year-to-date 2006 was lower compared to the corresponding periods in 2005. These decreases resulted primarily from the amortization of a regulatory liability related to the inclusion of new certified PPAs in retail rates on a levelized basis as ordered by the Georgia PSC under the terms of the retail order effective January 1, 2005.

     Taxes other than income taxes. Taxes other than income taxes increased 17.6% and 14.0% in the second quarter and year-to-date 2006, respectively, as a result of higher property taxes of $5.2 million and $9.4 million, respectively, due to an increase in property values and higher municipal gross receipts taxes of $4.5 million and $7.4 million, respectively, as a result of increased sales when compared to the corresponding periods in 2005.

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

     Allowance for equity funds used during construction. The 20.1% and 29.5% decreases in the allowance for equity funds used during construction in the second quarter and year-to-date 2006 when compared to the second quarter and year-to-date 2005 are attributed to completion of the McIntosh combined cycle units 10 and 11 which were placed in service in June 2005.

     Interest expense, net of amounts capitalized. During the second quarter and year-to-date 2006, interest expense, net of amounts capitalized increased 11.1% and 15.1%, respectively, when compared to the corresponding periods in 2005 due to the issuance of additional senior notes in 2005 and generally higher interest rates on variable rate debt and commercial paper.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Georgia Power’s future earnings potential. The level of 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. 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 regulations could affect earnings if such costs cannot be fully recovered in rates on a timely basis. As discussed in the Form 10-K, environmental compliance spending over the next several years may exceed amounts estimated. Some of the factors driving the anticipated increase are higher commodity costs, market demand for labor, and scope additions and clarifications. The timing, specific requirements, and estimated costs could also change as environmental regulations are modified. 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 Reform Rules

On October 20, 2005, the EPA published a proposed rule clarifying the test for determining when an emissions increase is subject to the NSR requirements. On March 17, 2006, the U.S. Court of Appeals for the District of Columbia Circuit vacated the EPA’s proposed rule which sought to clarify the scope of the existing Routine Maintenance, Repair, and Replacement Exclusion. Because this rule was not yet in effect, the court’s ruling is not anticipated to have any impact on Georgia Power. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters – New Source Review Actions” of Georgia Power in Item 7 of the Form 10-K for additional information.

Plant Wansley Environmental Litigation

On March 30, 2006, the U.S. Court of Appeals for the Eleventh Circuit ruled in favor of Georgia Power on its appeal and reversed the district court’s order regarding certain alleged opacity violations at Plant Wansley. The court of appeals remanded the case to the U.S. District Court for the Northern District of Georgia for further proceedings consistent with its decision. The ultimate outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental

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

Matters — Plant Wansley Environmental Litigation” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Environmental Matters — Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K for additional information.

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 on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Georgia Power has authorization from the FERC to sell power to non-affiliates at market-based prices. Georgia Power also has FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. On February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. A hearing before an ALJ originally scheduled for March 2006 has been held in abeyance to allow the parties to explore settlement. Any new market-based rate transactions in its retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. Such sales through May 27, 2006, the end of the 15-month refund period, were approximately $5.4 million for Georgia Power. In the event that the FERC’s default mitigation measures for entities that are found to have market power are ultimately applied, Georgia Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

     In addition, in May 2005, the FERC initiated an investigation to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing. The FERC established a new 15-month refund period related to this expanded investigation. Any new market-based rate transactions involving any Southern Company subsidiary will be subject to refund to the extent the FERC orders lower rates as a result of this new investigation, with the refund period beginning July 19, 2005. The impact of such sales involving Georgia Power through June 30, 2006 is not expected to exceed $14.1 million, of which $4.1 million relates to sales inside the retail service territory discussed above. The FERC also directed that this expanded proceeding be held in abeyance pending the outcome of the proceeding on the IIC discussed below.

     Georgia Power believes that there is no meritorious basis for this proceeding and is vigorously defending itself in this matter. However, the final outcome of this matter, including any remedies to be applied in the event of an adverse ruling in this proceeding, cannot now be determined.

Intercompany Interchange Contract

Also in May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the power pool of Southern Company is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (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

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

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. The FERC order directs that the ALJ who presided over a proceeding involving approval of PPAs between Southern Power and Georgia Power and Savannah Electric be assigned to preside over the hearing in this proceeding and that the testimony and exhibits presented in that proceeding be preserved to the extent appropriate. Effective July 19, 2005, revenues from transactions under the IIC involving any Southern Company subsidiaries will be subject to refund to the extent the FERC orders any changes to the IIC. On April 11, 2006, Southern Company, Calpine Corporation, Coral Energy, and Dalton Utilities filed a settlement offer that would resolve the proceeding, and does not require any refunds. The ALJ has certified the settlement to the FERC, where it is pending. Since the offer is pending, the final outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS— FUTURE EARNINGS POTENTIAL — “FERC Matters – Intercompany Interchange Contract” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for additional information.

Retail Fuel Cost Recovery

On March 17, 2006, Georgia Power and Savannah Electric filed a combined request for fuel cost recovery rate changes with the Georgia PSC to be effective July 1, 2006. On June 15, 2006, the Georgia PSC ruled on the combined request and approved an increase in Georgia Power’s total annual fuel billings of approximately $400 million. The Georgia PSC order provided for a combined ongoing fuel forecast but reduced the requested increase related to such forecast by $200 million. The Georgia PSC order included no disallowances of previously incurred fuel costs. Estimated under recovered fuel costs as of June 30, 2006 are to be recovered over 35 months for customers in the former Georgia Power territory and over 41 months for customers in the former Savannah Electric territory. As of June 30, 2006, Georgia Power had an under recovered fuel balance of approximately $850 million and Savannah Electric had an under recovered fuel balance of $82 million. Such balances exceed the estimates used to determine the rates approved in the order for customers in the former Georgia Power territory and former Savannah Electric territory by $130 million and $4 million, respectively. The order also requires Georgia Power to file for a new fuel cost recovery rate, which would include a true-up of these balances, on a semi-annual basis, beginning September 30, 2006. 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 have no significant effect on Georgia Power’s revenues or net income, but will affect cash flow. 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 and Note (H) to the Condensed Financial Statements herein for additional information.

Merger

With respect to the merger between Georgia Power and Savannah Electric, which was completed on July 1, 2006, the Georgia PSC voted on June 15, 2006 to set the Merger Transition Adjustment (MTA) applicable to customers in the former Savannah Electric service territory so that the new fuel rate plus the MTA equals the applicable fuel rate paid by such customers as of June 30, 2006. Amounts collected under the MTA are being credited to customers in the former Georgia Power service territory through a Merger Transition Credit (MTC). The MTA and the MTC will be in effect until December 31, 2007, when Georgia Power’s base rates are scheduled to be adjusted.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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Nuclear

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters – Nuclear” in Item 7 of the Form 10-K for information on Georgia Power’s involvement in nuclear initiatives. As part of a potential expansion of Plant Vogtle, Georgia Power and Southern Nuclear Operating Company, Inc. have notified the NRC of their intent to apply for an early site permit (ESP) this year and a combined construction and operating license (COL) in 2008. Ownership agreements have been signed with each of the existing Plant Vogtle co-owners. In February 2006, Georgia Power filed a request with the Georgia PSC to establish an accounting order that would allow Georgia Power to defer for future recovery the ESP and COL costs, of which Georgia Power’s portion is estimated to total approximately $51 million over the next four years. On June 22, 2006, the Georgia PSC approved the request. At this point, no final decision has been made regarding actual construction. Any new generation resource must be certified by the Georgia PSC in a separate proceeding.

Other Matters

Georgia Power has entered into three PPAs for a total of approximately 1,000 MW annually from June 2009 through May 2024. These agreements are subject to certification by the Georgia PSC in accordance with the capacity needs identified in Georgia Power’s Integrated Resource Plan. These agreements satisfy approximately 550 MW of growth, replace an existing 450 MW agreement that expires in May 2009, and are expected to result in higher operating and maintenance expenses that will be subject to recovery through future base rates.

     On February 23, 2006, approximately 170 current and former employees of Georgia Power filed a collective action against Georgia Power in the U.S. District Court for the Northern District of Georgia, alleging that Georgia Power violated the Fair Labor Standards Act by failing to properly compensate certain employees (primarily linemen and crew leaders whose work is governed by a union collective bargaining agreement) while the employees were subject to being called back into work under on-call work rules and regulations. The plaintiffs are seeking overtime compensation for on-call time for the three-year period prior to the filing of the action, liquidated damages in an amount equal to unpaid overtime compensation they say they have been denied, declaratory and injunctive relief, and attorney’s fees and expenses of litigation. Georgia Power believes that it has complied with the provisions of the Fair Labor Standards Act and is vigorously defending itself in this action. The ultimate outcome of this matter cannot now be determined.

     Georgia Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Georgia Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements such as opacity and other air 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.

     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.

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ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

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

New Accounting Standards

Stock Options

On January 1, 2006, Georgia Power adopted FASB Statement No. 123(R), “Share-Based Payment,” using the modified prospective method. This statement requires that compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. Although the compensation expense required under the revised statement differs slightly, the impacts on Georgia Power’s financial statements are similar to the pro forma disclosures previously included in Note 1 to the financial statements of Georgia Power under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein.

Income Taxes

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” This interpretation requires that tax benefits must be “more likely than not” of being sustained in order to be recognized. The provisions of FIN 48 must be applied to all tax positions beginning January 1, 2007. Georgia Power is currently assessing the impact of FIN 48. The impact on Georgia Power’s financial statements has not yet been determined.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Georgia Power’s financial condition remained stable at June 30, 2006. Net cash flow from operating activities decreased $38 million for the first six months of 2006 compared to the same period in 2005. The decrease in 2006 is primarily the result of higher fuel inventories and an increase in under recovered deferred fuel costs. Year-to-date 2006, gross property additions were $473 million. These additions were primarily related to the construction of transmission and distribution facilities, purchases of nuclear fuel, and purchases of equipment to comply with environmental standards. The majority of funds for these additions and other capital requirements were derived primarily from operating and financing activities and capital contributions from Southern Company. See Georgia Power’s Condensed Statements of Cash Flows herein for further details.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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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, lease obligations, purchase commitments, and trust funding requirements. Since December 31, 2005, Georgia Power entered into three PPAs that, subject to certification by the Georgia PSC, are expected to result in additional obligations of $55 million in 2009 through 2010 and $483 million thereafter. Approximately $3 million will be required by June 30, 2007 for redemptions and maturities of long-term debt.

     In addition, Georgia Power has entered into three new contracts for the purchase of uranium concentrates and uranium enrichment services at Plants Hatch and Vogtle that result in additional obligations of approximately $34 million in 2007 through 2008, $50 million in 2009 through 2010, and $63 million thereafter. These costs are expected to be recovered through Georgia Power’s fuel cost recovery clause. See Note 7 to the financial statements of Georgia Power under “Fuel Commitments” in Item 8 of the Form 10-K for additional information.

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, which were primarily operating cash flows, with capital contributions from Southern Company, short-term debt, and external security issuances providing additional funds. However, the amount, type and timing of any future financings, if needed, will depend on maintenance of adequate earnings, prevailing market conditions, regulatory approval, 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.

     To meet short-term cash needs and contingencies, Georgia Power had at June 30, 2006 approximately $11.4 million of cash and cash equivalents and $743 million of unused credit arrangements with banks, of which $390 million expire in 2007 and $353 million expire in 2010. Of the facilities that expire in 2007, $40 million contain provisions allowing two-year term loans executable at expiration. 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. Subsequent to June 30, 2006, Georgia Power refinanced facilities totaling $710 million with an $870 million credit facility that expires in July 2011 which revised total unused credit arrangements to $903 million. Georgia Power expects to renew its credit facilities, as needed, prior to expiration. These unused credit arrangements provide liquidity support to Georgia Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Georgia Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Georgia Power and other Southern Company subsidiaries. At June 30, 2006, Georgia Power had approximately $447.8 million of commercial paper, $59.8 million of extendible commercial notes, and $150 million of bank loans outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.

Credit Rating Risk

Georgia Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- or Baa3 or below. These contracts are primarily for physical electricity purchases and sales. At June 30, 2006, the maximum potential collateral requirements at a BBB- or Baa3 rating were approximately $8 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $248 million. Generally, collateral may be

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

provided for by a Southern Company guaranty, letter of credit, or cash. Georgia Power, along with all members of the Southern Company power pool, is also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for it and/or Alabama Power. These agreements are primarily for natural gas price risk management activities. At June 30, 2006, Georgia Power’s total exposure to these types of agreements was approximately $14.2 million.

Market Price Risk

Georgia Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2005 reporting period. In addition, Georgia Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

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

     The fair value of derivative energy contracts at June 30, 2006 was as follows:

	Second Quarter			Year-to-Date
	2006			2006
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	(20,274	)	$	26,562
Contracts realized or settled		12,799			7,468
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		(16,874	)		(58,379	)
Contracts at June 30, 2006	$	(24,349	)	$	(24,349	)

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

	Source of June 30, 2006
	Valuation Prices
	Total			Maturity
	Fair Value			Year 1			1-3 Years
	(in thousands)
Actively quoted	$	(24,500	)	$	(24,988	)	$	488
External sources		151			151			—
Models and other methods		—			—			—
Contracts at June 30, 2006	$	(24,349	)	$	(24,837	)	$	488

     Unrealized gains and losses from mark to market adjustments on derivative contracts related to Georgia Power’s fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through Georgia Power’s fuel cost recovery mechanism. Though June 30, 2006, Georgia Power was allowed to retain 25% of any net gains under an existing Georgia PSC order. In connection with the fuel cost recovery decision, effective July 1, 2006, the Georgia PSC ordered the suspension of the profit sharing framework related to the fuel hedging program. New profit sharing arrangements as well as other changes to the fuel hedging program are currently under development. Such changes are not expected to have a material impact on Georgia Power’s financial statements.

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

See Note 3 to the financial statements of Georgia Power under “Retail Regulatory Matters — Fuel Hedging Program” in Item 8 of the Form 10-K for additional information. Gains and losses on derivative contracts that are not designated as hedges are recognized in the statements of income as incurred. At June 30, 2006, the fair value gain / (loss) of all derivative energy contracts was reflected in the financial statements as follows:

	Amounts
	(in thousands)
Regulatory assets, net	$	(24,268	)
Accumulated other comprehensive income		—
Net income		(81	)
Total fair value loss	$	(24,349	)

     Unrealized pre-tax gains and losses recognized in income were not material for any period presented.

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

Financing Activities

In January 2006, all outstanding shares of the remaining issue of preferred stock were redeemed. In February 2006, Georgia Power redeemed $150 million of Series G 6.200% Senior Notes. Also during the first quarter, Georgia Power entered into two derivative transactions to reduce its exposure to interest rate risk. The transactions consisted of a hedge of an anticipated $150 million senior note issuance in 2006 and a hedge of an anticipated $225 million senior note issuance in 2007.

     In June 2006, Georgia Power incurred obligations in connection with the issuance of $10.1 million Auction Rate Pollution Control Revenue Bonds. The proceeds were used to defease and redeem in July 2006 a like amount of 5.25% Pollution Control Revenue Bonds. No other long-term securities were issued during the first six months of 2006.

     In July 2006, Georgia Power incurred obligations in connection with the issuance of $67 million 4.40% Pollution Control Revenue Bonds and $48.7 million 4.90% Pollution Control Revenue Bonds. Proceeds from the sales will be used for the legal defeasance and redemption in August 2006 of $67 million of 5.0% and $48.7 million of 5.25% Pollution Control Revenue Bonds.

     In connection with Savannah Electric’s merger into Georgia Power, all of Savannah Electric’s obligations under five series of senior notes outstanding at June 30, 2006, totaling $195 million, and the obligations related to three series of pollution control revenue bonds, totaling $18 million, were assumed by Georgia Power. Georgia Power also assumed Savannah Electric’s commercial paper and extendible commercial note obligations of $84 million.

     In addition, at the time of the merger, each of the 1,800,000 outstanding shares of Savannah Electric’s preferred stock was cancelled and converted into one share of Georgia Power 6 1/8% Series Class A Preferred Stock, Non-Cumulative, Par Value $25 Per Share.

     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

63

GULF POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006			2005
	(in thousands)						(in thousands)
Operating Revenues:
Retail revenues	$	245,656		$	207,110		$	424,973		$	369,392
Sales for resale —
Non-affiliates		20,344			19,614			41,182			39,326
Affiliates		15,417			14,443			68,025			47,043
Other revenues		11,305			10,130			21,584			20,133
Total operating revenues		292,722			251,297			555,764			475,894
Operating Expenses:
Fuel		120,915			94,814			242,156			187,444
Purchased power —
Non-affiliates		4,531			4,958			9,327			10,066
Affiliates		15,137			10,829			22,127			16,841
Other operations		46,761			41,148			90,251			74,917
Maintenance		16,142			16,286			30,714			33,885
Depreciation and amortization		22,381			21,333			44,366			42,082
Taxes other than income taxes		19,793			17,776			38,682			35,277
Total operating expenses		245,660			207,144			477,623			400,512
Operating Income		47,062			44,153			78,141			75,382
Other Income and (Expense):
Interest income		769			444			1,550			699
Interest expense, net of amounts capitalized		(9,785	)		(8,991	)		(19,057	)		(17,251	)
Interest expense to affiliate trusts		(1,147	)		(1,147	)		(2,295	)		(2,295	)
Other income (expense), net		(347	)		(160	)		(897	)		32
Total other income and (expense)		(10,510	)		(9,854	)		(20,699	)		(18,815	)
Earnings Before Income Taxes		36,552			34,299			57,442			56,567
Income taxes		13,689			12,787			21,352			20,355
Net Income		22,863			21,512			36,090			36,212
Dividends on Preferred and Preference Stock		825			54			1,650			108
Net Income After Dividends on Preferred and Preference Stock	$	22,038		$	21,458		$	34,440		$	36,104

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months					For the Six Months
	Ended June 30,					Ended June 30,
	2006			2005		2006			2005
	(in thousands)					(in thousands)
Net Income After Dividends on Preferred and Preference Stock	$	22,038		$	21,458	$	34,440		$	36,104
Other comprehensive income (loss):
Changes in fair value of qualifying hedges, net of tax of $(191) and $(191), respectively		(304	)		—		(304	)		—
Reclassification adjustment for amounts included in net income, net of tax of $32, $32, $63 and $63, respectively		50			49		100			100
COMPREHENSIVE INCOME	$	21,784		$	21,507	$	34,236		$	36,204

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

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months
	Ended June 30,
	2006			2005
	(in thousands)
Operating Activities:
Net income	$	36,090		$	36,212
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		47,115			45,007
Deferred income taxes		(9,061	)		(2,553	)
Pension, postretirement, and other employee benefits		1,480			1,123
Stock option expense		745			—
Tax benefit of stock options		68			2,659
Other, net		1,429			(2,151	)
Changes in certain current assets and liabilities —
Receivables		(9,935	)		(2,134	)
Fossil fuel stock		(11,273	)		(17,991	)
Materials and supplies		(15,973	)		1,270
Prepaid income taxes		1,446			4,019
Property damage cost recovery		11,765			6,462
Other current assets		926			6,282
Accounts payable		7,865			(38,761	)
Accrued taxes		17,204			6,256
Accrued compensation		(12,897	)		(7,837	)
Other current liabilities		6,282			7,987
Net cash provided from operating activities		73,276			45,850
Investing Activities:
Property additions		(73,761	)		(70,701	)
Cost of removal net of salvage		(2,159	)		(2,668	)
Construction payables		(5,704	)		(14,421	)
Other		(9,404	)		89
Net cash used for investing activities		(91,028	)		(87,701	)
Financing Activities:
Increase in notes payable, net		48,310			13,710
Proceeds —
Capital contributions from parent company		21,140			—
Gross excess tax benefit of stock options		167			—
Redemptions — Pollution control bonds		(12,075	)		—
Payment of preferred and preference stock dividends		(1,650	)		(108	)
Payment of common stock dividends		(35,150	)		(34,200	)
Other		(1,190	)		(270	)
Net cash provided from (used for) financing activities		19,552			(20,868	)
Net Change in Cash and Cash Equivalents		1,800			(62,719	)
Cash and Cash Equivalents at Beginning of Period		3,847			64,829
Cash and Cash Equivalents at End of Period	$	5,647		$	2,110
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $12 and $454 capitalized for 2006 and 2005, respectively)	$	17,175		$	17,814
Income taxes (net of refunds)	$	16,984		$	14,419

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

CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Assets		2006			2005
	(in thousands)
Current Assets:
Cash and cash equivalents	$	5,647		$	3,847
Receivables —
Customer accounts receivable		67,023			51,567
Unbilled revenues		50,895			39,951
Under recovered regulatory clause revenues		38,330			33,205
Other accounts and notes receivable		12,620			10,533
Affiliated companies		5,738			24,001
Accumulated provision for uncollectible accounts		(1,105	)		(1,134	)
Fossil fuel stock, at average cost		56,013			44,740
Materials and supplies, at average cost		48,949			32,976
Property damage cost recovery		27,898			28,744
Other regulatory assets		18,022			9,895
Other		7,128			19,636
Total current assets		337,158			297,961
Property, Plant, and Equipment:
In service		2,540,385			2,502,057
Less accumulated provision for depreciation		875,656			865,989
		1,664,729			1,636,068
Construction work in progress		29,244			28,177
Total property, plant, and equipment		1,693,973			1,664,245
Other Property and Investments		16,141			6,736
Deferred Charges and Other Assets:
Deferred charges related to income taxes		16,937			17,379
Prepaid pension costs		46,429			46,374
Other regulatory assets		108,783			123,258
Other		18,056			19,844
Total deferred charges and other assets		190,205			206,855
Total Assets	$	2,237,477		$	2,175,797

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

CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Liabilities and Stockholder’s Equity	2006			2005
	(in thousands)
Current Liabilities:
Securities due within one year	$	25,000		$	37,075
Notes payable		137,775			89,465
Accounts payable —
Affiliated		38,266			36,717
Other		36,578			44,139
Customer deposits		20,340			18,834
Accrued taxes —
Income taxes		22,462			12,823
Other		18,495			11,689
Accrued interest		7,428			7,713
Accrued compensation		7,152			20,336
Other regulatory liabilities		17,054			15,671
Other		26,023			21,844
Total current liabilities		356,573			316,306
Long-term Debt		544,585			544,388
Long-term Debt Payable to Affiliated Trusts		72,166			72,166
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		251,215			256,490
Accumulated deferred investment tax credits		15,637			16,569
Employee benefit obligations		57,769			56,235
Other cost of removal obligations		159,594			153,665
Other regulatory liabilities		25,135			26,795
Other		77,366			76,948
Total deferred credits and other liabilities		586,716			586,702
Total Liabilities		1,560,040			1,519,562
Preference Stock		53,887			53,891
Common Stockholder’s Equity:
Common stock, without par value—
Authorized - 20,000,000 shares
Outstanding - 992,717 shares		38,060			38,060
Paid-in capital		422,935			400,815
Retained earnings		165,569			166,279
Accumulated other comprehensive loss		(3,014	)		(2,810	)
Total common stockholder’s equity		623,550			602,344
Total Liabilities and Stockholder’s Equity	$	2,237,477		$	2,175,797

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

67

GULF POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SECOND QUARTER 2006 vs. SECOND QUARTER 2005
AND
YEAR-TO-DATE 2006 vs. YEAR-TO-DATE 2005

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 while containing costs, and to recover rising costs. These costs include those related to growing demand, increasingly stringent environmental standards, fuel prices, and storm restoration costs. Appropriately balancing environmental expenditures with customer prices will continue to challenge Gulf Power for the foreseeable future.

     Hurricanes Dennis and Katrina hit Gulf Power’s service territory in July and August 2005, respectively. As a result of these storms, as well as Hurricane Ivan in September 2004, Gulf Power has incurred significant restoration costs. Recent Florida PSC actions should assure the timely recovery of these costs, while minimizing the impact upon Gulf Power’s customers. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters — Storm Damage Cost Recovery” of Gulf Power in Item 7 of the Form 10-K and FUTURE EARNINGS POTENTIAL — “FERC and Florida PSC Matters — Storm Damage Cost Recovery” and Note (K) to the Condensed Financial Statements herein for additional information.

     Gulf Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS — OVERVIEW — “Key Performance Indicators” of Gulf Power in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Gulf Power’s net income after dividends on preferred and preference stock for the second quarter and year-to-date 2006 was $22.0 million and $34.4 million, respectively, compared to $21.5 million and $36.1 million, respectively, for the corresponding periods in 2005. Earnings in the second quarter 2006 increased by $0.6 million, or 2.7%, primarily due to increased retail revenue as a result of favorable weather and customer growth. Earnings year-to-date 2006 decreased by $1.7 million, or 4.6%, primarily due to increased dividends and increased interest expense, net of amounts capitalized, resulting from higher interest rates on variable-rate pollution control bonds, the issuance of $60 million in senior notes in August 2005, and the issuance of $55 million of preference stock in November 2005.

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

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Second Quarter						Year-to-Date
	(in thousands)			%			(in thousands)			%
Retail revenues	$	38,546			18.6		$	55,581			15.0
Sales for resale – affiliates		974			6.7			20,982			44.6
Other revenues		1,175			11.6			1,451			7.2
Fuel expense		26,101			27.5			54,712			29.2
Purchased power – affiliates		4,308			39.8			5,286			31.4
Other operations expense		5,613			13.6			15,334			20.5
Maintenance expense		(144	)		(0.9	)		(3,171	)		(9.4	)
Depreciation and amortization		1,048			4.9			2,284			5.4
Taxes other than income taxes		2,017			11.3			3,405			9.7
Interest expense, net of amounts capitalized		794			8.8			1,806			10.5

     Retail revenues. The chart below reflects the primary drivers of the 18.6% increase and 15.0% increase in retail revenues in the second quarter and year-to-date 2006, respectively, when compared to the corresponding periods in 2005. Excluding revenues related to fuel and other cost recovery, which do not affect net income, retail revenues increased by $8.6 million, or 4.1%, for the second quarter 2006 and increased by $7.7 million, or 2.1%, year-to-date 2006 as compared to the corresponding periods in the prior year. Retail energy sales to residential, commercial, and industrial customers increased by 12.3%, 6.0%, and 3.9%, respectively, in the second quarter 2006, when compared to the same period in the prior year. Retail energy sales to residential, commercial, and industrial customers increased by 5.1%, 4.6%, and 1.4%, respectively, year-to-date 2006, when compared to the same period in the prior year. The increases in sales to residential customers in the second quarter and year-to-date 2006 are primarily a result of more favorable weather and 3.0% customer growth. The increases in sales to commercial customers in the second quarter and year-to-date 2006 are primarily a result of favorable weather. The increases in sales to industrial customers in the second quarter and year-to-date 2006 are primarily a result of additional sales to customers with gas-fired cogeneration resulting from high natural gas prices. Other cost recovery for the second quarter and year-to-date 2006 includes approximately $6.9 million and $12.4 million, respectively, of revenues related to the recovery of expenses for Hurricane Ivan as approved by the Florida PSC. See 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 and FUTURE EARNINGS POTENTIAL — “FERC and Florida PSC Matters — Storm Damage Cost Recovery” herein for additional information on storm damage cost recovery related to Hurricane Ivan.

     Details of retail revenues are as follows:

	Second Quarter 2006					Year-to-Date 2006
	(in thousands)		%			(in thousands)			%
Retail – prior year	$	207,110				$	369,392
Change in —
Sales growth		728		0.4			(339	)		(0.1	)
Weather		7,838		3.8			7,990			2.1
Fuel cost recovery		25,730		12.3			33,941			9.2
Other cost recovery		4,250		2.1			13,989			3.8
Retail – current year	$	245,656		18.6	%	$	424,973			15.0	%

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

     Sales for resale — affiliates. Revenues from sales for resale to 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. The increases in sales for resale to affiliates of 6.7% in the second quarter and 44.6% year-to-date 2006, compared to the corresponding periods in 2005, are primarily a result of increased sales of available generation at a higher unit cost due to higher fuel prices.

     Other revenues. Other revenues increased $1.2 million and $1.5 million in the second quarter and year-to-date 2006, respectively, when compared to the same periods in 2005, primarily as a result of higher franchise fees, which have no impact on earnings. Franchise fees are generally proportional to sales revenue and are offset by franchise and gross receipt taxes.

     Fuel expense. Fuel expense increased $26.1 million in the second quarter 2006 when compared to the same period in 2005 due to a $22.1 million increase in the cost of fuel and related costs, and a $4.0 million increase resulting from an increase in total KWHs generated. Fuel expense increased $54.7 million year-to-date 2006 when compared to the same period in 2005 due to a $39.3 million increase in the cost of fuel and related costs, and a $15.4 million increase resulting from an increase in total KWHs generated. Since energy expenses are generally offset by energy revenues through Gulf Power’s fuel cost recovery mechanism, these expenses do not have a material impact on net income. See FUTURE EARNINGS POTENTIAL — “FERC and Florida PSC Matters — Fuel Cost Recovery” herein for additional information.

     Purchased power — affiliates. Purchased power 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. Purchased power from affiliates increased $4.3 million in the second quarter 2006 when compared to the same period in 2005 due to a $4.8 million increase resulting from increased KWH purchases, partially offset by a $0.5 million decrease resulting from lower average cost of purchased power per net KWH. Purchased power from affiliates increased $5.3 million year-to-date 2006 when compared to the same period in 2005 due to a $3.5 million increase resulting from increased KWH purchases, and a $1.8 million increase resulting from the higher average cost of purchased power per net KWH.

     Other operations expense. The increases in other operations expense in second quarter and year-to-date 2006 of $5.6 million and $15.3 million, respectively, as compared to the same periods in 2005, are primarily due to the recovery of Hurricane Ivan restoration costs as approved by the Florida PSC. Since these costs are recognized as revenues are collected, there is no impact on net income. See 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 and FUTURE EARNINGS POTENTIAL — “FERC and Florida PSC Matters — Storm Damage Cost Recovery” and Note (K) to the Condensed Financial Statements herein for additional information.

     Maintenance expense. Maintenance expense decreased $3.2 million year-to-date 2006 than in the same period in 2005 primarily due to a delay in scheduled maintenance performed on power generation facilities in 2006.

     Depreciation and amortization. Depreciation and amortization increased $1.0 million and $2.3 million in the second quarter and year-to-date 2006, respectively, when compared to the same periods in 2005, due to the construction of two major generation projects that were placed in service in the second and fourth quarters of 2005.

     Taxes other than income taxes. The increases in taxes other than income taxes in the second quarter and year-to-date 2006 of $2.0 million and $3.4 million, respectively, as compared to the same periods in 2005, are

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

primarily the result of increases in franchise and gross receipts taxes, which are directly related to increases in retail revenues.

     Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized, increased $0.8 million and $1.8 million in the second quarter and year-to-date 2006, respectively, as compared to the same periods in 2005 primarily due to higher interest rates on variable-rate pollution control bonds and the issuance of $60 million in senior notes in August 2005.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Gulf Power’s future earnings potential. The level of 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. 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 regulations could affect earnings if such costs cannot be fully recovered in rates on a timely basis. As discussed in the Form 10-K, environmental compliance spending over the next several years may exceed amounts estimated. Some of the factors driving the anticipated increase are higher commodity costs, market demand for labor, and scope additions and clarifications. The timing, specific requirements, and estimated costs could also change as environmental regulations are modified. 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 Reform Rules

On October 20, 2005, the EPA published a proposed rule clarifying the test for determining when an emissions increase is subject to the NSR requirements. On March 17, 2006, the U.S. Court of Appeals for the District of Columbia Circuit vacated the EPA’s proposed rule which sought to clarify the scope of the existing Routine Maintenance, Repair, and Replacement Exclusion. Because this rule was not yet in effect, the court’s ruling is not anticipated to have any impact on Gulf Power. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — New Source Review Actions” of Gulf Power in Item 7 of the Form 10-K for additional information.

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 on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s

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generation dominance within its retail service territory. Gulf Power has authorization from the FERC to sell power to non-affiliates at market-based prices. Gulf Power also has FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. On February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. A hearing before an ALJ originally scheduled for March 2006 has been held in abeyance to allow the parties to explore settlement. Any new market-based rate transactions in its retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. Such sales through May 27, 2006, the end of the 15-month refund period, were approximately $0.9 million for Gulf Power. In the event that the FERC’s default mitigation measures for entities that are found to have market power are ultimately applied, Gulf Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

     In addition, in May 2005, the FERC initiated an investigation to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing. The FERC established a new 15-month refund period related to this expanded investigation. Any new market-based rate transactions involving any Southern Company subsidiary will be subject to refund to the extent the FERC orders lower rates as a result of this new investigation, with the refund period beginning July 19, 2005. The impact of such sales involving Gulf Power through June 30, 2006 is not expected to exceed $2.4 million, of which $0.7 million relates to sales inside the retail service territory discussed above. The FERC also directed that this expanded proceeding be held in abeyance pending the outcome of the proceeding on the IIC discussed below.

     Gulf Power believes that there is no meritorious basis for this proceeding and is vigorously defending itself in this matter. However, the final outcome of this matter, including any remedies to be applied in the event of an adverse ruling in this proceeding, cannot now be determined.

Intercompany Interchange Contract

Also in May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the power pool of Southern Company is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (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. The FERC order directs that the ALJ who presided over a proceeding involving approval of PPAs between Southern Power and Georgia Power and Savannah Electric be assigned to preside over the hearing in this proceeding and that the testimony and exhibits presented in that proceeding be preserved to the extent appropriate. Effective July 19, 2005, revenues from transactions under the IIC involving any Southern Company subsidiaries will be subject to refund to the extent the FERC orders any changes to the IIC. On April 11, 2006, Southern Company, Calpine Corporation, Coral Energy, and Dalton Utilities filed a settlement offer that would resolve the proceeding, and does not require any refunds. The ALJ has certified the settlement to the FERC, where it is pending. Since the offer is pending, the final outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS— FUTURE EARNINGS POTENTIAL — “FERC

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Matters – Intercompany Interchange Contract” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for additional information.

Storm Damage Cost Recovery

See Note 1 to the financial statements of Gulf Power under “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 information on how Gulf Power maintains a reserve for property damage to cover the cost of damages from major storms to its transmission and distribution facilities and the cost of uninsured damages to its generation facilities and other property, and the impact of recent hurricanes on that reserve.

     In July and August 2005, Hurricanes Dennis and Katrina, respectively, hit the Gulf Coast of the United States and caused significant damage within Gulf Power’s service area. Hurricane Ivan hit the Gulf Coast of Florida and Alabama in September 2004, also causing significant damage to Gulf Power’s service area. Gulf Power was authorized by the Florida PSC to defer the portion of the hurricane restoration costs that exceeded the balance in its property damage reserve account. As of June 30, 2006, the deficit balance in Gulf Power’s property damage reserve account totaled approximately $41.2 million, of which approximately $8.5 million and $32.7 million, respectively, are included in the Condensed Balance Sheets herein under “Current Assets” and “Deferred Charges and Other Assets.” As of June 30, 2006, Gulf Power had recovered $33.7 million of the costs allowed for recovery related to Hurricane Ivan.

     In July 2006, the Florida PSC issued its order approving a stipulation and settlement between Gulf Power and several consumer groups that resolved all matters relating to Gulf Power’s request for recovery of incurred costs for storm-recovery activities, the replenishment of Gulf Power’s property damage reserve, and the related request for permission to issue $87.2 million in securitized storm-recovery bonds. The order provides for an extension of the storm recovery surcharge currently being collected by Gulf Power for an additional 27 months, expiring in June 2009, in lieu of the requested issuance of storm-recovery bonds.

     According to the stipulation, the funds resulting from the extension of the current surcharge will first be credited to the unrecovered balance of storm-recovery costs associated with Hurricane Ivan until these costs have been fully recovered. The funds will then be credited to the property reserve for recovery of the storm-recovery costs of $53.3 million associated with Hurricanes Dennis and Katrina that were previously charged to the reserve. Should revenues collected by Gulf Power through the extension of the storm-recovery surcharge exceed the storm-recovery costs associated with Hurricanes Dennis and Katrina, the excess revenues will be credited to the reserve.

     The annual accrual to the reserve of $3.5 million and Gulf Power’s limited discretionary authority to make additional accruals to the reserve will continue as previously approved by the Florida PSC. As part of the March 2005 agreement regarding Hurricane Ivan costs that established the existing surcharge, Gulf Power agreed that it would not seek any additional increase in its base rates and charges to become effective on or before March 1, 2007. The terms of the stipulation do not alter or affect that portion of the prior agreement.

     According to the order, in the case of future storms, if Gulf Power incurs cumulative costs for storm-recovery activities in excess of $10 million during any calendar year, Gulf Power will be permitted to file a streamlined formal request for an interim surcharge. Any interim surcharge would provide for the recovery, subject to refund, of up to 80% of the claimed costs for storm-recovery activities. Gulf Power would then petition the Florida PSC for full recovery through an additional surcharge or other cost recovery mechanism.

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Fuel Cost Recovery

Gulf Power has established fuel cost recovery rates approved by the Florida PSC. In 2005 and the first six months of 2006, Gulf Power has experienced higher than expected fuel costs for coal and natural gas. If the projected fuel revenue over or under recovery exceeds 10% of the projected fuel costs 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 such notice with the Florida PSC on July 21, 2006, but no adjustment to the factor was requested. Under recovered fuel costs at June 30, 2006 totaled $36.8 million, and are included in “Under Recovered Regulatory Clause Revenues” on the Condensed Balance Sheets. 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.

Other Matters

Gulf Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Gulf Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements such as opacity and other air 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 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 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

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.

New Accounting Standards

Stock Options

On January 1, 2006, Gulf Power adopted FASB Statement No. 123(R), “Share-Based Payment,” using the modified prospective method. This statement requires that compensation cost relating to share-based payment

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transactions be recognized in the financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. Although the compensation expense required under the revised statement differs slightly, the impacts on Gulf Power’s financial statements are similar to the pro forma disclosures previously included in Note 1 to the financial statements of Gulf Power under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein.

Income Taxes

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” This interpretation requires that tax benefits must be “more likely than not” of being sustained in order to be recognized. The provisions of FIN 48 must be applied to all tax positions beginning January 1, 2007. Gulf Power is currently assessing the impact of FIN 48. The impact on Gulf Power’s financial statements has not yet been determined.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Gulf Power’s financial condition remained stable at June 30, 2006. Net cash flow from operating activities totaled $73.3 million for the first six months of 2006, compared to $45.9 million for the corresponding period in 2005. The $27.4 million increase in 2006 resulted primarily from a decrease in payments related to storm damage costs partially offset by increased purchases of emission allowances. Gross property additions to utility plant were $68.3 million in the first six months of 2006. Funds for Gulf Power’s property additions were provided by operating activities and other financing activities. See Gulf Power’s Condensed Statements of Cash Flows herein for further details.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Capital Requirements and Contractual Obligations” of Gulf Power in Item 7 of the Form 10-K for a description of Gulf Power’s capital requirements for its construction program, lease obligations, preference stock dividends, purchase commitments, and trust funding requirements. Approximately $25 million will be required by June 30, 2007 for maturities of long-term debt.

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, which were primarily operating cash flows, with capital contributions from Southern Company, short-term debt, and external security issuances providing additional funds. However, the amount, type, and timing of any future financings, if needed, will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions, and other factors. SeeMANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Sources of Capital” of Gulf Power in Item 7 of the Form 10-K for additional information.

     At June 30, 2006, Gulf Power’s current liabilities exceed current assets primarily due to the scheduled maturity of $25 million of long-term debt in 2006. To meet short-term cash needs and contingencies, Gulf Power has various internal and external sources of liquidity. At June 30, 2006, Gulf Power had approximately $5.6 million of cash and cash equivalents and $120 million of unused committed lines of credit with banks. Of these facilities, $90 million expire in 2006 and $30 million expire in 2007. Approximately $60 million of these

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credit arrangements contain provisions allowing two-year term loans executable at expiration and $15 million contains 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 for additional information. These credit arrangements provide liquidity support to Gulf Power’s obligations with respect to variable rate pollution control bonds and commercial paper. A portion of these facilities may be used to fund or provide liquidity support for commercial paper issuances to fund costs related to Hurricanes Ivan, Dennis, and Katrina. In addition, Gulf Power has substantial cash flow from operating activities. 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 June 30, 2006, Gulf Power had outstanding $62.8 million in commercial paper and $75 million in bank notes. There were no extendible commercial notes outstanding at June 30, 2006.

Credit Rating Risk

Gulf Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- or Baa3, or below. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit, or cash. These contracts are primarily for physical electricity purchases and sales. At June 30, 2006, the maximum potential collateral requirements at a BBB- or Baa3 rating were approximately $5 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $10 million. Gulf Power, along with all members of the Southern Company power pool, is also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas price risk management activities. At June 30, 2006, Gulf Power’s total exposure to these types of agreements was approximately $14.2 million.

Market Price Risk

Gulf Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2005 reporting period. In addition, Gulf Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

     Due to cost-based rate regulation, Gulf Power has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Gulf Power enters into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Gulf Power has implemented a fuel-hedging program with the approval of the Florida PSC.

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     The fair value of derivative energy contracts at June 30, 2006 was as follows:

	Second Quarter			Year-to-Date
	2006			2006
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	(3,261	)	$	11,526
Contracts realized or settled		2,886			(25	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		(5,658	)		(17,534	)
Contracts at June 30, 2006	$	(6,033	)	$	(6,033	)

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

	Source of June 30, 2006
	Valuation Prices
	Total			Maturity
	Fair Value			Year 1			1-3 Years
	(in thousands)
Actively quoted	$	(6,058	)	$	(6,817	)	$	759
External sources		25			25			—
Models and other methods		—			—			—
Contracts at June 30, 2006	$	(6,033	)	$	(6,792	)	$	759

     Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to Gulf Power’s fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through Gulf Power’s fuel cost recovery clause. Gains and losses on derivative contracts that are not designated as hedges are recognized in the statements of income as incurred. At June 30, 2006, the fair value gain / (loss) of derivative energy contracts was reflected in the financial statements as follows:

	Amounts
	(in thousands)
Regulatory assets, net	$	(6,020	)
Accumulated other comprehensive income		—
Net income		(13	)
Total fair value loss	$	(6,033	)

     Unrealized gains (losses) recognized in income were not material for any period presented.

     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.

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Financing Activities

Gulf Power did not issue or redeem any long-term securities in the first six months of 2006; Gulf Power’s obligations in connection with pollution control bonds totaling $12.1 million matured in April 2006. In the second quarter 2006, Gulf Power entered into a derivative transaction to hedge the interest rate risk of an anticipated future financing. The derivative has a total notional amount of $80 million and will be settled at the time of the future financing, with any resulting gain or loss amortized over a 10-year period. For further details, see Note (F) to the Condensed Financial Statements herein.

     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

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006			2005
	(in thousands)						(in thousands)
Operating Revenues:
Retail revenues	$	173,145		$	166,597		$	304,509		$	298,391
Sales for resale —
Non-affiliates		66,606			67,726			127,928			127,312
Affiliates		10,781			9,988			22,553			28,920
Other revenues		4,388			4,265			8,871			9,169
Total operating revenues		254,920			248,576			463,861			463,792
Operating Expenses:
Fuel		104,386			90,639			182,649			181,678
Purchased power —
Non-affiliates		4,615			5,210			9,317			10,629
Affiliates		17,381			24,919			36,417			34,523
Other operations		41,134			39,724			78,411			79,234
Maintenance		19,360			21,683			33,775			37,221
Depreciation and amortization		12,002			8,195			24,322			16,252
Taxes other than income taxes		15,650			15,147			29,850			29,292
Total operating expenses		214,528			205,517			394,741			388,829
Operating Income		40,392			43,059			69,120			74,963
Other Income and (Expense):
Interest income		22			31			71			66
Interest expense		(4,221	)		(597	)		(8,512	)		(4,123	)
Interest expense to affiliate trusts		(650	)		(650	)		(1,299	)		(1,299	)
Other income (expense), net		1,550			217			2,493			646
Total other income and (expense)		(3,299	)		(999	)		(7,247	)		(4,710	)
Earnings Before Income Taxes		37,093			42,060			61,873			70,253
Income taxes		13,894			15,995			22,959			26,808
Net Income		23,199			26,065			38,914			43,445
Dividends on Preferred Stock		433			433			866			866
Net Income After Dividends on Preferred Stock	$	22,766		$	25,632		$	38,048		$	42,579

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2006		2005		2006		2005
	(in thousands)				(in thousands)
Net Income After Dividends on Preferred Stock	$	22,766	$	25,632	$	38,048	$	42,579
Other comprehensive income (loss):
Changes in fair value of qualifying hedges, net of tax of $64, $47, $204 and $(125), respectively		105		74		330		(203	)
COMPREHENSIVE INCOME	$	22,871	$	25,706	$	38,378	$	42,376

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

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CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months
	Ended June 30,
	2006			2005
	(in thousands)
Operating Activities:
Net income	$	38,914		$	43,445
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		33,111			31,097
Deferred income taxes and investment tax credits, net		21,218			27,486
Plant Daniel capacity		(6,504	)		(12,563	)
Pension, postretirement, and other employee benefits		2,518			1,259
Stock option expense		850			—
Tax benefit of stock options		49			2,676
Other, net		(9,188	)		(3,120	)
Changes in certain current assets and liabilities —
Receivables		41,243			(16,905	)
Fossil fuel stock		5,629			(15,097	)
Materials and supplies		61			2,491
Other current assets		30,303			1,683
Hurricane Katrina accounts payable		(41,638	)		—
Other accounts payable		(51,837	)		(10,540	)
Accrued taxes		(11,342	)		(14,855	)
Accrued compensation		(14,117	)		(11,305	)
Over recovered regulatory clause revenues		(22,354	)		(1,851	)
Other current liabilities		465			551
Net cash provided from operating activities		17,381			24,452
Investing Activities:
Property additions		(91,231	)		(32,385	)
Cost of removal net of salvage		(4,040	)		(1,366	)
Other		(12,500	)		(1,167	)
Net cash used for investing activities		(107,771	)		(34,918	)
Financing Activities:
Increase in notes payable, net		115,128			37,887
Proceeds —
Senior notes		—			30,000
Gross excess tax benefit of stock options		36			—
Redemptions — First mortgage bonds		—			(30,000	)
Special deposits — Redemption fund		—			(2,482	)
Capital distributions to parent company		(2,378	)		—
Payment of preferred stock dividends		(866	)		(866	)
Payment of common stock dividends		(32,600	)		(31,000	)
Net cash provided from financing activities		79,320			3,539
Net Change in Cash and Cash Equivalents		(11,070	)		(6,927	)
Cash and Cash Equivalents at Beginning of Period		14,301			6,945
Cash and Cash Equivalents at End of Period	$	3,231		$	18
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest	$	15,471		$	6,783
Income taxes (net of refunds)	$	(42,560	)	$	(11,811	)

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

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CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Assets	2006			2005
	(in thousands)
Current Assets:
Cash and cash equivalents	$	3,231		$	14,301
Receivables —
Customer accounts receivable		43,244			36,747
Unbilled revenues		27,421			20,267
Under recovered regulatory clause revenues		77,102			105,505
Other accounts and notes receivable		3,153			21,507
Insurance receivable		42,526			60,163
Affiliated companies		14,760			19,595
Accumulated provision for uncollectible accounts		(778	)		(2,321	)
Fossil fuel stock, at average cost		44,815			50,444
Materials and supplies, at average cost		28,616			28,678
Prepaid income taxes		6,016			42,278
Other regulatory assets		31,468			23,042
Other		17,032			25,160
Total current assets		338,606			445,366
Property, Plant, and Equipment:
In service		2,030,990			1,987,294
Less accumulated provision for depreciation		826,633			803,754
		1,204,357			1,183,540
Construction work in progress		46,327			52,225
Total property, plant, and equipment		1,250,684			1,235,765
Other Property and Investments		7,109			6,821
Deferred Charges and Other Assets:
Deferred charges related to income taxes		9,542			9,863
Prepaid pension costs		16,219			17,264
Deferred property damage		248,381			209,324
Other		51,037			56,866
Total deferred charges and other assets		325,179			293,317
Total Assets	$	1,921,578		$	1,981,269

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

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CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Liabilities and Stockholder’s Equity	2006			2005
	(in thousands)
Current Liabilities:
Notes payable	$	317,252		$	202,124
Accounts payable —
Affiliated		28,453			122,899
Other		50,959			89,598
Customer deposits		8,132			7,298
Accrued taxes —
Income taxes		26,881			17,736
Other		28,454			48,296
Accrued interest		2,821			3,408
Accrued compensation		10,471			24,587
Over recovered regulatory clause revenues		3,834			26,188
Plant Daniel capacity		9,334			13,008
Other		31,442			40,334
Total current liabilities		518,033			595,476
Long-term Debt		242,550			242,548
Long-term Debt Payable to Affiliated Trusts		36,082			36,082
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		287,739			266,629
Deferred credits related to income taxes		18,148			19,003
Accumulated deferred investment tax credits		16,871			17,465
Employee benefit obligations		59,791			58,318
Other cost of removal obligations		84,063			81,284
Other regulatory liabilities		6,353			13,755
Other		53,673			56,769
Total deferred credits and other liabilities		526,638			513,223
Total Liabilities		1,323,303			1,387,329
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		298,092			299,536
Retained earnings		233,150			227,701
Accumulated other comprehensive loss		(3,438	)		(3,768	)
Total common stockholder’s equity		565,495			561,160
Total Liabilities and Stockholder’s Equity	$	1,921,578		$	1,981,269

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

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SECOND QUARTER 2006 vs. SECOND QUARTER 2005
AND
YEAR-TO-DATE 2006 vs. YEAR-TO-DATE 2005

OVERVIEW

Mississippi Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the State of Mississippi and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Mississippi Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand, storm restoration, and increasingly stringent environmental standards. Hurricane Katrina hit Mississippi Power’s service territory in August 2005. As a result, Mississippi Power has incurred significant restoration costs. In addition, fuel costs rose significantly during 2005 and the first six months of 2006. Recent Mississippi PSC actions should assure the timely recovery of the storm recovery costs, while minimizing the impact on Mississippi Power’s customers. Mississippi Power will continue to work with the Mississippi PSC to ensure timely recovery of the storm recovery and fuel costs. See Note (I) to the Condensed Financial Statements herein for additional information on the recent storm recovery order.

     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. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS — OVERVIEW — “Key Performance Indicators” of Mississippi Power in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Mississippi Power’s net income after dividends on preferred stock for the second quarter and year-to-date 2006 was $22.8 million and $38.0 million, respectively, compared to $25.6 million and $42.6 million, respectively, for the corresponding periods of 2005. Earnings in the second quarter 2006 decreased by $2.9 million, or 11.2%, compared to the same period of 2005 primarily as a result of a $3.0 million reduction in net energy sales (revenue from energy sales less fuel and purchased power expense), a $3.8 million increase in depreciation and amortization expense, and a $3.6 million increase in interest expense, which were partially offset by a $3.7 million increase in territorial base revenues, a $0.8 million decrease in non-fuel operations and maintenance expenses, and a $1.3 million increase in other income (expense), net, of which $0.9 million is related to the increase in interest income associated with the recovery mechanism for fuel hedging and energy cost hedging. Year-to-date earnings in 2006 decreased $4.5 million, or 10.6%, compared to the same period of 2005 primarily as a result of a $0.4 million decrease in territorial base revenues, a $1.0 million reduction in net energy sales, an $8.1 million increase in depreciation and amortization expense, and a $4.4 million increase in interest expense, all of which were partially offset by a $4.3 million decrease in non-fuel operations and maintenance expenses and a $1.8 million increase in other income (expense), net, related to the increase in interest income associated with the recovery mechanism for fuel hedging and energy cost hedging.

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     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Second Quarter						Year-to-Date
	(in thousands)			%			(in thousands)			%
Retail revenues	$	6,548			3.9		$	6,118			2.1
Sales for resale – affiliates		793			7.9			(6,367	)		(22.0	)
Fuel expense		13,747			15.2			971			0.5
Purchased power expense – non-affiliates		(595	)		(11.4	)		(1,312	)		(12.3	)
Purchased power expense – affiliates		(7,538	)		(30.3	)		1,894			5.5
Maintenance expense		(2,323	)		(10.7	)		(3,446	)		(9.3	)
Depreciation and amortization		3,807			46.5			8,070			49.7
Interest expense		3,624			N/M			4,389			106.5
Other income (expense), net		1,333			N/M			1,847			N/M
Income taxes		(2,101	)		(13.1	)		(3,849	)		(14.4	)

N/M – Not meaningful

     Retail revenues. The chart below reflects the primary drivers of the 3.9% increase and 2.1% increase in retail revenues in the second quarter and year-to-date 2006, respectively, compared to the same periods in the prior year. Excluding revenues related to fuel and other cost recovery, which do not affect net income, retail revenues increased slightly in the second quarter and remained stable for the year-to-date 2006 when compared to the same periods of 2005. In the second quarter 2006, KWH sales to residential, commercial, and industrial customers decreased 4.1%, 12.3%, and 3.4%, respectively, when compared to the corresponding period in 2005, and year-to-date 2006 KWH sales to residential, commercial, and industrial customers decreased 9.8%, 13.3%, and 5.5%, respectively, when compared to the corresponding period in 2005 due to Hurricane Katrina and the loss of approximately 16,000 customers.

     Details of retail revenues are as follows:

	Second Quarter						Year-to-Date
	2006						2006
	(in thousands)			% change			(in thousands)			% change
Retail – prior year	$	166,597					$	298,391
Change in —
Base rates		8,018			4.8			9,728			3.3
Sales growth and weather		(4,934	)		(3.0	)		(10,509	)		(3.5	)
Fuel cost recovery		3,498			2.1			7,110			2.4
Other cost recovery		(34	)		—			(211	)		(0.1	)
Retail – current year	$	173,145			3.9	%	$	304,509			2.1	%

     Sales for resale — affiliates. Revenues from sales for resale to 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. The 7.9% increase in sales for resale to affiliates in the second quarter 2006 as compared to the same period in 2005 is primarily due to a decrease in Mississippi Power’s territorial demand resulting in available generation for sale to affiliates. The 22.0% decrease in sales for resale to affiliates for year-to-date 2006 as compared to the same period in 2005 is primarily due to higher gas prices.

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     Fuel expense and purchased power expense. Fuel expense and purchased power expense, together, increased $5.6 million and $1.6 million in the second quarter and year-to-date 2006, respectively, compared to the same periods in the prior year. Details of the individual components follow.

Fuel expense increased in the second quarter 2006 by $13.7 million when compared to the same period in 2005 primarily due to an increase in the cost of fuel. The year-to-date increase in fuel of $1 million as compared to the same period in 2005 is primarily due to a $21.8 million increase in the cost of fuel offset by a $20.7 million decrease related to fewer KWHs generated. Since energy expenses are generally offset by energy revenues through Mississippi Power’s retail and wholesale fuel cost recovery clauses, these expenses do not have a significant impact on earnings.

Purchased power expense — non-affiliates decreased $0.6 million and $1.3 million in the second quarter and year-to-date 2006, respectively, as compared to the same periods in 2005 primarily as the result of lower prices within the Southern Company system compared to the market.

Purchased power from affiliates decreased 30.3% in the second quarter 2006 as compared to the same period in 2005 due to decreased sales outside the Southern Company system. The 5.5% increase in purchased power from affiliates for the year-to-date 2006 as compared to the same period in 2005 is due to reduced generation because of increased fuel prices, resulting in more purchased power needed to meet the gap between generation and demand. This increase was offset by purchased power reductions due to fewer sales outside the Southern Company system. Energy purchases from affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. These purchases are made in accordance with the IIC, as approved by the FERC. These transactions did not have a significant impact on earnings since the energy purchases are generally offset by energy revenues through Mississippi Power’s retail and wholesale fuel cost recovery clauses.

     Maintenance expense. The second quarter and year-to-date 2006 decreases in maintenance expense when compared to the same periods in 2005 resulted from the decreased expenses of $1.3 million in Mississippi Power’s combined cycle long-term service agreement due to reduced operating hours as a result of higher cost of gas, approximately $1 million in decreases associated with overhead line clearing, stations equipment, and miscellaneous transmission plant maintenance, and approximately $1.4 million primarily associated with maintenance of overhead lines.

     Depreciation and amortization. The second quarter and year-to-date 2006 increases of $3.8 million and $8.1 million, respectively, in depreciation and amortization expense when compared to the same periods in 2005 are primarily due to the decrease in the credit amortization of the regulatory liability related to additional Plant Daniel capacity and to the new depreciation rates approved by the Mississippi PSC effective January 1, 2006. 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.

     Interest expense. The $3.6 million and $4.4 million increases in interest expense for the second quarter and year-to-date 2006, respectively, as compared to the same periods in 2005 are due to the increase in short-term indebtedness, higher interest rates, and reversal of a $2.5 million liability in June 2005 for a transmission facility agreement as a result of changes in the legal and regulatory environment.

     Other income (expense), net. The second quarter and year-to-date 2006 increases in other income (expense), net when compared to the same periods in 2005 are primarily the result of increases of $0.9 million and $1.8 million, respectively, in interest income related to the regulatory recovery of hedging activities.

     Income taxes. The $2.1 million and $3.8 million decreases in income taxes for the second quarter and year-to-date 2006, respectively, as compared to the same periods in 2005 are primarily related to the reductions in pre-tax income.

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FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Mississippi Power’s future earnings potential. The level of 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. 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 regulations could affect earnings if such costs cannot be fully recovered in rates on a timely basis. As discussed in the Form 10-K, environmental compliance spending over the next several years may exceed amounts estimated. Some of the factors driving the anticipated increase are higher commodity costs, market demand for labor, and scope additions and clarifications. The timing, specific requirements, and estimated costs could also change as environmental regulations are modified. 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 Reform Rules

On October 20, 2005, the EPA published a proposed rule clarifying the test for determining when an emissions increase is subject to the NSR requirements. On March 17, 2006, the U.S. Court of Appeals for the District of Columbia Circuit vacated the EPA’s proposed rule which sought to clarify the scope of the existing Routine Maintenance, Repair, and Replacement Exclusion. Because this rule was not yet in effect, the court’s ruling is not anticipated to have any impact on Mississippi Power. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — New Source Review Actions” of Mississippi Power in Item 7 of the Form 10-K for additional information.

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 on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Mississippi Power has authorization from the FERC to sell power to non-affiliates at market-based prices. Mississippi Power also has FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. On February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. A hearing before an ALJ originally scheduled for March 2006 has been held in abeyance to allow the parties to explore settlement. Any new market-based rate

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transactions in its retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. Such sales through May 27, 2006, the end of the 15-month refund period, were approximately $8.5 million for Mississippi Power. In the event that the FERC’s default mitigation measures for entities that are found to have market power are ultimately applied, Mississippi Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

     In addition, in May 2005, the FERC initiated an investigation to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing. The FERC established a new 15-month refund period related to this expanded investigation. Any new market-based rate transactions involving any Southern Company subsidiary will be subject to refund to the extent the FERC orders lower rates as a result of this new investigation, with the refund period beginning July 19, 2005. The impact of such sales involving Mississippi Power through June 30, 2006 is not expected to exceed $11.7 million, of which $7.8 million relates to sales inside the retail service territory discussed above. The FERC also directed that this expanded proceeding be held in abeyance pending the outcome of the proceeding on the IIC discussed below.

     Mississippi Power believes that there is no meritorious basis for this proceeding and is vigorously defending itself in this matter. However, the final outcome of this matter, including any remedies to be applied in the event of an adverse ruling in this proceeding, cannot now be determined.

Intercompany Interchange Contract

Also in May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the power pool of Southern Company is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (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. The FERC order directs that the ALJ who presided over a proceeding involving approval of PPAs between Southern Power and Georgia Power and Savannah Electric be assigned to preside over the hearing in this proceeding and that the testimony and exhibits presented in that proceeding be preserved to the extent appropriate. Effective July 19, 2005, revenues from transactions under the IIC involving any Southern Company subsidiaries will be subject to refund to the extent the FERC orders any changes to the IIC. On April 11, 2006, Southern Company, Calpine Corporation, Coral Energy, and Dalton Utilities filed a settlement offer that would resolve the proceeding, and does not require any refunds. The ALJ has certified the settlement to the FERC, where it is pending. Since the offer is pending, the final outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS— FUTURE EARNINGS POTENTIAL — “FERC Matters – Intercompany Interchange Contract” of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for additional information.

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Storm Damage Cost Recovery

In August 2005, Hurricane Katrina hit the Gulf Coast of the United States and caused significant damage within Mississippi Power’s service area. Mississippi Power maintains a reserve to cover the cost of damages from major storms to its transmission and distribution lines and the cost of uninsured damages to its generation facilities and other property. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters — Storm Damage Cost Recovery” of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters – Storm Damage Cost Recovery” in Item 8 of the Form 10-K for additional information.

     On June 28, 2006, the Mississippi PSC approved an order based upon a stipulation between Mississippi Power and the Mississippi Public Utilities Staff. The stipulation and the associated order certified actual storm restoration costs relating to Hurricane Katrina through April 30, 2006 of $267.9 million and affirmed estimated additional costs through December 31, 2007 of $34.5 million, for total storm restoration costs of $302.4 million, without offset for the property damage reserve of $3.0 million. Of the total amount, $292.8 million applies to Mississippi Power’s retail jurisdiction. The order directs Mississippi Power to file an application with the Mississippi Development Authority (MDA) for Community Development Block Grants (CDBG). The MDA has indicated that $360 million of CDBG will be available to utilities within the State of Mississippi impacted by Hurricane Katrina. All CDBG proceeds received by Mississippi Power will be applied to both retail and wholesale storm restoration costs. The retail portion of any certified restoration costs not covered by the CDBG program are expected to be funded through a state bond program previously approved by the State of Mississippi legislature. The Mississippi PSC order also indicated that the state bond program would be appropriate funding for all or a portion of a new storm operations center if approved and for an appropriate storm reserve, both of which require additional Mississippi PSC action. If state bonds are used for any portion of the Hurricane Katrina restoration costs, periodic true-up mechanisms will be structured to comply with terms and requirements from the legislation.

     The Mississippi PSC order also granted continuing authority to record a regulatory asset in an amount equal to the retail portion of the recorded Hurricane Katrina restoration costs. The balance in the regulatory asset account at June 30, 2006 is $248.4 million, which is net of insurance proceeds of $80.1 million. These costs include approximately $142 million of capital additions and $106 million of operation and maintenance expenditures. For any future event causing damage to property beyond the balance in the reserve, the order also granted Mississippi Power the authority to record a regulatory asset. Mississippi Power would then apply to the Mississippi PSC for recovery of such amounts or for authority to otherwise dispose of the regulatory asset.

     Mississippi Power expects to file the CDBG application with the MDA in the third quarter 2006, at which time the MDA is expected to assess applications and award grants. Mississippi Power filed an application for a financing order with the Mississippi PSC on July 3, 2006 for restoration costs under the state bond program, including the property damage reserve funding and the construction of the storm operations center. The final outcome of these matters cannot now be determined.

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Retail Regulatory Matters

In December 2005, Mississippi Power submitted its annual PEP filing to the Mississippi PSC. Ordinarily, PEP limits annual rate increases to 4%; however, Mississippi Power requested that the Mississippi PSC approve a temporary change to allow it to exceed this cap as a result of the ongoing effects of Hurricane Katrina. Mississippi Power had requested a 5.05%, or $32 million, retail base rate increase to become effective in April 2006. Hearings were held in March 2006 and the full increase was approved by the Mississippi PSC later in March 2006.

     In February 2006, Mississippi Power filed with the Mississippi PSC its annual ECO Plan evaluation. Mississippi Power requested a 12 cent per 1,000 KWH reduction for retail customers. This decrease would represent a reduction of approximately $1.3 million per year in annual revenues for Mississippi Power. Hearings were held in April 2006. The Mississippi PSC unanimously approved the decrease at the hearings and issued an order confirming approval in April 2006.

Fuel Cost Recovery

Mississippi Power has an established fuel cost recovery factor that is approved by the Mississippi PSC. In 2005 and the first six months of 2006, Mississippi Power experienced higher than expected fuel costs for coal and gas, which led to an increase in the under recovered fuel costs. Mississippi Power is required to file for an adjustment to the fuel cost recovery factor annually; the last such filing was made in November 2005, with the new rate becoming effective in January 2006. At June 30, 2006, the under recovered balance of fuel recorded in the Condensed Balance Sheets herein was $73.3 million. 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.

Other Matters

Mississippi Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Mississippi Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements such as opacity and other air 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.

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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.

New Accounting Standards

Stock Options

On January 1, 2006, Mississippi Power adopted FASB Statement No. 123(R), “Share-Based Payment,” using the modified prospective method. This statement requires that compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. Although the compensation expense required under the revised statement differs slightly, the impacts on Mississippi Power’s financial statements are similar to the pro forma disclosures previously included in Note 1 to the financial statements of Mississippi Power under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein.

Income Taxes

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” This interpretation requires that tax benefits must be “more likely than not” of being sustained in order to be recognized. The provisions of FIN 48 must be applied to all tax positions beginning January 1, 2007. Mississippi Power is currently assessing the impact of FIN 48. The impact on Mississippi Power’s financial statements has not yet been determined.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Mississippi Power’s financial condition remained stable at June 30, 2006. Net cash provided from operating activities totaled $17.4 million for the first six months of 2006, compared to net cash flow provided from operating activities of $24.5 million for the same period in 2005. The $7.1 million decrease in 2006 resulted primarily from cash requirements associated with Hurricane Katrina restoration.

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, preferred stock dividends, and trust funding requirements. Mississippi Power has no maturities or redemptions of long-term debt required by June 30, 2007.

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Sources of Capital

Mississippi Power plans to obtain the funds required for construction, continued storm damage restoration, and other purposes from sources similar to those used in the past, including operating cash flows, capital contributions from Southern Company, short-term debt, and external security issuances. The amount, type, and timing of any future financings, if needed, will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Sources of Capital” of Mississippi Power in Item 7 of the Form 10-K for additional information.

     At June 30, 2006, Mississippi Power’s current liabilities exceeded current assets primarily as a result of obligations incurred as a result of Hurricane Katrina, as well as the continued use of short-term debt as a funding source to meet cash needs, which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Mississippi Power had at June 30, 2006 approximately $3.2 million of cash and cash equivalents and $275.5 million of unused committed credit arrangements with banks. Of these facilities, $50.5 million expire in 2006, $50 million expire in 2007, and $175 million expire in 2008. 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. Approximately $38 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. The credit arrangements provide liquidity support to Mississippi Power’s obligations with respect to variable rate pollution control bonds and commercial paper. A portion of these facilities may be used to fund or provide liquidity support for commercial paper issuances to fund costs on an interim basis related to Hurricane Katrina. At June 30, 2006, Mississippi Power had $167.3 million in commercial paper, $150 million in bank notes, and no extendible commercial notes outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.

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. However, Mississippi Power, along with all members of the Southern Company power pool, is party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas price risk management activities. At June 30, 2006, Mississippi Power’s total exposure to these types of agreements was approximately $14.2 million.

Market Price Risk

Mississippi Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2005 reporting period. However, as a result of storm damage from Hurricane Katrina, Mississippi Power expects to maintain the increase in short-term indebtedness in the coming months while issues relating to storm cost recovery are resolved, which could significantly increase its exposure to

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interest rate risk. Mississippi Power will manage this increased exposure through a number of means, including interest rate hedges, where appropriate.

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

     The fair value of derivative, fuel, and energy contracts at June 30, 2006 was as follows:

	Second Quarter			Year-to-Date
	2006			2006
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	9,892		$	27,106
Contracts realized or settled		(1,345	)		(4,376	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		(6,975	)		(21,158	)
Contracts at June 30, 2006	$	1,572		$	1,572

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

	Source of June 30, 2006
	Valuation Prices
	Total		Maturity
	Fair Value		Year 1			1-3 Years
	(in thousands)
Actively quoted	$	879	$	(1,441	)	$	2,320
External sources		693		693			—
Models and other methods		—		—			—
Contracts at June 30, 2006	$	1,572	$	(748	)	$	2,320

     Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to Mississippi Power’s fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through Mississippi Power’s energy cost management clause. In addition, any unrealized gains and losses on energy-related derivatives used to hedge anticipated purchases and sales are deferred in other comprehensive income. Gains and losses on derivative contracts that are not designated as hedges are recognized in the statements of income as incurred. These amounts were not material in any period presented. At June 30, 2006, the fair value gain/(loss) of derivative energy contracts was reflected in the financial statements as follows:

	Amounts
	( in thousands)
Regulatory liabilities, net	$	1,393
Accumulated other comprehensive income		192
Net income		(13	)
Total fair value gain	$	1,572

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

     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.

Financing Activities

Mississippi Power did not issue or redeem any long-term securities in the first six months of 2006. 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.

94

SOUTHERN POWER COMPANY
AND SUBSIDIARY COMPANIES

95

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006			2005
	(in thousands)						(in thousands)
Operating Revenues:
Sales for resale —
Non-affiliates	$	62,915		$	39,703		$	114,612		$	79,807
Affiliates		129,947			109,217			217,270			221,554
Other revenues		777			306			1,586			686
Total operating revenues		193,639			149,226			333,468			302,047
Operating Expenses:
Fuel		40,245			26,730			54,504			61,274
Purchased power —
Non-affiliates		12,684			10,772			26,655			19,634
Affiliates		26,362			16,159			45,769			37,113
Other operations		16,792			13,814			34,299			26,533
Maintenance		5,519			4,939			11,404			8,198
Depreciation and amortization		15,864			13,109			30,571			25,892
Taxes other than income taxes		3,800			3,092			7,461			6,047
Total operating expenses		121,266			88,615			210,663			184,691
Operating Income		72,373			60,611			122,805			117,356
Other Income and (Expense):
Interest expense, net of amounts capitalized		(20,656	)		(19,935	)		(40,998	)		(39,179	)
Other income (expense), net		899			202			3,302			294
Total other income and (expense)		(19,757	)		(19,733	)		(37,696	)		(38,885	)
Earnings Before Income Taxes		52,616			40,878			85,109			78,471
Income taxes		20,795			15,644			33,388			30,164
Net Income	$	31,821		$	25,234		$	51,721		$	48,307

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2006		2005		2006		2005
	(in thousands)				(in thousands)
Net Income	$	31,821	$	25,234	$	51,721	$	48,307
Other comprehensive income (loss):
Changes in fair value of qualifying hedges, net of tax of $1,048, $50, $969, and $50, respectively		1,625		72		1,503		72
Reclassification adjustment for amounts included in net income, net of tax of $1,125, $1,050, $2,237, and $2,091, respectively		1,736		1,620		3,468		3,232
COMPREHENSIVE INCOME	$	35,182	$	26,926	$	56,692	$	51,611

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 Six Months
	Ended June 30,
	2006			2005
	(in thousands)
Operating Activities:
Net income	$	51,721		$	48,307
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		37,395			33,271
Deferred income taxes and investment tax credits, net		22,753			23,272
Deferred revenues		(24,929	)		(26,309	)
Tax benefit of stock options		—			231
Other, net		1,475			(1,205	)
Changes in certain current assets and liabilities —
Receivables		(7,141	)		(34,828	)
Fossil fuel stock		(369	)		(3,092	)
Materials and supplies		(719	)		(2,494	)
Other current assets		7,274			5,659
Accounts payable		(27,505	)		213
Accrued taxes		6,904			6,794
Accrued interest		114			49
Net cash provided from operating activities		66,973			49,868
Investing Activities:
Property additions		(94,294	)		(218,822	)
Sale of property to affiliate		15,674			—
Other		(638	)		(103	)
Net cash used for investing activities		(79,258	)		(218,925	)
Financing Activities:
Increase in notes payable, net		54,861			163,090
Redemptions — Other long term debt		(200	)		(200	)
Payment of common stock dividends		(38,850	)		—
Other		—			(958	)
Net cash provided from financing activities		15,811			161,932
Net Change in Cash and Cash Equivalents		3,526			(7,125	)
Cash and Cash Equivalents at Beginning of Period		27,631			25,241
Cash and Cash Equivalents at End of Period	$	31,157		$	18,116
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $48 and $0 capitalized for 2006 and 2005, respectively)	$	33,891		$	31,562
Income taxes (net of refunds)	$	4,767		$	3,582

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 June 30,		At December 31,
Assets	2006		2005
		(in thousands)
Current Assets:
Cash and cash equivalents	$	31,157	$	27,631
Receivables —
Customer accounts receivable		25,752		20,953
Other accounts receivable		72		93
Affiliated companies		62,940		60,505
Fossil fuel stock, at average cost		7,604		7,221
Materials and supplies, at average cost		17,416		15,628
Prepaid service agreements — current		21,102		6,178
Other prepaid expenses		2,581		4,610
Other		6,393		251
Total current assets		175,017		143,070
Property, Plant, and Equipment:
In service		2,110,923		2,030,996
Less accumulated provision for depreciation		184,699		161,358
		1,926,224		1,869,638
Construction work in progress		211,626		218,812
Total property, plant, and equipment		2,137,850		2,088,450
Deferred Charges and Other Assets:
Prepaid long-term service agreements		33,661		46,447
Other—
Affiliated		5,957		4,496
Other		16,790		20,513
Total deferred charges and other assets		56,408		71,456
Total Assets	$	2,369,275	$	2,302,976

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 June 30,			At December 31,
Liabilities and Stockholder’s Equity	2006			2005
		(in thousands)
Current Liabilities:
Securities due within one year	$	1,209		$	200
Notes payable		165,553			110,692
Accounts payable —
Affiliated		36,260			65,262
Other		10,054			7,651
Accrued taxes —
Income taxes		9,326			3,477
Other		10,234			2,524
Accrued interest		29,275			29,161
Other		581			71
Total current liabilities		262,492			219,038
Long-term Debt		1,098,491			1,099,520
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		95,570			68,535
Deferred capacity revenues — Affiliated		12,890			37,534
Other—
Affiliated		9,200			10,792
Other		6,447			1,214
Total deferred credits and other liabilities		124,107			118,075
Total Liabilities		1,485,090			1,436,633
Common Stockholder’s Equity:
Common stock, par value $.01 per share —
Authorized - 1,000,000 shares
Outstanding - 1,000 shares		—			—
Paid-in capital		746,243			746,243
Retained earnings		177,396			164,525
Accumulated other comprehensive loss		(39,454	)		(44,425	)
Total common stockholder’s equity		884,185			866,343
Total Liabilities and Stockholder’s Equity	$	2,369,275		$	2,302,976

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

99

SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES

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

SECOND QUARTER 2006 vs. SECOND QUARTER 2005
AND
YEAR-TO-DATE 2006 vs. YEAR-TO-DATE 2005

OVERVIEW

Southern Power constructs, owns, and manages Southern Company’s competitive generation assets and sells electricity at market-based rates in the Super Southeast wholesale market. Southern Power continues to focus on executing its regional strategy in the Super Southeast in 2006, including potential acquisition and/or expansion opportunities. Southern Power continues to address questions at the federal regulatory level relative to market power and affiliate transactions. See FUTURE EARNINGS POTENTIAL — “FERC Matters” herein for additional detail.

     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 consist of plant availability, peak season equivalent forced outage rate (EFOR), and net income. Plant availability shows the percentage of time during the year that Southern Power’s generating units are available to be called upon to generate (the higher the better), whereas the EFOR more narrowly defines the hours during peak demand times when Southern Power’s generating units are not available due to forced outages (the lower the better). For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS — OVERVIEW — “Key Performance Indicators” of Southern Power in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Southern Power’s net income for the second quarter and year-to-date 2006 was $31.8 million and $51.7 million compared to $25.2 million and $48.3 million, respectively, for the corresponding periods of 2005. The increase in second quarter 2006 earnings of $6.6 million, or 26.1%, was primarily the result of increased demand under affiliate company PPAs due to warmer weather within the Southern Company service territory, operations of Plant Oleander acquired in June 2005, and new operations from Plant DeSoto acquired in June 2006. Year-to-date 2006 earnings were $3.4 million, or 7.1%, higher than year-to-date 2005 as a result of a full period of operations at Plant Oleander, a new PPA with Piedmont Municipal Power Authority (PMPA), effective January 1, 2006, gains on open derivative positions, and the acquisition of Plant DeSoto in June 2006. These factors were partially offset by higher operating and maintenance expenses, as well as increased depreciation expense.

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Second Quarter				Year-to-Date
	(in thousands)		%		(in thousands)			%
Sales for resale – non-affiliates	$	23,212		58.5		34,805			43.6
Sales for resale – affiliates		20,730		19.0		(4,284	)		(1.9	)
Fuel expense		13,515		50.6		(6,770	)		(11.0	)
Purchased power expense – non-affiliates		1,912		17.7		7,021			35.8
Purchased power expense – affiliates		10,203		63.1		8,656			23.3
Other operations expense		2,978		21.6		7,766			29.3
Maintenance expense		580		11.7		3,206			39.1
Depreciation and amortization expense		2,755		21.0		4,679			18.1
Interest expense, net of amounts capitalized		721		3.6		1,819			4.6

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

     Sales for resale — affiliates and non-affiliates. Second quarter 2006 revenues increased for sales for resale to both non-affiliates and affiliates when compared to the corresponding period in 2005. Revenues from non-affiliates increased $23.2 million primarily due to PPA sales from Plant Oleander, acquired in June 2005, and Plant DeSoto, acquired in June 2006, and revenues from affiliates increased by $20.7 million due to weather-related higher demand under PPAs with affiliates in the second quarter 2006. Year-to-date 2006 revenues from sales for resale to non-affiliates increased $34.8 million and revenues from sales for resale to affiliates decreased $4.3 million when compared to the same period in 2005. The increase in revenues from non-affiliates was primarily due to PPA sales from Plant Oleander, the new PMPA PPA, and PPA sales from Plant DeSoto. The decrease in revenues from affiliates was primarily due to lower energy sales under existing affiliate PPAs due to decreased demand as a result of milder weather in the first quarter 2006. 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.

     Fuel expense. Fuel expense in the second quarter 2006 increased $13.5 million when compared to the same period in 2005 primarily from a 77% increase in generation at Plant Wansley under PPAs with Georgia Power and Savannah Electric. Fuel expense decreased $6.8 million year-to-date 2006 when compared to the same period in 2005 due to the effects of the first quarter 2006 decline in energy sales under affiliate PPAs. Existing PPAs generally provide that the purchasers are responsible for substantially all of the fuel costs relating to energy delivered under the PPAs; therefore, fuel expenses do not have a significant impact on net income.

     Purchased power expense — affiliates and non-affiliates. Total purchased power increased $12.1 million in the second quarter and $15.7 million year-to-date 2006 when compared to the corresponding periods in 2005. This was partially due to 7% and 8% price increases in the respective periods and volume increases from available lower cost energy from contracts with Georgia electric membership cooperatives and PMPA.

     Other operations expense. Other operations expense increased $3.0 million in the second quarter and $7.8 million year-to-date 2006 when compared to the corresponding periods in 2005 primarily due to additional administrative expense of $2.4 million and $5.2 million, respectively, and operations at Plant Oleander and Plant DeSoto. Also contributing to the increase were transmission expenses related to the PMPA PPA, which were $0.5 million and $0.8 million in the second quarter and year-to-date 2006, respectively.

     Maintenance expense. Maintenance expense increased $0.6 million in the second quarter and $3.2 million year-to-date 2006 when compared to the corresponding periods in 2005, primarily due to operations at Plant Oleander and Plant DeSoto as well as the timing of plant maintenance activities.

     Depreciation and amortization expense. Depreciation expense increased $2.8 million in the second quarter and $4.7 million year-to-date 2006 when compared to the corresponding periods in 2005, primarily as a result of additional plant in service relating to Plant Oleander and Plant DeSoto, acquired in June 2005 and June 2006, respectively. Higher depreciation rates from a new depreciation study adopted in March 2006 also contributed to the second quarter and year-to-date 2006 increases by $1.5 million and $2.0 million, respectively.

     Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized increased $0.7 million in the second quarter and $1.8 million year-to-date 2006 when compared to the same periods in 2005 primarily as the result of an increase in outstanding short-term debt incurred to finance plant acquisitions discussed above.

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

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Southern Power’s future earnings potential. Several factors affect the opportunities, challenges, and risks of Southern Power’s competitive wholesale energy business. These factors include the ability to achieve sales growth while containing costs. Another major factor is federal regulatory policy, which may impact Southern Power’s level of participation in this market. The level of future earnings depends on numerous factors, especially regulatory matters, including those related to affiliate contracts, sales, creditworthiness of customers, total generating capacity available in the Southeast, and the successful remarketing of capacity as current contracts expire. For additional information relating to these issues, see 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 2 to the financial statements of Southern Power under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Southern Power has authorization from the FERC to sell power to non-affiliates at market-based prices. Southern Power also has FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. On February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. A hearing before an ALJ originally scheduled for March 2006 has been held in abeyance to allow the parties to explore settlement. Any new market-based rate transactions in Southern Company’s retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. Such sales through May 27, 2006, the end of the 15-month refund period, were approximately $0.8 million for Southern Power. In the event that the FERC’s default mitigation measures for entities that are found to have market power are ultimately applied, Southern Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

     In addition, in May 2005, the FERC initiated an investigation to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing. The FERC established a new 15-month refund period related to this expanded investigation. Any new market-based rate transactions involving any Southern Company subsidiary will be subject to refund to the extent the FERC orders lower rates as a result of this new investigation, with the refund period beginning July 19, 2005. The impact of such sales involving Southern Power through June 30, 2006 is not expected to exceed $2.3 million, of which $0.7 million relates to sales inside the retail service territory discussed above. The FERC also directed that this expanded proceeding be held in abeyance pending the outcome of the proceeding on the IIC discussed below.

     Southern Power believes that there is no meritorious basis for this proceeding and is vigorously defending itself in this matter. However, the final outcome of this matter, including any remedies to be applied in the event of an adverse ruling in this proceeding, cannot now be determined.

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

Intercompany Interchange Contract

Also in May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the power pool of Southern Company is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (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. The FERC order directs that the ALJ who presided over a proceeding involving approval of PPAs between Southern Power and Georgia Power and Savannah Electric be assigned to preside over the hearing in this proceeding and that the testimony and exhibits presented in that proceeding be preserved to the extent appropriate. Effective July 19, 2005, revenues from transactions under the IIC involving any Southern Company subsidiaries will be subject to refund to the extent the FERC orders any changes to the IIC. On April 11, 2006, Southern Company, Calpine Corporation, Coral Energy, and Dalton Utilities filed a settlement offer that would resolve the proceeding, and does not require any refunds. The ALJ has certified the settlement to the FERC, where it is pending. Since the offer is pending, the final outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS— FUTURE EARNINGS POTENTIAL — “FERC Matters – Intercompany Interchange Contract” of Southern Power in Item 7 and Note 2 to the financial statements of Southern Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for additional information.

Franklin Unit 3 Construction Activities

See Note 2 to the financial statements of Southern Power under “Plant Franklin Unit 3 Construction Project” in Item 8 of the Form 10-K for information on the suspension of construction activities. On May 6, 2006, Southern Power signed a PPA with Progress Ventures, Inc. for 621 MW of capacity from Plant Franklin. The PPA term is from 2009 through 2015. To provide this capacity, Southern Power expects to complete construction of Franklin Unit 3 at a total cost of approximately $351 million, of which $172 million had been spent as of June 30, 2006. Construction is expected to be complete in 2008.

Plant Acquisitions

On May 31, 2006, Southern Power acquired all of the outstanding membership interests of DeSoto County Generating Company, LLC (DeSoto) from Progress Genco Ventures LLC, a subsidiary of Progress Energy, Inc. The results of DeSoto’s operations have been included in Southern Power’s consolidated financial statements since that date. Southern Power’s acquisition of the membership interests in DeSoto was pursuant to an agreement dated May 8, 2006 for an aggregate purchase price of $79.2 million. DeSoto owns a dual-fired generating plant near Arcadia, Florida with a nameplate capacity of 340 MW. The plant’s capacity and associated energy is sold under PPAs with Florida Power & Light Company that expire in 2007.

     Also in May 2006, Southern Power entered into an agreement to purchase all of the outstanding membership interests of Rowan County Power, LLC (Rowan) from another subsidiary of Progress Energy, Inc. Rowan owns a dual-fired generating plant near Salisbury, North Carolina with a nameplate capacity of 985 MW. The purchase price is $325 million and, subject to regulatory approval, the acquisition is expected to be completed in the third quarter 2006.

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

Other Matters

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 on long-term PPAs. Southern Power’s PPAs with non-affiliated counterparties have provisions that require the posting of collateral or an acceptable substitute guarantee in the event that the counterparty does not meet certain rating or financial requirements. The PPAs are expected to provide Southern Power with a stable source of revenue during their respective terms.

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

     Southern Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Southern Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements such as opacity and other air 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 cannot be predicted at this time; however, management does not anticipate that the liabilities, if any, arising from any such current 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 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 and asset impairments.

New Accounting Standards

Income Taxes

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” This interpretation requires that tax benefits must be “more likely than not” of being sustained in order to be recognized. The provisions of FIN 48 must be applied to all tax positions beginning January 1, 2007. Southern Power is currently assessing the impact of FIN 48. The impact on Southern Power’s financial statements has not yet been determined.

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

FINANCIAL CONDITION AND LIQUIDITY

Overview

Southern Power’s financial condition remained stable at June 30, 2006. Major changes in Southern Power’s financial condition for the six months ended June 30, 2006 as compared to the same period in 2005 included the payment of $38.8 million in dividends to Southern Company, the completion of the sale of Cherokee Falls Development of South Carolina LLC and all of its assets at cost to Southern Company’s nuclear development affiliate, and the acquisition of Plant DeSoto in June 2006 which contributed an additional $79.2 million of utility plant. This acquisition was financed with the issuance of additional short-term commercial paper. During the second quarter 2006, Southern Power also entered into an agreement to acquire all of the outstanding membership interests of Rowan for $325 million. Rowan owns a dual-fired generating plant near Salisbury, North Carolina with a nameplate capacity of 1,048 MW. Subject to regulatory approvals, the acquisition is expected to be completed in the third quarter 2006.

Capital Requirements and Contractual Obligations

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

Sources of Capital

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

     At June 30, 2006, Southern Power’s current liabilities exceeded current assets due to the use of short-term debt as a funding source to finance the Plant Oleander and Plant Desoto acquisitions and for general corporate needs. At June 30, 2006, Southern Power had approximately $31.2 million of cash and cash equivalents to meet short-term cash needs and contingencies. To insure liquidity and capital resource requirements, Southern Power had a $400 million committed credit facility with banks with a 2010 final maturity. Subsequent to June 30, 2006, Southern Power replaced that facility with a $400 million credit agreement that expires in 2011. Proceeds from borrowings under this arrangement may be used for working capital and general corporate purposes as well as liquidity support for Southern Power’s commercial paper program. At June 30, 2006, Southern Power had approximately $166 million of commercial paper outstanding. Amounts drawn under the commercial paper program may be used to finance acquisition and construction costs related to electric generating facilities and for general corporate purposes. 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.

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 to BBB- or Baa3 or below. Generally, collateral may be provided with a Southern Company guaranty, letter of credit, or cash. These contracts are primarily for physical electricity purchases and sales. At June 30, 2006, the maximum potential collateral requirements at a BBB and Baa2 rating were approximately $9 million and at a BBB- or Baa3 rating were approximately $232 million. The

105

SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $414 million. Southern Power, along with all members of the Southern Company power pool, is also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas price risk management activities. At June 30, 2006, Southern Power’s total exposure to these types of agreements was approximately $14.2 million.

Market Price Risk

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.

     Southern Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2005 reporting period. In addition, Southern Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

     Because energy from Southern Power’s generating facilities is primarily sold under long-term PPAs with tolling agreements and provisions shifting substantially all of the responsibility for fuel cost to the purchasers, Southern Power’s exposure to market volatility in commodity fuel prices and prices of electricity is limited. To mitigate residual risks in those areas, Southern Power enters into fixed-price contracts for the sale of electricity.

     The fair value of changes in derivative energy contracts at June 30, 2006 was as follows:

	Second Quarter			Year-to-Date
	2006			2006
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of year	$	2,240		$	223
Contracts realized or settled		(527	)		(471	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		2,682			4,643
Contracts at June 30, 2006	$	4,395		$	4,395

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

     At June 30, 2006, the sources of the valuation prices were as follows:

	Total		Maturity
	Fair Value		Year 1		1-3 Years
	(in thousands)
Actively quoted	$	2,971	$	2,965	$	6
External sources		1,424		1,424		—
Models and other methods		—		—		—
Contracts end of quarter	$	4,395	$	4,389	$	6

106

SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Unrealized pre-tax gains and losses on electric contracts used to hedge anticipated sales, and gas contracts used to hedge anticipated purchases and sales, are deferred in Other Comprehensive Income. Gains and losses on contracts that are not designated as hedges are recognized in the statements of income as incurred.

     At June 30, 2006, the fair value gain / (loss) of derivative energy contracts was as follows:

	Amounts
	(in thousands)
Net Income	$	3,108
Accumulated other comprehensive income		1,287
Total fair value gain	$	4,395

     For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Market Price Risk” of Southern Power in Item 7 and Notes 1 and 5 to the financial statements of Southern Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.

Financing Activities

In the second quarter, Southern Power entered into a derivative transaction to hedge the interest rate risk of a planned future financing. The derivative has a total notional amount of $200 million and will be terminated at the time of the future financing, with any resulting gain or loss amortized over a 10-year period. For further details, see Note (F) to the Condensed Financial Statements herein.

107

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, J, K, L, M
Alabama Power	A, B, C, D, F, G, J
Georgia Power	A, B, C, D, F, G, H
Gulf Power	A, B, C, D, F, G, K
Mississippi Power	A, B, C, D, F, G, I
Southern Power	A, B, F, L

108

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)	The condensed quarterly financial statements of the registrants included herein have been prepared by each registrant, without audit, pursuant to the rules and regulations of the SEC. The condensed balance sheets as of December 31, 2005 have been derived from the audited financial statements. In the opinion of each registrant’s management, the information regarding such registrant furnished herein reflects all adjustments necessary to present fairly the results of operations for the periods ended June 30, 2006 and 2005. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although each registrant believes that the disclosures regarding such registrant are adequate to make the information presented not misleading. Disclosure which would substantially duplicate the disclosure in the Form 10-K and details which have not changed significantly in amount or composition since the filing of the Form 10-K are omitted from this Quarterly Report on Form 10-Q. Therefore, these condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in the Form 10-K. Certain prior period amounts have been reclassified to conform to current period presentation. Due to seasonal variations in the demand for energy, operating results for the periods presented do not necessarily indicate operating results for the entire year.
(B)	See Note 3 to the financial statements of Southern Company and the retail operating companies and Note 2 to the financial statements of Southern Power in Item 8 of the Form 10-K for information relating to various lawsuits and other contingencies.
	NEW SOURCE REVIEW ACTIONS
	New Source Review Litigation
	See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters – New Source Review Actions” of Southern Company and Alabama Power in Item 7 and Note 3 to the financial statements of Southern Company and 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 June 19, 2006, the U.S. District Court for the Northern District of Alabama entered a consent decree between Alabama Power and the EPA, resolving alleged NSR violations at Plant Miller. The consent decree requires Alabama Power to pay $100,000 to resolve the government’s claim for a civil penalty and donate $4.9 million of sulfur dioxide emission allowances to a nonprofit charitable organization. As a result, Alabama Power has recognized $5 million in other income (expense), net related to the consent decree. The consent decree also formalizes specific emissions reductions to be accomplished by Alabama Power, consistent with other Clean Air Act programs that require emissions reductions. On May 31, 2006, Alabama Power filed a motion for summary judgment and entry of a final order on claims related to Plants Barry, Gaston, Gorgas, and Greene County, based on the district court’s previous ruling regarding the correct legal tests and stipulations entered between the parties. The final resolution of these claims is dependent on further court action and subject to possible appeals and, therefore, cannot be determined at this time.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

New Source Review Reform Rules

On October 20, 2005, the EPA published a proposed rule clarifying the test for determining when an emissions increase is subject to the NSR requirements. On March 17, 2006, the U.S. Court of Appeals for the District of Columbia Circuit vacated the EPA’s proposed rule which sought to clarify the scope of the existing Routine Maintenance, Repair, and Replacement Exclusion. Because this rule was not yet in effect, the court’s ruling is not anticipated to have any impact on Southern Company or its subsidiaries.

BIRMINGHAM AREA EIGHT-HOUR OZONE ATTAINMENT REDESIGNATION

On May 12, 2006, the EPA published a final rule approving the State of Alabama’s request to redesignate the Birmingham eight-hour ozone non-attainment area to attainment under the standard. The EPA also approved a revision to the Alabama state implementation plan, containing a maintenance plan to ensure the area’s continued compliance with the standard and to address any future exceedances of the standard. The EPA’s redesignation determination became effective on June 12, 2006.

PLANT WANSLEY ENVIRONMENTAL LITIGATION

On March 30, 2006, the U.S. Court of Appeals for the Eleventh Circuit ruled in favor of Georgia Power on its appeal and reversed the district court’s order regarding certain alleged opacity violations at Plant Wansley. The court of appeals remanded the case to the U.S. District Court for the Northern District of Georgia for further proceedings consistent with its decision. The ultimate outcome of this matter cannot now be determined. See Note 3 to the financial statements of Southern Company and Georgia Power under “Environmental Matters - Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K for additional information.

MIRANT MATTERS

Mirant was an energy company with businesses that included independent power projects and energy trading and risk management companies in the U.S. 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. In July 2003, Mirant filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code. See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Bankruptcy” in Item 8 of the Form 10-K for information regarding Southern Company’s contingent liabilities associated with Mirant, including guarantees of contractual commitments, litigation, and joint and several liabilities in connection with the consolidated federal income tax return.

Mirant Bankruptcy Litigation

See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Bankruptcy Litigation” in Item 8 of the Form 10-K for information regarding the complaint filed in June 2005 against Southern Company alleging fraudulent activities and payments of illegal dividends prior to the spin-off. In May 2006, Southern Company filed a motion for summary judgment on all claims in the case. The ultimate outcome of this matter cannot be determined at this time.

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. In November 2002, Southern Company, certain former and current senior officers of Southern Company,

110

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

and 12 underwriters of Mirant’s initial public offering were added as defendants. On March 24, 2006, the plaintiffs filed a Motion for Reconsideration requesting that the court vacate that portion of its July 14, 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 have opposed the plaintiffs’ motion. 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 Mirant bankruptcy litigation. See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Bankruptcy Litigation” in Item 8 of the Form 10-K for additional information. The ultimate outcome of these matters cannot be determined at this time.

Southern Company Employee Savings Plan Litigation

See Note 3 to the financial statements of Southern Company under “Mirant Matters – Southern Company Employee Savings Plan Litigation” in Item 8 of the Form 10-K for information related to the class action complaint filed under ERISA on behalf of a purported class of participants in or beneficiaries of The Southern Company Employee Savings Plan at any time since April 2, 2001 and whose plan accounts included investments in Mirant common stock. In April 2006, the U.S. District Court for the Northern District of Georgia granted summary judgment in favor of Southern Company and all individually named defendants in the case. The plaintiff has filed an appeal of the ruling. The final outcome of this matter cannot be determined at this time.

FERC MATTERS

Market-Based Rate Authority

See Note 3 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power under “FERC Matters – Market-Based Rate Authority” and Note 2 to the financial statements of Southern Power under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Each of the retail operating companies and Southern Power has authorization from the FERC to sell power to non-affiliates at market-based prices. The retail operating companies and Southern Power also have FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. On February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. A hearing before an ALJ originally scheduled for March 2006 has been held in abeyance to allow the parties to explore settlement. Any new market-based rate transactions in Southern Company’s retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. Such sales through May 27, 2006, the end of the 15-month refund period, were approximately $20 million for the Southern Company system. In the event that the FERC’s default mitigation measures for entities that are found to have market power are ultimately applied, the retail operating companies and Southern Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

In addition, in May 2005, the FERC initiated an investigation to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing. The FERC established a new 15-month refund period related to this expanded investigation. Any new market-based rate transactions involving any Southern Company subsidiary will be subject to refund to the extent the FERC orders lower rates as a result of this new investigation, with the refund period beginning July 19, 2005. The impact of all such

111

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

sales through June 30, 2006 is not expected to exceed $42.6 million, of which $16.8 million relates to sales inside the retail service territory discussed above. The FERC also directed that this expanded proceeding be held in abeyance pending the outcome of the proceeding on the IIC discussed below.

Southern Company and its subsidiaries believe that there is no meritorious basis for this proceeding and are vigorously defending themselves in this matter. However, the final outcome of this matter, including any remedies to be applied in the event of an adverse ruling in this proceeding, cannot now be determined.

Intercompany Interchange Contract

Also in May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the power pool of Southern Company is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (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. The FERC order directs that the ALJ who presided over a proceeding involving approval of PPAs between Southern Power and Georgia Power and Savannah Electric be assigned to preside over the hearing in this proceeding and that the testimony and exhibits presented in that proceeding be preserved to the extent appropriate. Effective July 19, 2005, revenues from transactions under the IIC involving any Southern Company subsidiaries will be subject to refund to the extent the FERC orders any changes to the IIC. On April 11, 2006, Southern Company, Calpine Corporation, Coral Energy, and Dalton Utilities filed a settlement offer that would resolve the proceeding, and does not require any refunds. The ALJ has certified the settlement to the FERC, where it is pending. Since the offer is pending, the final outcome of this matter cannot now be determined. See Note 3 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power under “FERC Matters – Intercompany Interchange Contract” and Note 2 to the financial statements of Southern Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for additional information.

INCOME TAX MATTERS

Leveraged Lease Transactions

See Note 3 to the financial statements of Southern Company under “Income Tax Matters” 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 audit of Southern Company’s 2000 and 2001 tax returns. If the IRS is ultimately successful in disallowing the tax deductions related to these transactions beginning with the 2000 tax year, Southern Company could be subject to additional interest charges of up to $45 million. The IRS had initially proposed a penalty of approximately $16 million, which has now been withdrawn. Discussions with the IRS have ended without resolution. In the third quarter 2006, Southern Company will pay the full amount of the disputed tax and the applicable interest and will file a claim for refund. The disputed tax amount is $79 million and the related interest is approximately $27 million. Southern Company has accounted for this payment as a deposit, and recorded the liability in the second quarter 2006. This payment will close the issue with the IRS and Southern Company will then proceed to litigate this matter.

In July 2006, the FASB released new guidance for the accounting for both leveraged leases and uncertain tax positions that will be effective beginning in 2007. For the lease-in-lease-out transaction settled with the IRS in February 2005, the new standard for leveraged leases (FSP 13-2) will require Southern

112

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

Company to change the timing of income recognized under the lease, including a cumulative effect upon adoption of the change. Southern Company estimates such cumulative effect will reduce Southern Company’s retained earnings by approximately $17 million. The impact of these proposed changes related to the SILO transactions would be dependent on the outcome of pending litigation, but could be significant, and potentially material, to Southern Company’s net income. Southern Company believes these transactions are valid leases for U.S. tax purposes and the related deductions are allowable. Southern Company is continuing to pursue resolution of these matters through litigation; however, the ultimate outcome of these matters cannot now be determined.

Synthetic Fuel Tax Credits

Southern Company has made investments in two entities that produce synthetic fuel and receive tax credits under Section 45K (formerly Section 29) of the IRC. In accordance with Section 45K of the IRC, these tax credits are subject to limitation as the annual average price of oil (as determined by the DOE) increases over a specified, inflation-adjusted dollar amount published in the spring of the subsequent year. Southern Company, along with its partners in these investments, has continued to monitor oil prices. Reserves against these tax credits of $36 million have been recorded in the first half of 2006 due to projected phase-outs of the credits in 2006 as a result of current and projected future oil prices. See Note (J) herein for additional information regarding the impact of these reserves on the effective tax rate.

On May 11, 2006, production at one of the synthetic fuel investments was idled due to continued uncertainty over the value of tax credits. In addition, Southern Company entered into an agreement in June 2006 which terminated its ownership interest in its other synthetic fuel investment, effective July 1, 2006. As a result of these actions and the projected continued phase out of tax credits because of high oil prices, the investments in these two synthetic fuel entities were considered fully impaired and approximately $15.3 million was written off at June 30, 2006. This write-off is reflected in the line item “Impairment loss on equity method investments” on Southern Company’s income statement herein.

SOUTHERN COMPANY GAS SALE

On January 4, 2006, Southern Company completed the sale of substantially all the assets of Southern Company Gas, its competitive retail natural gas marketing subsidiary, including natural gas inventory, accounts receivable, and customer list, to Gas South, LLC, an affiliate of Cobb Electric Membership Corporation. Southern Company Gas’ sale of such assets was pursuant to a Purchase and Sale Agreement dated November 18, 2005 between Southern Company Gas and Gas South. The gross proceeds from the sale were approximately $131 million. This sale had no material impact on Southern Company’s net income for the six months ended June 30, 2006. As a result of the sale, Southern Company’s financial statements and related information reflect Southern Company Gas as discontinued operations.

GEORGIA POWER FAIR LABOR STANDARDS ACT LITIGATION

On February 23, 2006, approximately 170 current and former employees of Georgia Power filed a collective action against Georgia Power in the U.S. District Court for the Northern District of Georgia, alleging that Georgia Power violated the Fair Labor Standards Act by failing to properly compensate certain employees (primarily linemen and crew leaders whose work is governed by a union collective bargaining agreement) while the employees were subject to being called back into work under on-call work rules and regulations. The plaintiffs are seeking overtime compensation for on-call time for the three-year period prior to the filing of the action, liquidated damages in an amount equal to unpaid overtime compensation they say they have been denied, declaratory and injunctive relief, and attorney’s fees and expenses of litigation. Georgia Power believes that it has complied with the provisions of the Fair Labor Standards Act and is vigorously defending itself in this action. The ultimate outcome of this matter cannot now be determined.

113

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(C)	See Note 1 to the financial statements of Southern Company and the retail operating companies under “Stock Options” and Note 8 to the financial statements of Southern Company and the retail operating companies under “Stock Option Plan” in Item 8 of the Form 10-K for information regarding non-qualified employee stock options provided by Southern Company. Southern Company and the retail operating companies have not modified any of their stock option plans or outstanding stock options, nor have they changed the underlying valuation assumptions used in valuing the stock options. Employee stock options vest proportionately over a three-year service period, which each company recognizes on a straight-line basis. Prior to January 1, 2006, Southern Company accounted for options granted in accordance with Accounting Principles Board Opinion No. 25; thus, no compensation expense was recognized because the exercise price of all options granted equaled the fair market value on the date of the grant.
	Effective January 1, 2006, Southern Company and the retail operating companies adopted the fair value recognition provisions of FASB Statement No. 123(R), using the modified prospective method. Under that method, compensation cost recognized in the six-month period ended June 30, 2006 is recognized as the requisite service is rendered and includes: (a) compensation cost for the portion of share-based awards granted prior to and that are outstanding as of January 1, 2006, for which the requisite service has not been rendered, based on the grant-date fair value of those awards as calculated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based awards granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement No. 123(R). Results for prior periods have not been restated.
	For Southern Company and each of the retail operating companies, the adoption of Statement No. 123(R) has resulted in a reduction in earnings from continuing operations before income taxes, net income, and operating cash flows as follows (in millions):

	Three months ended June 30, 2006						Six months ended June 30, 2006
	Earnings
	Before						Earnings
	Income		Net		Operating		Before Income		Net		Operating
	Taxes		Income		Cash Flows 1		Taxes		Income		Cash Flows 1
Alabama Power	$	0.4	$	0.2	$	0.2	$	4.0	$	2.4	$	0.4
Georgia Power		0.6		0.4		0.2		4.3		2.7		0.6
Gulf Power		0.1		0.1		0.1		0.7		0.5		0.2
Mississippi Power		0.1		—		—		0.8		0.5		—
Southern Company	$	3.1	$	1.9	$	0.5	$	22.2	$	13.7	$	2.5

¹ Financing cash flows have increased by the stated amount for Southern Company and each retail operating company, respectively.

Basic and diluted earnings per share from continuing operations for the three-month period ended June 30, 2006 would have remained as reported if Southern Company had not adopted Statement No. 123(R). For the six-month period ended June 30, 2006, basic and diluted earnings per share from continuing operations would have been $0.89 and $0.89, respectively, compared to reported basic and diluted earnings per share of $0.87 and $0.87, respectively.

114

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

For the periods prior to the adoption of Statement No. 123(R), the pro forma impact of fair-value accounting for options granted on earnings from continuing operations and basic and diluted earnings per share is as follows:

	Three months ended June 30, 2005						Six months ended June 30, 2005
			Options						Options
	As		Impact		Pro		As		Impact		Pro
	Reported		After Tax		Forma		Reported		After Tax		Forma
Net income after dividends on preferred stock (in millions):
Alabama Power	$	121.5	$	0.2	$	121.3	$	214.9	$	2.4	$	212.5
Georgia Power		157.5		0.3		157.2		299.9		2.7		297.2
Gulf Power		21.5		0.1		21.4		36.1		0.5		35.6
Mississippi Power		25.7		—		25.7		42.6		0.5		42.1
Southern Company	$	388.9	$	1.7	$	387.2	$	706.4	$	13.7	$	692.7
Earnings per share (Dollars):
Basic	$	0.52			$	0.52	$	0.95			$	0.93
Diluted	$	0.52			$	0.52	$	0.94			$	0.92

The estimated fair values of stock options granted in 2006 and 2005 were derived using the Black-Scholes stock option pricing model. Expected volatility is based on historical volatility of Southern Company’s stock over a period equal to the expected term. Southern Company uses historical exercise data to estimate the expected term that represents the period of time that options granted to employees are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant that covers the expected term of the stock options. The following table shows the assumptions used in the pricing model and the weighted average grant-date fair value of stock options granted:

	Three months ended June 30						Six months ended June 30
	2006			2005			2006			2005
Expected volatility		16.7	%		17.7	%		16.9	%		17.9	%
Expected term (in years)		5			5			5			5
Interest rate		5.0	%		3.8	%		4.6	%		3.9	%
Dividend yield		4.8	%		4.5	%		4.4	%		4.4	%
Weighted average grant-date fair value	$	3.82		$	3.78		$	4.15		$	3.90

Southern Company and each of the retail operating companies’ activity under the stock option plan as of June 30, 2006, and changes during the six months then ended, is summarized below:

	Southern			Alabama			Georgia			Gulf			Mississippi
Shares Subject to Option	Company			Power			Power			Power			Power
Outstanding at December 31, 2005		31,347,355			5,227,985			6,705,891			1,099,549			1,444,438
Granted		6,633,437			1,147,804			1,337,949			240,825			253,762
Exercised		(849,420	)		(156,316	)		(200,929	)		(48,607	)		(20,797	)
Canceled		(135,254	)		(4,136	)		(2,786	)		—			—
Outstanding at June 30, 2006		36,996,118			6,215,337			7,840,125			1,291,767			1,677,403
Exercisable at June 30, 2006		24,119,197			3,986,933			5,198,898			821,990			1,180,538

115

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

The number of stock options vested and expected to vest at June 30, 2006 is not significantly different from the number of stock options outstanding as detailed above.

	Southern		Alabama		Georgia		Gulf		Mississippi
Weighted-Average Exercise Price	Company		Power		Power		Power		Power
Outstanding at December 31, 2005	$	27.13	$	27.09	$	26.82	$	27.07	$	26.86
Granted		33.81		33.81		33.81		33.81		33.81
Exercised		22.87		23.24		22.92		21.94		24.25
Canceled		31.30		24.52		32.23		—		—
Outstanding at June 30, 2006	$	28.41	$	28.43	$	28.11	$	28.52	$	27.95
Exercisable at June 30, 2006	$	26.10	$	26.03	$	25.77	$	26.11	$	25.94

At June 30, 2006	Southern		Alabama		Georgia		Gulf		Mississippi
(in millions unless stated)	Company		Power		Power		Power		Power
Weighted-Average Remaining Contractual Term – Outstanding (in years)		6.8		7.1		6.8		7.1		6.4
Weighted-Average Remaining Contractual Term – Exercisable (in years)		5.7		6.0		5.7		6.0		5.3
Aggregate Intrinsic Value – Outstanding	$	150.7	$	25.3	$	34.2	$	5.1	$	7.5
Aggregate Intrinsic Value – Exercisable	$	145.4	$	24.3	$	33.1	$	5.0	$	7.3
Six-month period
Total intrinsic value of options exercised during 2006	$	9.3	$	1.4	$	2.3	$	0.6	$	0.2
Total intrinsic value of options exercised during 2005	$	98.8	$	16.1	$	14.6	$	3.2	$	3.9

Southern Company and each of the retail operating companies’ total pre-tax compensation cost related to non-vested awards is expected to be recognized over the remaining three-year service period from the grant date and is approximately (in millions):

	Southern		Alabama		Georgia		Gulf		Mississippi
	Company		Power		Power		Power		Power
Unrecognized compensation	$	15.2	$	2.2	$	3.5	$	0.7	$	0.6

Southern Company has a policy of issuing shares to satisfy share option exercises. Historically, this has been satisfied by the issuance of new common shares; however, during January 2006, Southern Company started reissuing treasury shares that it had previously repurchased. Cash received from issuances related to option exercise under the share-based payment arrangements for the six-month periods ended June 30, 2006 and 2005 was $19.5 million and $147.7 million, respectively.

116

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

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

	Balance at		Liabilities		Liabilities						Cash Flow			Balance at
	12/31/05		Incurred		Settled			Accretion			Revisions			6/30/06
Alabama Power	$	446.3	$	—	$	(2.3	)	$	14.8		$	—		$	458.8
Georgia Power		627.5		—		(0.4	)		19.9			—			647.0
Gulf Power		15.3		—		—			(2.9	)		—			12.4
Mississippi Power		15.4		—		—			0.5			(0.2	)		15.7
Southern Company	$	1,117.3	$	—	$	(2.8	)	$	32.7		$	(0.2	)	$	1,147.0

(E) 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		Six Months		Six Months
	Ended		Ended		Ended		Ended
	June 30, 2006		June 30, 2005		June 30, 2006		June 30, 2005
As reported shares		742,515		746,823		742,355		745,424
Effect of options		3,872		4,193		4,370		3,936
Diluted shares		746,387		751,016		746,725		749,360

(F) See Note 6 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power and Note 5 to the financial statements of Southern Power under “Financial Instruments” in Item 8 of the Form 10-K. At June 30, 2006, the fair value gains/(losses) of derivative energy contracts 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	$	(60.2	)	$	(29.7	)	$	(24.2	)	$	(6.0	)	$	1.4	$	—
Accumulated other comprehensive income (loss)		1.6			0.1			—			—			0.2		1.3
Net income (loss)		1.0			(0.1	)		(0.1	)		—			—		3.1
Total fair value gain/(loss)	$	(57.6	)	$	(29.7	)	$	(24.3	)	$	(6.0	)	$	1.6	$	4.4

For the six months ended June 30, 2006, the unrealized gain recognized in income for derivative energy contracts that are not hedges was $3.0 million for Southern Power and was immaterial for the other registrants, and for the six months ended June 30, 2005, the amounts were immaterial for all registrants.

The amounts reclassified from other comprehensive income to fuel expense for the three months and six months ended June 30, 2006 were immaterial for each registrant. Additionally, no material ineffectiveness has been recorded in net income for the three months and six months ended June 30, 2006 and 2005. The amounts expected to be reclassified from other comprehensive income to revenue for the next twelve-month period to June 30, 2007 is a $1.4 million gain for Southern Power and is immaterial for the other registrants.

117

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

In June 2006, Southern Company entered into derivative transactions with an initial premium received of $1.6 million to reduce its exposure to a potential phase-out of certain income tax credits in 2006. In accordance with Section 45K of the IRC, these tax credits are subject to limitation as the annual average price of oil increases. At June 30, 2006, the fair value of the derivatives was $2.3 million. For the three months and six months ended June 30, 2006, the fair value gain recognized in income to mark the transactions to market was $3.9 million. For the three months and six months ended June 30, 2005, the fair value expense recognized in income for similar derivative transactions was $1.2 million.

At June 30, 2006, Southern Company had $2.8 billion notional amount of interest rate derivatives outstanding with net fair value gains of $37.9 million as follows:

Fair Value Hedges

							Fair Value Gain
						Hedge	(Loss)
	Notional	Fixed Rate			Variable Rate	Maturity	June 30, 2006
	Amount	Received			Paid	Date	(in millions)
Southern Company	$400 million		5.30	%	6-month LIBOR (in arrears)less 0.10%	February 2007	$	(1.2	)

Cash Flow Hedges

							Fair Value
			Weighted Average			Hedge	Gain (Loss)
	Notional	Variable Rate	Fixed Rate			Maturity	June 30, 2006
	Amount	Received	Paid			Date	(in millions)
Alabama Power	$536 million	BMA Index		2.01	%	January 2007	$	6.4
Alabama Power*	$100 million	3-month LIBOR		6.15	%	November 2017		0.6
Alabama Power*	$100 million	3-month LIBOR		6.15	%	December 2017		0.7
Georgia Power*	$300 million	3-month LIBOR		5.75	%	July 2037		12.9
Georgia Power**	$400 million	Floating		3.20 – 3.85	%	December 2007		1.7
Georgia Power	$225 million	3-month LIBOR		5.29	%	March 2017		7.4
Georgia Power	$150 million	3-month LIBOR		5.30	%	December 2016		4.9
Georgia Power	$300 million	1-month LIBOR		2.67	%	June 2007		3.3
Gulf Power	$80 million	3-month LIBOR		5.82	%	October 2016		(0.5	)
Savannah Electric***	$14 million	BMA Index		2.50	%	December 2007		0.3
Southern Power	$200 million	3-month LIBOR		5.64	%	September 2016		1.4

*	Interest rate collar (showing only the rate cap percentage)
**	Series of interest rate collars with variable rate based on one-month LIBOR (showing range of rate caps)
***	On July 1, 2006, this transaction was assumed by Georgia Power as part of the merger of Savannah Electric into Georgia Power.

The amount of ineffectiveness that has been recorded in net income for the three months and six months ended June 30, 2006 was a gain of $2.1 million. This gain related to a discontinued cash flow hedge of interest exposure on an expected debt issuance at Savannah Electric. Due to the merger of Savannah Electric into Georgia Power, this debt was not issued.

118

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

For the next twelve-month period ending June 30, 2007, the following table reflects the estimated pre-tax gains/(losses) that will be reclassified from Accumulated Other Comprehensive Income to Interest Expense.

	(in millions)
Alabama Power	$	6.3
Georgia Power		2.9
Gulf Power		(0.4	)
Southern Power		(12.2	)
Southern Company	$	(3.1	)

(G) 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-month and six-month periods ended June 30, 2006 and 2005 are as follows (in millions):

	Southern			Alabama			Georgia			Gulf			Mississippi
PENSION PLANS	Company			Power			Power			Power			Power
Three Months Ended June 30, 2006
Service cost	$	38		$	9		$	13		$	1		$	2
Interest cost		75			19			28			4			4
Expected return on plan assets		(114	)		(35	)		(46	)		(5	)		(5	)
Recognized net (gain)/loss		4			1			1			—			—
Net amortization		7			3			2			1			—
Net cost (income)	$	10		$	(3	)	$	(2	)	$	1		$	1
Six Months Ended June 30, 2006
Service cost	$	76		$	18		$	25		$	3		$	4
Interest cost		150			38			56			7			7
Expected return on plan assets		(228	)		(70	)		(91	)		(10	)		(9	)
Recognized net (gain)/loss		8			2			2			—			—
Net amortization		14			5			4			1			—
Net cost (income)	$	20		$	(7	)	$	(4	)	$	1		$	2
Three Months Ended June 30, 2005
Service cost	$	35		$	8		$	11		$	2		$	2
Interest cost		72			19			27			3			3
Expected return on plan assets		(116	)		(35	)		(46	)		(5	)		(5	)
Recognized net (gain)/loss		3			1			1			—			—
Net amortization		6			2			2			—			—
Net cost (income)	$	—		$	(5	)	$	(5	)	$	—		$	—
Six Months Ended June 30, 2005
Service cost	$	71		$	17		$	23		$	4		$	3
Interest cost		143			37			53			6			7
Expected return on plan assets		(231	)		(70	)		(92	)		(10	)		(9	)
Recognized net (gain)/loss		6			1			2			—			—
Net amortization		11			4			3			—			—
Net cost (income)	$	—		$	(11	)	$	(11	)	$	—		$	1

119

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

	Southern			Alabama			Georgia			Gulf			Mississippi
POSTRETIREMENT PLANS	Company			Power			Power			Power			Power
Three Months Ended June 30, 2006
Service cost	$	8		$	2		$	2		$	1		$	1
Interest cost		24			7			11			1			1
Expected return on plan assets		(12	)		(5	)		(6	)		(1	)		(1	)
Net amortization		10			3			5			—			1
Net cost (income)	$	30		$	7		$	12		$	1		$	2
Six Months Ended June 30, 2006
Service cost	$	15		$	4		$	5		$	1		$	1
Interest cost		49			13			21			2			2
Expected return on plan assets		(24	)		(9	)		(12	)		(1	)		(1	)
Net amortization		21			6			10			—			1
Net cost (income)	$	61		$	14		$	24		$	2		$	3
Three Months Ended June 30, 2005
Service cost	$	7		$	2		$	3		$	—		$	—
Interest cost		24			7			10			1			1
Expected return on plan assets		(11	)		(4	)		(6	)		—			—
Net amortization		10			3			5			—			—
Net cost (income)	$	30		$	8		$	12		$	1		$	1
Six Months Ended June 30, 2005
Service cost	$	14		$	4		$	5		$	1		$	1
Interest cost		48			13			21			2			2
Expected return on plan assets		(22	)		(8	)		(11	)		(1	)		(1	)
Net amortization		19			5			9			—			1
Net cost (income)	$	59		$	14		$	24		$	2		$	3

(H)	See Note 3 to the financial statements of Southern Company under “Georgia Power Retail Regulatory Matters” and “Merger of Georgia Power and Savannah Electric” and Georgia Power under “Retail Regulatory Matters — Merger” and “ — Fuel Cost Recovery” in Item 8 of the Form 10-K for information on the merger of Savannah Electric into Georgia Power and its impact on retail fuel cost recovery.
	With respect to the merger, all required shareholder and regulatory approvals were received and, effective July 1, 2006, Savannah Electric was merged into Georgia Power. Prior to the merger, Southern Company was the sole common shareholder of both Georgia Power and Savannah Electric. At the time of the merger, each outstanding share of Savannah Electric common stock was cancelled, and Southern Company was issued an additional 1,500,000 shares of Georgia Power common stock, no par value per share. In addition, at the time of the merger, each outstanding share of Savannah Electric’s preferred stock was cancelled and converted into the right to receive one share of Georgia Power 6 1/8% Series Class A Preferred Stock, Non-Cumulative, Par Value $25 Per Share.
	Following completion of the merger, the outstanding capital stock of Georgia Power consists of 9,261,500 shares of common stock, all of which are held by Southern Company, and 1,800,000 shares of preferred stock. In connection with the merger, Georgia Power also assumed all of Savannah Electric’s obligations under five series of senior notes outstanding at July 1, 2006, totaling $195 million, and the obligations of three series related to pollution control revenue bonds, totaling $18 million. In addition, Georgia Power assumed Savannah Electric’s commercial paper and extendible commercial note obligations of $84 million.

120

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

	Savannah Electric’s separate SEC reporting obligations were terminated following the merger and its results of operations and cash flows for the three and six months ended June 30, 2006 and 2005 and assets and liabilities as of June 30, 2006 and December 31, 2005 are included in the Southern Company condensed consolidated financial statements herein. Georgia Power will account for the merger in a manner similar to a pooling of interests, and Georgia Power’s financial statements will reflect the merger effective July 1, 2006.
	In March 2006, Georgia Power and Savannah Electric filed a combined request with the Georgia PSC to change the fuel cost recovery rate effective July 1, 2006. On June 15, 2006, the Georgia PSC ruled on the request and approved an increase in Georgia Power’s total annual fuel billings of approximately $400 million. The order provides for a combined ongoing fuel forecast, but reduced the requested increase related to such forecast by $200 million. The Georgia PSC order included no disallowances of previously incurred fuel costs. Estimated under recovered fuel costs as of June 30, 2006 are to be recovered over 35 months for customers in the former Georgia Power territory and over 41 months for customers in the former Savannah Electric territory. In accordance with the order, approximately $358 million has been reclassified from current assets to deferred charges and other assets on the balance sheet. As of June 30, 2006, the under recovered fuel balances of Georgia Power and Savannah Electric totaled approximately $850 million and $82 million, respectively. Such balances exceed the estimates used to determine the rates approved in the order for customers in the former Georgia Power territory and former Savannah Electric territory by $130 million and $4 million, respectively. The order also requires Georgia Power to file for a new fuel cost recovery rate, which would include a true-up of these balances, on a semi-annual basis, beginning September 30, 2006.
	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 increase in the billing factor will have no significant effect on Georgia Power’s revenues or net income but will increase cash flow.
	The order also set a Merger Transition Adjustment (MTA) applicable to customers in the former Savannah Electric service territory so that the new fuel rate plus the MTA equals the applicable fuel rate paid by such customer as of June 30, 2006. Amounts collected under the MTA are being credited to customers in the former Georgia Power service territory through a Merger Transition Credit (MTC). The MTA and the MTC will be in effect until December 31, 2007, when Georgia Power’s base rates are scheduled to be adjusted.
(I)	See Note 1 to the financial statements of Southern Company and Mississippi Power under “Storm Damage Reserves” and “Provision for Property Damage,” respectively, and Note 3 to the financial statements of Southern Company and Mississippi Power under “Storm Damage Cost Recovery” in Item 8 of the Form 10-K for information on how Mississippi Power maintains a reserve for property damage to cover the cost of damages from major storms to its transmission and distribution lines and the cost of uninsured damages to its generation facilities and other property, as well as the specific impact of Hurricane Katrina on that reserve.
	On June 28, 2006, the Mississippi PSC approved an order based upon a stipulation between Mississippi Power and the Mississippi Public Utilities Staff. The stipulation and the associated order certified actual storm restoration costs relating to Hurricane Katrina through April 30, 2006 of $267.9 million and affirmed estimated additional costs through December 31, 2007 of $34.5 million, for total storm restoration costs of $302.4 million, without offset for the property damage reserve of $3.0 million. Of the total amount, $292.8 million applies to Mississippi Power’s retail jurisdiction. The order directs Mississippi Power to file an application with the Mississippi Development Authority (MDA) for Community Development Block Grants (CDBG). The MDA has indicated that $360 million of CDBG will be available to utilities within the State of Mississippi impacted by Hurricane Katrina. All CDBG proceeds received by Mississippi Power will be applied to both retail and wholesale storm restoration

121

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

	costs. The retail portion of any certified restoration costs not covered by the CDBG program are expected to be funded through the state bond program previously approved by the State of Mississippi legislature. The Mississippi PSC order also indicated that the state bond program would be appropriate funding for all or a portion of a new storm operations center if approved and for an appropriate storm reserve, both of which require additional Mississippi PSC action. If state bonds are used for any portion of the Hurricane Katrina restoration costs, periodic true-up mechanisms will be structured to comply with terms and requirements from the legislation.
	The Mississippi PSC order also granted continuing authority to record a regulatory asset in an amount equal to the retail portion of the recorded Hurricane Katrina restoration costs. The balance in the regulatory asset account at June 30, 2006 is $248.4 million, which is net of insurance proceeds of $80.1 million. These costs include approximately $142 million of capital additions and $106 million of operation and maintenance expenditures. For any future event causing damage to property beyond the balance in the reserve, the order also granted Mississippi Power the authority to record a regulatory asset. Mississippi Power would then apply to the Mississippi PSC for recovery of such amounts or for authority to otherwise dispose of the regulatory asset.
	Mississippi Power expects to file the CDBG application with the MDA in the third quarter 2006, at which time the MDA is expected to assess applications and award grants. Mississippi Power filed an application for a financing order with the Mississippi PSC on July 3, 2006 for restoration costs under the state bond program, including the property damage reserve funding and the construction of the storm operations center. The final outcome of these matters cannot now be determined.
(J)	See Note 5 to the financial statements of Southern Company and Alabama Power in Item 8 of the Form 10-K for information on each company’s effective income tax rate. In accordance with an Alabama PSC-approved accounting order to restore the natural disaster reserve, Alabama Power returned approximately $27.7 million of excess deferred income taxes to its retail customers in 2005. The impact of this entry was a significantly lower effective income tax rate for the six months ended June 30, 2005 when compared to the six months ended June 30, 2006 for Alabama Power and Southern Company. For additional information on Alabama Power’s accounting order, see Note 3 to the financial statements of Southern Company and Alabama Power under “Storm Damage Recovery” and “Natural Disaster Cost Recovery,” respectively, in Item 8 of the Form 10-K.
	Southern Company has recorded reserves associated with a potential phase out of its synthetic fuel tax credits of $39.7 million in 2006. The impact of these reserves is an increase in Southern Company’s effective tax rate for the six months ended June 30, 2006 as compared to the same period in 2005.
(K)	See Note 1 to the financial statements of Southern Company and Gulf Power under “Storm Damage Reserves” and “Property Damage Reserve,” respectively, and Note 3 to the financial statements of Southern Company and Gulf Power under “Storm Damage Cost Recovery” and “Retail Regulatory Matters – Storm Damage Cost Recovery,” respectively, in Item 8 of the Form 10-K for information on how Gulf Power maintains a reserve for property damage to cover the cost of damages from major storms to its transmission and distribution facilities and the cost of uninsured damages to its generation facilities and other property, and the impact of recent hurricanes on that reserve. In September 2004, Hurricane Ivan hit the Gulf Coast of Florida and Alabama and caused significant damage to Gulf Power’s service area. In July and August 2005, Hurricanes Dennis and Katrina, respectively, hit the Gulf Coast of the United States also causing significant damage within Gulf Power’s service area. As a result, Gulf Power has a deficit balance in the reserve at June 30, 2006 of $41.2 million.
	In July 2006, the Florida PSC issued its order approving a stipulation and settlement between Gulf Power and several consumer groups that resolved all matters relating to Gulf Power’s request for recovery of incurred costs for storm recovery activities, the replenishment of Gulf Power’s property damage reserve, and the related request for permission to issue $87.2 million in securitized storm recovery bonds. The

122

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

	order provides for an extension of the storm recovery surcharge currently being collected by Gulf Power for an additional 27 months, expiring in June 2009, in lieu of the requested issuance of storm recovery bonds.
	According to the stipulation, the funds resulting from the extension of the current surcharge will first be credited to the unrecovered balance of storm recovery costs associated with Hurricane Ivan until these costs have been fully recovered. The funds will then be credited to the property reserve for recovery of the storm recovery costs of $53.3 million associated with Hurricanes Dennis and Katrina that were previously charged to the reserve. Should revenues collected by Gulf Power through the extension of the storm recovery surcharge exceed the storm recovery costs associated with Hurricanes Dennis and Katrina, the excess revenues will be credited to the reserve.
	The annual accrual to the reserve of $3.5 million and Gulf Power’s limited discretionary authority to make additional accruals to the reserve will continue as previously approved by the Florida PSC. As part of the March 2005 agreement regarding Hurricane Ivan costs that established the existing surcharge, Gulf Power agreed that it would not seek any additional increase in its base rates and charges to become effective on or before March 1, 2007. The terms of the stipulation do not alter or affect that portion of the prior agreement.
	According to the order, in the case of future storms, if Gulf Power incurs cumulative costs for storm recovery activities in excess of $10 million during any calendar year, Gulf Power will be permitted to file a streamlined formal request for an interim surcharge. Any interim surcharge would provide for the recovery, subject to refund, of up to 80% of the claimed costs for storm recovery activities. Gulf Power would then petition the Florida PSC for full recovery through an additional surcharge or other cost recovery mechanism.
(L)	See Note 3 to the financial statements of Southern Company under “Plant Franklin Construction Project” and Note 2 to the financial statements of Southern Power under “Plant Franklin Unit 3 Construction Project” in Item 8 of the Form 10-K for information on the suspension of construction activities. On May 6, 2006, Southern Power signed a PPA with Progress Ventures, Inc. for 621 MW of capacity from Plant Franklin. The PPA term is from 2009 through 2015. To provide this capacity, Southern Power expects to complete construction of Franklin Unit 3 at a total cost of approximately $351 million, of which $172 million has been spent as of June 30, 2006. Construction is expected to be complete in 2008.
	On May 31, 2006, Southern Power acquired all of the outstanding membership interests of DeSoto County Generating Company, LLC (DeSoto) from Progress Genco Ventures LLC, a subsidiary of Progress Energy, Inc. The results of DeSoto’s operations have been included in Southern Power’s consolidated financial statements since that date. Southern Power’s acquisition of the membership interests in DeSoto was pursuant to an agreement dated May 8, 2006 for an aggregate purchase price of $79.2 million. The total purchase price was allocated to property, plant, and equipment and materials and supplies based on a preliminary assessment. Southern Power is in the process of obtaining third-party valuations of certain intangible assets; thus, the allocation of the purchase price is subject to future refinement. The impact of these refinements is not known at this time. DeSoto owns a dual-fired generating plant near Arcadia, Florida with a nameplate capacity of 340 MW. The plant’s capacity and associated energy is sold under PPAs with Florida Power & Light Company that expire in 2007. This acquisition is in accordance with Southern Power’s overall regional growth strategy.
	Southern Power revised its depreciation rates in March 2006. 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 2006. Depreciation rates by generating facility increased from a range of 2.5% to 2.9% to a range of 2.7% to 3.8%. These changes increase depreciation expense and reduce net income. As a result of these changes, net income was decreased by $0.9 million and $1.2 million for the second quarter and year-to-date 2006, respectively. The expected total impact on Southern Power’s net income for 2006 is a decrease of $3.2 million.

123

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(M) Southern Company’s reportable business segment is the sale of electricity in the Southeast by the retail operating companies and Southern Power. Net income and total assets for discontinued operations are included in the “Reconciling Eliminations” column. The “All Other” column includes parent Southern Company, which does not allocate operating expenses to business segments. Also, this category includes segments below the quantitative threshold for separate disclosure. These segments include investments in synthetic fuels and leveraged lease projects, telecommunications, and energy-related services. Southern Power’s revenues from sales to the retail operating companies were $130 million and $217 million for the three months and six months ended June 30, 2006, respectively, and $110 million and $222 million for the three months and six months ended June 30, 2005, respectively. All other intersegment revenues are not material. Financial data for business segments and products and services are as follows:

	Electric Utilities
	Retail
	Operating		Southern							All			Reconciling
	Companies		Power		Eliminations			Total		Other			Eliminations			Consolidated
								(in millions)
Three Months Ended June 30, 2006:
Operating revenues	$	3,489	$	193	$	(155	)	$	3,527	$	103		$	(38	)	$	3,592
Segment net income (loss)		362		32		—			394		(7	)		(2	)		385
Six Months Ended June 30, 2006:
Operating revenues	$	6,453	$	333	$	(262	)	$	6,524	$	207		$	(76	)	$	6,655
Segment net income (loss)		601		52		—			653		(6	)		—			647
Total assets at June 30, 2006	$	37,082	$	2,369	$	(128	)	$	39,323	$	1,989			(511	)	$	40,801
Three Months Ended June 30, 2005:
Operating revenues	$	3,026	$	149	$	(126	)	$	3,049	$	102		$	(31	)	$	3,120
Segment net income (loss)		332		25		—			357		29			1			387
Six Months Ended June 30, 2005:
Operating revenues	$	5,723	$	302	$	(259	)	$	5,766	$	198		$	(57	)	$	5,907
Segment net income (loss)		598		48		—			646		61			3			710
Total assets at December 31, 2005	$	36,335	$	2,303	$	(179	)	$	38,459	$	1,751			(333	)	$	39,877

Products and Services

	Electric Utilities Revenues
Period	Retail		Wholesale		Other		Total
	(in millions)
Three Months Ended June 30, 2006	$	2,971	$	440	$	116	$	3,527
Three Months Ended June 30, 2005		2,555		385		109		3,049
Six Months Ended June 30, 2006	$	5,442	$	855	$	227	$	6,524
Six Months Ended June 30, 2005		4,824		732		210		5,766

124

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

See Item 1A. RISK FACTORS in Part 1 of the Form 10-K for the year ended December 31, 2005 for a discussion of the risk factors of Southern Company and the subsidiary registrants. For the quarter ended June 30, 2006, there have been no material changes to these risk factors.

Item 4. Submission of Matters to a Vote of Security Holders.

Southern Company

Southern Company held its annual meeting of shareholders on May 24, 2006. Each nominee for director of Southern Company received the requisite plurality of votes for election. The vote tabulation was as follows:

Nominees	Shares For		Shares Withheld
Juanita Powell Baranco		552,588,106		10,799,892
Dorrit J. Bern		553,345,486		10,042,512
Francis S. Blake		547,359,073		16,028,925
Thomas F. Chapman		535,100,191		28,287,807
Donald M. James		529,771,092		33,616,906
Zack T. Pate		553,654,462		9,733,536
J. Neal Purcell		553,624,682		9,763,316
David M. Ratcliffe		551,492,644		11,895,354
William G. Smith, Jr.		551,787,664		11,600,334
Gerald J. St. Pé		549,575,443		13,812,555

In addition, at the annual meeting, shareholders were asked to vote for the ratification of the appointment of auditors. The vote tabulation was 552,349,715 shares for, 5,319,789 shares against, and 5,718,494 shares abstaining. As a result of this vote, the audit appointment was ratified. Shareholders were also asked to vote to approve the 2006 Omnibus Incentive Compensation Plan. The vote tabulation was 343,902,796 shares for, 45,697,372 shares against, and 11,891,033 shares abstaining. As a result of this vote, the 2006 Omnibus Incentive Compensation Plan was approved.

125

Item 4. Submission of Matters to a Vote of Security Holders. (Continued)

Alabama Power

Alabama Power held its annual meeting of common shareholders and preferred shareholders on April 28, 2006, and the following persons were elected to serve as directors of Alabama Power:

Whit Armstrong	Robert D. Powers
David J. Cooper, Sr.	David M. Ratcliffe
John D. Johns	C. Dowd Ritter
Patricia M. King	James H. Sanford
James K. Lowder	John C. Webb, IV
Charles D. McCrary	James W. Wright
Malcolm Portera

All 9,250,000 of the shares of Alabama Power’s common stock outstanding on the record date were owned by Southern Company and were voted in favor of the nominees for directors. None of the shares of preferred stock or Class A preferred stock were voted.

In addition, at the annual meeting, shareholders were asked to vote for a proposed amendment to Alabama Power’s Articles of Incorporation, which would increase the authorized common stock from 15,000,000 shares to 25,000,000 shares, and would create a new class of securities to be issued by Alabama Power to be called preference stock. The vote tabulation was 9,250,000 shares for, 0 shares against, and 0 shares abstaining. As a result of this vote, the amendment was approved.

Georgia Power

By written consent, in lieu of the annual meeting of the sole shareholder of Georgia Power, effective May 17, 2006, the following persons were elected to serve as directors of Georgia Power:

Gus H. Bell, III	David M. Ratcliffe
Robert L. Brown, Jr.	D. Gary Thompson
Ronald D. Brown	Richard W. Ussery
Anna R. Cablik	William Jerry Vereen
Michael D. Garrett	E. Jenner Wood, III

By written consent, in lieu of a special meeting of the sole shareholder of Georgia Power, effective May 22, 2006, the sole shareholder approved (1) an amendment to the Charter of Georgia Power to amend and restate the terms of the Charter and establish a new series of Class A preferred stock designated as the “6 1/8% Series Class A Preferred Stock, Non-Cumulative, Par Value $25 Per Share” and (2) the merger agreement between Georgia Power and Savannah Electric and the merger of Savannah Electric into Georgia Power pursuant to the merger agreement.

All of the 7,761,500 outstanding shares of Georgia Power’s common stock were owned by Southern Company and were voted in favor of the nominees for directors, the amendment to the Charter, and the merger agreement and merger.

126

Item 4. Submission of Matters to a Vote of Security Holders. (Continued)

Gulf Power

By written consent, in lieu of the annual meeting of stockholders of Gulf Power, effective June 27, 2006, the following persons were elected to serve as directors of Gulf Power:

C. LeDon Anchors	William A. Pullum
William C. Cramer, Jr.	Winston E. Scott
Fred C. Donovan, Sr.	Susan N. Story

All of the 992,717 outstanding shares of Gulf Power’s common stock are owned by Southern Company and were voted in favor of the nominees for directors. None of the shares of preference stock were entitled to vote.

Mississippi Power

Mississippi Power held its annual meeting of common shareholders and preferred shareholders on May 17, 2006, and the following persons were elected to serve as directors of Mississippi Power:

Tommy E. Dulaney	George A. Schloegel
Warren A. Hood, Jr.	Philip J. Terrell
Robert C. Khayat	Anthony J. Topazi
Aubrey B. Patterson, Jr.

All of the 1,121,000 outstanding shares of Mississippi Power’s common stock are owned by Southern Company and were voted in favor of the nominees for directors. None of the shares of preferred stock were voted.

Southern Power

By written consent, in lieu of the annual meeting of stockholders of Southern Power, effective April 12, 2006, the number of directors constituting the board of directors was set at four and the following persons were elected to serve as directors of Southern Power:

William P. Bowers	G. Edison Holland, Jr.
Thomas A. Fanning	David M. Ratcliffe

All of the 1,000 outstanding shares of Southern Power’s common stock are owned by Southern Company and were voted in favor of the nominees for directors.

Item 5. Other Information.

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

On May 24, 2006, at Southern Company’s annual meeting of shareholders, Southern Company’s shareholders approved the Southern Company 2006 Omnibus Incentive Compensation Plan (Plan). See Item 4 above. Executive officers of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power will be eligible to participate in the Plan. A summary of the material terms of the Plan is included on pages 13 through 17 of Southern Company’s Definitive Proxy Statement on Schedule 14A, filed with the SEC on April 13, 2006, and is incorporated by reference herein. The full text of the Plan is attached hereto as Exhibits 10(a)1, 10(b)1, 10(c)1, 10(d)1, and 10(e)1, and is incorporated by reference herein.

127

Item 6. Exhibits.

(3) Articles of Incorporation and By-Laws

Georgia Power

(c)1 — Amendment to Charter of Georgia Power, dated June 27, 2006, which amended and restated the terms of the Charter and established the Georgia Power 6 1/8% Series Class A Preferred Stock. (Designated in Form 8-K dated June 27, 2006, File No. 1-6468, as Exhibit 3.1.)

(4) Instruments Describing Rights of Security Holders, Including Indentures

Alabama Power

(b)1 — Thirty-Sixth Supplemental Indenture to Senior Note Indenture dated as of June 14, 2006. (Designated in Form 8-K dated June 7, 2006, File No. 1-3436, as Exhibit 4.2.)

Georgia Power

(c)1	—	Senior Note Indenture dated as of March 1, 1998 between Savannah Electric and The Bank of New York, as Trustee, and indentures supplemental thereto through December 9, 2004 (Designated in Form 8-K of Savannah Electric dated March 9, 1998, File No. 1-5072, as Exhibits 4.1 and 4.2, in Form 8-K of Savannah Electric dated May 8, 2001, File No. 1-5072, as Exhibits 4.2(a) and 4.2(b), in Form 8-K of Savannah Electric dated March 4, 2002, File No. 1-5072, as Exhibit 4.2, in Form 8-K of Savannah Electric dated November 4, 2002, File No. 1-5072, as Exhibit 4.2, in Form 8-K of Savannah Electric dated December 10, 2003, File No. 1-5072, as Exhibits 4.1 and 4.2 and in Form 8-K of Savannah Electric dated December 2, 2004, File No. 1-5072, as Exhibit 4.1).
(c)2	—	Eighth Supplemental Indenture, dated as of June 30, 2006, and effective as of July 1, 2006, between Georgia Power and The Bank of New York, as Trustee. (Designated in Form 8-K dated June 27, 2006, File No. 1-6468, as Exhibit 4.2.)

(10) Material Contracts

Southern Company

(a)1	—	Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006.
(a)2	—	Form of Award Agreement under Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006.

Alabama Power

(b)1	—	Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006. See Exhibit 10(a)1 herein.
(b)2	—	Form of Award Agreement under Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006. See Exhibit 10(a)2 herein.

128

Item 6. Exhibits. (continued)

Georgia Power

(c)1	—	Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006. See Exhibit 10(a)1 herein.
(c)2	—	Form of Award Agreement under Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006. See Exhibit 10(a)2 herein.
(c)3	—	1997 Deferred Compensation Plan for Directors of Savannah Electric, Amended and Restated effective October 26, 2000 (Designated in Savannah Electric’s Form 10-K for the year ended December 31, 2000, File No. 1-5072, as Exhibit 10(f)18).
Gulf Power
(d)1	—	Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006. See Exhibit 10(a)1 herein.
(d)2	—	Form of Award Agreement under Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006. See Exhibit 10(a)2 herein.
Mississippi Power
(e)1	—	Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006. See Exhibit 10(a)1 herein.
(e)2	—	Form of Award Agreement under Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006. See Exhibit 10(a)2 herein.
Southern Power
(f)1#	—	Multi-Year Credit Agreement dated as of July 7, 2006 by and among Southern Power, the Lenders (as defined therein), Citibank, N.A., as Administrative Agent, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as Initial Issuing Bank.
(f)2*#	—	Purchase and Sale Agreement by and between Progress Genco Ventures, LLC and Southern Power Company – DeSoto LLC dated May 8, 2006. (Designated in Form 8-K dated May 31, 2006, File No. 333-98553, as Exhibit 2.1.)
(f)3	—	Assignment and Assumption Agreement between Southern Power Company – Desoto LLC and Southern Power effective May 24, 2006. (Designated in Form 8-K dated May 31, 2006, File No. 333-98553, as Exhibit 2.2.)
(f)4*#	—	Purchase and Sale Agreement by and between Progress Genco Ventures, LLC and Southern Power Company – Rowan LLC dated May 8, 2006.
(f)5	—	Assignment and Assumption Agreement between Southern Power Company – Rowan LLC and Southern Power effective May 24, 2006.

129

Item 6. Exhibits. (continued)

(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, 2005, 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, 2005, 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, 2005, 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, 2005, File No. 0-2429 as Exhibit 24(d) and incorporated herein by reference.)
Mississippi Power
(e)1	—	Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2005, 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, 2005, File No. 333-98553 as Exhibit 24(g) and incorporated herein by reference.)
(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.

130

Item 6. Exhibits. (continued)

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.
(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.

131

Item 6. Exhibits. (continued)

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.

Notes:
*	Southern Power has requested confidential treatment for certain portions of this document pursuant to an application for confidential treatment sent to the SEC. Southern Power has omitted such portions from this filing and filed them separately with the SEC.
#	Omits schedules and exhibits. Southern Power agrees to provide supplementally the omitted schedules and exhibits to the SEC upon request.

132

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	Thomas A. Fanning
	Executive Vice President, Chief Financial Officer and Treasurer
	(Principal Financial Officer)
By	/s/ Wayne Boston
	(Wayne Boston, Attorney-in-fact)
		Date: August 3, 2006

133

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: August 3, 2006

134

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: August 3, 2006

135

GULF POWER COMPANY

SIGNATURES

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

	GULF POWER COMPANY
By	Susan N. Story
	President and Chief Executive Officer
	(Principal Executive Officer)
By	Ronnie R. Labrato
	Vice President and Chief Financial Officer
	(Principal Financial Officer)
By	/s/ Wayne Boston
	(Wayne Boston, Attorney-in-fact)
		Date: August 3, 2006

136

MISSISSIPPI POWER COMPANY

SIGNATURES

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

	MISSISSIPPI POWER COMPANY
By	Anthony J. Topazi
	President and Chief Executive Officer
	(Principal Executive Officer)
By	Frances V. Turnage
	Vice President, Treasurer and Chief Financial Officer
	(Principal Financial Officer)
By	/s/ Wayne Boston
	(Wayne Boston, Attorney-in-fact)
		Date: August 3, 2006

137

SOUTHERN POWER COMPANY

SIGNATURES

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

	SOUTHERN POWER COMPANY
By	Ronnie L. Bates
	President and Chief Executive Officer (Principal Executive Officer)
By	Michael W. Southern
	Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)
By	/s/ Wayne Boston
	(Wayne Boston, Attorney-in-fact)
		Date: August 3, 2006

138

EX-10.A.1

EXHIBIT 10(a)1

SOUTHERN COMPANY

2006 OMNIBUS INCENTIVE COMPENSATION PLAN

Effective January 1, 2006

Contents

Article 1. Establishment, Objectives, and Duration 1

Article 2. Definitions 1

Article 3. Administration 4

Article 4. Shares Subject to the Plan and Maximum Awards 5

Article 5. Eligibility and Participation 7

Article 6. Stock Options 7

Article 7. Stock Appreciation Rights 9

Article 8. Restricted Stock and Restricted Stock Units 10

Article 9. Performance Units, Performance Shares, and Cash-Based Awards 11

Article 10. Performance Measures 13

Article 11. Beneficiary Designation 15

Article 12. Deferrals 15

Article 13. Rights of Employees/Directors 15

Article 14. Amendment, Modifications, and Termination 16

Article 15. Withholding 17

Article 16. Indemnification 17

Article 17. Successors 17

Article 18. General Provisions 17

i

Southern Company

2006 Omnibus Incentive Compensation Plan

Article 1. Establishment, Objectives, and Duration

1.1.Establishment of the Plan. The Southern Company (hereinafter referred to as the “Company”), hereby establishes this “Southern Company 2006 Omnibus Incentive Compensation Plan” (hereinafter referred to as the “Plan”), as set forth in this document. The Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, and Cash-Based Awards.

Subject to approval by the Company’s stockholders, the Plan shall become effective as of January 1, 2006 (the “Effective Date”) and shall remain in effect as provided in Section 1.3 hereof.

1.2.Objectives of the Plan. The objectives of the Plan are to optimize the profitability and growth of the Company through annual and long-term incentives that are consistent with the Company’s goals and that link the personal interests of Participants to those of the Company’s stockholders; to provide Participants with an incentive for excellence in individual performance; and to promote teamwork among Participants.

The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of Employees and Directors who make significant contributions to the Company’s success and to allow those individuals to share in the success of the Company.

1.3.Duration of the Plan. The Plan shall commence on the Effective Date and shall remain in effect, subject to the right of the Board of Directors to amend or terminate the Plan at any time pursuant to Article 14 hereof, until all Shares subject to it shall have been purchased or acquired according to the Plan’s provisions. However, in no event may an Award be granted under the Plan on or after the tenth anniversary of the Effective Date.

Article 2. Definitions

Whenever used in the Plan, the following terms shall have the meanings set forth below, and when the meaning is intended, the initial letter of the word shall be capitalized:

2.1. “Award” means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, or Cash-Based Awards.

2.2. “Award Agreement” means an agreement entered into by the Company and each Participant setting forth the terms and provisions applicable to Awards granted under this Plan, which agreement may be delivered and executed in electronic form.

1

2.3. “Board” or “Board of Directors” means the Board of Directors of the Company.

2.4. “Cash-Based Award” means an Award granted to a Participant, as described in Article 9 herein.

2.5. “Change in Control Benefit Plan Determination Policy” shall mean the change in control benefit plan determination policy, as approved by the Board of Directors of Southern Company Services, Inc., as it may be amended from time to time in accordance with the provisions therein.

2.6. “Code” means the Internal Revenue Code of 1986, as amended from time to time.

2.7. “Committee” means any committee appointed by the Board to administer Awards to Employees, as specified in Article 3 herein. The Committee shall at all times maintain compliance with Code Section 162(m), or any successor statute thereto, as to the composition of the Committee.

2.8. “Common Stock” shall mean the common stock of the Company.

2.9. “Company” means The Southern Company, a Delaware corporation, and any successor thereto as provided in Article 17 herein.

2.10. “Covered Employee” means a Participant who, as of the date of vesting and/or payout of an Award, as applicable, is one of the group of “covered employees,” as defined in the regulations promulgated under Code Section 162(m), or any successor statute.

2.11. “Director” means any individual who is a member of the Board of Directors of the Company or any Subsidiary; provided, however, that any Director who is employed by the Company or any Subsidiary shall be considered an Employee under the Plan.

2.12. “Disability” shall have the meaning ascribed to such term in the Participant’s governing long-term disability plan, or if no such plan exists, at the discretion of the Committee.

2.13. “Effective Date” means January 1, 2006.

2.14. “Employee” means any employee of the Company or its Subsidiaries. Directors who are employed by the Company or its Subsidiaries shall be considered Employees under this Plan.

2.15. “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto.

2.16. “Fair Market Value” shall mean the average of the high and low prices at which a share of Common Stock shall have been traded on the respective measurement date,

2

such as the date of grant or the exercise of an Award, or on the next preceding trading day if such date was not a trading date, as reported by the principal securities exchange on which the Shares are traded or, if there is no such sale on the relevant date, then on the last previous day on which a sale was reported. If the Shares are not listed for trading on a national securities exchange, the fair market value of the Shares shall be determined by the Committee in good faith and in accordance with a reasonable valuation method as determined under Code Section 409A and the rules and regulations promulgated thereunder.

2.17. “Freestanding SAR” means an SAR that is granted independently of any Options, as described in Article 7 herein.

2.18. “Incentive Stock Option” or “ISO” means an option to purchase Shares granted under Article 6 herein and which is designated as an Incentive Stock Option and which is intended to meet the requirements of Code Section 422.

2.19. “Insider” shall mean an individual who is, on the relevant date, an officer, director or more than ten percent (10%) beneficial owner of any class of the Company’s equity securities that is registered pursuant to Section 12 of the Exchange Act, all as defined under Section 16 of the Exchange Act.

2.20. “Nonqualified Stock Option” or “NQSO” means an option to purchase Shares granted under Article 6 herein and which is not intended to meet the requirements of Code Section 422.

2.21. “Option” means an Incentive Stock Option or a Nonqualified Stock Option, as described in Article 6 herein.

2.22. “Option Price” means the price at which a Share may be purchased by a Participant pursuant to an Option.

2.23. “Participant” means an Employee or Director who has been selected to receive an Award or with respect to whom an Award is outstanding under the Plan.

2.24. “Performance-Based Exception” means the performance-based exception from the tax deductibility limitations of Code Section 162(m).

2.25. “Performance Period” means with respect to Performance Units, Performance Shares and, if applicable, Cash-Based Awards, the time period during which any performance goals will be measured.

2.26. “Performance Share” means an Award granted to a Participant, as described in Article 9 herein.

2.27. “Performance Unit” means an Award granted to a Participant, as described in Article 9 herein.

3

2.28. “Period of Restriction” means the period during which the transfer of Shares of Restricted Stock is limited in some way (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Committee, at its discretion), and the Shares are subject to a substantial risk of forfeiture, as provided in Article 8 herein.

2.29. “Restricted Stock” means an Award granted to a Participant, as described in Article 8 herein.

2.30. “Restricted Stock Unit” means an Award granted to a Participant, as described in Article 8 herein.

2.31. “Retirement” shall have the meaning ascribed to such term in The Southern Company Pension Plan.

2.32. “Shares” means the shares of Common Stock.

2.33. “Stock Appreciation Right” or “SAR” means an Award, granted alone or in connection with a related Option, designated as an SAR, pursuant to the terms of Article 7 herein.

2.34. “Subsidiary” means any corporation, partnership, joint venture, limited liability company, or other entity (other than the Company) which is part of an unbroken chain of entities beginning with the Company if, at the time of the granting of an Award, each of the entities in the unbroken chain (other than the last entity) owns more than 50% of the total combined voting power in one of the other entities in such chain.

2.35. “Tandem SAR” means an SAR that is granted in connection with a related Option pursuant to Article 7 herein, the exercise of which shall require forfeiture of the right to purchase a Share under the related Option (and when a Share is purchased under the Option, the Tandem SAR shall similarly be canceled).

Article 3. Administration

3.1.General. The Plan shall be administered by a Committee. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board of Directors. The Committee shall be responsible for administration of the Plan; provided, however, that the determination of the number of Awards to be granted to Directors shall remain vested in the Board of Directors. The Committee shall have the authority to delegate administrative duties to one or more officers, Employees or Directors of the Company or Subsidiaries to the extent that such delegation would not jeopardize the Performance-Based Exception with respect to any Award.

3.2.Authority of the Committee. Except as limited by law or by the Certificate of Incorporation or Bylaws of the Company, and subject to the provisions herein, the Committee shall have full power to select Employees and Directors who shall participate in the Plan; determine the sizes and types of Awards; determine the terms and conditions of Awards in a manner consistent

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with the Plan; construe and interpret the Plan and any agreement or instrument entered into under the Plan; establish, amend, or waive rules and regulations for the Plan’s administration; determine and certify whether Award requirements have been met; and (subject to the provisions of Articles 13 and 14 herein) amend the terms and conditions of any outstanding Award as provided in the Plan. Further, the Committee shall make all other determinations which may be necessary or advisable for the administration of the Plan. As permitted by law (and subject to Section 3.1 herein), the Committee may delegate its authority as identified herein.

3.3.Underpayments/Overpayments. If any Participant or beneficiary receives an underpayment of Shares or cash payable under the terms of any Award, payment of any such shortfall shall be made as soon as administratively practicable. If any Participant or beneficiary receives an overpayment of Shares or cash payable under the terms of any Award for any reason, the Committee or its delegate shall have the right, in its sole discretion, to take whatever action it deems appropriate, including but not limited to the right to require repayment of such amount or to reduce future payments under this Plan, to recover any such overpayment. Notwithstanding the foregoing, if the Company is required to prepare an accounting restatement due to the material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement under the securities laws, and if the Participant knowingly or grossly negligently engaged in the misconduct, or knowingly or grossly negligently failed to prevent the misconduct, or if the Participant is one of the individuals subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002, the Participant shall reimburse the Company the amount of any payment in settlement of an Award earned or accrued during the twelve- (12-) month period following the first public issuance or filing with the United States Securities and Exchange Commission (whichever just occurred) of the financial document embodying such financial reporting requirement.

3.4.Decisions Binding. All determinations and decisions made by the Board or the Committee pursuant to the provisions of the Plan and all related orders and resolutions of the Board or the Committee shall be final, conclusive and binding on all persons, including the Company, its stockholders, Directors, Employees, Participants, their estates and beneficiaries and the Subsidiaries.

Article 4. Shares Subject to the Plan and Maximum Awards

4.1.Number of Shares Available for Grants. Subject to adjustment as provided in Section 4.3 herein, the number of Shares hereby reserved for issuance to Participants under the Plan shall be 28,000,000 (twenty-eight million). Additionally, any Shares available for issuance under the Southern Company Omnibus Incentive Compensation Plan effective May 23, 2001, as amended, (the “2001 Plan”) on May 24, 2006 in excess of 10,000,000 (ten million) Shares shall be transferred to the Plan, added to the reserved Shares and available for issuance to Participants under the Plan. Any remaining Shares under the 2001 Plan shall be cancelled and no further Shares will be granted under the 2001 Plan after May 24, 2006. No more than one-half of the Shares available for issuance under the Plan may be granted in the form of Awards other than Stock Options or Stock Appreciation Rights. The Shares available for issuance under this Plan may be authorized and unissued Shares, treasury Shares (if provided for in the Company’s Articles of Incorporation), or previously issued Shares reacquired by the Company, including Shares purchased on the open market.

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Unless and until the Committee determines that an Award to a Covered Employee shall not be designed to comply with the Performance-Based Exception, the following rules shall apply to grants of such Awards under the Plan:

(a) Stock Options: The maximum aggregate number of Shares that may be granted in the form of Stock Options, pursuant to any Award granted in any one fiscal year to any one single Participant shall be 5,000,000 (five million).

(b) SARs: The maximum aggregate number of Shares that may be granted in the form of Stock Appreciation Rights, pursuant to any Award granted in any one fiscal year to any one single Participant shall be 5,000,000 (five million).

(c) Restricted Stock: The maximum aggregate grant with respect to Awards of Restricted Stock granted in any one fiscal year to any one Participant shall be 1,000,000 (one million).

(d) Restricted Stock Units: The maximum aggregate payout (determined as of the end of the applicable restriction period) with respect to Awards of Restricted Stock Units granted in any one fiscal year to any one Participant shall be the greater of $10,000,000 (ten million dollars) or 1,000,000 (one million) shares.

(e) Performance Shares. The maximum aggregate payout (determined as of the end of the applicable performance period) with respect to Awards of Performance Shares granted in any one fiscal year to any one Participant shall be $10,000,000 (ten million dollars) or 1,000,000 (one million) shares.

(f) Performance Units and Cash-Based Awards: The maximum aggregate payout (determined as of the end of the applicable performance period) with respect to Performance Units or Cash-Based Awards awarded in any one fiscal year to any one Participant shall be $10,000,000 (ten million dollars).

4.2.Incentive Stock Option Limit. The maximum number of Shares of the share authorization that may be issued pursuant to ISOs under this Plan shall be one-half of the Shares available for issuance under the Plan

4.3.Adjustments in Authorized Shares. In the event of any change in corporate capitalization, such as a stock split, stock dividend or reclassification, or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Code Section 368) or any partial or complete liquidation of the Company, such adjustment shall be made in the number and class of Shares which may be delivered under Section 4.1, in the number and class of and/or price of Shares subject to outstanding Awards granted under the Plan, and in the Award limits set forth in Section 4.1 as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; provided, however, that the number of Shares subject to any Award shall always be a whole number. The Committee shall not make any adjustment pursuant to this Section 4.3 that would cause an Award that is otherwise exempt from Code Section 409A to become subject to

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Section 409A; or that would cause an Award that is subject to Code Section 409A to fail to satisfy the requirements of Section 409A.

4.4.Share Usage. Any Shares covered by an Award shall be counted as used as of the date of the grant. Any Shares related to Awards which terminate by expiration, forfeiture, cancellation, or otherwise without the issuance of such Shares, are settled in cash in lieu of Shares, or are exchanged with the Committee’s permission, prior to the issuance of Shares, for Awards not involving Shares, shall be available again for grant under this Plan. The following Shares, however, may not again be made available for issuance as Awards under this Plan: (i) Shares not issued or delivered as a result of the net settlement of an outstanding Stock Appreciation Right, (ii) Shares used to pay the exercise price or withholding taxes related to an outstanding Award or (iii) Shares repurchased on the open market with the proceeds of the option exercise price.

Article 5. Eligibility and Participation

5.1.Eligibility. Persons eligible to participate in this Plan include all Employees and Directors.

5.2.Actual Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible Employees and Directors, those to whom Awards shall be granted and shall determine the nature and amount of each Award.

Article 6. Stock Options

6.1.Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Participants in such number, and upon such terms, and at any time and from time to time as shall be determined by the Committee; provided that an ISO may be granted only to an eligible Employee.

6.2.Award Agreement. Each Option grant shall be evidenced by an Award Agreement that shall specify the Option Price, the duration of the Option, the number of Shares to which the Option pertains, and such other provisions as the Committee shall determine. The Award Agreement also shall specify whether the Option is intended to be an ISO within the meaning of Code Section 422, or an NQSO whose grant is intended not to fall under the provisions of Code Section 422.

The Committee, in its sole discretion, shall have the ability to require in the Award Agreement that the Participant must certify in a manner acceptable to the Committee that he/she is in compliance with the terms and conditions of the Plan and the Award Agreement. In the event that a Participant fails to comply with the provisions of this Section 6.2 prior to, or during the six (6) month period after any exercise, payment, or delivery pursuant to an Option, such exercise, payment, or delivery may be rescinded by the Committee within two (2) years thereafter. In the event of such rescission, the Participant shall pay to the Company the amount of any gain realized or payment received as a result of the rescinded exercise, payment, or delivery, in such manner and or such terms and conditions as may be required, and the Company shall be entitled to set-off against the amount of any such gain any amount owed to the Participant by the Company.

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6.3.Option Price. The Option Price for each grant of an Option under this Plan shall be determined by the Committee in its sole discretion and shall be specified in the Award Agreement; provided that the Option Price shall in no event be less than one hundred percent (100%) of the Fair Market Value of a Share on the date of grant of the Option.

6.4.Term of Options. Each Option granted to a Participant shall expire at such time as the Committee shall determine at the time of grant; provided that no Option shall be exercisable later than the tenth (10^th) anniversary of the date of grant of the Option.

6.5.Exercise of Options. Options granted under this Article 6 shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which need not be the same for each grant or for each Participant.

6.6.Payment. Options granted under this Article 6 shall be exercised by the delivery of a written notice of exercise to the Company and/or the Committee, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. The Option Price upon exercise of any Option shall be payable to the Company in full either: (a) in cash or its equivalent, (b) except with regard to Executive Officers as defined in the Exchange Act, by forgoing compensation that the Committee agrees otherwise would be owed, (c) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Option Price, (d) by the attestation of Shares, or (e) by any combination of (a), (b), (c) or (d).

The Committee also may allow cashless exercise as permitted under Federal Reserve Board’s Regulation T, subject to applicable securities law restrictions, or by any other means which the Committee determines to be consistent with the Plan’s purpose and applicable law.

Subject to any governing rules or regulations, after receipt of a written notification of exercise and full payment, the Company may deliver to the Participant, in the Participant’s name, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s).

All payments under all of the methods indicated above shall be paid in United States dollars.

6.7.Restrictions on Share Transferability. The Committee may impose such restrictions on any Shares acquired pursuant to the exercise of an Option granted under this Article 6 as it may deem advisable, including, without limitation, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such Shares.

6.8.Termination of Employment/Directorship. Each Participant’s Option Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the Option following termination of the Participant’s employment or directorship with the Company. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Options issued pursuant to this Article 6, and may reflect distinctions based on the reasons for termination.

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Article 7. Stock Appreciation Rights

7.1.Grant of SARs. Subject to the terms and conditions of the Plan, SARs may be granted to Participants at any time and from time to time as shall be determined by the Committee. The Committee may grant Freestanding SARs, Tandem SARs, or any combination of these forms of SAR.

The Committee shall have complete discretion in determining the number of SARs granted to each Participant (subject to Article 4 herein) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such SARs.

The grant price of a Freestanding SAR or a Tandem SAR shall equal the Fair Market Value of a Share on the date of grant of the SAR.

7.2.Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable.

Notwithstanding any other provision of this Plan to the contrary, with respect to a Tandem SAR granted in connection with an ISO: (i) the Tandem SAR will expire no later than the expiration of the underlying ISO; (ii) the value of the payout with respect to the Tandem SAR may be for no more than one hundred percent (100%) of the difference between the Option Price of the underlying ISO and the Fair Market Value of the Shares subject to the underlying ISO at the time the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only when the Fair Market Value of the Shares subject to the ISO exceeds the Option Price of the ISO.

7.3.Exercise of Freestanding SARs. Freestanding SARs may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes upon them.

7.4.SAR Agreement. Each SAR grant shall be evidenced by an Award Agreement that shall specify the grant price, the term of the SAR, and such other provisions as the Committee shall determine.

7.5.Term of SARs. The term of an SAR granted under the Plan shall be determined by the Committee, in its sole discretion, at the time of grant; provided, however, that such term shall not exceed ten (10) years.

7.6.Payment of SAR Amount. Upon exercise of an SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying:

(a) The difference between the Fair Market Value of a Share on the date of exercise over the Fair Market Value of a Share on the date of grant; by

(b) The number of Shares with respect to which the SAR is exercised.

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At the discretion of the Committee, the payment upon SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof. The Committee’s discretionary authority regarding the form of SAR payout shall be set forth in the Award Agreement pertaining to the grant of the SAR.

7.7.Termination of Employment/Directorship. Each SAR Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the SAR following termination of the Participant’s employment or directorship with the Company and/or its Subsidiaries. Such provisions shall be determined in the sole discretion of the Committee, and need not be uniform among all SARs issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination.

Article 8. Restricted Stock and Restricted Stock Units

8.1.Grant of Restricted Stock/Units. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock and/or Restricted Stock Units to Participants in such amounts as the Committee shall determine. Restricted Stock Units shall be similar to Restricted Stock except that no shares are actually awarded to the Participant except that the Committee may designate that a portion of the Restricted Stock Unit be paid out in Shares.

8.2.Award Agreement. Each Restricted Stock and Restricted Stock Unit grant shall be evidenced by an Award Agreement that shall specify the Period(s) of Restriction, the number of Shares of Restricted Stock or Restricted Stock Units granted, and such other provisions as the Committee shall determine.

8.3.Other Restrictions. Except as provided in Article 12, each Restricted Stock Unit shall be paid in full to the Participant no later than the fifteenth (15^th) day of the third month following the end of the first calendar year in which the Period of Restriction lapses. Subject to Article 10 herein, the Committee shall impose such other conditions and/or restrictions on any Shares of Restricted Stock or Restricted Stock Units granted pursuant to the Plan as it may deem advisable including, without limitation, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock or each Restricted Stock Unit, restrictions based upon the achievement of specific performance goals (Company-wide, divisional, and/or individual), time-based restrictions on vesting following the attainment of the performance goals, and/or restrictions under applicable federal or state securities laws.

The Company, directly or through its designee, may retain the certificates representing Shares of Restricted Stock in the Company’s possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied.

Except as otherwise provided in this Article 8, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the applicable Period of Restriction.

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8.4.Voting Rights. Subject to the terms of the Award Agreements, Participants holding Shares of Restricted Stock granted hereunder may be granted the right to exercise full voting rights with respect to those Shares during the Period of Restriction. A Participant has no voting rights with Restricted Stock Units.

8.5.Dividends and Other Distributions. Subject to the terms of the Award Agreements, during the Period of Restriction, Participants holding Shares of Restricted Stock or Restricted Stock Units granted hereunder may be credited with regular cash dividends paid with respect to the underlying Shares while they are so held. The Committee may apply any restrictions to the dividends that the Committee deems appropriate. Without limiting the generality of the preceding sentence, if the grant or vesting of Restricted Shares or Restricted Stock Units granted to a Covered Employee is designed to comply with the requirements of the Performance-Based Exception, the Committee may apply any restrictions it deems appropriate to the payment of dividends declared with respect to such Restricted Shares or Restricted Stock Units, such that the dividends and/or the Restricted Shares or Restricted Stock Units maintain eligibility for the Performance-Based Exception. Except as provided in Article 12, any cash dividends credited with respect to Restricted Stock or Restricted Stock Units shall be paid in full to the Participant no later than the fifteenth (15^th) day of the third month following the end of the first calendar year in which such dividends are no longer subject to a Period of Restriction or other substantial risk of forfeiture.

8.6.Termination of Employment/Directorship. Each Award Agreement shall set forth the extent to which the Participant shall have the right to receive unvested Restricted Shares or Restricted Stock Units following termination of the Participant’s employment or directorship with the Company. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Shares of Restricted Stock or Restricted Stock Units granted pursuant to the Plan, and may reflect distinctions based on the reasons for termination; provided, however that, except in the cases of terminations connected with a “Change in Control” (as defined in the Change in Control Benefit Plan Determination Policy) and terminations by reason of retirement, death or Disability, the vesting of Shares of Restricted Stock or Restricted Stock Units which qualify for the Performance-Based Exception and which are held by Covered Employees shall not be accelerated.

Article 9. Performance Units, Performance Shares, and Cash-Based Awards

9.1.Grant of Performance Units/Shares and Cash-Based Awards. Subject to the terms of the Plan, Performance Units, Performance Shares, and/or Cash-Based Awards may be granted to Participants in such amounts and upon such terms, and at any time and from time to time, as shall be determined by the Committee.

9.2.Value of Performance Units/Shares and Cash-Based Awards. Each Performance Unit shall have an initial value that is established by the Committee at the time of grant. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the date of grant. Each Cash-Based Award shall have a value as may be determined by the Committee. The Committee shall set performance or other goals, including without limitation time-based goals, in its discretion which, depending on the extent to which they are met, will determine the number and/or value of Performance Units/Shares and Cash-Based Awards which will be paid out to the Participant.

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9.3.Earning of Performance Units/Shares and Cash-Based Awards. Subject to the terms of this Plan, after the applicable Performance Period has ended, the holder of Performance Units/Shares and Cash-Based Awards shall be entitled to receive payout on the number and value of Performance Units/Shares and Cash-Based Awards earned by the Participant as of the end of the Performance Period, to be determined as a function of the extent to which the corresponding performance goals have been achieved.

9.4. Determination of Awards. The factors required to determine Awards under the Plan shall be fixed in all events by the end of the applicable performance period established by the Committee.

9.5.Form and Timing of Payment of Performance Units/Shares and Cash-Based Awards. Payment of earned Performance Units/Shares and Cash-Based Awards shall be made in such form and at such time as the Committee shall determine at the time of the Award. Subject to the terms of this Plan, the Committee, in its sole discretion, may pay earned Performance Units/Shares and Cash-Based Awards in the form of cash or in Shares (or in a combination thereof) which have an aggregate Fair Market Value equal to the value of the earned Performance Units/Shares and Cash-Based Awards at the close of the applicable Performance Period. Such Shares may be granted subject to any restrictions deemed appropriate by the Committee. The discretionary authority of the Committee with respect to the form of payout of such Awards shall be set forth in the Award Agreement pertaining to the grant of the Award. Notwithstanding anything in this Section 9.5 to the contrary and subject to Article 12, payment of any Performance Units/Shares and Cash-Based Awards shall be made no later than the fifteenth (15^th) day of the third month following the end of the first calendar year in which the Performance Period ends or such Awards are no longer subject to a substantial risk of forfeiture.

At the discretion of the Committee, Participants may be entitled to receive any dividends declared with respect to Shares which have been earned in connection with grants of Performance Units and/or Performance Shares which have been earned, but not yet distributed to Participants (such dividends shall be subject to the same accrual, forfeiture, and payout restrictions as apply to dividends earned with respect to Shares of Restricted Stock, as set forth in Section 8.5 herein). In addition, Participants may, at the discretion of the Committee, be entitled to exercise their voting rights with respect to such Shares. Subject to Article 12, any dividends which a Participant is entitled to receive with respect to Shares that have been earned in connection with grants of Performance Units/Shares shall be paid no later than the fifteenth (15^th) day of the third month following the end of the first calendar year in which the Performance Period for such dividends ends or such dividends are no longer subject to a substantial risk of forfeiture.

To the extent that any Performance Units/Shares or Cash-Based Award provides for the payment of all or a portion of any dividend based upon the number of shares underlying an Option or SAR, the right to such dividends shall be a separate and distinct arrangement from such Option or SAR and shall not be contingent upon the exercise of such Option or SAR. Subject to Article 12, any such dividend shall be paid no later than the fifteenth (15^th) day of the third month following the end of the first calendar year in which the Performance Period for such dividends ends or such dividends are no longer subject to a substantial risk of forfeiture.

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9.6.Termination of Employment/Directorship Due to Death, Disability, or Retirement. Unless determined otherwise by the Committee and set forth in the Award Agreement or the administrative specifications for such Award, in the event the employment or directorship of a Participant is terminated by reason of death, Disability, or Retirement during a Performance Period, the Participant shall receive a payout of the Performance Units/Shares or Cash-Based Awards which is prorated, as specified by the Committee in its discretion.

Payment of earned Performance Units/Shares or Cash-Based Awards shall be made at a time specified by the Committee in its sole discretion following the Performance Period subject to the limitations set forth in Section 9.5. Notwithstanding the foregoing, with respect to Covered Employees who retire during a Performance Period, payments shall be made at the same time as payments are made to Participants who did not retire during the applicable Performance Period.

9.7.Termination of Employment/Directorship for Other Reasons. In the event that a Participant’s employment or directorship terminates for any reason other than those reasons set forth in Section 9.6 herein, all Performance Units/Shares and Cash-Based Awards shall be forfeited by the Participant to the Company unless determined otherwise by the Committee as set forth in the Participant’s Award Agreement or in the administrative specifications for such Award.

Article 10. Performance Measures

Unless and until the Committee proposes for shareholder vote and shareholders approve a change in the general performance measures set forth in this Article 10, the attainment of which may determine the degree of payout and/or vesting with respect to Awards to Covered Employees which are designed to qualify for the Performance-Based Exception, the performance measure(s) to be used for purposes of such grants shall be chosen from among:

(a) Earnings per share;

(b) Net income or net operating income (before or after taxes and before or after extraordinary items);

(c) Return measures (including, but not limited to, return on assets, equity, or sales);

(d) Cash flow return on investments which equals net cash flows divided by owners’ equity;

(e) Earnings before or after taxes;

(f) Gross revenues;

(g) Gross margins;

(h) Share price (including, but not limited to, growth measures and total shareholder return);

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(i) Economic Value Added, which equals net income or net operating income minus a charge for use of capital;

(j) Operating margins;

(k) Market share;

(l) Gross revenues or revenues growth;

(m) Capacity utilization;

(n) Increase in customer base including associated costs;

(o) Environmental, Health and Safety;

(p) Reliability

(q) Price

(r) Bad debt expense

(s) Customer satisfaction

(t) Operations and maintenance expense

(u) Accounts receivable

(v) Diversity/Inclusion; and

(w) Quality.

The Committee, in its sole discretion, shall have the ability to set such performance measures at the corporate level or the subsidiary/business unit level. If the Company’s Shares are traded on an established securities market, any Awards issued to Covered Employees are intended but not required to meet the requirements of the Treasury Regulations under Code Section 162(m) necessary to satisfy the Performance-Based Exception.

The Committee shall have the discretion to adjust the determinations of the degree of attainment of the preestablished performance goals; provided, however, that Awards which are designed to qualify for the Performance-Based Exception, and which are held by Covered Employee, may not be adjusted upward (the Committee shall retain the discretion to adjust such Awards downward).

In the event that applicable tax and/or securities laws change to permit Committee discretion to alter the governing performance measures without obtaining shareholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining shareholder approval. In addition, in the event that the Committee determines that it is advisable to

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grant Awards which shall not qualify for the Performance-Based Exception, the Committee may make such grants without satisfying the requirements of Code Section 162(m).

No Award shall be paid unless the Committee certifies that the requirements necessary to receive the Award have been met.

Article 11. Beneficiary Designation

Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company or the Committee, and will be effective only when filed by the Participant in writing with the Company or the Committee during the Participant’s lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant’s death shall be paid to the Participant’s estate.

Article 12. Deferrals

12.1.Deferred Compensation Plan. To the extent permitted under the Southern Company Deferred Compensation Plan, a Participant may elect to defer his or her receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant with respect to Restricted Stock Units, Performance Units, Performance Shares or Cash-Based Awards (and any cash dividends credited with respect to any such Award). Any such deferral shall be made in accordance with the rules and procedures established under the Southern Company Deferred Compensation Plan.

12.2.Award Agreement. The Committee may require a Participant to defer such Participant’s receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant with respect to Restricted Stock Units, Performance Units, Performance Shares or Cash-Based Awards (and any cash dividends credited with respect to any such Award). Any such requirement shall be set forth in an Award Agreement or in the administrative specifications for such Award, which shall include terms that are designed to satisfy the requirements of Code Section 409A.

Article 13. Rights of Employees/Directors

13.1.Employment. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant’s employment at any time, nor confer upon any Participant any right to continue in the employ of the Company.

13.2.Participation. No Employee or Director shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award.

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13.3.Rights as a Stockholder. Except as otherwise provided in an Award Agreement, a Participant shall have none of the rights of a shareholder with respect to shares of Common Stock covered by any Award until the Participant becomes the record holder of such shares.

Article 14. Amendment, Modification, and Termination

14.1.Amendment, Modification, and Termination. Subject to Section 14.3, the Committee may, at any time and from time to time, alter, amend, modify, suspend, or terminate this Plan and any Award Agreement in whole or in part; provided, however, that, without the prior approval of the Company’s shareholders and except as provided in Section 4.3, Options or SARs issued under this Plan will not be repriced, replaced, or regranted through cancellation, or by lowering the Option Price of a previously granted Option or the grant price of a previously granted SAR, and no material amendment of this Plan shall be made without shareholder approval if shareholder approval is required by law, regulation, or stock exchange rule. Notwithstanding the foregoing, Section 18.4 of the Plan may not be amended following a “Change in Control” or “Southern Termination” (as such terms are defined in the Change in Control Benefit Plan Determination Policy).

14.2.Adjustment of Awards upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee may make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4.3 hereof) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan; provided that, unless the Committee determines otherwise at the time such adjustment is considered, no such adjustment shall be authorized to the extent that such authority would be inconsistent with the Plan’s meeting the requirements of Section 162(m) of the Code, as from time to time amended.

14.3.Awards Previously Granted. Notwithstanding any other provision of the Plan to the contrary, to the extent specifically set forth in an Award Agreement, no termination, amendment, or modification of the Plan shall adversely affect in any material way any such Award previously granted under the Plan without the written consent of the Participant holding such Award.

14.4.Compliance with Code Section 162(m). At all times when Code Section 162(m) is applicable, all Awards granted under this Plan shall comply with the requirements of Code Section 162(m); provided, however, that in the event the Board determines that such compliance is not desired with respect to any Award or Awards available for grant under the Plan, and such determination is communicated to the Committee, then compliance with Code Section 162(m) will not be required. In addition, in the event that changes are made to Code Section 162(m) to permit greater flexibility with respect to any Award or Awards available under the Plan, the Board or the Committee may, subject to this Article 14, make any adjustments it deems appropriate.

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Article 15. Withholding

15.1.Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Plan.

15.2.Share Withholding. With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock, or upon any other taxable event arising as a result of Awards granted hereunder, Participants may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction. All such elections shall be irrevocable, made in writing, signed by the Participant, and shall be subject to any restrictions or limitations that the Committee, in its sole discretion, deems appropriate.

Article 16. Indemnification

Each person who is or shall have been a member of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Certificate of Incorporation of Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.

Article 17. Successors

All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

Article 18. General Provisions

18.1.Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural.

17

18.2.Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included, provided that the remaining provisions shall be construed in a manner necessary to accomplish the intentions of the Company upon execution of the Plan.

18.3.Requirements of Law. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

18.4.Change in Control. The provisions of the Change in Control Benefit Plan Determination Policy are incorporated herein by reference to determine the occurrence of a change in control or preliminary change in control of Southern Company or a Subsidiary, the funding of any trust and the benefits to be provided hereunder in the event of such a change in control. Any modifications to the Change in Control Benefit Plan Determination Policy are likewise incorporated herein.

18.5.Delivery of Title. The Company shall have no obligation to issue or deliver evidence of title for Shares under the Plan prior to:

(a) Obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and

(b) Completion of any registration or other qualification of the Shares under any applicable national or foreign law or ruling of any governmental body that the Company determines to be necessary or advisable.

18.6.Securities Law Compliance. With respect to Insiders, transactions under this Plan are intended to comply with all applicable conditions or Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the plan or action by the Board or Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Board or Committee.

18.7.No Additional Rights. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant’s employment at any time, or confer upon any Participant any right to continue in the employ of the Company.

No Employee or Director shall have the right to be selected to receive an Award under this Plan or having been so selected, to be selected to receive a future Award.

Neither the Award nor any benefits arising under this Plan shall constitute part of a Participant’s employment contract with the Company or any Subsidiary, and accordingly, this Plan and the benefits hereunder may be terminated at any time in the sole and exclusive discretion of the Committee without giving rise to liability on the part of the Company or any Subsidiary for severance payments.

18

18.8.No Effect on Other Benefits. This receipt of Awards under the Plan shall have no effect on any benefits and obligations to which a Participant may be entitled from the Company or any Subsidiary, under another plan or otherwise, or preclude a Participant from receiving any such benefits.

18.9.Employees Based Outside of the United States. Notwithstanding any provision of the Plan to the contrary, in order to comply with provisions of laws in other countries in which the Company and its Subsidiaries operate or have Employees, the Board or the Committee, in their sole discretion, shall have the power and authority to:

(a) Determine which Employees employed outside the United States are eligible to participate in the Plan;

(b) Modify the terms and conditions of any Award granted to Employees who are employed outside the United States; and

(c) Establish subplans, modified exercise procedures, and other terms and procedures to the extent such actions may be necessary or advisable. Any subplans and modifications to Plan terms and procedures established under this Section 18.9 by the Board or the Committee shall be attached to this Plan document as Appendices.

18.10.No Guarantee of Favorable Tax Treatment. Although the Company intends to administer the Plan so that Awards will be exempt from, or will comply with, the requirements of Code Section 409A, the Company does not warrant that any Award under the Plan will qualify for favorable tax treatment under Code Section 409A or any other provision of federal, state, local, or foreign law. The Company shall not be liable to any Participant for any tax the Participant might owe as a result of the grant, holding, vesting, exercise, or payment of any Award under the Plan.

18.11.Transferability. During a Participant’s lifetime, his or her Awards shall be exercisable only by the Participant. Awards shall not be transferable other than by will or the laws of descent and distribution; no Awards shall be subject, in whole or in part, to attachment, execution, or levy of any kind; and any purported transfer in violation hereof shall be null and void. Notwithstanding the forgoing, the Committee may, in its discretion, provide in an Award Agreement or in the administrative specifications for an Award that any or all Awards (other than ISOs) shall be transferable to and exercisable by such transferees, and subject to such terms and conditions, as the Committee may deem appropriate; provided, however, no Award may be transferred for value (as defined in the General Instructions to Form S-8).

18.12.Shareholder Approval. Notwithstanding anything in the Plan to the contrary, the ISO portion of this Plan shall be effective only if approved by the shareholders of the Company (excluding a Subsidiary) within 12 months before or after the date the Plan is adopted. If not so approved, any Options which were designated as ISOs hereunder shall be automatically be converted to NQSOs.

19

18.13.Governing Law. To the extent not preempted by federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Delaware.

	SOUTHERN COMPANY By: /s/David M. Ratcliffe Chairman of the Board, President and Chief Executive Officer
ATTEST: By: /s/Patricia L. Roberts Patricia L. Roberts Assistant Secretary

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EX-10.A.2

Exhibit 10(a)2

SOUTHERN COMPANY

OMNIBUS INCENTIVE COMPENSATION PLAN

2006 AWARD AGREEMENT

Your Options are subject to the following terms and conditions:

1.	Grant: The Southern Company (the “Company”) Compensation and Management Succession Committee (the “Committee”) has granted you nonqualified stock options (the “Options”) to purchase shares of Southern Company common stock (“Common Stock”). This award is governed by the Southern Company Omnibus Incentive Compensation Plan, as amended from time to time (the “Plan”).
2.	Terms: Terms used in this Award Agreement that are defined in the Plan will have the meanings ascribed to them in the Plan. If there is any inconsistency between the terms of this Award Agreement and the terms of the Plan, the Plan’s terms will supersede and replace the conflicting terms of this Award Agreement.
3.	Grant Date, Number of Shares and Grant Price: The Grant Date of your Options, number of shares granted to you under your Options and the Grant Price (also referred to as the Exercise Price) are set forth on the UBS Financial Services Inc. website at https://onesource.ubs.com/so.
4.	Option Term: The Options have been granted for a period of ten (10) years from the Grant Date (the “Option Term”).
5.	Vesting and Exercise: Options do not provide you with any rights or interests until they vest (become exercisable). One-third of the shares granted under the Options shall vest on each one year anniversary of the Grant Date.
6.	How to Exercise: You may exercise an Option by entering and executing an exercise order with UBS Financial Services Inc. and obtaining an exercise confirmation. UBS Financial Services Inc. may be reached by telephone at 404-760-3312 or 1-866-4SO-OPTION (1-866-476-6784) or on the UBS Financial Services Inc. website at https://onesource.ubs.com/so. Payment for shares you elect to purchase may be made in cash or in any other form of payment allowed by the Company. Should you decide to purchase Common Stock pursuant to the exercise of an Option with previously purchased Common Stock (if allowed), any such Common Stock used as payment will be valued at its Fair Market Value as of the date of exercise of the Option.

1

7. Impact of Termination of Employment

The vesting and term of any Options will change if you terminate employment, according to the following table:

Termination of Employment Event	Impact on Unvested Options	Exercise Period for Vested Options (But in No Event Beyond the Original Option Term )
Disability 1	Vest fully	3 years
Retirement 2	Vest fully	5 years
Death	Vest fully	3 years
Any other type of termination not for cause3	Forfeited	90 days
Any termination for cause3/4	Forfeited	Forfeited

¹Disability means any physical or mental condition which would qualify you for a disability benefit under the long-term disability plan maintained by the Company and applicable to you, or if no such disability plan exists, as determined by the Committee.

²Retirement means any retirement under the Southern Company Pension Plan. If you die within the 5-year period for exercise after the date of your termination, your executor will have 3 years from the date of your death to exercise (subject to the expiration of the original 10-year term of the Option).

³Cause is determined by the Committee.

⁴Any termination for cause includes any type of termination (including, but not limited to, a voluntary or involuntary resignation by you, a voluntary or involuntary termination by the Company, your termination with severance, your retirement, or your termination because of a disability) if such termination is related to cause.

Options that are not and do not become exercisable at the time of your termination of employment will, coincident therewith, terminate and be of no force or effect.

8. Transferability: Options are not transferable except by will or the laws of descent and distribution and may be exercised during your life only by you or, following your death or disability if any Options are still exercisable, by your duly appointed guardian or other legal representative.

Notwithstanding the above, if you are a designated “executive officer”, as that term is defined in Rule 3b-7 of the Securities Exchange Act of 1934, of Southern Company (but not of a Southern Company subsidiary) at the time of transfer (or, if your employment has terminated at the time of transfer, at the time of your termination), Options may be transferred to your immediate family (spouse, children, or grandchildren), a trust for the benefit of your immediate family, or a partnership or limited liability company whose only partners or members are you or your immediate family (any such recipient to be referred to as a “Transferee”), provided such transfer is one which is not treated as a taxable sale or exchange of the Option for federal income tax purposes. Subsequent transfer or assignment by a Transferee is prohibited and any such attempt will be disregarded as void. Please provide prior notice of any transfer to the Senior Vice President HR Services. Transfers incident to a divorce are not allowed.

2

9.

Other Terms and Conditions. The Design Details, an administrative document adopted by the Committee which is set forth on the UBS Financial Services Inc. website at https://onesource.ubs.com/so, contains additional provisions that apply to the Options. Additionally, the Options are subject to all of the terms and conditions set forth in the Plan and any other administrative documents adopted by the Committee. By exercising any portion of the Options, you agree to be subject to all of the terms and conditions of this Award Agreement. Additionally, you agree to be subject to all of the terms and conditions of the Plan, the Design Details, and any other administrative documents, as amended from time to time.

10.

Additional Information: Please refer any questions you may have regarding these Options to UBS Financial Services Inc. at 404-760-3312 or 1-866-4SO-OPTION or HR Direct at 1-888-678-6787.

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SOUTHERN COMPANY

OMNIBUS INCENTIVE COMPENSATION PLAN

2006 AWARD AGREEMENT

Your Options are subject to the following terms and conditions:

1.	Grant: The Southern Company (the “Company”) Compensation and Management Succession Committee (the “Committee”) has granted you nonqualified stock options (the “Options”) to purchase shares of Southern Company common stock (“Common Stock”). This award is governed by the Southern Company Omnibus Incentive Compensation Plan, as amended from time to time (the “Plan”).
2.	Terms: Terms used in this Award Agreement that are defined in the Plan will have the meanings ascribed to them in the Plan. If there is any inconsistency between the terms of this Award Agreement and the terms of the Plan, the Plan’s terms will supersede and replace the conflicting terms of this Award Agreement.
3.	Grant Date, Number of Shares and Grant Price: The Grant Date of your Options, number of shares granted to you under your Options and the Grant Price (also referred to as the Exercise Price) are set forth on the UBS Financial Services Inc. website at https://onesource.ubs.com/so.
4.	Option Term: The Options have been granted for a period of ten (10) years from the Grant Date (the “Option Term”).
5.	Vesting and Exercise: Options do not provide you with any rights or interests until they vest (become exercisable). One-third of the shares granted under the Options shall vest on each one year anniversary of the Grant Date.
6.	How to Exercise: You may exercise an Option by entering and executing an exercise order with UBS Financial Services Inc. and obtaining an exercise confirmation. UBS Financial Services Inc. may be reached by telephone at 404-760-3312 or 1-866-4SO-OPTION (1-866-476-6784) or on the UBS Financial Services Inc. website at https://onesource.ubs.com/so. Payment for shares you elect to purchase may be made in cash or in any other form of payment allowed by the Company. Should you decide to purchase Common Stock pursuant to the exercise of an Option with previously purchased Common Stock (if allowed), any such Common Stock used as payment will be valued at its Fair Market Value as of the date of exercise of the Option.

7. Impact of Termination of Employment

The vesting and term of any Options will change if you terminate employment, according to the following table:

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Termination of Employment Event	Impact on Unvested Options	Exercise Period for Vested Options (But in No Event Beyond the Original Option Term )
Disability 1	Vest fully	3 years
Retirement 2	Vest fully	5 years
Death	Vest fully	3 years
Any other type of termination not for cause3	Forfeited	90 days
Any termination for cause3/4	Forfeited	Forfeited

¹Disability means any physical or mental condition which would qualify you for a disability benefit under the long-term disability plan maintained by the Company and applicable to you, or if no such disability plan exists, as determined by the Committee.

²Retirement means any retirement under the Southern Company Pension Plan. If you die within the 5-year period for exercise after the date of your termination, your executor will have 3 years from the date of your death to exercise (subject to the expiration of the original 10-year term of the Option).

³Cause is determined by the Committee.

⁴Any termination for cause includes any type of termination (including, but not limited to, a voluntary or involuntary resignation by you, a voluntary or involuntary termination by the Company, your termination with severance, your retirement, or your termination because of a disability) if such termination is related to cause.

Options that are not and do not become exercisable at the time of your termination of employment will, coincident therewith, terminate and be of no force or effect.

8. Transferability: Options are not transferable except by will or the laws of descent and distribution and may be exercised during your life only by you or, following your death or disability if any Options are still exercisable, by your duly appointed guardian or other legal representative.

Notwithstanding the above and in the sole discretion of the Committee, Options may be transferred to a qualified revocable trust provided such transfer is one which is not treated as a taxable sale or exchange of the Options for federal income tax purposes. In order to obtain approval of a transfer, please submit your request to the Senior Vice President HR Services. If an approved transfer to a qualified revocable trust occurs, no subsequent transfer or assignment will be allowed and any such attempt will be disregarded as void. Transfers incident to a divorce are not allowed.

9. Other Terms and Conditions. The Design Details, an administrative document adopted by the Committee which is set forth on the UBS Financial Services Inc. website at https://onesource.ubs.com/so, contains additional provisions that apply to the Options. Additionally, the Options are subject to all of the terms and conditions set forth in the Plan and any other administrative documents adopted by the Committee. By exercising any portion of the Options, you agree to be subject to all of the terms and conditions of this Award Agreement. Additionally, you agree to be subject to all of the terms and conditions of the Plan, the Design Details, and any other administrative documents, as amended from time to time.

2

10. Additional Information: Please refer any questions you may have regarding these Options to UBS Financial Services Inc. at 404-760-3312 or 1-866-4SO-OPTION or HR Direct at 1-888-678-6787.

3

EX-10.F.1

Exhibit 10(f)1

EXECUTION COPY

MULTI-YEAR CREDIT AGREEMENT

dated as of July 7, 2006

among

SOUTHERN POWER COMPANY,

as Borrower,

THE LENDERS IDENTIFIED HEREIN,

CITIBANK, N.A.,

as Administrative Agent,

and

THE BANK OF TOKYO-MITSUBISHI UFJ, LTD., NEW YORK BRANCH,

as Initial Issuing Bank

THE BANK OF TOKYO-MITSUBISHI UFJ, LTD., NEW YORK BRANCH,

as Syndication Agent,

BAYERISCHE LANDESBANK,

ING CAPITAL LLC,

KBC BANK, N.V.,

as Documentation Agents,

BARCLAYS BANK PLC,

HSBC BANK USA, NATIONAL ASSOCIATION,

JPMORGAN CHASE BANK, N.A.,

MIZUHO CORPORATE BANK, LTD.,

THE BANK OF NOVA SCOTIA,

WACHOVIA BANK, N.A.,

as Senior Managing Agents,

and

CITIGROUP GLOBAL MARKETS INC.

and

THE BANK OF TOKYO-MITSUBISHI UFJ, LTD.,

NEW YORK BRANCH,

as Joint Lead Arrangers and Joint Book Managers

The Syndication Agent, the Documentation Agents, the Managing Agents, the Joint Lead Arrangers and the Joint Book Managers are for information purposes only and have no liability in such capacities in this Credit Agreement.

Table of Contents

Page

Section 1

DEFINITIONS AND ACCOUNTING TERMS

1.1 Definitions		1
1.2 Computation of Time Periods and Other Definitional Provisions	16
1.3 Accounting Terms	16

Section 2

LOANS AND LETTERS OF CREDIT

2.1 Commitment of the Lenders	16
2.2 Extension of Maturity Date	19
2.3 Method of Borrowing for Revolving Loans	20
2.4 Funding of Revolving Loans	20
2.5 Continuations and Conversions	21
2.6 Minimum Amounts	21
2.7 Reductions of Commitments	21
2.8 Notes	22
2.9 Increases in Revolving Loan Commitment	22
2.10 Letters of Credit	23

Section 3

PAYMENTS

3.1 Interest	26
3.2 Prepayments.	26
3.3 Payment in Full at Maturity	27
3.4 Fees	27
3.5 Place and Manner of Payments	28
3.6 Pro Rata Treatment	29
3.7 Computations of Interest and Fees	29
3.8 Sharing of Payments	30

Section 4

ADDITIONAL PROVISIONS REGARDING LOANS

4.1 Eurodollar Loans	30
4.2 Capital Adequacy	32
4.3 Compensation	32
4.4 Taxes	33
4.5 Mitigation; Mandatory Assignment	35

Section 5

CONDITIONS PRECEDENT

5.1 Closing Conditions	35
5.2 Conditions to Extensions of Credit	37

Section 6

REPRESENTATIONS AND WARRANTIES

6.1 Organization and Good Standing	38
6.2 Due Authorization	38
6.3 No Conflicts	38

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6.4 Consents	38
6.5 Enforceable Obligations	38
6.6 Financial Condition	38
6.7 No Default	39
6.8 Indebtedness and Off-Balance Sheet Indebtedness	39
6.9 Litigation	39
6.10 Material Agreements	39
6.11 Taxes	39
6.12 ERISA	39
6.13 Compliance with Law	40
6.14 Use of Proceeds; Margin Stock	40
6.15 Government Regulation	40
6.16 Solvency	40

Section 7

AFFIRMATIVE COVENANTS

7.1 Information Covenants	40
7.2 Preservation of Existence and Franchises	42
7.3 Books and Records	42
7.4 Compliance with Law	42
7.5 Payment of Taxes	42
7.6 Insurance	42
7.7 Performance of Obligations	42
7.8 ERISA	42
7.9 Use of Proceeds	43
7.10 Audits/Inspections	43
7.11 Indebtedness to Capitalization	43

Section 8

NEGATIVE COVENANTS

8.1 Nature of Business	43
8.2 Consolidation and Merger	43
8.3 Sale or Lease of Assets	44
8.4 Transactions with Affiliates	44
8.5 Fiscal Year	44
8.6 Liens	44
8.7 Minimum Contract Maintenance Covenant	45

Section 9

EVENTS OF DEFAULT

9.1 Events of Default	46
9.2 Acceleration; Remedies	48
9.3 Allocation of Payments after Event of Default	49

Section 10

AGENCY PROVISIONS

10.1 Appointment	50
10.2 Delegation of Duties	50
10.3 Exculpatory Provisions	50
10.4 Reliance on Communications	51

ii

10.5 Notice of Default	51
10.6 Non-Reliance on Agents and Other Lenders	51
10.7 Indemnification	52
10.8 Each Agent in Its Individual Capacity	52
10.9 Successor Administrative Agent	53
10.10 Administrative Agent May File Proof of Claims	53

Section 11

MISCELLANEOUS

11.1 Notices and Other Communications; Facsimile Copies	54
11.2 Right of Setoff	56
11.3 Benefit of Agreement	56
11.4 No Waiver; Remedies Cumulative	59
11.5 Payment of Expenses, Etc	60
11.6 Amendments, Waivers and Consents	60
11.7 Counterparts	61
11.8 Headings	61
11.9 Defaulting Lender	61
11.10 Survival of Indemnification and Representations and Warranties	62
11.11 Governing Law	62
11.12 Waiver of Jury Trial; Waiver of Consequential Damages	62
11.13 Time	62
11.14 Severability	62
11.15 Entirety	62
11.16 Confidentiality	62
11.17 Binding Effect	63
11.18 USA Patriot Act Notice	63
11.19 Jurisdiction, Etc	64

iii

SCHEDULES

Schedule 1.1(a)	Account Designation Letter
Schedule 1.1(b)	Commitment Percentages
Schedule 11.1	Notices

EXHIBITS

Exhibit 1.1	Terms of Subordination
Exhibit 2.1(b)	Form of Competitive Bid Request
Exhibit 2.3	Form of Notice of Borrowing
Exhibit 2.5	Form of Notice of Continuation/Conversion
Exhibit 2.8(a)	Form of Revolving Loan Note
Exhibit 2.8(b)	Form of Competitive Bid Loan Note
Exhibit 2.10	Form of Letter of Credit Request
Exhibit 7.1(c)	Form of Compliance Certificate
Exhibit 11.3(b)	Form of Assignment and Assumption

iv

MULTI-YEAR CREDIT AGREEMENT

THIS MULTI-YEAR CREDIT AGREEMENT (this “Credit Agreement”), dated as of July 7, 2006, is entered into among SOUTHERN POWER COMPANY, a Delaware corporation (together with any other Person (as defined herein) as may be substituted therefor pursuant to Section 8.2(b)(ii), the “Borrower”), the Lenders (as defined herein), CITIBANK, N.A. (“Citibank”), as administrative agent(together with any successor administrative agent appointed pursuant to Section 10, the “Administrative Agent”), and THE BANK OF TOKYO-MITSUBISHI UFJ, LTD., NEW YORK BRANCH (“BTMU”), as Initial Issuing Bank (as defined herein).

RECITALS

WHEREAS,the Borrower has requested that the Lenders provide a revolving credit facility, and the Lenders are willing to do so on the terms and conditions set forth herein.

NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

SECTION 1

DEFINITIONS AND ACCOUNTING TERMS

1.1 Definitions. As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires. Defined terms herein shall include in the singular number the plural and in the plural the singular:

“Adjusted Eurodollar Rate” means, at any time, the Eurodollar Rate plus the Applicable Percentage for Eurodollar Loans, in each case as then in effect.

“Administrative Agent” has the meaning in the recital of parties to this Credit Agreement.

“Affiliate” means, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by or under direct or indirect common control with such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power (i) to vote 20% or more of the securities having ordinary voting power for the election of directors of such corporation or (ii) to direct or cause direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise.

“Affiliate Subordinated Indebtedness” means any borrowings by the Borrower from The Southern Company or an Affiliate of The Southern Company; provided that such borrowings are subordinated on terms substantially similar to the terms of subordination set forth in Exhibit 1.1 hereto.

“Agent-Related Persons” means each of the Agents (including any successor agents), together with its Affiliates (including any Affiliate of such Agent acting as a Joint Lead Arranger) and the officers, directors, employees, representatives, agents, counsel and attorneys-in-fact of such Persons and Affiliates.

“Agents” means, collectively, the Issuing Banks, the Administrative Agent, the Syndication Agent, the Documentation Agents and the Managing Agents.

“Agent’s Account” means the account of the Administrative Agent maintained by the Administrative Agent at Citibank, N.A., with its office at 388 Greenwich Street, New York, New York 10013, Account No. 36852248¹, Attention: Bank Loan Syndications.

“Anniversary Date” has the meaning specified in Section 2.2(a).

“Applicable Percentage” means, at any time, and with respect to all Eurodollar Loans then outstanding, Unused Fees, and/or Utilization Fees, the applicable percentage corresponding to the Senior Debt Rating in effect from time to time as described below:

Senior Debt Rating	Applicable Percentage for Eurodollar Loans	Applicable Percentage for Unused Fees	Applicable Percentage for Utilization Fees
I.              A+/A1/A+	.15%	.060%	.050%
II.            A/A2/A	.20%	.070%	.050%
III.           A-/A3/A-	.25%	.080%	.050%
IV.           BBB+/Baa1/BBB+	.35%	.10%	.050%
V.            BBB/Baa2/BBB	.45%	.125%	.10%
VI.           BBB-/Baa3/BBB-	.55%	.15%	.15%
VII.          less than BBB-/Baa3/BBB- or unrated	.75%	.20%	.15%

Notwithstanding the above, if at any time there is a split in Senior Debt Ratings between S&P, Moody’s and Fitch and (a) any two such Senior Debt Ratings are equal and higher than the third such Senior Debt Rating, the two equal and higher Senior Debt Ratings (i.e., the lower pricing) will apply, (b) any two such Senior Debt Ratings are equal but lower than the third such Senior Debt Rating, the two equal and lower Senior Debt Ratings (i.e., the higher pricing) will apply or (c) none of the Senior Debt Ratings are equal, the intermediate Senior Debt Rating will apply. If at any time the Borrower shall maintain Senior Debt Ratings from only two of S&P, Moody’s and Fitch and there is a split in such Senior Debt Ratings and (x) in the event of a single level split, the higher Senior Debt

_________________________

¹Confirm account details.

2

Rating (i.e., the lower pricing) will apply and (y) in the event of a multiple level split, one level below the higher Senior Debt Rating will apply.

The Applicable Percentages for Eurodollar Loans, Unused Fees and Utilization Fees shall be determined and adjusted on the date (each, a “Calculation Date”) on which there is any change in the Senior Debt Rating of the Borrower. Each Applicable Percentage shall be effective from one Calculation Date until the next Calculation Date. Any adjustment in the Applicable Percentage shall be applicable to all existing Eurodollar Loans as well as any new Eurodollar Loans made. The Borrower shall notify the Administrative Agent in writing immediately upon any change in any of its Senior Debt Ratings.

“Approved Fund” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

“Arranger” means each of Citigroup Global Markets Inc. and BTMU in its capacity as joint lead arranger.

“Assignment and Assumption” means an assignment and assumption entered into by a Lender and an Eligible Assignee (with the consent of any party whose consent is required by Section 11.3(b), and accepted by the Administrative Agent, in substantially the form of Exhibit 11.3(b) or any other form approved by the Administrative Agent).

“Available Amount” of any Letter of Credit means, at any time, the maximum amount available to be drawn (whether or not such maximum amount is then in effect under such Letter of Credit if such maximum amount increases periodically pursuant to the terms of such Letter of Credit) under such Letter of Credit (assuming compliance at such time with all conditions to drawing).

“Bankruptcy Code” means the Bankruptcy Code in Title 11 of the United States Code, as amended, modified, succeeded or replaced from time to time.

“Base Rate” means, for any day, a simple rate per annum equal to the greater of (a) the Prime Rate for such day or (b) the sum of 1/2% plus the Federal Funds Rate for such day.

“Base Rate Loan” means a Revolving Loan which bears interest based on the Base Rate.

“Borrower” has the meaning specified in the recital of parties to this Credit Agreement.

“Borrower Obligations” means, without duplication, all of the obligations of the Borrower to the Lenders and the Agents, whenever arising, under this Credit Agreement, the Notes or any of the other Credit Documents.

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“BTMU” has the meaning specified in the recital of parties to this Credit Agreement.

“Business Day” means any day other than a Saturday, a Sunday, a legal holiday or a day on which any Lender specifically or banking institutions generally are authorized or required by law or other governmental action to close in Atlanta, Georgia or New York, New York; provided that in the case of Eurodollar Loans, such day is also a day on which dealings between banks are carried on in Dollar deposits in the London interbank market.

“Calculation Date” has the meaning set forth in the definition of Applicable Percentage.

“Capitalization” means, with respect to the Borrower at any time, without duplication, the sum of (a) the aggregate of (i) the capital stock (but excluding treasury stock and capital stock subscribed and unissued), other equity accounts (including retained earnings and paid-in capital but excluding accumulated other comprehensive income and loss) of the Borrower as the same appears on its balance sheet prepared in accordance with GAAP as of the date of determination, (ii) Affiliate Subordinated Indebtedness and (iii) the principal amount of Trust Preferred Obligations and Junior Subordinated Deferred Interest Debt Obligations; provided that the maturity date of such Trust Preferred Obligations and Junior Subordinated Deferred Interest Debt Obligations is subsequent to the latest Maturity Date applicable to any of the Commitments and Loans outstanding at such time and (b) the amount of all Indebtedness of the Borrower as of the same date; provided, that “Capitalization” shall not include any capital stock or other equity (including paid in capital and retained earnings, other than retained earnings which are permitted to be distributed by an Unrestricted Subsidiary to the Borrower) attributable, directly or indirectly, to an Unrestricted Subsidiary.

“Cash Collateralize” means to pledge and deposit with or deliver to the Administrative Agent, for the benefit of the Issuing Banks and the Lenders, as collateral for the Letters of Credit Outstanding, cash or deposit account balances pursuant to documentation in form and substance satisfactory to the Administrative Agent and the Issuing Banks (which documents are hereby consented to by the Lenders). Derivatives of such term have corresponding meanings.

“Change of Control” means the failure of The Southern Company, a Delaware corporation, to own more than 51% of the outstanding shares of the capital stock of the Borrower entitled to vote generally for the election of directors of the Borrower.

“Citibank” has the meaning specified in the recital of parties to this Credit Agreement.

“Closing Date” means the date hereof.

“Code” means the Internal Revenue Code of 1986, as amended from time to time.

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“Commitment” means, with respect to each Lender, the obligation of such Lender to make Loans to the Borrower in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lender’s name on Schedule 1.1(b) under the caption “Commitment” or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable, as such amount may be adjusted from time to time in accordance with this Credit Agreement, and “Commitments” means, collectively, the sum of all Lenders’ Commitments, which shall be equal to $400,000,000 as such amount may be otherwise reduced in accordance with Section 2.7 or increased in accordance with Section 2.9.

“Commitment Percentage” means, for each Lender, the percentage identified as its Commitment Percentage opposite such Lender’s name on Schedule 1.1(b) attached hereto, as such percentage may be modified by assignment in accordance with Section 11.3 or by increases in the Commitments pursuant to Section 2.9.

“Communication” has the meaning set forth in Section 11.1(b).

“Competitive Bid” means an offer by a Lender to make a Competitive Bid Loan pursuant to the terms of Section 2.1(b).

“Competitive Bid Fee” means a fee of $1,000 payable by the Borrower to the Administrative Agent in connection with a Competitive Bid Request pursuant to Section 2.1(b).

“Competitive Bid Loan” means a loan made by a Lender in its discretion pursuant to the provisions of Section 2.1(b).

“Competitive Bid Maturity Date” means, with respect to any Competitive Bid Loan, the maturity date specified for such Competitive Bid Loan pursuant to Section 2.1(b)(ii).

“Competitive Bid Loan Notes” means the promissory notes of the Borrower in favor of each Lender evidencing the Competitive Bid Loans and substantially in the form of Exhibit 2.8(b), as such promissory notes may be amended, modified, supplemented or replaced from time to time.

“Competitive Bid Rate” means, as to any Competitive Bid made by a Lender in accordance with the provisions of Section 2.1(b), the rate of interest offered by the Lender making the Competitive Bid.

“Competitive Bid Request” means a request by the Borrower for Competitive Bids in the form of Exhibit 2.1(b).

“Contracted Operating Cash Flows” means the projection done at the end of each fiscal quarter of the next four fiscal quarters of the Borrower’s and its Subsidiaries’ (other

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than Unrestricted Subsidiaries) total cash flow available for debt service from fixed-price capacity power contracts, each contract having a term from initial commencement to expiry of at least five years; provided, however, that up to 12.5% of the Contracted Operating Cash Flows may be derived from fixed-price capacity power contracts that have contract terms of at least two years but less than five years from initial commencement to expiry. The projection shall be consistent with financial reporting procedures of the Borrower. The term fixed-price capacity power contracts includes any power contract that states the base capacity price on a per unit basis (for example, in Dollars per megawatt) and which may allow for adjustments to that base price that are generally encompassed within the Borrower’s or the electric generation industry’s commercial expectations for a power contract of a similar duration (including but not limited to adjustments to accommodate changed capacity purchase levels, variations in expected or actual construction costs or demonstrated capability levels, changes in equipment or law and force majeure); provided, however, that a power contract will not be considered to be a fixed-price capacity power contract if a material portion of the capacity price varies based upon a market index for electric capacity or energy, fuel, weather or other factor that is external to the generating facility and the transaction between the Borrower and its customer. The method of calculating the energy price shall not be considered in assessing whether a power contract is a fixed-priced capacity power contract.

“Controlled Group” means (a) the controlled group of corporations as defined in Section 414(b) of the Code and the applicable regulations thereunder or (b) the group of trades or businesses under common control as defined in Section 414(c) of the Code and the applicable regulations thereunder, of which the Borrower is a part or may become a part.

“Credit Documents” means this Credit Agreement, the Notes, and all other related agreements and documents issued or delivered hereunder or thereunder or pursuant hereto or thereto.

“Credit Extensions” means as of any day, the sum of (a) the principle balance of all Loans then outstanding plus (b) the amount of Letters of Credit Outstanding as of such day.

“Debt Rating” means any credit rating of the Borrower by S&P, Moody’s or Fitch.

“Default” means any event, act or condition which, with notice or lapse of time, or both, would constitute an Event of Default.

“Defaulting Lender” means, at any time, any Lender that, at such time, (a) has failed to make a Loan required pursuant to the terms of this Credit Agreement, (b) has failed to pay to the Administrative Agent or any Lender an amount owed by such Lender pursuant to the terms of this Credit Agreement or (c) has been deemed insolvent or has become subject to a bankruptcy or insolvency proceeding or to a receiver, trustee or similar official.

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“Documentation Agents” means each of Bayerische Landesbank, ING Capital         LLC and KBC Bank, N.V. in its capacity as Documentation Agent.

“Dollars” and “$” means dollars in lawful currency of the United States of America.

“Eligible Assignee” means any Person (other than a natural Person) that (a) has a combined capital and surplus of at least $500,000,000 and (b) is approved by (A) the Administrative Agent and (B) unless (i) a Default or Event of Default has occurred and is continuing or (ii) such Person is an Affiliate of or Approved Fund related to the assigning Lender, the Borrower (each such approval not to be unreasonably withheld or delayed); provided that notwithstanding the foregoing, “Eligible Assignee” shall not include the Borrower or any of the Borrower’s Affiliates or Subsidiaries.

“Engagement Letter” means that certain letter agreement, dated as of May 30, 2006, among the Borrower and each of the Arrangers.

“Environmental Law” means any federal, state, local or foreign statute, law, ordinance, rule, regulation, code, order, judgment, decree or judicial or agency interpretation, policy or guidance relating to pollution or protection of the environment, health, safety or natural resources, including, without limitation, those relating to the use, handling, transportation, treatment, storage, disposal, release or discharge of hazardous materials.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and the rulings issued thereunder.

“ERISA Affiliate” means each person (as defined in Section 3(9) of ERISA) which together with the Borrower or any Subsidiary of the Borrower would be deemed to be a member of the same “controlled group” within the meaning of Section 414(b), (c), (m) and (o) of the Code.

“Eurodollar Loan” means a Revolving Loan bearing interest based on the Adjusted Eurodollar Rate.

“Eurodollar Rate” means, with respect to any Eurodollar Loan, for the Interest Period applicable thereto, a rate per annum determined pursuant to the following formula:

“Eurodollar Rate”	=		Interbank Offered Rate
		1 - Eurodollar Reserve Percentage

“Eurodollar Reserve Percentage” means, for any day, that percentage (expressed as a decimal) which is in effect from time to time under Regulation D, as the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency,

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special, or marginal reserves) applicable with respect to “Eurocurrency liabilities” as that term is defined in Regulation D (or against any other category of liabilities that includes deposits by reference to which the interest rate of Eurodollar Loans is determined), whether or not any Lender has any Eurodollar liabilities subject to such reserve requirement at that time. Eurodollar Loans shall be deemed to constitute Eurodollar liabilities and as such shall be deemed subject to reserve requirements without benefits of credits for proration, exceptions or offsets that may be available from time to time to a Lender. The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage.

“Event of Default” has the meaning specified in Section 9.1.

“Existing Credit Agreement” means that certain Amended and Restated Credit Agreement, dated as of June 10, 2005, among the Borrower, Citibank, as administrative agent, and certain lenders party thereto.

“Federal Funds Rate” means for any day the rate per annum (rounded upward to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to the Administrative Agent on such day on such transactions as determined by the Administrative Agent.

“Fitch” means Fitch, Inc., or any successor or assignee of the business of such company in the business of rating securities.

“Fund” means any Person (other than a natural Person) that is, or will be, engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.

“GAAP” means generally accepted accounting principles in the United States applied on a consistent basis and subject to Section 1.3.

“Governmental Authority” means any federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body.

“Guaranty Obligations” means, in respect of any Person, any legally enforceable obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Indebtedness of another Person.

“Indebtedness” means, as to any Person, without duplication: (i) all obligations of such Person for borrowed money or evidenced by bonds, debentures, notes or similar

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instruments; (ii) all obligations of such Person for the deferred purchase price of property or services (except trade accounts payable arising in the ordinary course of business); (iii) all capital lease obligations of such Person; (iv) all Indebtedness of others secured by a Lien on any properties, assets or revenues of such Person (other than stock, partnership interests or other equity interests of such Person in entities other than the Borrower or any of its Subsidiaries) to the extent of the lesser of the value of the property subject to such Lien or the amount of such Indebtedness; (v) all Guaranty Obligations; and (vi) all non-contingent obligations of such Person under any letters of credit or bankers’ acceptances. It is understood and agreed that Indebtedness (including Guaranty Obligations) shall not include (A) any Off Balance Sheet Indebtedness in existence as of the Closing Date and additional Off Balance Sheet Indebtedness in an amount not to exceed $150,000,000 in the aggregate at any time, other than obligations of any partnership or joint venture that are recourse to the Borrower or any of its Subsidiaries, (B) any refinancing of Off Balance Sheet Indebtedness described in subsection (A) above in a principal amount not in excess of that outstanding as of the date of refinancing, (C) any project Indebtedness incurred by Subsidiaries of the Borrower to the extent such Indebtedness is non-recourse to the Borrower or (D) any Indebtedness with respect to Trust Preferred Obligations and any Junior Subordinated Deferred Interest Debt Obligations, as long as the maturity date of such Trust Preferred Obligations and Junior Subordinated Deferred Interest Debt Obligations is subsequent to the latest Maturity Date of any of the Commitments and Loans as of any date of determination; provided that the amount of any mandatory principal amortization or defeasance of Trust Preferred Obligations or Junior Subordinated Deferred Interest Debt Obligations prior to the Maturity Date shall be included in this definition of Indebtedness.

“Initial Issuing Bank” means BTMU, in its capacity as issuer of Letters of Credit hereunder.

“Interbank Offered Rate” means, with respect to any Eurodollar Loan for the Interest Period applicable thereto:

(a)       the rate per annum equal to the rate determined by the Administrative Agent to be the offered rate that appears on the page of the Telerate screen (or any successor thereto) that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or

(b)       if the rate referenced in the preceding clause (a) does not appear on such page or service or such page or service shall not be available, the rate per annum equal to the rate determined by the Administrative Agent to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or

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(c)       if the rates referenced in the preceding clauses (a) and (b) are not available, the rate per annum determined by the Administrative Agent as the rate of interest at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Loan being made, continued or converted by the Administrative Agent and with a term equivalent to such Interest Period would be offered to leading banks in the London interbank eurodollar market at their request at approximately 4:00 p.m. (London time) two Business Days prior to the first day of such Interest Period.

“Interest Payment Date” means (a) as to any Base Rate Loan, the last day of each fiscal quarter of the Borrower and the Maturity Date applicable to such Base Rate Loan, (b) as to any Eurodollar Loan, the last day of each applicable Interest Period and the Maturity Date applicable to such Eurodollar Loan and (c) as to any Competitive Bid Loan, the last day of the Interest Period for such Competitive Bid Loan and the Competitive Bid Maturity Date applicable to such Competitive Bid Loan. In addition, where the applicable Interest Period for a Eurodollar Loan is greater than three months or the applicable Interest Period for a Competitive Bid Loan is greater than 90 days, then an Interest Payment Date shall also occur on the last day of each three-month period during such Interest Period. If an Interest Payment Date falls on a date which is not a Business Day, such Interest Payment Date shall be deemed to be the next succeeding Business Day, except that in the case of Eurodollar Loans where the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding Business Day.

“Interest Period” means (a) as to each Eurodollar Loan, a period of one, two, three, six, nine or 12 months’ duration, as the Borrower may elect and as may be available, with respect to durations of six months or less, and as consented to by all Lenders, with respect to durations of nine or 12 months, commencing, in each case, on the date of the borrowing (including continuations and conversions of Eurodollar Loans) and (b) with respect to each Competitive Bid Loan, each of the Interest Periods specified for such Competitive Bid Loan pursuant to Section 2.2(b)(ii), each of which Interest Periods shall not in any event be less than seven days’ duration; provided, however, (i) if any Interest Period would end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day (except that where the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding Business Day), (ii) no Interest Period shall extend beyond the Competitive Bid Maturity Date or Maturity Date applicable to the relevant Loan and (iii) with respect to Eurodollar Loans, where an Interest Period begins on a day for which there is no numerically corresponding day in the calendar month in which the Interest Period is to end, such Interest Period shall end on the last Business Day of such calendar month.

“Issuing Bank” means the Initial Issuing Bank and any other Lender selected by the Borrower and agreed by such Lender with the Administrative Agent’s consent, such consent not to be unreasonably withheld, to which a Letter of Credit commitment hereunder has been assigned pursuant to Section 11.3 so long as such Lender expressly agrees to perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as an Issuing Bank and notifies the Administrative Agent of its Letter of Credit Commitment (which information shall be

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recorded by the Administrative Agent in the Register), for so long as such Initial Issuing Bank or Lender, as the case may be, shall have a Letter of Credit Commitment. Any Issuing Bank may, in its reasonable discretion, arrange for one or more Letters of Credit to be issued by Affiliates of such Issuing Bank, in which case the term “Issuing Bank” shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate. Each Issuing Bank shall act commercially reasonably.

“Junior Subordinated Deferred Interest Debt Obligations” means deferrable interest debt obligations of the Borrower or one of its Subsidiaries that are subordinated with respect to right of payment on terms and conditions substantially similar to the Series F 7.125% Junior Subordinated Notes due June 30, 2042 issued by Southern Company Capital Funding, Inc.

“L/C Cash Deposit Account” has the meaning specified in Section 2.10(i).

“L/C Disbursement” means a payment made by any Issuing Bank pursuant to a Letter of Credit issued by such Issuing Bank.

“Lenders” means those banks and other financial institutions identified as such on the signature pages hereto and such other institutions that may become Lenders pursuant to Section 11.3.

“Letter of Credit” means a letter of credit that is (a) issued by any Issuing Bank for the account of the Borrower and (b) in form and substance reasonably satisfactory to such Issuing Bank.

“Letter of Credit Commitment” means, with respect to any Issuing Bank at any time, the amount set forth opposite such Issuing Bank’s name on Schedule 1.1(b) hereto under the caption “Letter of Credit Commitment” or, if such Issuing Bank has entered into one or more Assignment and Acceptances, set forth for such Issuing Bank in the Register maintained by the Administrative Agent pursuant to Section 11.03(c) as such Issuing Bank’s “Letter of Credit Commitment” as such amount may be reduced at or prior to such time pursuant to Section 2.7.

“Letter of Credit Fees” means the fees payable in respect of Letters of Credit pursuant to Section 3.4(c).

“Letters of Credit Outstanding” means, at any time, with respect to Letters of Credit outstanding at such time, the sum of (a) the Available Amount of such Letters of Credit at such time plus (b) all amounts theretofore drawn or paid under Letters of Credit for which any Issuing Bank has not then been reimbursed.

“Letter of Credit Request” means a request by the Borrower for the issuance of a Letter of Credit in the form of Exhibit 2.10.

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“Lien” means any mortgage, pledge, hypothecation, assignment, deposit arrangement, security interest, encumbrance, lien (statutory or otherwise), preference, priority or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any financing or similar statement or notice filed under the Uniform Commercial Code as adopted and in effect in the relevant jurisdiction or other similar recording or notice statute, and any lease in the nature thereof).

“Loans” means the Revolving Loans and the Competitive Bid Loans.

“Managing Agents” means each of Barclays Bank PLC, HSBC Bank USA, National Association, JPMorgan Chase Bank, N.A., Mizuho Corporate Bank, Ltd., The Bank of Nova Scotia, Scotiabanc Inc. and Wachovia Bank, N.A. in its capacity as Senior Managing Agent..

“Material Adverse Effect” means a material adverse effect on (a) the operations, assets, financial condition or business of the Borrower, (b) the ability of the Borrower to perform its obligations under this Credit Agreement and the other Credit Documents or (c) the validity or enforceability of this Credit Agreement, any of the other Credit Documents, or the rights and remedies of the Lenders hereunder or thereunder; provided that neither a downgrade in any Debt Rating(s) nor the inability of the Borrower to place commercial paper shall, standing alone, constitute a Material Adverse Effect.

“Maturity Date” means the earlier of (a) July 7, 2011, subject to the extension thereof pursuant to Section 2.2, and (b) the date of termination in whole of the aggregate Commitments and Letter of Credit Commitments pursuant to Section 2.7 or 9.2; provided, however, that the Maturity Date of any Lender that is a Refusing Lender to any requested extension pursuant to Section 2.2 shall be the Maturity Date in effect immediately prior to the applicable Anniversary Date for all purposes of this Credit Agreement; providedfurther that if any Maturity Date as determined hereunder falls on a day that is not a Business Day, such Maturity Date shall be deemed to fall on the next preceding Business Day.

“Moody’s” means Moody’s Investors Service, Inc., or any successor or assignee of the business of such company in the business of rating securities.

“Multiemployer Plan” means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the Controlled Group during such five-year period but only with respect to the period during which such Person was a member of the Controlled Group.

“Net Tangible Assets” means, as of any date, the total assets shown on the balance sheet of the Borrower and its Subsidiaries, determined on a consolidated basis in

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accordance with GAAP less (a) all current liabilities and minority interests and (b) goodwill and other identifiable intangibles.

“Notes” means the Revolving Loan Notes and the Competitive Bid Loan Notes.

“Notice” has the meaning set forth in Section 11.1(b).

“Notice of Borrowing” means a request by the Borrower for a Revolving Loan (or any continuation or conversion thereof) in the form of Exhibit 2.3.

“Notice of Continuation/Conversion” means a request by the Borrower for the continuation or conversion of a Revolving Loan in the form of Exhibit 2.5.

“Off-Balance Sheet Indebtedness” means any obligation of a Person that would be considered indebtedness for tax purposes but is not set forth on the balance sheet of such Person, including, but not limited to, (a) any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing product of such Person, (b) the aggregate amount of uncollected accounts receivables of such Person subject at such time to a sale of receivables (or similar transaction) and (c) obligations of any partnership or joint venture that is recourse to such Person.

“Other Taxes” has the meaning set forth in Section 4.4(b).

“Participation Purchaser” has the meaning assigned to such term in Section 11.3(d).

“PBGC” means the Pension Benefit Guaranty Corporation established under ERISA, and any successor thereto.

“Pension Plan” means any “pension plan” as defined in Section 3(2) of ERISA which is maintained for the employees of the Borrower or any Subsidiary of the Borrower.

“Person” means any individual, partnership (general or limited), limited liability company, joint venture, firm, corporation, association, trust or other enterprise (whether or not incorporated), or any government or political subdivision or any agency, department or instrumentality thereof.

“Plan” means any single-employer plan as defined in Section 4001 of ERISA and to which ERISA applies, which is maintained, or at any time during the five calendar years preceding the date of this Credit Agreement was maintained, for employees of the Borrower, any Subsidiary of the Borrower or an ERISA Affiliate.

“Platform” has the meaning set forth in Section 11.1(b).

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“Prime Rate” means the per annum rate of interest established from time to time by the Administrative Agent at its principal office in New York, New York as its “prime rate”. Such rate is a rate set by the Administrative Agent based upon various factors including the Administrative Agent’s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above or below such announced rate. Any change in the interest rate resulting from a change in the Prime Rate shall become effective as of the opening of business on the day on which such change in the Prime Rate is announced by the Administrative Agent.

“Refund” has the meaning specified in Section 4.4(c).

“Refusing Lenders” has the meaning specified in Section 2.2.

“Regulation D, U or X” means Regulation D, U or X, respectively, of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof.

“Reportable Event” means a “reportable event” as defined in Section 4043 of ERISA with respect to which the notice requirements to the PBGC have not been waived.

“Required Lenders” means, at any time, Lenders whose aggregate Credit Exposure (as hereinafter defined) constitutes more than 50% of the aggregate Credit Exposure of all Lenders at such time; provided, however, that if any Lender shall be a Defaulting Lender at such time, then there shall be excluded from the determination of Required Lenders the aggregate principal amount of Credit Exposure of such Lender at such time. For purposes of the preceding sentence, the term “Credit Exposure” as applied to each Lender means (a) at any time prior to the termination of the Commitments, an amount equal to the Commitment of such Lender and (b) at any time after the termination of the Commitments, the outstanding amount of Revolving Loans owed to such Lender.

“Revolving Loan Notes” means the promissory notes of the Borrower in favor of each Lender evidencing the Revolving Loans and substantially in the form of Exhibit 2.8(a), as such promissory notes may be amended, modified, supplemented or replaced from time to time.

“Revolving Loans” means the revolving Loans made by the Lenders to the Borrower pursuant to Section 2.1(a).

“S&P” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., or any successor or assignee of the business of such division in the business of rating securities.

“Senior Debt Rating” means the long-term senior unsecured, non-credit enhanced Debt Rating of the Borrower by each of S&P, Moody’s and Fitch.

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“Significant Subsidiary” means a Subsidiary of the Borrower which represents more than 10% of the Borrower’s assets on a consolidated basis.

“Subsidiary” means, as to any Person, (a) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries and (b) any partnership, limited liability company, association, joint venture or other entity in which such Person directly or indirectly through Subsidiaries has more than 50% equity interest at any time.

“Syndication Agent” has the meaning specified in the recital of parties to this Credit Agreement.

“Taxes” has the meaning set forth in Section 4.4(a).

“Total Operating Cash Flows” means the projection done at the end of each fiscal quarter of the next four fiscal quarters of the Borrower’s and its Subsidiaries’ (other than Unrestricted Subsidiaries) total cash flow available for debt service, as projected consistent with the Borrower’s financial reporting procedures.

“Trust Indenture Act” has the meaning set forth in Section 10.8.

“Trust Preferred Obligations” means any securities issued by a trust or other special purpose entity in connection with the issuance of Junior Subordinated Deferred Interest Debt Obligations that are substantially similar to the 7.125% Trust Preferred Securitiesissued by Southern Company Capital Trust VI.

“Unrestricted Subsidiary” means any Subsidiary of the Borrower all the Indebtedness of which (a) is nonrecourse to the Borrower or any of its Subsidiaries (other than any other Unrestricted Subsidiary), other than with respect to stock or other ownership interest of the Borrower or any of its Subsidiaries in such Subsidiary, and (b) is not secured by any property of the Borrower or any of its Subsidiaries (other than the property of, or stock or other ownership interest in, an Unrestricted Subsidiary).

“Unused Fees” has the meaning set forth in Section 3.4(a).

“Unused Revolving Loan Commitment” means, for any period from the Closing Date to the final Maturity Date, the amount by which (a) the average aggregate amount of the Commitments for such period exceeds (b) the daily average sum for such period of the aggregate principal amount of all Revolving Loans outstanding.

“Utilization Fees” has the meaning set forth in Section 3.4(b).

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“Utilized Revolving Loan Commitment” means, for any period from the Closing Date to the final Maturity Date, the amount equal to the daily average sum for such period of the aggregate principal amount of all Loans outstanding.

1.2 Computation of Time Periods and Other Definitional Provisions. For purposes of computation of periods of time hereunder, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding.” References in this Credit Agreement to “Articles”, “Sections”, “Schedules” or “Exhibits” shall be to Articles, Sections, Schedules or Exhibits of or to this Credit Agreement unless otherwise specifically provided.

1.3 Accounting Terms. Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lenders hereunder shall be prepared, in accordance with GAAP applied on a consistent basis. All calculations made for the purposes of determining compliance with this Credit Agreement shall (except as otherwise expressly provided herein) be made by application of GAAP applied on a basis consistent with the most recent annual or quarterly financial statements delivered pursuant to Section 7.1 (or, prior to the delivery of the first financial statements pursuant to Section 7.1, consistent with the financial statements described in Section 5.1(e)); provided, however, if (a) the Borrower shall object to determining such compliance on such basis at the time of delivery of such financial statements due to any change in GAAP or the rules promulgated with respect thereto or (b) the Administrative Agent or the Required Lenders shall so object in writing within 30 days after delivery of such financial statements, then such calculations shall be made on a basis consistent with the most recent financial statements delivered by the Borrower to the Lenders as to which no such objection shall have been made.

SECTION 2

LOANS AND LETTERS OF CREDIT

2.1 Commitment of the Lenders. (a) Extensions of Credit. Subject to the terms and conditions set forth herein, each Lender severally agrees to extend credit to the Borrower, on a revolving basis, in the form of revolving loans to the Borrower (each, a “Revolving Loan” and collectively, the “Revolving Loans”) and Letters of Credit, each in Dollars, at any time and from time to time, during the period from the Closing Date until the Maturity Date applicable to the Commitment and Loans of such Lender; provided, however, that (i) the aggregate amount of the Credit Extensions (after giving effect to such extension of credit) outstanding shall not exceed the aggregate amount of the Commitments of the Lenders then in effect; (ii) Letters of Credit shall be available from the Issuing Banks, subject to the ratable participation of all Lenders, as set forth in Section 2.10; (iii) the aggregate amount of Letters of Credit Outstanding shall not at any time exceed the aggregate amount of the Commitments of the Lenders then in effect; and (iv) with respect to each individual Lender, the Lender’s pro rata share of outstanding Credit Extensions shall not exceed such Lender’s Commitment Percentage of the aggregate amount of

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Commitments then in effect. Within the limits of each Lender’s Commitment, the Borrower may borrow, repay and reborrow pursuant to the terms of this Credit Agreement.

(b) Competitive Bid Loans Subfacility.

(i)        Competitive Bid Loans. Subject to the terms and conditions set forth herein, the Borrower may, from time to time, during the period from the Closing Date to the relevant Maturity Date, request, in Dollars, and each Lender may, in its sole discretion, agree to make Competitive Bid Loans to the Borrower; provided, however, that (A) the sum of the aggregate amount of Credit Extensions outstanding shall not exceed the aggregate amount of the Commitments then in effect and (B) if a Lender does make a Competitive Bid Loan it shall not reduce such Lender’s obligation to make its pro rata share of any Revolving Loan or fund participations in L/C Disbursements.

(ii)       Competitive Bid Requests. The Borrower may solicit Competitive Bids by delivery of a Competitive Bid Request to the Administrative Agent by 10:00 a.m. on a Business Day not less than one nor more than five Business Days prior to the date of the requested Competitive Bid Loan. A Competitive Bid Request must be substantially in the form of Exhibit 2.1(b) and shall specify (A) the date of the requested Competitive Bid Loan (which shall be a Business Day), (B) the aggregate amount of the requested Competitive Bid Loan, (C) the applicable Interest Period or Interest Periods requested, (D) the maturity date (the “Competitive Bid Maturity Date”) for repayment of the requested Competitive Bid Loan (which Competitive Bid Maturity Date may not be earlier than the date occurring seven days after the date on which such requested Competitive Bid Loan is to be made and no later than 180 days after the date on which such requested Competitive Bid Loan is to be made; provided, however, that such Competitive Bid Maturity Date shall be no later than the Maturity Date) and (E) other terms (if any) and must be accompanied by the Competitive Bid Fee. The Administrative Agent shall notify the Lenders of its receipt of a Competitive Bid Request and the contents thereof and invite the Lenders to submit Competitive Bids in response thereto. The Borrower may not request a Competitive Bid for more than three different Interest Periods per Competitive Bid Request and Competitive Bid Requests may be made no more frequently than four times every calendar month.

(iii)       Competitive Bid Procedure. Each Lender may, in its sole discretion, make one or more Competitive Bids to the Borrower in response to a Competitive Bid Request. Each Competitive Bid must be received by the Administrative Agent not later than 10:00 a.m. on the proposed date of the requested Competitive Bid Loan; provided, however, that should the Administrative Agent, in its capacity as a Lender, desire to submit a Competitive Bid it shall notify the Borrower of its Competitive Bid and the terms thereof not later than 15 minutes prior to the time the other Lenders are required to submit their Competitive Bid. A Lender may offer to make all or part of the requested Competitive Bid Loan and may submit multiple Competitive Bids in response to a Competitive Bid Request. Any Competitive Bid must specify (A) the particular Competitive Bid Request as to which the Competitive Bid is submitted, (B) the minimum (which shall be not less than $5,000,000 and integral multiples of $1,000,000 in excess thereof) and maximum principal amounts of the requested Competitive Bid Loan or

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Loans that the Lender is willing to make and (C) the applicable interest rate or rates and Interest Period or Interest Periods therefor. A Competitive Bid submitted by a Lender in accordance with the provisions hereof shall be irrevocable. The Administrative Agent shall promptly notify the Borrower of all Competitive Bids made and the terms thereof. The Administrative Agent shall send a copy of each of the Competitive Bids to the Borrower and each of the Lenders for its records as soon as practicable.

(iv)      Acceptance of Competitive Bids. The Borrower may, in its sole discretion, subject only to the provisions of this subsection (iv), accept or refuse any Competitive Bid offered to it. To accept a Competitive Bid, the Borrower shall give oral notification of its acceptance of any or all such Competitive Bids (which shall be promptly confirmed in writing) to the Administrative Agent by 11:00 a.m. on the proposed date of the Competitive Bid Loan; provided, however, (A) the failure by the Borrower to give timely notice of its acceptance of a Competitive Bid shall be deemed to be a refusal thereof, (B) to the extent Competitive Bids are for comparable Interest Periods, the Borrower may accept Competitive Bids only in ascending order of rates, (C) the aggregate amount of Competitive Bids accepted by the Borrower shall not exceed the principal amount specified in the Competitive Bid Request, (D) if the Borrower shall accept a bid or bids made at a particular Competitive Bid Rate, but the amount of such bid or bids shall cause the total amount of bids to be accepted by the Borrower to be in excess of the amount specified in the Competitive Bid Request, then the Borrower shall accept a portion of such bid or bids in an amount equal to the amount specified in the Competitive Bid Request less the amount of all other Competitive Bids accepted with respect to such Competitive Bid Request, which acceptance in the case of multiple bids at such Competitive Bid Rate, shall be made pro rata in accordance with the amount of each such bid at such Competitive Bid Rate and (E) no bid shall be accepted for a Competitive Bid Loan unless such Competitive Bid Loan is in a minimum principal amount of $5,000,000 and integral multiples of $1,000,000 in excess thereof, except that where a portion of a Competitive Bid is accepted in accordance with the provisions of clause (D) of this subsection (iv), then in a minimum principal amount of $500,000 and integral multiples of $100,000 in excess thereof (but not in any event less than the minimum amount specified in the Competitive Bid), and in calculating the pro rata allocation of acceptances of portions of multiple bids at a particular Competitive Bid Rate pursuant to clause (D) of this subsection (iv), the amounts shall be rounded to integral multiples of $100,000 in a manner which shall be in the discretion of the Borrower. A notice of acceptance of a Competitive Bid given by the Borrower in accordance with the provisions hereof shall be irrevocable. The Administrative Agent shall, not later than noon on the proposed date of such Competitive Bid Loan, notify each bidding Lender whether or not its Competitive Bid has been accepted (and, if so, in what amount and at what Competitive Bid Rate), and each successful bidder will thereupon become bound, subject to the other applicable conditions hereof, to make the Competitive Bid Loan in respect of which its bid has been accepted.

(v)       Funding of Competitive Bid Loans. Each Lender which is to make a Competitive Bid Loan shall make its Competitive Bid Loan available to the Administrative Agent by 2:00 p.m. on the date specified in the Competitive Bid Request by deposit of immediately available funds to the Administrative Agent at the Agent’s

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Account. The Administrative Agent will, upon receipt, make the proceeds of such Competitive Bid Loans available to the Borrower.

(vi)      Maturity of Competitive Bid Loans. Each Competitive Bid Loan shall mature and be due and payable in full on the Competitive Bid Maturity Date applicable thereto. Unless the Borrower shall give notice to the Administrative Agent otherwise (or repays such Competitive Bid Loan), or a Default or Event of Default exists and is continuing, the Borrower shall be deemed to have requested Revolving Loans from all of the Lenders (in the amount of the maturing Competitive Bid Loan and accruing interest at the Base Rate), the proceeds of which will be used to repay such Competitive Bid Loan.

2.2 Extension of Maturity Date. (a) Not more than 75 days and not less than 20 days prior to each anniversaryof the Closing Date (the “Anniversary Date”), the Borrower may request in writing that the Lenders extend each Maturity Date for an additional year (and the Administrative Agent shall promptly give the Lenders notice of any such request). Each Lender shall provide the Administrative Agent, not less than 15 days prior to the then current Anniversary Date, with written notice regarding whether it agrees to extend the Maturity Date of its Commitment. Each decision by a Lender shall be in its sole discretion and failure by a Lender to give timely written notice hereunder shall be deemed a decision by such Lender not to extend the Maturity Date of its Commitment and Loans. If each of the Lenders timely agrees in writing to extend the Maturity Date, then the Maturity Date shall be extended for an additional year pursuant to a duly written amendment of this Credit Agreement executed by the Administrative Agent, on behalf of the Lenders, and the Borrower.

(b)       If Lenders holding more than 50% of the Commitments but less than all of the Commitments timely agree in writing to extend the Maturity Date of their respective Commitments, then the Borrower may either:

(i)        notify the Administrative Agent in writing that it wishes to (and all Lenders that are not Refusing Lenders (as defined below) shall agree to) extend the Maturity Date applicable to the Commitments and Loans of those Lenders that are not Refusing Lenders; provided that the Maturity Date shall not be extended as to any Refusing Lender; or

(ii) acknowledge in writing that the Maturity Date will not be extended.

(c)       In the event that the Borrower elects to extend the Maturity Date pursuant to Section 2.2(b)(i), then the Borrower may, on or before the then current Anniversary Date, request, at its own discretion and its own expense, that any of the Lenders that fail to agree to extend the Maturity Dates of their respective Commitments (each, a “Refusing Lender”) (and each Refusing Lender shall be required to transfer and assign upon such request) transfer and assign in whole (but not in part), without recourse (in accordance with and subject to the terms of Section 11.3(b)), all of its interests, rights and obligations under this Credit Agreement to an Eligible Assignee or Eligible Assignees (which may be one or more existing Lenders if any existing Lender accepts such assignment); provided that (A) such assignment or assignments shall not conflict with any law, rule, regulation or order of any court or other Governmental Authority, (B) the Borrower or such Eligible Assignee or Eligible Assignees shall pay to the

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Refusing Lenders in immediately available funds the principal of and interest accrued to the date of such payment on the portion of the Loans hereunder held by such Refusing Lenders and all other amounts owed to such Refusing Lenders hereunder, as well as any transfer fee owing to the Administrative Agent under Section 11.3(b) and (C) such transfer and assignment must occur on or prior to the then current Anniversary Date.

(d)       If the Maturity Date is extended in accordance with clause (a) or (b)(i) of this Section 2.2, then the Borrower shall pay to the Administrative Agent, for the pro rata benefit of the Lenders (other than the Refusing Lenders), a Maturity Date extension fee.

2.3 Method of Borrowing for Revolving Loans. By no later than 11:00 a.m. (a) on the date of the requested borrowing of Revolving Loans that will be Base Rate Loans or (b) three Business Days prior to the date of the requested borrowing of Revolving Loans that will be Eurodollar Loans, the Borrower shall submit a written Notice of Borrowing in the form of Exhibit 2.3 to the Administrative Agent setting forth (i) the amount requested, (ii) whether such Revolving Loans shall accrue interest at the Base Rate or the Adjusted Eurodollar Rate, (iii) with respect to Revolving Loans that will be Eurodollar Loans, the Interest Period applicable thereto and (iv) certification that the Borrower has complied in all respects with Section 5.2.

2.4 Funding of Revolving Loans. Upon receipt of a Notice of Borrowing, the Administrative Agent shall promptly inform the Lenders as to the terms thereof. Each such Lender shall make its Commitment Percentage of the requested Revolving Loans available to the Administrative Agent by 1:00 p.m. on the date specified in the Notice of Borrowing by deposit in Dollars of immediately available funds to the Administrative Agent at the Agent’s Account. The amount of the requested Revolving Loans will then be made available to the Borrower by the Administrative Agent by crediting the account of the Borrower on the books of such office of the Administrative Agent, to the extent the amount of such Revolving Loans are made available to the Administrative Agent.

No Lender shall be responsible for the failure or delay by any other Lender in its obligation to make Revolving Loans hereunder; provided, however, that the failure of any Lender to fulfill its obligations hereunder shall not relieve any other Lender of its obligations hereunder. Unless the Administrative Agent shall have been notified by any Lender prior to the date of any such Revolving Loan that such Lender does not intend to make available to the Administrative Agent its portion of the Revolving Loans to be made on such date, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent on the date of such Revolving Loans, and the Administrative Agent in reliance upon such assumption, may (in its sole discretion but without any obligation to do so) make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent, the Administrative Agent shall be able to recover such corresponding amount from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent’s demand therefor, the Administrative Agent will promptly notify the Borrower, and the Borrower shall immediately pay such corresponding amount to the Administrative Agent. The Administrative Agent shall also be entitled to recover from the Lender or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to the Borrower to the date such corresponding

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amount is recovered by the Administrative Agent at a per annum rate equal to (i) from the Borrower at the applicable rate for such Revolving Loan pursuant to the Notice of Borrowing and (ii) from a Lender at the Federal Funds Rate.

2.5 Continuations and Conversions. The Borrower shall have the option, on any Business Day, to continue existing Eurodollar Loans for a subsequent Interest Period, to convert Base Rate Loans into Eurodollar Loans or to convert Eurodollar Loans in Dollars into Base Rate Loans; provided, however, that (a) each such continuation or conversion must be requested by the Borrower pursuant to a written Notice of Continuation/Conversion, in the form of Exhibit 2.5, in compliance with the terms set forth below, (b) except as provided in Section 4.1, Eurodollar Loans may only be continued or converted into Base Rate Loans on the last day of the Interest Period applicable hereto, (c) upon the occurrence of an Event of Default, any Eurodollar Loan then outstanding shall automatically be converted into a Base Rate Loan at the end of the Interest Period then in effect for such Eurodollar Loan, (d) Base Rate Loans may not be converted into Eurodollar Loans during the existence and continuation of a Default or Event of Default and (e) any request to extend a Eurodollar Loan that fails to comply with the terms hereof or any failure to request an extension of a Eurodollar Loan at the end of an Interest Period shall constitute a conversion, in each case, to a Base Rate Loan on the last day of the applicable Interest Period. Each continuation or conversion must be requested by the Borrower no later than 11:00 a.m. (i) on the date for a requested conversion of a Eurodollar Loan to a Base Rate Loan or (ii) three Business Days prior to the date for a requested continuation of a Eurodollar Loan or conversion of a Base Rate Loan to a Eurodollar Loan, in each case pursuant to a written Notice of Continuation/Conversion submitted to the Administrative Agent which shall set forth (A) whether the Borrower wishes to continue or convert such Loans and (B) if the request is to continue a Eurodollar Loan or convert a Base Rate Loan to a Eurodollar Loan, the Interest Period applicable thereto.

2.6 Minimum Amounts. Each request for a Revolving Loan or a conversion or continuation hereunder shall be subject to the following requirements: (a) each Revolving Loan shall be in a minimum of $5,000,000, and (b) no more than ten Eurodollar Loans shall be outstanding hereunder at any one time. For the purposes of this Section 2.6, all Eurodollar Loans with the same Interest Periods shall be considered as one Eurodollar Loan, but Eurodollar Loans with different Interest Periods, even if they begin on the same date, shall be considered separate Eurodollar Loans. Any Revolving Loan requested shall be in an integral multiple of $1,000,000, unless the request is for all of the remaining amount of the Commitments available to be borrowed.

2.7 Reductions of Commitments.

(a)       Commitments. Upon at least three Business Days’ prior written notice to the Administrative Agent (which notice shall be promptly transmitted by the Administrative Agent to each Lender), the Borrower shall have the right to permanently terminate or reduce the aggregate unused amount of the Commitments, at any time or from time to time; provided that (a) each partial reduction shall be in an aggregate amount at least equal to $10,000,000 and in integral multiples of $1,000,000 above such amount, and (b) no reduction shall be made which would reduce the aggregate amount of the Commitments to an amount less than the then

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outstanding Credit Extensions. Any reduction in (or termination of) the Commitments shall be permanent and may not be reinstated except as permitted by Section 2.9.

(b)       The Letter of Credit Commitments of each Issuing Bank shall be permanently reduced on a pro rata basis from time to time on the date of each reduction in the Commitments by the amount of each such reduction in the Commitments.

2.8 Notes. (a) Revolving Loan Notes. Any Lender may request that the Revolving Loans made by it to the Borrower be evidenced by a promissory note of the Borrower payable to each Lender in substantially the form of Exhibit 2.8(a) (the “Revolving Loan Notes”). In such event, the Borrower shall prepare, execute and deliver to such Lender a Revolving Loan Note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns). Thereafter, the Revolving Loans evidenced by such Revolving Loan Notes and interest thereon shall at all times (including after assignment pursuant to Section 11.3) be represented by one or more Revolving Loan Notes in such form payable to the order of the payee named therein (or, if such Revolving Loan Note is a registered note, to such payee and its registered assigns).

(b)       Competitive Bid Loan Notes. Any Lender may request that the Competitive Bid Loans made by it to the Borrower be evidenced by a promissory note of the Borrower payable to each Lender in substantially the form of Exhibit 2.8(b) (the “Competitive Bid Loan Notes”). In such event, the Borrower shall prepare, execute and deliver to such Lender a Competitive Bid Loan Note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns). Thereafter, the Competitive Bid Loans evidenced by such Competitive Bid Loan Notes and interest thereon shall at all times (including after assignment pursuant to Section 11.3) be represented by one or more Competitive Bid Loan Notes in such form payable to the order of the payee named therein (or, if such Competitive Bid Loan Note is a registered note, to such payee and its registered assigns).

The date, amount, type, interest rate and duration of Interest Period (if applicable) of each Loan made by each Lender to the Borrower, and each payment made on account of the principal thereof, shall be recorded by such Lender on its books; provided that the failure of such Lender to make any such recordation or endorsement shall not affect the obligations of the Borrower to make a payment when due of any amount owing hereunder or under any Note in respect of the Loans to be evidenced by such Note, and each such recordation or endorsement shall be conclusive and binding absent manifest error.

2.9 Increases in Revolving Loan Commitment. From time to time prior to the latest applicable Maturity Date and, in each case, upon at least 45 days’ prior written notice to the Administrative Agent (which notice shall be promptly transmitted by the Administrative Agent to each Lender), the Borrower shall have the right, subject to the terms and conditions set forth below, to increase the aggregate amount of the Commitments; provided that (a) no Default or Event of Default shall exist at the time of a request or a proposed increase in the Commitments, (b) such increase must be in a minimum amount of $25,000,000 and in integral multiples of $1,000,000 above such amount, (c) the Commitments shall not be increased by an amount greater than $100,000,000 without the prior written consent of the Required Lenders, (d) no individual Lender’s Commitment may be increased without such Lender’s written consent,

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(e) Schedule 1.1(b) shall be amended to reflect the revised Commitments and revised Commitment Percentages of the Lenders and (f) if any Revolving Loans are outstanding at the time of an increase in the Commitments, the Borrower will prepay (provided that any such prepayment shall be subject to Section 4.3) one or more existing Revolving Loans in an amount necessary such that after giving effect to the increase in the Commitments each Lender will hold its pro rata share (based on its share of the revised Commitments) of outstanding Revolving Loans.

Any such increase in the aggregate amount of the Commitments shall apply to (x) the Commitment of one or more existing Lenders requested by the Borrower to participate in such increase that accepts such request in the Lender’s sole discretion; provided that if more than one Lender wishes to participate, then such increase shall be allocated pro rata among such Lenders and any Eligible Assignee referred to in (y) below (based on the amount that each such Lender was willing to increase its Commitment) and/or (y) the creation of a new Commitment by one or more institutions that is not an existing Lender; provided that any such institution (A) must be an Eligible Assignee, (B) must be acceptable to the Administrative Agent, (C) must have a Commitment of at least $10,000,000 and (D) must become a Lender under this Credit Agreement by execution and delivery of an appropriate joinder agreement or of counterparts to this Credit Agreement in a manner acceptable to the Borrower and the Administrative Agent.

2.10 Letters of Credit. (a) Upon the terms and subject to the conditions herein set forth, the Borrower may request, in the form of a Letter of Credit Request, any Issuing Bank, at any time and from time to time after the date hereof, to issue, and such Issuing Bank shall issue, for the account of the Borrower one or more Letters of Credit; provided that no Letter of Credit shall be issued if after giving effect to such issuance (i) the aggregate Letters of Credit Outstanding shall exceed the aggregate amount of the Commitments of the Lenders then in effect, (ii) the aggregate Credit Extensions (after giving effect to the issuance of such Letter of Credit) would exceed the aggregate amount of Commitments then in effect or (iii) the Letters of Credit Outstanding for all Letters of Credit Issued by such Issuing Bank would exceed such Issuing Bank’s Letter of Credit Commitment at such time; and provided further that no Letter of Credit shall be issued if the applicable Issuing Bank shall have received notice from the Administrative Agent or the Required Lenders that the conditions to such issuance have not been met.

(b)       Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is five Business Days prior to the latest applicable Maturity Date.

(c)       Each Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit issued by such Issuing Bank. Each Issuing Bank shall promptly notify the Administrative Agent and the Borrower by telephone (confirmed by telecopy) of such demand for payment and whether such Issuing Bank will make payment thereunder (which payment shall not be made until at least two Business Days after such notice from such Issuing Bank to the Borrower); provided that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse such Issuing Bank and the Lenders with respect to any such payment.

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(d)       Any L/C Disbursement shall be reimbursed by the Borrower in Dollars on the next Business Day of any such payment thereof by any Issuing Bank by paying to the Administrative Agent an amount equal to such drawing not later than 3:00 p.m., New York time, on such date; provided that the Borrower may, subject to the conditions to borrowing set forth herein, request in accordance with Section 2.3 that such payment be financed with a Revolving Loan in an equivalent amount and, to the extent so financed, the Borrower’s obligation to make such payment shall be discharged and replaced by the resulting Revolving Loan; provided that if the Borrower fails to reimburse such Issuing Bank when due pursuant to this paragraph (d), then (i) Section 2.10(f) shall apply and (ii) interest shall accrue on the unpaid amount of the L/C Disbursement, from the date of such disbursement to but excluding the date the Borrower reimburses the relevant Issuing Bank, at the rate per annum then applicable to Base Rate Loans, and such interest accrued shall be for the account of such Issuing Bank; providedfurther that interest accrued on and after the date of payment by any Lender pursuant to paragraph (g) of this Section to reimburse the relevant Issuing Bank shall be for the account of such Lender to the extent of such payment.

(e)       Immediately upon the issuance of any Letter of Credit by any Issuing Bank (or the amendment of a Letter of Credit increasing the amount thereof), and without any further action on the part of such Issuing Bank, such Issuing Bank shall be deemed to have sold to each Lender, and each such Lender shall be deemed unconditionally and irrevocably to have purchased from such Issuing Bank, without recourse or warranty, an undivided interest and participation, to the extent of such Lender’s Commitment Percentage, in such Letter of Credit, each drawing thereunder and the obligations of the Borrower under this Credit Agreement and the other Credit Documents with respect thereto. Upon any change in the Commitments pursuant to Sections 2.2, 2.7, 2.9 or 11.3 or any termination of the Commitment of any Refusing Lender on any Maturity Date occurring prior to the latest Maturity Date applicable to the Loans pursuant to Section 2.2, it is hereby agreed that with respect to all Letters of Credit Outstanding, there shall be an automatic adjustment to the participations hereby created to reflect the new Commitment of the assigning and assignee Lenders or the termination of the Commitment of any Refusing Lender on the Maturity Date applicable to such Refusing Lender. Any action taken or omitted by any Issuing Bank under or in connection with a Letter of Credit, if taken or omitted in the absence of gross negligence or willful misconduct, shall not create for such Issuing Bank any resulting liability to any Lender.

(f)        In the event that any Issuing Bank makes any L/C Disbursement and the Borrower shall not have reimbursed such amount in full to such Issuing Bank pursuant to Section 2.10(d), such Issuing Bank shall promptly notify the Administrative Agent, which shall promptly notify each Lender of such failure, and each Lender shall promptly and unconditionally pay to the Administrative Agent for the account of such Issuing Bank the amount of such Lender’s Commitment Percentage of such unreimbursed payment in Dollars and in same day funds. If such Issuing Bank so notifies the Administrative Agent, and the Administrative Agent so notifies the Lenders prior to 11:00 a.m., New York time, on any Business Day, each such Lender shall make available to such Issuing Bank such Lender’s Commitment Percentage of the amount of such payment on such Business Day in same day funds. If and to the extent such Lender shall not have so made its Commitment Percentage of the amount of such payment available to the applicable Issuing Bank, such Lender agrees to pay to the applicable Issuing Bank, forthwith on demand such amount, together with interest thereon, for each day from such

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date until the date such amount is paid to the Administrative Agent for the account of the applicable Issuing Bank at the Federal Funds Rate. Each Lender agrees to fund its Commitment Percentage of such unreimbursed payment notwithstanding a failure to satisfy any applicable lending conditions or the provisions of Section 2.1 or Section 2.6, or the occurrence of the applicable Maturity Date. The failure of any Lender to make available to any Issuing Bank its Commitment Percentage of any payment under any Letter of Credit issued by such Issuing Bank shall neither relieve any Lender of its obligation hereunder to make available to such Issuing Bank its Commitment Percentage of any payment under any Letter of Credit on the date required, as specified above, nor increase the obligation of such other Lender. Whenever any Lender has made payments to any Issuing Bank in respect of any reimbursement obligation for any Letter of Credit issued by such Issuing Bank, such Lender shall be entitled to share ratably, based on its Commitment Percentage, in all payments and collections thereafter received on account of such reimbursement obligation.

(g)       Whenever the Borrower desires that an Issuing Bank issue a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Borrower shall give to such Issuing Bank and the Administrative Agent at least two Business Days’ prior written (including telegraphic, telex, facsimile or cable communication) notice (or such shorter period as may be agreed upon in writing by such Issuing Bank and the Borrower) specifying the date on which the proposed Letter of Credit is to be issued, amended, renewed or extended (which shall be a Business Day), the stated amount of the Letter of Credit so requested, the expiration date of such Letter of Credit, the name and address of the beneficiary thereof, and the provisions thereof.

(h)       The obligations of the Borrower to reimburse any Issuing Bank for any L/C Disbursement made by such Issuing Bank shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Credit Agreement under all circumstances, including, without limitation: (i) any lack of validity or enforceability of any Letter of Credit; (ii) the existence of any claim, setoff, defense or other right which the Borrower may have at any time against a beneficiary of any Letter of Credit or against any of the Lenders, whether in connection with this Credit Agreement, the transactions contemplated herein or any unrelated transaction; (iii) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower’s obligations hereunder; or (v) the fact that any Event of Default shall have occurred and be continuing.

(i)        If any Letters of Credit shall remain outstanding and partially or wholly undrawn on any Maturity Date applicable to the Commitments and Loans of any Refusing Lender, the Borrower shall immediately Cash Collateralize an amount equal to such Refusing Lender’s Commitment Percentage of the amount of Letters of Credit Outstanding on such Maturity Date. The Borrower hereby grants to the Administrative Agent, for the benefit of each Issuing Bank and the Lenders, a security interest in all cash, deposit accounts and all balances therein and all proceeds of the foregoing which form part of the Cash Collateral. Cash Collateral shall be maintained in a blocked, non-interest bearing deposit account of the Administrative

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Agent (the “L/C Cash Deposit Account”). Amounts deposited into the L/C Cash Deposit Account pursuant to this Section 2.10(i) shall be made available to the Issuing Banks to the extent such Refusing Lender would have been required to make such amount available to the Issuing Banks in accordance with Section 2.10(f) if the Commitments of such Refusing Lender had not terminated on the relevant Maturity Date. After all relevant Letters of Credit shall have expired or been fully drawn upon and all other obligations of the Borrower thereunder shall have been paid in full, the balance, if any, in such L/C Cash Deposit Account shall be promptly returned to the Borrower.

SECTION 3

PAYMENTS

3.1 Interest.

(a) Interest Rate.

(i)        Each Base Rate Loan shall accrue interest at the Base Rate applicable to such Base Rate Loan.

(ii)       Each Eurodollar Loan shall accrue interest at the Adjusted Eurodollar Rate applicable to such Eurodollar Loan.

(iii)       Each Competitive Bid Loan shall accrue interest at the applicable Competitive Bid Rate with respect to such Competitive Bid Loan.

(b)       Default Rate of Interest. Upon the occurrence, and during the continuance, of an Event of Default, the principal of and, to the extent permitted by law, interest on the Loans and any other amounts owing hereunder or under the other Credit Documents shall bear interest, payable on demand, at a per annum rate equal to 2% plus the rate which would otherwise be applicable (or if no rate is applicable, then a rate per annum equal to the rate for Revolving Loans that are Base Rate Loans plus 2% per annum).

(c)       Interest Payments. Interest on Loans shall be due and payable in arrears on each applicable Interest Payment Date.

3.2 Prepayments.

(a)       Voluntary Prepayments. The Borrower shall have the right to prepay Loans in whole or in part from time to time without premium or penalty; provided, however, that (i) Eurodollar Loans may only be prepaid on two Business Days’ prior written notice to the Administrative Agent and any prepayment of Eurodollar Loans will be subject to Section 4.3; (ii) each such partial prepayment of Loans shall be in the minimum principal amount of $5,000,000 and integral multiples of $1,000,000 in excess thereof; and (iii) Competitive Bid Loans may not be prepaid unless a breakage fee equal to the actual amount of damages suffered by the Lender whose Competitive Bid Loan is prepaid is paid to such Lender. Amounts prepaid hereunder shall be applied as the Borrower may elect; provided that if the Borrower fails to

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specify the application of a voluntary prepayment, then such prepayment shall be applied first to Base Rate Loans, then to Eurodollar Loans in direct order of Interest Period maturities, and then to Competitive Bid Loans pro rata among all Lenders holding same.

(b) Mandatory Prepayments.

(i)        If at any time the amount of Revolving Loans outstanding plus the aggregate amount of Competitive Bid Loans outstanding plus the aggregate amount of Letters of Credit Outstanding exceeds the aggregate amount of the Commitments of the Lenders then in effect, the Borrower shall immediately make a principal payment to the Administrative Agent in the manner and in an amount such that the sum of the aggregate amount of Revolving Loans outstanding plus Competitive Bid Loans outstanding plus the aggregate amount of Letters of Credit Outstanding is less than or equal to the aggregate amount of the Commitments of the Lenders then in effect.

(ii)       Any prepayments made under this Section 3.2(b) shall be subject to Section 4.3 and shall be applied first to Base Rate Loans, then to Eurodollar Loans in direct order of Interest Period maturities, and then to Competitive Bid Loans pro rata among all Lenders holding same.

3.3 Payment in Full at Maturity.

On each Maturity Date, the entire outstanding principal amount owing under the Credit Documents, together with accrued but unpaid interest and all other sums owing under the Credit Documents, shall be due and payable in full to the relevant Lenders, unless accelerated sooner pursuant to Section 9.2.

3.4 Fees.

(a) Unused Fees.

(i)        In consideration of the Commitment being made available by each Lender hereunder, the Borrower agrees to pay to the Administrative Agent, for the pro rata benefit of each Lender, a per annum fee equal to the Applicable Percentage for Unused Fees multiplied by the Unused Revolving Loan Commitment (the “Unused Fees”).

(ii)       The accrued Unused Fees shall be due and payable in arrears fifteen days after the end of each fiscal quarter of the Borrower for the immediately preceding fiscal quarter (or portion thereof), beginning with the first of such dates to occur after the Closing Date, as well as on each Maturity Date.

(b) Utilization Fees.

(i)        If on any day the aggregate outstanding principal amount of all Revolving Loans and Competitive Bid Loans plus the amount of Letters of Credit Outstanding on such day exceeds the product of (A) 50% times (B) the aggregate amount of Commitments then in effect, the Borrower agrees to pay to the Administrative Agent, for the pro rata benefit of each Lender, a per annum fee equal to the Applicable Percentage

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for Utilization Fees multiplied by the Utilized Revolving Loan Commitment (the “Utilization Fees”).

(ii)       The accrued Utilization Fees shall be due and payable in arrears 15 days after the end of each fiscal quarter of the Borrower for the immediately preceding fiscal quarter (or portion thereof), beginning with the first of such dates to occur after the Closing Date, as well as on each Maturity Date.

(c) Letter of Credit Fees.

(i)        The Borrower shall pay to the Administrative Agent, for the pro rata benefit of each Lender, in arrears 15 days after the end of each fiscal quarter and on each Maturity Date, a fee (each, a “Letter of Credit Fee”) equal to the average daily aggregate Available Amount during such quarter of all Letters of Credit outstanding during such quarter at the Applicable Percentage for Eurodollar Loans during such quarter. Upon the occurrence and during the continuance of an Event of Default, the amount of any Letter of Credit Fees payable by the Borrower pursuant to this Section 3.4(c)(i) shall be increased by 2% per annum.

(ii)       The Borrower shall pay to each Issuing Bank, for its own account, and in addition to all Letter of Credit Fees otherwise provided for hereunder, (A) a fee in an amount equal to (1) if the applicable Issuing Bank is the Initial Issuing Bank, 0.125% per annum of the average face amount of any Letters of Credit outstanding and issued by the Initial Issuing Bank during eachfiscal quarter, and (2) if the applicable Issuing Bank is any other Issuing Bank, such other rate as agreed to between such Issuing Bank and the Borrower, in each case which shall be due and payable in arrears 15 days after the end of such quarter and on each Maturity Date, and (B) such fees and charges in connection with the issuance, negotiation, settlement, amendment and processing of each Letter of Credit issued by such Issuing Bank as are agreed upon between the Borrower and such Issuing Bank.

(d)       Administrative Fees. The Borrower agrees to pay to the Administrative Agent, for its own account, the administrative fee as agreed to between the Borrower and the Administrative Agent in the Engagement Letter.

3.5 Place and Manner of Payments. All payments of principal, interest, fees, expenses and other amounts to be made by the Borrower under this Credit Agreement shall be made unconditionally and without deduction for any counterclaim, defense, recoupment or setoff. All such payments shall be received not later than 2:00 p.m. on the date when due in Dollars and in immediately available funds by the Administrative Agent at its offices in New York, New York. The Administrative Agent will distribute such payments made to the Lenders on the date of receipt if such payment is received prior to 2:00 p.m.; otherwise, the Administrative Agent will distribute such payments to the Lenders, and such payment will be credited to the Borrower, on the next succeeding Business Day. The Borrower shall, at the time it makes any payment under this Credit Agreement, specify to the Administrative Agent the Loans, fees or other amounts payable by the Borrower hereunder to which such payment is to be applied (and in the event that it fails to specify, or if such application would be inconsistent with the terms

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hereof, the Administrative Agent shall distribute such payment to the Lenders in such manner as it reasonably determines in its sole discretion). Whenever any payment hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day (subject to accrual of interest and fees for the period of such extension), except that, in the case of Eurodollar Loans (or interest payable with respect thereto), if the extension would cause the payment to be made in the next following calendar month, then such payment shall instead be made on the next preceding Business Day.

3.6 Pro Rata Treatment. Except to the extent otherwise provided herein, all Revolving Loans, each payment or prepayment of principal of any Revolving Loan, each payment of interest on the Revolving Loans, each payment with respect to a Letter of Credit, each payment of Unused Fees, each payment of Utilization Fees, each payment of Letters of Credit Fees, each reduction of the Commitments, and each conversion or continuation of any Revolving Loans, shall be allocated pro rata among the Lenders in accordance with the respective Commitment Percentages; provided that if any Lender shall have failed to pay its applicable pro rata share of any Revolving Loan or L/C Disbursement and such amount was made available to the Borrower pursuant to Section 2.4 or 2.10, as applicable, then any amount to which such Lender would otherwise be entitled pursuant to this Section 3.6 shall instead be payable to the Administrative Agent until the share of such Revolving Loan not funded by such Lender has been repaid; providedfurther that, in the event that any amount paid to any Lender pursuant to this Section 3.6 is rescinded or must otherwise be returned by the Administrative Agent, each Lender shall, upon the request of the Administrative Agent, repay to the Administrative Agent the amount so paid to such Lender, with interest for the period commencing on the date such payment is returned by the Administrative Agent until the date the Administrative Agent receives such payment at a rate per annum equal to the Federal Funds Rate.

3.7 Computations of Interest and Fees. (a) Except for Base Rate Loans, on which interest shall be computed on the basis of a 365- or 366-day year, as the case may be, all computations of interest and fees hereunder shall be made on the basis of the actual number of days elapsed over a year of 360 days.

(b)       It is the intent of the Lenders and the Borrower to conform to and contract in strict compliance with applicable usury law from time to time in effect. All agreements between the Lenders and the Borrower are hereby limited by the provisions of this paragraph which shall override and control all such agreements, whether now existing or hereafter arising and whether written or oral. In no way, nor in any event or contingency (including but not limited to prepayment or acceleration of the maturity of any obligation), shall the interest taken, reserved, contracted for, charged, or received under this Credit Agreement, under the Notes or otherwise, exceed the maximum nonusurious amount permissible under applicable law. If, from any possible construction of any of the Credit Documents or any other document, interest would otherwise be payable in excess of the maximum nonusurious amount, any such construction shall be subject to the provisions of this paragraph and such documents shall be automatically reduced to the maximum nonusurious amount permitted under applicable law, without the necessity of execution of any amendment or new document. If any Lender shall ever receive anything of value which is characterized as interest on the Loans under applicable law and which would, apart from this provision, be in excess of the maximum lawful amount, an amount equal to the amount which would have been excessive interest shall, without penalty, be applied to the

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reduction of the principal amount owing on the Loans and not to the payment of interest, or refunded to the Borrower or the other payor thereof if and to the extent such amount which would have been excessive exceeds such unpaid principal amount of the Loans. The right to demand payment of the Loans or any other indebtedness evidenced by any of the Credit Documents does not include the right to receive any interest which has not otherwise accrued on the date of such demand, and the Lenders do not intend to charge or receive any unearned interest in the event of such demand. All interest paid or agreed to be paid to the Lenders with respect to the Loans shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full stated term (including any renewal or extension) of the Loans so that the amount of interest on account of such indebtedness does not exceed the maximum nonusurious amount permitted by applicable law.

3.8 Sharing of Payments. Each Lender agrees that, in the event that any Lender shall obtain payment in respect of any Loan or L/C Disbursement owing to such Lender under this Credit Agreement through the exercise of a right of setoff, banker’s lien, counterclaim or otherwise (including, but not limited to, pursuant to the Bankruptcy Code) in excess of its pro rata share as provided for in this Credit Agreement, such Lender shall promptly purchase from the other Lenders a participation in such Loans or L/C Disbursements, in such amounts and with such other adjustments from time to time, as shall be equitable in order that all Lenders share such payment in accordance with their respective ratable shares as provided for in this Credit Agreement. Each Lender further agrees that if a payment to a Lender (which is obtained by such Lender through the exercise of a right of setoff, banker’s lien, counterclaim or otherwise) shall be rescinded or must otherwise be restored, each Lender which shall have shared the benefit of such payment shall, by repurchase of a participation theretofore sold, return its share of that benefit to each Lender whose payment shall have been rescinded or otherwise restored, together with its pro rata share of any interest required to be paid by the Lender whose payment shall have been rescinded or otherwise restored. The Borrower agrees that any Lender so purchasing such a participation may, to the fullest extent permitted by law, exercise all rights of payment, including setoff, banker’s lien or counterclaim, with respect to such participation as fully as if such Lender were a holder of such Loan or other obligation in the amount of such participation. Except as otherwise expressly provided in this Credit Agreement, if any Lender shall fail to remit to the Administrative Agent or any other Lender an amount payable by such Lender to the Administrative Agent or such other Lender pursuant to this Credit Agreement on the date when such amount is due, such payments shall accrue interest thereon, for each day from the date such amount is due until the day such amount is paid to the Administrative Agent or such other Lender, at a rate per annum equal to the Federal Funds Rate.

SECTION 4

ADDITIONAL PROVISIONS REGARDING LOANS

4.1 Eurodollar Loans. (a) Unavailability. In the event that the Administrative Agent shall have determined in good faith (i) that Dollar deposits in the principal amounts requested with respect to a Eurodollar Loan are not generally available in the London interbank Eurodollar market or (ii) that reasonable means do not exist for ascertaining the Eurodollar Rate, the Administrative Agent shall, as soon as practicable thereafter, give written notice of such

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determination to the Borrower and the Lenders. In the event of any such determination under clauses (i) or (ii) above, until the Administrative Agent shall have advised the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (A) any request by the Borrower for Eurodollar Loans shall be deemed to be a request for Base Rate Loans and (B) any request by the Borrower for conversion into or continuation of Eurodollar Loans shall be deemed to be a request for conversion into or continuation of Base Rate Loans.

(b)       Change in Legality. Notwithstanding any other provision herein, if any change in any law or regulation or in the interpretation thereof by any Governmental Authority charged with the administration or interpretation thereof shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar Loan, then, by written notice to the Borrower and to the Administrative Agent, such Lender may:

(A)       declare that Eurodollar Loans, and conversions to or continuations of Eurodollar Loans, will not thereafter be made by such Lender hereunder, whereupon any request by the Borrower for, or for conversion into or continuation of, Eurodollar Loans shall, as to such Lender only, be deemed a request for, or for conversion into or continuation of, Base Rate Loans, unless such declaration shall be subsequently withdrawn; and

(B)       require that all outstanding Eurodollar Loans made by it be converted to Base Rate Loans in which event all such Eurodollar Loans shall be automatically converted to Base Rate Loans.

In the event any Lender shall exercise its rights under clause (A) or (B) above, all payments and prepayments of principal which would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead be applied to repay the Base Rate Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans.

(c)       Increased Costs. If at any time a Lender shall incur increased costs or reductions in the amounts received or receivable hereunder with respect to the making, the commitment to make or the maintaining of any Eurodollar Loan because of any change since the date of this Credit Agreement in any applicable law, governmental rule, regulation, guideline or order (or in the interpretation or administration thereof and including the introduction of any new law or governmental rule, regulation, guideline or such order) including, without limitation, the imposition, modification or deemed applicability of any reserves, deposits or similar requirements (such as, for example, but not limited to, a change in official reserve requirements, but, in all events, excluding reserves required under Regulation D to the extent included in the computation of the Adjusted Eurodollar Rate), then the Borrower shall pay to such Lender within 15 days after demand, which demand shall contain the basis and calculations supporting such demand, such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender may determine in its sole discretion) as may be required to compensate such Lender for such increased costs or reductions in amounts receivable hereunder.

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Each determination and calculation made by a Lender under this Section 4.1 shall, absent manifest error, be binding and conclusive on the parties hereto.

4.2 Capital Adequacy. If, after the date hereof, any Lender has determined that the adoption or effectiveness of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender’s (or parent corporation’s) capital or assets as a consequence of its commitments or obligations hereunder to a level below that which such Lender, or its parent corporation, could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Lender’s (or parent corporation’s) policies with respect to capital adequacy), then the Borrower shall pay to such Lender within 15 days after demand, which demand shall contain the basis and calculations supporting such demand, such additional amount or amounts as will compensate such Lender for such reduction. Each determination by any such Lender of amounts owing under this Section 4.2 shall, absent manifest error, be conclusive and binding on the parties hereto.

4.3 Compensation. The Borrower shall compensate each Lender, within 15 days after demand, which demand shall contain the basis and calculations supporting such demand, for all reasonable losses, expenses and liabilities (including, without limitation, any loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by the Lender to fund its Eurodollar Loans) which such Lender may sustain:

(a)       if for any reason (other than a default by such Lender or the Administrative Agent) a borrowing, continuation or conversion of any Eurodollar Loan or Competitive Bid Loan does not occur on a date specified therefor in a Notice of Borrowing, Competitive Bid Request or Notice of Continuation/Conversion, as the case may be;

(b)       if any prepayment, repayment, continuation or conversion of any Eurodollar Loan or Competitive Bid Loan occurs on a date which is not the last day of an Interest Period applicable thereto, including, without limitation, in connection with any demand, acceleration, mandatory prepayment or otherwise (including any demand under this Section 4);

(c)       if the Borrower fails to repay any Eurodollar Loan or Competitive Bid Loans when required by the terms of this Credit Agreement; or

(d)       if the Borrower elects to cause a mandatory assignment of such Lender’s Commitment pursuant to Section 4.5.

Calculation of all amounts payable to a Lender under this Section 4.3 shall be made as though the Lender has actually funded its relevant Eurodollar Loan through the purchase of a Eurodollar deposit bearing interest at the Adjusted Eurodollar Rate (or at the margin set forth in the applicable Competitive Bid) in an amount equal to the amount of that Loan, having a maturity comparable to the relevant Interest Period and through the transfer of such Eurodollar deposit

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from an offshore office of that Lender to a domestic office of that Lender in the United States of America; provided, however, that each Lender may fund each of its Eurodollar Loans in any manner it sees fit and the foregoing assumption shall be utilized only for the calculation of amounts payable under this Section 4.3. Each determination and calculation hereunder shall be in good faith and shall be conclusive absent manifest error.

4.4 Taxes. (a) Tax Liabilities Imposed on a Lender. Any and all payments by the Borrower hereunder or under any of the Credit Documents shall be made, in accordance with the terms hereof and thereof, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding taxes measured by net income and franchise taxes imposed on any Lender by the jurisdiction under the laws of which such Lender is organized or transacting business or any political subdivision thereof (all such non-excluded taxes, being hereinafter referred to as “Taxes”). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 4.4) such Lender receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law, and (iv) the Borrower shall deliver to such Lender evidence of such payment to the relevant Governmental Authority.

(b)       Other Taxes. In addition, the Borrower agrees to pay, upon written notice from a Lender and prior to the date when penalties attach thereto, all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies of the United States or any state or political subdivision thereof or any applicable foreign jurisdiction that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Credit Agreement (collectively, the “Other Taxes”).

(c)       Refunds. If a Lender or the Administrative Agent (as the case may be) shall become aware that it is entitled to claim a refund (or a refund in the form of a credit) (each, a “Refund”) from a Governmental Authority (as a result of any error in the amount of Taxes or Other Taxes paid to such Governmental Authority or otherwise) of Taxes or Other Taxes which the Borrower has paid, or with respect to which the Borrower has paid additional amounts, pursuant to this Section 4.4, it shall promptly notify the Borrower in writing of the availability of such Refund and shall, within 30 days after receipt of written notice by the Borrower make a claim to such Governmental Authority for such Refund at the Borrower’s expense if, in the judgment of such Lender or the Administrative Agent (as the case may be), the making of such claim will not be otherwise disadvantageous to it; provided that nothing in this subsection (c) shall be construed to require any Lender or the Administrative Agent to institute any administrative proceeding (other than the filing of a claim for any such Refund) or judicial proceeding to obtain such Refund.

If a Lender or the Administrative Agent (as the case may be) receives a Refund from a Governmental Authority (as a result of any error in the amount of Taxes or Other Taxes paid to such Governmental Authority or otherwise) of any Taxes or Other Taxes which have been paid by the Borrower, or with respect to which the Borrower has paid additional amounts

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pursuant to this Section 4.4, it shall promptly pay to the Borrower the amount so received (but only to the extent of payments made, or additional amounts paid, by the Borrower under this Section 4.4 with respect to Taxes or Other Taxes giving rise to such Refund), net of all reasonable out-of-pocket expenses (including the net amount of taxes, if any, imposed on such Lender or the Administrative Agent with respect to such Refund) of such Lender or Administrative Agent, and without interest (other than interest paid by the relevant Governmental Authority with respect to such Refund); provided, however, that the Borrower, upon the request of such Lender or the Administrative Agent, agrees to repay the amount paid over to the Borrower (plus penalties, interest or other charges) to such Lender or the Administrative Agent in the event such Lender or the Administrative Agent is required to repay such Refund to such Governmental Authority. Nothing contained in this Section 4.4(c) shall require any Lender or the Administrative Agent to make available any of its tax returns (or any other information that it deems to be confidential or proprietary) or to alter its tax accounting practices.

(d)       Foreign Lender. Each Lender (which, for purposes of this Section 4.4, shall include any Affiliate of a Lender that makes any Eurodollar Loan pursuant to the terms of this Credit Agreement) that is not a “United States person” (as such term is defined in Section 7701(a)(30) of the Code) shall submit to the Borrower and the Administrative Agent on or before the Closing Date (or, in the case of a Person that becomes a Lender after the Closing Date by assignment, promptly upon such assignment), two duly completed and signed copies of (A) either (1) Form W-8BEN of the United States Internal Revenue Service, or a successor applicable form, entitling such Lender to a complete exemption from withholding on all amounts to be received by such Lender pursuant to this Credit Agreement and/or the Notes or (2) Form W-8ECI of the United States Internal Revenue Service, or an applicable successor form, relating to all amounts to be received by such Lender pursuant to this Credit Agreement and/or the Notes and, if applicable, (B) an Internal Revenue Service Form W-8 or W-9 entitling such Lender to receive a complete exemption from United States backup withholding tax. Each such Lender shall, from time to time after submitting either such form, submit to the Borrower and the Administrative Agent such additional duly completed and signed copies of such forms (or such successor forms or other documents as shall be adopted from time to time by the relevant United States taxing authorities) as may be (1) reasonably requested in writing by the Borrower or the Administrative Agent and (2) appropriate under then current United States laws or regulations. Upon the reasonable request of the Borrower or the Administrative Agent, each Lender that has not provided the forms or other documents as provided above, on the basis of being a United States person, shall submit to the Borrower and the Administrative Agent a certificate to the effect that it is such a “United States person.” If and for any period during which the provisions of this Section 4.4(d) are not satisfied by or with respect to any such Lender, no provision of this Credit Agreement shall require the Borrower to indemnify with respect to any resulting withholding of United States taxes imposed on or with respect to such Lender as a result of such noncompliance for the periods to which such noncompliance relates, unless such noncompliance is directly attributable to a change in a law, rule or regulation issued by a Governmental Authority which results in the inability of such Lender to provide such form. Each such Lender shall indemnify and hold harmless (on an after-tax basis) the Borrower against any claim for United States withholding taxes which the Borrower fails to withhold on payments to such Lender as a direct result of the invalidity of any form provided to the Borrower by such Lender pursuant to this Section 4.4(d).

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4.5 Mitigation; Mandatory Assignment. The Administrative Agent and each Lender shall use reasonable efforts to avoid or mitigate any increased cost or suspension of the availability of an interest rate under Sections 4.1 through 4.4 above to the greatest extent practicable (including transferring the Loans to another lending office or Affiliate of a Lender) unless, in the opinion of the Administrative Agent or such Lender, such efforts would be likely to have an adverse effect upon it. In the event that (a) a Lender makes a request to the Borrower for additional payments in accordance with Section 4.1, 4.2 or 4.4 or (b) a Lender is a Defaulting Lender, then, provided that no Default or Event of Default has occurred and is continuing at such time, the Borrower may, at its own expense (such expense to include any transfer fee payable to the Administrative Agent under Section 11.3(b) and any expense pursuant to this Section 4.5) and in its sole discretion, require such Lender to transfer and assign in whole (but not in part), without recourse (in accordance with and subject to the terms and conditions of Section 11.3(b)), all of its interests, rights and obligations under this Credit Agreement to an Eligible Assignee which shall assume such assigned obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (a) such assignment shall not conflict with any law, rule or regulation or order of any court or other Governmental Authority and (b) the Borrower or such assignee shall have paid to the assigning Lender in immediately available funds the principal of and interest accrued to the date of such payment on the portion of the Loans hereunder held by such assigning Lender and all other amounts owed to such assigning Lender hereunder, including amounts owed pursuant to Sections 4.1 through 4.4. In the event that, after ten Business Days of receiving written notice from the Borrower requiring any Lender to make such an assignment pursuant to this Section 4.5, such Lender fails to execute the agreements required under Section 11.3(b) in connection with such an assignment, then upon one Business Day’s prior written notice from the Borrower to such Lender (with a copy furnished to the Administrative Agent), such agreements shall be deemed to have been executed by such Lender.

SECTION 5

CONDITIONS PRECEDENT

5.1 Closing Conditions. The obligation of each Lender to enter into this Credit Agreement is subject to satisfaction of the following conditions on or prior to the Closing Date (in form and substance acceptable to the Lenders):

(a)       Executed Credit Documents. Receipt by the Administrative Agent of duly executed copies of (i) this Credit Agreement and (ii) the Revolving Loan Notes.

(b)       Officer’s Certificate. Receipt by the Administrative Agent of a certificate of an officer of the Borrower stating that, as of the Closing Date, (i) there exists no Default or Event of Default, (ii) all representations and warranties contained herein and in the other Credit Documents are true and correct in all material respects and (iii) the Borrower is in compliance with the financial covenant set forth in Section 7.11, as demonstrated by the covenant calculations on a schedule attached thereto.

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(c)       Opinions of Counsel. Receipt by the Administrative Agent of the following:

(i)        an opinion, or opinions, satisfactory to the Administrative Agent, addressed to the Administrative Agent and each of the Lenders from legal counsel to the Borrower; and

(ii)       an opinion of Shearman & Sterling LLP, counsel to the Administrative Agent, in form and substance satisfactory to the Administrative Agent.

(d)       Corporate Documents. Receipt by the Administrative Agent of the following:

(i)        Charter Documents. A certificate of an officer of the Borrower that there have been no amendments or documents granted by the office of the Secretary of State of the State of Delaware affecting the Certificate of Incorporation of the Borrower issued by the Secretary of State of the State of Delaware on January 8, 2001.

(ii)       Bylaws. A copy of the bylaws of the Borrower certified by a secretary or assistant secretary of the Borrower to be true and correct as of the Closing Date.

(iii)       Resolutions. Copies of resolutions of the Board of Directors of the Borrower approving and adopting the Credit Documents to which it is a party and the transactions contemplated therein and authorizing execution and delivery thereof, certified by a secretary or assistant secretary of the Borrower to be true and correct and in force and effect as of the Closing Date.

(iv)      Good Standing. Copies of (A) certificates of good standing, existence or its equivalent with respect to the Borrower certified as of a recent date by the appropriate Governmental Authorities of the state or other jurisdiction of incorporation and each other jurisdiction in which the failure to so qualify and be in good standing would have a Material Adverse Effect and (B) to the extent available, a certificate indicating payment of all corporate franchise taxes certified as of a recent date by the appropriate Governmental Authorities of the state or other jurisdiction of its incorporation and each other jurisdiction in which the failure to pay such franchise taxes would have a Material Adverse Effect.

(v)       Incumbency. An incumbency certificate of the Borrower, certified by a secretary or assistant secretary of the Borrower to be true and correct as of the Closing Date.

(e)       Financial Statements. Receipt by the Lenders of the consolidated audited financial statements of the Borrower dated as of December 31, 2005, including balance sheets and income and cash flow statements, in each case audited by independent public accountants of recognized standing and prepared in accordance with GAAP.

(f)        Fees and Expenses. Payment by the Borrower of all fees and expenses owed by it to the Lenders, the Arrangers and the Administrative Agent, including, without

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limitation, payment to the Administrative Agent of the fees agreed to between the Borrower and the Administrative Agent set forth in the Engagement Letter and payment to each of the Arrangers of the fees agreed to between the Borrower and each Arranger set forth in the respective fee letter between such Arranger and the Borrower.

(g)       Material Adverse Effect. No event or condition shall have occurred since the date of the financial statements delivered pursuant to Section 5.1(e) above that has had or would be likely to have a Material Adverse Effect.

(h)       Existing Credit Agreement. Receipt by the Administrative Agent of evidence that all obligations under the Existing Credit Agreement have been paid in full and all commitments thereunder terminated.

(i)        Account Designation Letter. The Administrative Agent shall have received the executed Account Designation Letter in the form of Schedule 1.1(a).

(j)        Other. Receipt by the Lenders of such other documents, instruments, agreements or information as reasonably requested by any Lender.

5.2 Conditions to Extensions of Credit. In addition to the conditions precedent stated elsewhere herein, the Lenders shall not be obligated to make any Loans, issue any Letters of Credit or extend any Maturity Date hereunder unless:

(a)       Request. The Borrower shall have timely delivered a duly executed and completed Notice of Borrowing, Letter of Credit Request, Competitive Bid Request or written request to extend any Maturity Date, as applicable, in conformance with all the terms and conditions of this Credit Agreement;

(b)       Representations and Warranties. The representations and warranties made by the Borrower in the Credit Documents are true and correct in all material respects at and as if made as of the date of the funding of each Loan, issuance of each Letter of Credit or each extension of any Maturity Date, and after giving effect to such Loan, Letter of Credit or extension, as applicable, and, with respect to each Loan, to the application of the proceeds therefrom; provided that the representations made pursuant to Sections 6.6, 6.8 and 6.9 shall only be made on the Closing Date and on the date of any extension of any Maturity Date; and

(c)       No Default. On the date of the funding of each Loan, issuance of each Letter of Credit or each extension of any Maturity Date, as applicable, no Default or Event of Default has occurred and is continuing or would be caused by making the requested Loans, including, without limitation, with respect to each Loan, the restrictions on (i) the amount of Credit Extensions that may be outstanding as set forth in Sections 2.1(a) and 2.1(b) and (ii) the use of proceeds set forth in Section 7.9.

The delivery of each Notice of Borrowing, Letter of Credit Request or Competitive Bid Request, as applicable, shall constitute a representation and warranty by the Borrower of the correctness of the matters specified in subsections (b) and (c) above.

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SECTION 6

REPRESENTATIONS AND WARRANTIES

The Borrower hereby represents and warrants to each Lender that:

6.1 Organization and Good Standing. Each of the Borrower and each Significant Subsidiary (a) is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (b) is duly qualified and in good standing as a foreign corporation authorized to do business in every jurisdiction where the failure to so qualify would have a Material Adverse Effect and (c) has the requisite corporate power and authority to own its properties and to carry on its business as now conducted and as proposed to be conducted.

6.2 Due Authorization. The Borrower (a) has the requisite corporate power and authority to execute, deliver and perform this Credit Agreement and the other Credit Documents and to incur the obligations herein and therein provided for and (b) is duly authorized to, and has been authorized by all necessary corporate action to, execute, deliver and perform this Credit Agreement and the other Credit Documents.

6.3 No Conflicts. Neither the execution and delivery of the Credit Documents, nor the consummation of the transactions contemplated therein, nor performance of and compliance with the terms and provisions thereof by the Borrower will (a) violate or conflict with any provision of its certificate or articles of incorporation or bylaws, (b) violate, contravene or materially conflict with any law, regulation (including without limitation, Regulation D, U or X), order, writ, judgment, injunction, decree or permit applicable to it, (c) violate, contravene or materially conflict with contractual provisions of, or cause an event of default under, any indenture, loan agreement, mortgage, deed of trust, contract or other agreement or instrument to which it is a party or by which it may be bound, the violation of which could have a Material Adverse Effect or (d) result in or require the creation of any Lien upon or with respect to its properties.

6.4 Consents. No consent, approval, authorization or order of, or filing, registration or qualification with, any court or Governmental Authority or third party is required in connection with the execution, delivery or performance of this Credit Agreement or any of the other Credit Documents that has not been obtained.

6.5 Enforceable Obligations. This Credit Agreement and the other Credit Documents have been duly executed and delivered by the Borrower and constitute legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, except as may be limited by bankruptcy or insolvency laws or similar laws affecting creditors’ rights generally or by general equitable principles.

6.6 Financial Condition. The financial statements provided to the Lenders as described in Section 5.1(e): (a) fairly present the financial condition and operations of the Borrower as of the date thereof and (b) were prepared in accordance with GAAP. Since the date

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of such financial statements, there has been no change that has, or would be reasonably likely to have, a Material Adverse Effect.

6.7 No Default. No Default or Event of Default presently exists.

6.8 Indebtedness and Off-Balance Sheet Indebtedness. As of the Closing Date, the Borrower and its Subsidiaries have no Indebtedness except as disclosed in the financial statements referenced in Section 5.1(e) and as otherwise incurred in the ordinary course. Set forth on the Borrower’s Annual Report on Form 10-K for the year ended December 31, 2005 and the Borrower’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 is a specific description of all material Off-Balance Sheet Indebtedness of the Borrower and its Subsidiaries as of the periods covered thereby.

6.9 Litigation. Except as disclosed in the Borrower’s Annual Report on Form 10-K for the year ended December 31, 2005, in the Borrower’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 and in any Current Report on Form 8-K filed by the Borrower between December 31, 2005 and the Closing Date, there are no actions, suits or legal, equitable, arbitration or administrative proceedings, pending or, to the knowledge of the Borrower, threatened against the Borrower or a Significant Subsidiary, in which there is a reasonable possibility of an adverse decision which has had or would be reasonably expected to have a Material Adverse Effect.

6.10 Material Agreements. The Borrower is not in default in any respect under any contract, lease, loan agreement, indenture, mortgage, security agreement or other agreement or obligation to which it is a party or by which any of its properties is bound, which default has had or would be reasonably expected to have a Material Adverse Effect.

6.11 Taxes. The Borrower has filed, or caused to be filed, all material tax returns (federal, state, local and foreign) required to be filed and paid all amounts of taxes shown thereon to be due (including interest and penalties) and has paid all other taxes, fees, assessments and other governmental charges (including mortgage recording taxes, documentary stamp taxes and intangibles taxes) owing by it, except for such taxes (a) which are not yet delinquent or (b) that are being contested in good faith and by proper proceedings, and against which adequate reserves are being maintained in accordance with GAAP. The Borrower is not aware of any proposed material tax assessments against it.

6.12 ERISA. (a) No Reportable Event has occurred and is continuing with respect to any Plan; (b) no Plan has an accumulated funding deficiency determined under Section 412 of the Code; (c) no proceedings have been instituted, or, to the knowledge of the Borrower, planned to terminate any Plan; (d) neither the Borrower, nor any member of a Controlled Group, nor any duly appointed administrator of a Plan has instituted or intends to institute proceedings to withdraw from any Multiemployer Pension Plan (as defined in Section 3(37) of ERISA); and (e) each Plan has been maintained and funded in all material respects with its terms and with the provisions of ERISA applicable thereto.

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6.13 Compliance with Law. The Borrower is in compliance with all laws, rules, regulations, orders and decrees applicable to it, or to its properties, unless such failure to comply would not have a Material Adverse Effect.

6.14 Use of Proceeds; Margin Stock. The proceeds of the Loans hereunder (a) will be used solely for the purposes specified in Section 7.9 and (b) will not be used in a manner that would cause a violation of Regulation U or Regulation X.

6.15 Government Regulation. Any issuance of the Notes by the Borrower hereunder, the incurrence of the indebtedness contemplated by this Credit Agreement and the borrowing, repayment and reborrowing of Loans hereunder requires no authorization or approval of any Governmental Authority other than such authorizations and approvals that already have been obtained. The Borrower is not an “investment company” registered or required to be registered under the Investment Company Act of 1940, as amended, or controlled by such a company.

6.16 Solvency. The Borrower is solvent. For purposes of the preceding sentence, “solvent” means (a) the fair saleable value (on a going concern basis) of the Borrower’s assets exceed its liabilities, contingent or otherwise, fairly valued, (b) the Borrower will be able to pay its debts as they become due and (c) upon paying its debts as they become due, the Borrower will be left with reasonably sufficient capital to satisfy all of its current and reasonably anticipated obligations.

SECTION 7

AFFIRMATIVE COVENANTS

The Borrower hereby covenants and agrees that so long as this Credit Agreement is in effect and until the Loans and L/C Disbursements, together with interest, fees and other obligations hereunder, have been paid in full and the Commitments hereunder shall have terminated:

7.1 Information Covenants. The Borrower will furnish, or cause to be furnished, to the Administrative Agent:

(a)       Annual Financial Statements. As soon as available, and in any event within 120 days after the close of each fiscal year of the Borrower, a consolidated balance sheet and income statement of the Borrower and its Subsidiaries as of the end of such fiscal year, together with related statements of operations and retained earnings and of cash flows for such fiscal year, setting forth in comparative form figures for the preceding fiscal year, all such financial information described above to be in reasonable form and detail and audited by independent certified public accountants of recognized national standing reasonably acceptable to the Administrative Agent and whose opinion shall be to the effect that such financial statements have been prepared in accordance with GAAP (except for changes with which such accountants concur) and shall not be limited as to the scope of the audit or qualified as to going concern.

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(b)       Quarterly Financial Statements. As soon as available, and in any event within 55 days after the close of each fiscal quarter of the Borrower (other than the fourth fiscal quarter), a consolidated balance sheet and income statement of the Borrower and its Subsidiaries as of the end of such fiscal quarter, together with related statements of operations and retained earnings and of cash flows for such fiscal quarter in each case setting forth in comparative form figures for the corresponding period of the preceding fiscal year, all such financial information described above to be in reasonable form and detail and reasonably acceptable to the Administrative Agent, and accompanied by a certificate of the chief financial officer of the Borrower to the effect that such quarterly financial statements fairly present in all material respects the financial condition of the Borrower and its Subsidiaries and have been prepared in accordance with GAAP, subject to changes resulting from audit and normal year-end audit adjustments.

(c)       Officer’s Certificate. At the time of delivery of the financial statements provided for in Sections 7.1(a) and 7.1(b) above, a certificate of the chief financial officer of the Borrower, substantially in the form of Exhibit 7.1(c), (i) demonstrating compliance with the financial covenant contained in Section 7.11 by calculation thereof as of the end of each such fiscal period, (ii) providing Contracted Operating Cash Flows and Total Operating Cash Flows, each as of the end of such fiscal quarter, and (iii) stating that no Default or Event of Default exists, or if any Default or Event of Default does exist, specifying the nature and extent thereof and what action the Borrower proposes to take with respect thereto.

(d)       Reports. Promptly upon transmission or receipt thereof, copies of any filings and registrations with, and reports to or from, the Securities and Exchange Commission, or any successor agency, and copies of all financial statements, proxy statements, notices and reports as the Borrower shall send to its shareholders.

(e)       Notices. Upon the Borrower obtaining knowledge thereof, the Borrower will give written notice to the Administrative Agent immediately of (i) the occurrence of an event or condition consisting of a Default or Event of Default, specifying the nature and existence thereof and what action the Borrower proposes to take with respect thereto, and (ii) the occurrence of any of the following with respect to the Borrower: (A) the pendency or commencement of any litigation, arbitral or governmental proceeding against the Borrower which, if adversely determined, is likely to have a Material Adverse Effect, (B) the institution of any proceedings against the Borrower with respect to, or the receipt of notice by the Borrower of potential liability or responsibility for, violation or alleged violation of any federal, state or local law, rule or regulation, the violation of which would likely have a Material Adverse Effect, or (C) any notice or determination concerning the imposition of any withdrawal liability by a Multiemployer Plan against the Borrower or any of its ERISA Affiliates, the determination that a Multiemployer Plan is, or is expected to be, in reorganization within the meaning of Title IV of ERISA or the termination of any Plan.

(f)        Other Information. With reasonable promptness upon any such request, such other information regarding the business, properties or financial condition of the Borrower as the Administrative Agent or any Lender may reasonably request.

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7.2 Preservation of Existence and Franchises. The Borrower will, except as permitted by Section 8.2, do all things necessary to preserve and keep in full force and effect its existence, rights, franchises and authority.

7.3 Books and Records. The Borrower will keep complete and accurate books and records of its transactions in accordance with good accounting practices on the basis of GAAP (including the establishment and maintenance of appropriate reserves).

7.4 Compliance with Law. The Borrower will comply with all laws, rules, regulations and orders, and all restrictions imposed by all Governmental Authorities, applicable to it and its property if noncompliance with any such law, rule, regulation, order or restriction would be reasonably expected to have a Material Adverse Effect, such compliance to include, without limitation, ERISA and Environmental Laws.

7.5 Payment of Taxes. The Borrower will pay and discharge all taxes, assessments and governmental charges or levies imposed upon it, or upon its income or profits, or upon any of its properties, before they shall become delinquent; provided, however, that the Borrower shall not be required to pay any such tax, assessment, charge, levy, or claim which is being contested in good faith by appropriate proceedings and as to which adequate reserves therefor have been established in accordance with GAAP.

7.6 Insurance. The Borrower will at all times maintain in full force and effect insurance (including worker’s compensation insurance, liability insurance, casualty insurance and business interruption insurance) in such amounts, covering such risks and liabilities and with such deductibles or self-insurance retentions as are in accordance with normal industry practice.

7.7 Performance of Obligations. The Borrower will perform in all material respects all of its obligations under the terms of all material agreements, indentures, mortgages, security agreements or other material debt instruments to which it is a party or by which it is bound.

7.8 ERISA. The Borrower and each ERISA Affiliate will (a) at all times make prompt payment of all contributions (i) required under all Pension Plans and (ii) required to meet the minimum funding standard set forth in ERISA with respect to each Plan; (b) promptly upon request, furnish the Administrative Agent and the Lenders copies of each annual report/return (Form 5500 Series), as well as all schedules and attachments required to be filed with the Department of Labor and/or the Internal Revenue Service pursuant to ERISA, and the regulations promulgated thereunder, in connection with each of its Pension Plans for each Plan Year (as defined in ERISA); (c) notify the Administrative Agent immediately of any fact, including, but not limited to, any Reportable Event arising in connection with any of its Plans, which might constitute grounds for termination thereof by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer such Plan, together with a statement, if requested by the Administrative Agent, as to the reason therefor and the action, if any, proposed to be taken in respect thereof; and (d) furnish to the Administrative Agent, upon its request, such additional information concerning any of its Plans as may be reasonably requested. The Borrower will not nor will it permit any ERISA Affiliate to (A) terminate a Plan if any such termination would have a Material Adverse Effect or (B) cause or permit to exist any

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Reportable Event under ERISA or other event or condition which presents a material risk of termination at the request of the PBGC if such termination would have a Material Adverse Effect.

7.9 Use of Proceeds. The proceeds of the Loans may be used solely (a) to provide credit support for the Borrower’s commercial paper program or tax-exempt financings, (b) for working capital for the Borrower and (c) for other general corporate purposes, including, without limitation, acquisitions.

7.10 Audits/Inspections. Upon reasonable notice and during normal business hours, the Borrower will permit representatives appointed by the Administrative Agent, including, without limitation, independent accountants, agents, attorneys, and appraisers, to visit and inspect the Borrower’s property, including its books and records, its accounts receivable and inventory, the Borrower’s facilities and its other business assets, and to make photocopies or photographs thereof and to write down and record any information such representatives obtain and shall permit the Administrative Agent or its representatives to investigate and verify the accuracy of information provided to the Lenders and to discuss all such matters with the officers, employees and representatives of the Borrower.

7.11 Indebtedness to Capitalization. The ratio of (a) Indebtedness of the Borrower to (b) Capitalization shall at all times be less than or equal to .65 to 1.0.

SECTION 8

NEGATIVE COVENANTS

The Borrower hereby covenants and agrees that so long as this Credit Agreement is in effect and until the Loans and L/C Disbursements, together with interest, fees and other obligations hereunder, have been paid in full and the Commitments hereunder shall have terminated:

8.1 Nature of Business. The Borrower will not alter the character of its business from that conducted as of the Closing Date.

8.2 Consolidation and Merger. The Borrower will not enter into any transaction of merger or consolidation or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution); provided that notwithstanding the foregoing provisions of this Section 8.2, the following actions may be taken if after giving effect thereto no Default or Event of Default exists:

(a)       a Subsidiary of the Borrower may be merged or consolidated with or into the Borrower; provided that the Borrower shall be the continuing or surviving corporation; and

(b)       the Borrower may merge or consolidate with any other Person (other than one of its Subsidiaries) if either (i) the Borrower shall be the continuing or surviving corporation or (ii) the Borrower shall not be the continuing or surviving corporation and the corporation so continuing or surviving (A) is a corporation organized and duly existing under the law of any

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state of the United States, (B) has (1) a long-term, senior, unsecured, non-credit enhanced debt rating of BBB- or better from S&P and Baa3 or better from Moody’s or (2) a commercial paper rating of A-2 or better from S&P and P-2 or better from Moody’s and (C) executes and delivers to the Administrative Agent and the Lenders an instrument in form satisfactory to the Required Lenders pursuant to which it expressly assumes the Loans and all of the other obligations of the Borrower under the Credit Documents and procures for the Administrative Agent and each Lender an opinion in form satisfactory to the Required Lenders and from counsel satisfactory to the Required Lenders in respect of the due authorization, execution, delivery and enforceability of such instrument and covering such other matters as the Required Lenders may reasonably request; provided that prior to any such merger or consolidation, the Borrower shall have delivered to the Administrative Agent a certificate demonstrating that, upon giving effect to such merger or consolidation on a pro forma basis, the Borrower will be in compliance with Section 7.11.

8.3 Sale or Lease of Assets. The Borrower will not convey, sell, lease, transfer or otherwise dispose of in one transaction or a series of transactions, all or substantially all of its business or assets whether now owned or hereafter acquired, except as permitted pursuant to Section 8.2.

8.4 Transactions with Affiliates. Except as otherwise required by law, the Borrower will not enter into any transaction or series of transactions, whether or not in the ordinary course of business, with any of its Affiliates other than on terms and conditions substantially as favorable as would be obtainable in a comparable arm’s-length transaction with a Person other than an Affiliate.

8.5 Fiscal Year. The Borrower will not change its fiscal year (a) without prior written notification to the Lenders and (b) if such change would materially affect the Lenders’ ability to read and interpret the financial statements delivered pursuant to Section 7.1 or calculate the financial covenant in Section 7.11.

8.6 Liens. The Borrower will not contract, create, incur, assume or permit to exist any Lien with respect to any of its property or assets of any kind (whether real or personal, tangible or intangible), whether now owned or hereafter acquired, securing any Indebtedness unless the Loans hereunder are equally and ratably secured with such other Indebtedness other than the following: (a) Liens securing Borrower Obligations, (b) Liens for taxes not yet due or Liens for taxes being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof), (c) Liens in respect of property imposed by law arising in the ordinary course of business such as materialmen’s, mechanics’, warehousemen’s, carrier’s, landlords’ and other nonconsensual statutory Liens which are not yet due and payable, which have been in existence less than 90 days or which are being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the property subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof), (d) pledges or deposits made in the ordinary course of business to secure payment of worker’s compensation insurance, unemployment insurance, pensions or social security programs, (e) Liens arising from good faith deposits in connection with or to secure

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performance of tenders, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (other than obligations in respect of the payment of borrowed money), (f) Liens arising from good faith deposits in connection with or to secure performance of statutory obligations and surety and appeal bonds (unless such Lien is in connection with a judgment that has caused an Event of Default pursuant to Section 9.1(g)), (g) easements, rights-of-way, restrictions (including zoning restrictions), minor defects or irregularities in title and other similar charges or encumbrances not, in any material respect, impairing the use of the encumbered property for its intended purposes, (h) judgment Liens that would not constitute an Event of Default, (i) Liens arising by virtue of any statutory or common law provision relating to banker’s liens, rights of setoff or similar rights as to deposit accounts or other funds maintained with a creditor depository institution, (j) any Lien created or arising over any property which is acquired, constructed or created by the Borrower, but only if (i) such Lien secures only principal amounts (not exceeding the cost of such acquisition, construction or creation) raised for the purposes of such acquisition, construction or creation, together with any costs, expenses, interest and fees incurred in relation thereto or a guarantee given in respect thereof, (ii) such Lien is created or arises on or before 180 days after the completion of such acquisition, construction or creation and (iii) such Lien is confined solely to the property so acquired, constructed or created and any improvements thereto, (k) any Lien on any property or assets acquired from a corporation or other entity which is merged with or into the Borrower in accordance with Section 8.2, and is not created in anticipation of any such transaction (unless such Lien is created to secure or provide for the payment of any part of the purchase price of such corporation or other entity), (l) any Lien on any property or assets existing at the time of acquisition of such property or assets by the Borrower and which is not created in anticipation of such acquisition (unless such Lien was created to secure or provide for the payment of any part of the purchase price of such property or assets), (m) any extension, renewal or replacement (or successive extensions, renewals or replacements), as a whole or in part, of any Liens referred to in the foregoing clauses (a) through (l), for amounts not exceeding the principal amount of the Indebtedness secured by the Lien so extended, renewed or replaced, provided that such extension, renewal or replacement Lien is limited to all or a part of the same property or assets that were covered by the Lien extended, renewed or replaced (plus improvements on such property or assets) and (n) Liens on property, in addition to those otherwise permitted by clauses (a) through (m) above, securing, directly or indirectly, Indebtedness which does not exceed, in the aggregate at any one time outstanding, ten percent (10%) of Net Tangible Assets.

8.7 MinimumContractMaintenanceCovenant. The Borrower will not declare or pay any dividends or make any other distributions (except dividends payable or distributions made in shares of its common stock and dividends payable in cash in cases where, concurrently with the payment of the dividend, an amount in cash equal to the dividend is received by the Borrower as a capital contribution or as the proceeds of the issue and sale of shares of its common stock) on its common stock, or purchase or permit any of its Subsidiaries to purchase any shares of its common stock or make any payment on Affiliate Subordinated Indebtedness, unless (i) the percentage derived from dividing Contracted Operating Cash Flows by Total Operating Cash Flows is at least 80%, or (ii) the ratio of Indebtedness of the Borrower and its Subsidiaries (other than Unrestricted Subsidiaries) to Capitalization of the Borrower and its Subsidiaries (other than Unrestricted Subsidiaries) is no more than .60 to 1.0.

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SECTION 9

EVENTS OF DEFAULT

9.1 Events of Default. An Event of Default shall exist upon the occurrence of any of the following specified events (each, an “Event of Default”):

(a)	Payment. The Borrower shall:
(i)	default in the payment when due of any principal of any of the Loans; or

(ii)       default, and such default shall continue for five or more Business Days, in the payment when due of any interest on the Loans or of any fees or other amounts owing hereunder, under any of the other Credit Documents or in connection herewith.

(b)       Representations. Any representation, warranty or statement made or deemed to be made by the Borrower herein, in any of the other Credit Documents, or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto shall prove untrue in any material respect on the date as of which it was made or deemed to have been made.

(c) Covenants. The Borrower shall:

(i)        default in the due performance or observance of any term, covenant or agreement contained in Sections 7.2, 7.3, 7.4, 7.9, 7.11 or 8.1 through 8.7, inclusive; or

(ii)       default in the due performance or observance by it of any term, covenant or agreement contained in Section 7.1(a), (b), (c) or (e) and such default shall continue unremedied for a period of ten Business Days after the earlier of an officer of the Borrower becoming aware of such default or written notice thereof given by the Administrative Agent; or

(iii)       default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in subsections (a), (b), (c)(i) or (c)(ii) of this Section 9.1) contained in this Credit Agreement or any other Credit Document and such default shall continue unremedied for a period of at least 30 days after the earlier of an officer of the Borrower becoming aware of such default and written notice thereof given by the Administrative Agent.

(d)       Credit Documents. Any Credit Document shall fail to be in full force and effect or to give the Administrative Agent and/or the Lenders the rights, powers and privileges purported to be created thereby.

(e)       Bankruptcy, Etc. The occurrence of any of the following with respect to the Borrower or a Significant Subsidiary: (i) a court or governmental agency having jurisdiction in the premises shall enter a decree or order for relief in respect of the Borrower or a Significant

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Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appoint a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Borrower or a Significant Subsidiary or for any substantial part of its property or ordering the winding up or liquidation of its affairs; or (ii) an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect is commenced against the Borrower or a Significant Subsidiary and such petition remains unstayed and in effect for a period of 60 consecutive days; or (iii) the Borrower or a Significant Subsidiary shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of such Person or any substantial part of its property or make any general assignment for the benefit of creditors; or (iv) the Borrower or a Significant Subsidiary shall admit in writing its inability to pay its debts generally as they become due or any action shall be taken by such Person in furtherance of any of the aforesaid purposes.

(f)        Defaults under Other Agreements. With respect to any Indebtedness (other than the Indebtedness under this Credit Agreement) of the Borrower or a Significant Subsidiary in an aggregate principal amount in excess of $100,000,000, (i) the Borrower or such Significant Subsidiary shall (A) default in any payment (interest or principal) (beyond the applicable grace period with respect thereto, if any) with respect to any such Indebtedness, or (B) default (after giving effect to any applicable grace period) in the observance or performance of any covenant or agreement relating to such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event or condition shall occur or condition exist, the effect of which default or other event or condition is to cause, or permit, the holder or holders of such Indebtedness (or trustee or agent on behalf of such holders) to cause any such Indebtedness to become due prior to its stated maturity; or (ii) any such Indebtedness shall be declared due and payable, or required to be prepaid other than by a regularly scheduled required prepayment, prior to the stated maturity thereof; or (iii) any such Indebtedness matures and remains unpaid.

(g)       Judgments. One or more judgments, orders, or decrees shall be entered against the Borrower or a Significant Subsidiary involving any liabilities of $100,000,000 or more, in the aggregate (to the extent not paid or covered by insurance provided by a carrier that has acknowledged coverage), and such judgments, orders or decrees shall continue unsatisfied, undischarged and unstayed for a period ending on the first to occur of (i) the last day on which such judgment, order or decree becomes final and unappealable and, where applicable, with the status of a judicial lien or (ii) 30 days.

(h)       ERISA. (i) The Borrower, or any member of the Controlled Group, shall fail to pay when due an amount or amounts aggregating in excess of $100,000,000 which it shall have become liable to pay under Title IV of ERISA; or (ii) notice of intent to terminate a Plan or Plans which in the aggregate have unfunded liabilities in excess of $100,000,000 (individually and collectively, a “Material Plan”) shall be filed under Title IV of ERISA by the Borrower or any member of the Controlled Group, any plan administrator or any combination of the foregoing; or (iii) the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to

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cause a trustee to be appointed to administer any Material Plan; or (iv) a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or (v) there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the Controlled Group to incur a current payment obligation in excess of $100,000,000.

(i) Change of Control. The occurrence of any Change of Control.

9.2 Acceleration; Remedies. Upon the occurrence of an Event of Default, and at any time thereafter unless and until such Event of Default has been waived by the Required Lenders (or the Lenders, if required by Section 11.6) or cured to the satisfaction of the Required Lenders (or the Lenders, if required by Section 11.6), the Administrative Agent may, with the consent of the Required Lenders or, in the case of clause (ii) or (iv), the Required Lenders or the relevant Issuing Bank, and shall, upon the request and direction of the Required Lenders or, in the case of clause (ii) or (iv), the Required Lenders or the relevant Issuing Bank, by written notice to the Borrower take any of the following actions without prejudice to the rights of the Administrative Agent or any Lender to enforce its claims against the Borrower, except as otherwise specifically provided for herein:

(i)        Termination of Commitments. Declare the Commitments terminated whereupon the Commitments shall be immediately terminated.

(ii)       Letters of Credit. Declare the obligation of any Issuing Banks to issue Letters of Credit to be terminated, whereupon the same shall forthwith terminate.

(iii)       Acceleration of Loans. Declare the unpaid principal of and any accrued interest in respect of all Loans and any and all other indebtedness or obligations of any and every kind owing by the Borrower to any of the Lenders or the Administrative Agent hereunder to be due whereupon the same shall be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.

(iv)      Cash Collateral. Require that the Borrower Cash Collateralize the Letters of Credit in an amount equal to the Letters of Credit Outstanding.

(v)       Enforcement of Rights. Enforce any and all rights and interests created and existing under the Credit Documents, including, without limitation, all rights of setoff.

Notwithstanding the foregoing, if an Event of Default specified in Section 9.1(e) shall occur, then the Commitments and the obligation of each Issuing Bank to issue Letters of Credit shall automatically terminate, and all Loans, all accrued interest in respect thereof, all accrued and unpaid fees and other indebtedness or obligations owing to the Lenders and the Administrative Agent hereunder shall immediately become due and payable, in each case, without the giving of any notice or other action by the Administrative Agent, the Issuing Banks or the Lenders, and the obligation of the Borrower to Cash Collateralize the Letters of Credit pursuant to Section 9.2(iv) shall automatically become effective.

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Notwithstanding the fact that enforcement powers reside primarily with the Administrative Agent, each Issuing Bank and each Lender have, to the extent permitted by law, a separate right of payment and shall be considered a separate “creditor” holding a separate “claim” within the meaning of Section 101(5) of the Bankruptcy Code or any other insolvency statute.

9.3 Allocation of Payments after Event of Default. Notwithstanding any other provisions of this Credit Agreement, after the exercise of any remedies by the Administrative Agent or the Lenders pursuant to Section 9.2 (or after the Commitments shall automatically terminate, the Loans (with accrued interest thereon) and all other amounts under the Credit Documents shall automatically become due and payable in accordance with the terms of such Section and the Letters of Credit Outstanding shall automatically be required to be Cash Collateralized as set forth in Section 9.2), all amounts collected or received by the Administrative Agent, any Issuing Bank or any Lender on account of amounts outstanding under any of the Credit Documents shall be paid over or delivered as follows:

FIRST, to the payment of all reasonable out-of-pocket costs and expenses (including without limitation reasonable attorneys’ fees) of the Administrative Agent, any Issuing Bank or any of the Lenders in connection with enforcing the rights of the Administrative Agent, the Issuing Banks and the Lenders under the Credit Documents and any protective advances made by the Administrative Agent, any of the Issuing Banks or any of the Lenders, pro rata as set forth below;

SECOND, to payment of any fees owed to the Administrative Agent, any Issuing Bank or any Lender, pro rata as set forth below;

THIRD, to the payment of all accrued interest payable to the Lenders hereunder, pro rata as set forth below;

FOURTH, to the payment of the outstanding principal amount of the Loans and all other obligations which shall have become due and payable under the Credit Documents;

FIFTH, to the Administrative Agent for the account of each of the Issuing Banks, to Cash Collateralize the Letters of Credit Outstanding comprised of the aggregate undrawn amount of all outstanding Letters of Credit issued by such Issuing Banks; and

SIXTH, the payment of the surplus, if any, after all of the Borrower Obligations have been indefeasibly paid in full to whomever may be lawfully entitled to receive such surplus.

Subject to Section 2.10(i), amounts used to Cash Collateralize the aggregate undrawn amount of Letters of Credit pursuant to clause Fifth above shall be applied to satisfy drawings under such Letters of Credit as they occur. If any amount remains on deposit as Cash Collateral after all Letters of Credit have either been fully drawn or expired, such remaining amount shall be applied in accordance with clause Sixth above.

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In carrying out the foregoing, (a) amounts received shall be applied in the numerical order provided until exhausted prior to application to the next succeeding category and (b) each of the Lenders shall receive an amount equal to its pro rata share (based on the proportion that the then outstanding Loans held by such Lender bears to the aggregate then outstanding Loans) of amounts available to be applied.

SECTION 10

AGENCY PROVISIONS

10.1 Appointment. Each Lender hereby designates and appoints Citibank as Administrative Agent and BTMU as Initial Issuing Bank to act as specified herein and in the other Credit Documents, and each such Lender hereby authorizes the Agents, as an agent for such Lender, to take such action on its behalf under the provisions of this Credit Agreement and the other Credit Documents and to exercise such powers and perform such duties as are expressly delegated by the terms hereof and of the other Credit Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere herein and in the other Credit Documents, the Agents shall not have any duties or responsibilities, except those expressly set forth herein and therein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Credit Agreement or any of the other Credit Documents, or shall otherwise exist against the Agents. The provisions of this Section 10.1 are solely for the benefit of the Agents and the Lenders, and the Borrower shall not have any rights as a third-party beneficiary of the provisions hereof. In performing its functions and duties under this Credit Agreement and the other Credit Documents, each Agent shall act solely as an agent of the Lenders and does not assume and shall not be deemed to have assumed any obligation or relationship of agency or trust with or for the Borrower. Notwithstanding anything herein or in any of the Credit Documents to the contrary, no Lender that is listed as a “Co-Documentation Agent”, a “Co-Managing Agent” or a “Co-Agent”(if any) herein shall have any functions, duties, obligations, responsibilities or liabilities, or serve in any capacity, hereunder or under any of the Credit Documents except as a Lender in accordance with the terms of the Credit Documents. The Administrative Agent shall, upon receipt thereof from the Borrower, promptly deliver to the Lenders copies of the financial statements received pursuant to Section 7.1.

10.2 Delegation of Duties. An Agent may execute any of its duties hereunder or under the other Credit Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. An Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care.

10.3 Exculpatory Provisions. No Agent-Related Person shall be (a) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection herewith or in connection with any of the other Credit Documents (except for its or such Person’s own gross negligence or willful misconduct) or (b) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower contained herein or in any of the other Credit Documents or in any certificate, report, statement or other document

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referred to or provided for in, or received by an Agent-Related Person under or in connection herewith, or in connection with, the other Credit Documents, or enforceability or sufficiency therefor of any of the other Credit Documents, or for any failure of the Borrower to perform its obligations hereunder or thereunder. No Agent-Related Person shall be responsible to any Lender for the effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of this Credit Agreement or any of the other Credit Documents or for any representations, warranties, recitals or statements made herein or therein or made by the Borrower in any written or oral statement or in any financial or other statements, instruments, reports, certificates or any other documents in connection herewith or therewith furnished or made by an Agent-Related Person to the Lenders or by or on behalf of the Borrower to an Agent-Related Person or any Lender or be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained herein or therein or as to the use of the proceeds of the Loans or of the existence or possible existence of any Default or Event of Default or to inspect the properties, books or records of the Borrower. The Agents are not trustees for the Lenders and owe no fiduciary duty to the Lenders.

10.4 Reliance on Communications. An Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower, independent accountants and other experts selected by such Agent with reasonable care). An Agent may deem and treat the Lenders as the owner of its interests hereunder for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent in accordance with Section 11.3(b). The Agents shall be fully justified in failing or refusing to take any action under this Credit Agreement or under any of the other Credit Documents unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agents shall in all cases be fully protected in acting, or in refraining from acting, hereunder or under any of the other Credit Documents, in accordance with a request of the Required Lenders (or, to the extent specifically provided in Section 11.6, all the Lenders) and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders (including their successors and assigns).

10.5 Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless it has received notice from a Lender or the Borrower referring to the Credit Document, describing such Default or Event of Default and stating that such notice is a “notice of default.” In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be directed by the Required Lenders.

10.6 Non-Reliance on Agents and Other Lenders. Each Lender expressly acknowledges that no Agent-Related Person has made any representations or warranties to it and that no act by any Agent-Related Person hereinafter taken, including any review of the affairs of

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the Borrower, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to the Agents that it has, independently and without reliance upon the Agents, any other Agent-Related Person or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of the Borrower and made its own decision to make its Loans hereunder and enter into this Credit Agreement. Each Lender also represents that it will, independently and without reliance upon the Agents, any other Agent-Related Person or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Credit Agreement, and to make such investigation as it deems necessary to inform itself as to the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of the Borrower. Except for (i) delivery of the Credit Documents, (ii) delivery of all financial statements received by the Administrative Agent pursuant to Section 7.1(a) and 7.1(b), (iii) delivery of all notices received by the Administrative Agent pursuant to Sections 7.1(e) and 7.8 and (iv) delivery of notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, no Agent-Related Person shall have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, assets, property, financial or other conditions, prospects or creditworthiness of the Borrower which may come into the possession of an Agent-Related Person.

10.7 Indemnification. Each Lender agrees to indemnify each Agent-Related Person (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to such Lender’s Commitment in effect on the date on which indemnification is sought under this section (or if indemnification is sought after the date on which the Commitments shall have terminated and the Loans shall have been paid in full, according to such Lender’s Commitment in effect immediately prior to such date), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including without limitation at any time following the payment of the Borrower Obligations) be imposed on, incurred by or asserted against such Agent-Related Person in any way relating to or arising out of this Credit Agreement or the other Credit Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by such Agent-Related Person under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or willful misconduct of such Agent-Related Person. If any indemnity furnished to an Agent-Related Person for any purpose shall, in the opinion of such Agent-Related Person, be insufficient or become impaired, such Agent-Related Person may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The agreements in this Section 10.7 shall survive the payment of the Borrower Obligations and all other amounts payable hereunder and under the other Credit Documents.

10.8 Each Agent in Its Individual Capacity. Each Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the

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Borrower as though such Agent were not an Agent hereunder. With respect to the Loans made and all Borrower Obligations owing to it, each Agent shall have the same rights and powers under this Credit Agreement as any Lender and may exercise the same as though it were not an Agent, and the terms “Lender” and “Lenders” shall include each Agent in its individual capacity. No Agent shall have any duty to disclose any information obtained or received by it or any of its Affiliates relating to the Borrower or any of its Affiliates to the extent such information was obtained or received in any capacity other than as such Agent. In the event that Citibank or any of its Affiliates shall be or become an indenture trustee under the Trust Indenture Act of 1939 (as amended, the "Trust Indenture Act") in respect of any securities issued or guaranteed by the Borrower, the parties hereto acknowledge and agree that any payment or property received in satisfaction of or in respect of any obligation of the Borrower hereunder or under any other Credit Document by or on behalf of Citibank in its capacity as the Administrative Agent for the benefit of any Lender (other than Citibank or an Affiliate of Citibank) under this Credit Agreement or any Note and which is applied in accordance with this Credit Agreement shall be deemed to be exempt from the requirements of Section 311 of the Trust Indenture Act pursuant to Section 311(b)(3) of the Trust Indenture Act.

10.9 Successor Administrative Agent. The Administrative Agent may, at any time, resign upon 30 days’ written notice to the Borrower and the Lenders. Upon any such resignation, the Required Lenders, with the written consent of the Borrower, shall have the right to appoint a successor to the resigning Administrative Agent. If no successor Administrative Agent shall have been so duly appointed, and/or such successor agent shall not have accepted such appointment, within 30 days after the notice of resignation, then the retiring Administrative Agent shall select a successor Administrative Agent, with the written consent of the Borrower, provided such successor is a Lender hereunder or a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and has a combined capital and surplus of at least $500,000,000. If no successor Administrative Agent shall have been appointed within the time frame set forth above, then the Lenders shall perform all the obligations of the resigning Administrative Agent until the time a successor has been appointed by the Required Lenders, with the written consent of the Borrower, as set forth above and has accepted such appointment. Upon the acceptance of the appointment as Administrative Agent hereunder by a successor, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations as Administrative Agent under this Credit Agreement and the other Credit Documents, and the provisions of this Section 10 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Administrative Agent under this Credit Agreement.

10.10 Administrative Agent May File Proof of Claims. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Borrower, the Administrative Agent (irrespective of whether the principal of any Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise:

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(a)       to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans and all other Borrower Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders and the Administrative Agent under Sections 3.4 and 11.5 allowed in such judicial proceeding); and

(b)       to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;

and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Sections 3.4 and 11.5.

Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Borrower Obligations or the rights of any Lender or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.

SECTION 11

MISCELLANEOUS

11.1 Notices and Other Communications; Facsimile Copies. (a) General. Unless otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including by facsimile transmission). All written notices and all other communications expressly permitted hereunder to be given by telephone shall be made to the applicable address, facsimile number, electronic mail address or telephone number specified for such Person on Schedule 11.1 or to such other address, facsimile number, electronic mail address or telephone number as shall be designated by such party in a notice to the other parties. All such notices and other communications shall be deemed to be given or made upon the earlier to occur of (i) actual receipt by the relevant party hereto and (ii) (A) if delivered by hand or by courier, when signed for by or on behalf of the relevant party hereto; (B) if delivered by mail, four Business Days after deposit in the mails, postage prepaid; (C) if delivered by facsimile, when sent and receipt has been confirmed by telephone; and (D) if delivered by electronic mail (which form of delivery is subject to the provisions of subsection (c) below), when delivered; provided, however, that notices and other communications to the Administrative Agent or the Lenders pursuant to Section 2 shall not be effective until actually received by the Administrative Agent or the Lenders, as the case may be. In no event shall a voicemail message be effective as a notice, communication or confirmation hereunder.

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(b)       Platform. So long as Citibank or any of its Affiliates is the Administrative Agent, materials required to be delivered pursuant to Sections 7.1(a), (b) and (d) may be delivered to the Administrative Agent in an electronic medium in a format acceptable to the Administrative Agent and the Lenders by e-mail at [?]. The Borrower agrees that the Administrative Agent may make such materials, as well as any other written information, documents, instruments and other material relating to the Borrower, any of its Subsidiaries or any other materials or matters relating to this Credit Agreement, any Notes or any of the transactions contemplated hereby (collectively, the "Communications"), available to the Lenders by posting such notices on Intralinks (the "Platform"). The Borrower acknowledges that (i) the distribution of material through an electronic medium is not necessarily secure and that there are confidentiality and other risks associated with such distribution, (ii) the Platform is provided "as is" and "as available" and (iii) neither the Administrative Agent nor any of its Affiliates warrants the accuracy, adequacy or completeness of the Communications or the Platform and each expressly disclaims liability for errors or omissions in the Communications or the Platform. No warranty of any kind, express, implied or statutory, including, without limitation, any warranty of merchantability, fitness for a particular purpose, non-infringement of third party rights or freedom from viruses or other code defects, is made by the Administrative Agent or any of its Affiliates in connection with the Platform. Each Lender agrees that notice to it (as provided in the next sentence) (a "Notice") specifying that any Communications have been posted to the Platform shall constitute effective delivery of such information, documents or other materials to such Lender for purposes of this Credit Agreement; provided that, if requested by any Lender, the Administrative Agent shall deliver a copy of the Communications to such Lender by e-mail or telecopier. Each Lender agrees (i) to notify the Administrative Agent in writing of such Lender's e-mail address or addresses to which a Notice may be sent by electronic transmission (including by electronic communication) on or before the date such Lender becomes a party to this Agreement (and from time to time thereafter to ensure that the Administrative Agent has on record an effective e-mail address(es) for such Lender) and (ii) that any Notice may be sent to such e-mail address or addresses. In the event that a Lender notifies the Administrative Agent of a change in the e-mail address or addresses previously designated by such Lender for the purpose of receiving Notices, the Administrative Agent shall promptly confirm with such Lender the requested change.

(c)       Effectiveness of Facsimile Documents and Signatures. Credit Documents may be transmitted and/or signed by facsimile. The effectiveness of any such documents and signatures shall have the same force and effect as manually signed originals and shall be binding on the Borrower, the Administrative Agent and the Lenders. The Administrative Agent may also require that any such documents and signatures be confirmed by a manually signed original thereof; provided, however, that the failure to request or deliver the same shall not limit the effectiveness of any facsimile document or signature.

(d)       Limited Use of Electronic Mail.Electronic mail and Internet and intranet websites may be used only to distribute routine communications, such as financial statements and other information as provided in Section 7.1, and to distribute Credit Documents for execution by the parties thereto, and may not be used for any other purpose except as deemed reasonable and appropriate by the Administrative Agent.

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(e)       Reliance by Administrative Agent and Lenders.The Administrative Agent and the Lenders shall be entitled to rely and act upon any notices given by the Borrower even if such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein. All telephonic notices to and other communications with the Administrative Agent may be recorded by the Administrative Agent, and each of the parties hereto hereby consents to such recording.

11.2 Right of Setoff. In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence of an Event of Default and the commencement of remedies described in Section 9.2, each Lender is authorized at any time and from time to time, without presentment, demand, protest or other notice of any kind (all of which rights being hereby expressly waived), to set off and to appropriate and apply any and all deposits (general or special) and any other indebtedness at any time held or owing by such Lender (including, without limitation branches, agencies or Affiliates of such Lender wherever located) to or for the credit or the account of the Borrower against obligations and liabilities of the Borrower to the Lenders hereunder, under the Notes, the other Credit Documents or otherwise, irrespective of whether the Administrative Agent or the Lenders shall have made any demand hereunder and although such obligations, liabilities or claims, or any of them, may be contingent or unmatured, and any such setoff shall be deemed to have been made immediately upon the occurrence of an Event of Default even though such charge is made or entered on the books of such Lender subsequent thereto. The Borrower hereby agrees that any Participation Purchaser may exercise all rights of setoff with respect to its participation interest as fully as if such Person were a Lender hereunder.

11.3 Benefit of Agreement. (a) The provisions of this Credit Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an Eligible Assignee in accordance with the provisions of subsection (b) of this Section, (ii) by way of participation in accordance with the provisions of subsection (d) of this Section, or (iii) by way of pledge or assignment of a security interest subject to the restrictions of subsection (f) of this Section (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Credit Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby and Participation Purchasers to the extent provided in subsection (d) of this Section) any legal or equitable right, remedy or claim under or by reason of this Credit Agreement.

(b)       Any Lender may at any time assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Credit Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that (i) except in the case of an assignment of the entire remaining amount of the assigning Lender’s Commitment and the Loans at the time owing to it or, in the case of an assignment to a Lender or an Affiliate of a Lender or an Approved Fund with respect to a Lender, the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) subject to each such assignment, determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if “Trade Date” is specified in the Assignment and

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Assumption, as of the Trade Date, shall not be less than $5,000,000and in integral multiples of $1,000,000 in excess thereof,unless each of the Administrative Agent and, so long as no Default or Event of Default has occurred and is continuing or such Person is not an Affiliate of or Approved Fund related to the assigning Lender, the Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed); (ii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Credit Agreement with respect to the Loans or the Commitment assigned; (iii) any assignment of a Commitment must be approved by the Administrative Agent (which approval shall not be unreasonably withheld) unless the Person that is the proposed assignee is itself a Lender or an Affiliate of a Lender (whether or not the proposed assignee would otherwise qualify as an Eligible Assignee); (iv) any assignment of a Commitment must be approved by each Issuing Bank (which approval shall not be unreasonably withheld); and (v) except as provided in Section 4.5 solely with respect to an assigning Lender, the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500. Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the Eligible Assignee thereunder shall be a party to this Credit Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Credit Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Credit Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Credit Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 4.1 through 4.4 and 11.5 with respect to facts and circumstances occurring prior to the effective date of such assignment). Upon request, the Borrower (at its expense) shall execute and deliver a Revolving Loan Note to the assignee Lender. Any assignment or transfer by a Lender of rights or obligations under this Credit Agreement that does not comply with this subsection shall be treated for purposes of this Credit Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection (d) of this Section.

(c)       The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at one of its offices in the United States a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Credit Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

(d)       Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to any Person (other than a natural person or the Borrower or any of the Borrower’s Affiliates or Subsidiaries) (each, a “Participation Purchaser”) in all or a portion of such Lender’s rights and/or obligations under this Credit Agreement (including all or a portion of its Commitment and/or the Loans owing to it);

57

provided that (i) such Lender’s obligations under this Credit Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Credit Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Credit Agreement and to approve any amendment, modification or waiver of any provision of this Credit Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participation Purchaser, agree to any amendment, waiver or other modification described in clauses (a) through (g) of Section 11.6 that directly affects such Participation Purchaser. Subject to subsection (e) of this Section, the Borrower agrees that each Participation Purchaser shall be entitled to the benefits of Sections 4.1 through 4.4 and 11.5to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (b) of this Section. To the extent permitted by law, each Participation Purchaser also shall be entitled to the benefits of Section 11.2 as though it were a Lender, provided such Participation Purchaser agrees to be subject to Section 3.8 as though it were a Lender.

(e)       A Participation Purchaser shall not be entitled to receive any greater payment under Section 4.2 or 4.4 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participation Purchaser, unless the sale of the participation to such Participation Purchaser is made with the Borrower’s prior written consent. A Participation Purchaser that would be a “foreign corporation, partnership or trust” within the meaning of the Code if it were a Lender shall not be entitled to the benefits of Section 4.4 unless the Borrower is notified of the participation sold to such Participation Purchaser and such Participation Purchaser agrees, for the benefit of the Borrower, to comply with Section 4.4(d) as though it were a Lender.

(f)        Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Credit Agreement (including under its Notes, if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

(g)       Notwithstanding anything to the contrary contained herein, any Lender (a “Granting Lender”) may grant to a special purpose-funding vehicle managed or sponsored by the Granting Lender or an Affiliate thereof (an “SPC”) the option to fund all or any part of any Loan that such Granting Lender would otherwise be obligated to fund pursuant to this Credit Agreement; provided that (i) nothing herein shall constitute a commitment by any SPC to fund any Loan, (ii) if an SPC elects not to exercise such option or otherwise fails to fund all or any part of such Loan, the Granting Lender shall be obligated to fund such Loan pursuant to the terms hereof, (iii) no SPC shall have any voting rights pursuant to Section 11.6, (iv) with respect to notices, payments and other matters hereunder, the Borrower, the Administrative Agent and the Lenders shall not be obligated to deal with an SPC, but may limit their communications and other dealings relevant to such SPC to the applicable Granting Lender and (v) each Granting Lender’s obligations under this Credit Agreement shall remain unchanged. Each party hereto

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agrees that no SPC will be entitled to any rights or benefits except as expressly set forth in this subsection (g). The funding of a Loan by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent that, and as if, such Loan were funded by such Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or payment under this Credit Agreement for which a Lender would otherwise be liable for so long as, and to the extent, the Granting Lender provides such indemnity or makes such payment. Notwithstanding anything to the contrary contained in this Credit Agreement, any SPC may disclose on a confidential basis any non-public information relating to its funding of Loans to any rating agency, commercial paper dealer or provider of any surety or guarantee to such SPC. This subsection (g) may not be amended without the prior written consent of each Granting Lender, all or any part of whose Loan is being funded by an SPC at the time of such amendment.

(h)       Notwithstanding anything to the contrary contained herein, any Lender that is a Fund may create a security interest in all or any portion of the Loans owing to it and the Notes, if any, held by it to the trustee for holders of obligations owed, or securities issued, by such Fund as security for such obligations or securities, provided that, unless and until such trustee actually becomes a Lender in compliance with the other provisions of this Section 11.3, (i) no such pledge shall release the pledging Lender from any of its obligations under the Credit Documents and (ii) such trustee shall not be entitled to exercise any of the rights of a Lender under the Credit Documents even though such trustee may have acquired ownership rights with respect to the pledged interest through foreclosure or otherwise.

(i)        Each Issuing Bank may assign to one or more Eligible Assignees all or a portion of its rights and obligations under the undrawn portion of its Letter of Credit Commitment at any time; provided, however, that (i) except in the case of an assignment to a Person that immediately prior to such assignment was an Issuing Bank or an assignment of all of an Issuing Bank’s rights and obligations under this Agreement, the amount of the Letter of Credit Commitment of the assigning Issuing Bank being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 and shall be in an integral multiple of $1,500,000 in excess thereof, (ii) each such assignment shall be to an Eligible Assignee and (iii) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with a processing and recordation fee of $3,500.

11.4 No Waiver; Remedies Cumulative. No failure or delay on the part of an Agent or any Lender in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Borrower and an Agent or any Lender shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies provided herein are cumulative and not exclusive of any rights or remedies which an Agent or any Lender would otherwise have. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Administrative Agent or the Lenders to any other or further action in any circumstances without notice or demand.

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11.5 Payment of Expenses, Etc. The Borrower agrees to: (i) pay all reasonable out-of-pocket costs and expenses of (A) each Agent-Related Person in connection with the administration of this Credit Agreement and the other Credit Documents and the documents and instruments referred to therein (including, without limitation, the reasonable fees and expenses of Shearman & Sterling LLP, special counsel to the Administrative Agent) and any amendment, waiver, consent or assignment relating hereto and thereto including, but not limited to, any such amendments, waivers or consents resulting from or related to any work-out, renegotiation or restructure relating to the performance by the Borrower under this Credit Agreement and (B) the Administrative Agent and the Lenders in connection with enforcement of the Credit Documents and the documents and instruments referred to therein (including, without limitation, in connection with any such enforcement, the reasonable fees and disbursements of counsel for the Administrative Agent and each of the Lenders); and (ii) indemnify each Agent-Related Person, each Lender and their respective Affiliates, directors, officers, employees, counsel, agents, representatives and attorneys-in-fact from and hold each of them harmless against any and all losses, liabilities, claims, damages or expenses incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of, any investigation, litigation or other proceeding (whether or not any Lender is a party thereto) related to the entering into and/or performance of any Credit Document or the use of proceeds of any Loans (including other extensions of credit) hereunder or the consummation of any other transactions contemplated in any Credit Document, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding; provided that the Borrower shall not be responsible for any such losses, liabilities, claims, damages or expenses to the extent incurred by reason of gross negligence or willful misconduct on the part of the Person to be indemnified; and providedfurther that in no event shall the Borrower have any liability with respect to the settlement or compromise of any claim or proceeding effected without its prior written consent. The agreements in this Section 11.5 shall survive the repayment of the Borrower Obligations and the termination of the Commitments.

11.6 Amendments, Waivers and Consents. Neither this Credit Agreement nor any other Credit Document nor any of the terms hereof or thereof may be amended, changed, waived, discharged or terminated unless such amendment, change, waiver, discharge or termination is in writing and signed by the Required Lenders and the Borrower; provided that no such amendment, change, waiver, discharge or termination shall without the consent of each Lender affected thereby,

(a) extend any Maturity Date;

(b)       reduce the rate or extend the time of payment of interest (other than as a result of waiving the applicability of any post-default increase in interest rates) on any Loan or reduce the amount or extend the time of payment of fees owing hereunder;

(c)       reduce or waive or extend the time of payment of the principal amount of any Loan;

(d)       increase the Commitment of a Lender over the amount thereof in effect (it being understood and agreed that a waiver of any Default or Event of Default or a mandatory

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reduction in the Commitments shall not constitute a change in the terms of any Commitment of any Lender);

(e)       release the Borrower from its obligations under the Credit Documents or consent to the transfer or assignment of such obligations;

(f)        amend, modify or waive any provision of this Section 11.6 or Section 3.6, 3.8, 5.2, 9.1(a), 11.2, 11.3 or 11.5; or

(g)       reduce any percentage specified in, or otherwise modify, the definition of Required Lenders.

Notwithstanding the above, no provision of Section 10 may be amended or modified without the written consent of the Administrative Agent.

Notwithstanding the above, in the case of a non-consenting Lender, the Borrower may, at its own discretion and its own expense, require that any such Lender transfer and assign in whole (but not in part), without recourse (in accordance with and subject to the terms of Section 11.3(b)), all of its interests, rights and obligations under this Credit Agreement to an Eligible Assignee or Eligible Assignees (which may be one or more existing Lenders if any existing Lender accepts such assignment); provided that (A) such assignment or assignments shall not conflict with any law, rule, regulation or order of any court or other Governmental Authority and (B) the Borrower or such Eligible Assignee or Eligible Assignees shall pay to such Lender in immediately available funds the principal of and interest accrued to the date of such payment on the portion of the Loans hereunder held by such Lender and all other amounts owed to such Lender hereunder, as well as any transfer fee owing to the Administrative Agent under Section 11.3(b).

Notwithstanding the fact that the consent of all the Lenders is required in certain circumstances as set forth above, each Lender is entitled to vote as such Lender sees fit on any reorganization plan that affects the Loans and each Lender acknowledges that the provisions of Section 1126(c) of the Bankruptcy Code supersede the unanimous consent provisions set forth herein.

11.7 Counterparts. This Credit Agreement may be executed in any number of counterparts, each of which where so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. It shall not be necessary in making proof of this Credit Agreement to produce or account for more than one such counterpart.

11.8 Headings. The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Credit Agreement.

11.9 Defaulting Lender. Each Lender understands and agrees that if such Lender is a Defaulting Lender then it shall not be entitled to vote on any matter requiring the consent of the Required Lenders or to object to any matter requiring the consent of all the Lenders; provided, however, that (a) any Defaulting Lender shall be entitled to vote on any matters set

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forth in clause (d) of Section 11.6 (or the amendment of such clause) or any amendment or modification to this Section 11.9 and (b) all other benefits and obligations under the Credit Documents shall apply to such Defaulting Lender.

11.10 Survival of Indemnification and Representations and Warranties. All indemnities set forth herein and all representations and warranties made herein shall survive the execution and delivery of this Credit Agreement, the making of the Loans, and the repayment of the Loans and other obligations and the termination of the Commitments hereunder.

11.11 GOVERNING LAW. THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AND THE PARTIES HERETO CONSENT TO SUCH GOVERNANCE, CONSTRUCTION AND INTERPRETATION UNDER THE LAWS OF THE STATE OF NEW YORK.

11.12 WAIVER OF JURY TRIAL; WAIVER OF CONSEQUENTIAL DAMAGES. (a) EACH OF THE PARTIES TO THIS CREDIT AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS CREDIT AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY.

(b) The Borrower agrees that the Administrative Agent, any Lender, any of their Affiliates and their respective officers, directors, employees, representatives, agents and attorneys-in-fact (each, an “Indemnified Party”) shall not have any liability for any indirect or consequential damages arising out of, related to or in connection with the Credit Documents except to the extent such damages were caused by reason of gross negligence or willful misconduct on the part of such Indemnified Party.

11.13 Time. All references to time herein shall be references to Eastern Standard Time or Eastern Daylight time, as the case may be, unless specified otherwise.

11.14 Severability. If any provision of any of the Credit Documents is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions.

11.15 Entirety. This Credit Agreement together with the other Credit Documents represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements and understandings, oral or written, if any, including any commitment letters or correspondence relating to the Credit Documents or the transactions contemplated herein and therein.

11.16 Confidentiality. Each Lender agrees that it will use its reasonable best efforts to keep confidential and to cause any representative designated under Section 7.10 to keep confidential any non-public information from time to time supplied to it under or in connection with any Credit Document including, without limitation, any such information

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furnished to a Lender prior to or in connection with its entry into any Credit Document (the “Information”); provided, however, that nothing herein shall affect the disclosure of any such Information to (a) the extent such Lender in good faith believes such disclosure is required by statute, rule, regulation or judicial process, (b) the extent requested by any regulatory authority having jurisdiction over such Lender (including any self-regulatory authority, such as the National Association of Insurance Commissioners) which has been notified of the confidential nature of such Information, (c) counsel for such Lender or to its accountants, (d) bank examiners or auditors or comparable Persons, (e) any Affiliate of such Lender, (f) (i) any other Lender, (ii) any assignee, transferee or participant or (iii) any potential assignee, transferee or participant of all or any portion of any Lender’s rights under this Credit Agreement, in each case, who is notified of the confidential nature of the Information and agrees to be bound by this provision or provisions reasonably comparable hereto or (g) any other Person in connection with any litigation to which any one or more of the Lenders is a party; and providedfurther that no Lender shall have any obligation under this Section 11.16 to the extent any such Information becomes available on a non-confidential basis from a source other than the Borrower or its Subsidiaries or that any Information becomes publicly available other than by a breach of this Section 11.16. Each Lender agrees it will use all confidential Information exclusively for the purpose of evaluating, monitoring, selling, protecting or enforcing its Loans and other rights under the Credit Documents.

11.17 Binding Effect. (a) This Credit Agreement shall become effective when it shall have been executed by the Borrower, each Lender and the Agents, and thereafter this Credit Agreement shall be binding upon and inure to the benefit of the Borrower, each Lender and the Agents, together with their respective successors and assigns. Nothing in this Credit Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their successors and assigns permitted hereby and, to the extent expressly contemplated hereby, the indemnified parties hereunder) any legal or equitable right, remedy or claim under or by reason of this Credit Agreement.

(b)       This Credit Agreement shall be a continuing agreement and shall remain in full force and effect until all Loans, interest, fees and other Borrower Obligations have been paid in full and all Commitments have been terminated. Upon termination, the Borrower shall have no further obligations (other than the indemnification provisions that survive) under the Credit Documents; provided that, should any payment, in whole or in part, of the Borrower Obligations be rescinded or otherwise required to be restored or returned by the Administrative Agent or any Lender, whether as a result of any proceedings in bankruptcy or pursuant to court order, then the Credit Documents shall automatically be reinstated and all amounts required to be restored or returned, and all costs and expenses incurred by the Administrative Agent or any Lender in connection therewith shall be deemed included as part of the Borrower Obligations.

11.18 USA Patriot Act Notice. Each Lender that is subject to the Act (as hereinafter defined) and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies the Borrower that, pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”), it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender or the Administrative Agent, as applicable, to identify the Borrower in accordance with the Act.

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11.19 Jurisdiction, Etc. (a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Credit Agreement or any of the other Credit Documents to which it is a party, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the fullest extent permitted by law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Credit Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Credit Agreement or any of the other Credit Documents in the courts of any jurisdiction.

(b)       Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Credit Agreement or any of the other Credit Documents to which it is a party in any New York State or federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

[Signature pages follow.]

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Each of the parties hereto has caused a counterpart of this Credit Agreement to be duly executed and delivered as of the date first above written.

SOUTHERN POWER COMPANY,

as Borrower

By: /s/Michael W. Southern

Name: Michael W. Southern

Title: Senior Vice President and Chief Financial Officer

CITIBANK, N.A.,

as Administrative Agent

By: /s/Maureen Maroney

Name: Maureen Maroney

Title: Director

THE BANK OF TOKYO-MITSUBISHI UFJ, LTD., NEW YORK BRANCH,

as Initial Issuing Bank

By: /s/Linda Tam

Name: Linda Tam

Title: Authorized Signatory

CITIBANK, N.A.,

as Lender

By: /s/Maureen Maroney

Name: Maureen Maroney

Title: Director

THE BANK OF TOKYO-MITSUBISHI UFJ, LTD., NEW YORK BRANCH,

as Lender

By: /s/Linda Tam

Name: Linda Tam

Title: Authorized Signatory

BAYERISCHE LANDESBANK, Cayman Islands Branch, as Lender

By: /s/Michael Jakob

Name: Michael Jakob

Title: First Vice President

By: /s/Norman McClave

Name: Norman McClave

Title: First Vice President

ING CAPITAL, LLC,

as Lender

By: /s/Ann E. Sutton

Name: Ann E. Sutton

Title: Associate

By: /s/Erwin Thomet

Name: Erwin Thomet

Title: Managing Director

KBC BANK, N.V.,

as Lender

By: /s/Rik Scheerlinck

Name: Rik Scheerlinck

Title: Sr. Vice President & General Manager

By: /s/Eric Raskin

Name: Eric Raskin

Title: Vice President

JPMORGAN CHASE BANK, N.A.,

as Lender

By: /s/Michael DeForge

Name: Michael DeForge

Title: Vice President

BARCLAYS BANK PLC,

as Lender

By: /s/Gary B. Wenslow

Name: Gary B. Wenslow

Title: Associate Director

HSBC BANK USA, NATIONAL ASSOCIATION, as Lender

By: /s/Jennifer Diedzic

Name: Jennifer Diedzic

Title: Assistant Vice President

MIZUHO CORPORATE BANK, LTD.,

as Lender

By: /s/Raymond Ventura

Name: Raymond Ventura

Title: Deputy General Manager

THE BANK OF NOVA SCOTIA,

as Lender

By: /s/Thane A. Rattew

Name: Thane A. Rattew

Title: Managing Director

WACHOVIA BANK, N.A.,

as Lender

By: /s/Lawrence P. Sullivan

Name: Lawrence P. Sullivan

Title: Director

BANK OF AMERICA, N.A.,

as Lender

By: /s/Gabriela Millhorn

Name: Gabriela Millhorn

Title: Senior Vice President

SANPAOLO IMI, S.P.A.,

as Lender

By: /s/Renato Carducci

Name: Renato Carducci

Title: General Manager

By: /s/K. Douglas Knapp

Name: K. Douglas Knapp

Title: First Vice President

EX-10.F.4

Exhibit 10(f)4

Southern Power has requested confidential treatment for certain portions of this document pursuant to an application for confidential treatment sent to the Securities and Exchange Commission. Southern Power has omitted such portions from this filing and filed them separately with the Securities and Exchange Commission. Such omissions are designated as "[**]."

EXECUTION VERSION

PURCHASE AND SALE AGREEMENT

by and between

PROGRESS GENCO VENTURES, LLC

as the Seller

and

SOUTHERN POWER COMPANY – ROWAN LLC

as the Purchaser

Dated as of May 8, 2006

TABLE OF CONTENTS

			Page
ARTICLE I DEFINITIONS			1
	1.1	Certain Definitions	1
	1.2	Other Terms	13
	1.3	Rules as to Usage	13
	1.4	Schedules and Exhibits	14
ARTICLE II PURCHASE AND SALE OF MEMBERSHIP INTEREST			14
	2.1	Sale and Transfer of the Membership Interest	14
	2.2	Purchase Price	14
	2.3	Payment of Purchase Price	14
	2.4	Allocation of Purchase Price; Tax Filings	14
	2.5	Closing Purchase Price Adjustments	15
	2.6	Post-Closing Purchase Price Adjustment	16
ARTICLE III CLOSING			17
	3.1	Time and Place of Closing	17
	3.2	Deliveries by the Seller	17
	3.3	Deliveries by the Purchaser	19
ARTICLE IV TERMINATION			20
	4.1	Termination of Agreement	20
	4.2	Effect of Termination	21
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE SELLER			21
	5.1	Organization and Good Standing	21
	5.2	Authorization; Enforceability	22
	5.3	No Violation; Consents	22
	5.4	Litigation	23
	5.5	Compliance with Law	23
	5.6	Environmental Matters	24
	5.7	Ownership	25
	5.8	Title to Assets	25
	5.9	Description of Real Property	25
	5.10	Condition of Facilities	26
	5.11	Financial Advisors	26
	5.12	Employees; Employee Benefits	27
	5.13	Labor Matters	27
	5.14	Financial Statements	28
	5.15	Events Subsequent to Most Recent Fiscal Year End	28
	5.16	Minute Books	28
	5.17	Emissions Allowances	28
	5.18	Undisclosed Liabilities	28
	5.19	Taxes	28
	5.20	Intellectual Property	30
	5.21	Insurance	30
	5.22	Contracts	31
	5.23	Guaranties	32

i

	5.24	Bank Accounts	32
	5.25	Business	32
	5.26	Accounts Receivable	32
	5.27	Solvency	32
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PURCHASER			32
	6.1	Organization and Good Standing	32
	6.2	Authorization; Enforceability	32
	6.3	No Violation; Consents	33
	6.4	Litigation	33
	6.5	Investment Intent	34
	6.6	Financial Capability	34
	6.7	Financial Advisors	34
	6.8	Solvency	34
ARTICLE VII COVENANTS			34
	7.1	Access to Information	34
	7.2	Conduct of the Business Pending the Closing	35
	7.3	Appropriate Action; Consents; Filings	36
	7.4	Preservation of Records; Cooperation	36
	7.5	Confidentiality	37
	7.6	Public Announcements	37
	7.7	Use of Name	38
	7.8	Certain Dividends, Assignments and Releases	38
	7.9	Further Assurances	38
	7.10	Supplements to Schedules	38
	7.11	Environmental Due Diligence	39
	7.12	Title Insurance and Surveys	41
	7.13	Transition Plan	42
	7.14	Replacement of Credit Support	43
	7.15	Performance Testing	43
	7.16	No Solicitation	44
	7.17	Removing Excluded Assets	44
	7.18	Credit Support	44
	7.19	Insurance	45
	7.20	Emission Credits	46
ARTICLE VIII CONDITIONS TO CLOSING			47
	8.1	Conditions Precedent to Obligations of Each Party	47
	8.2	Conditions Precedent to Obligations of the Purchaser	48
	8.3	Conditions Precedent to Obligations of the Seller	48
ARTICLE IX TAXES			49
	9.1	Sales and Transfer Taxes	49
	9.2	Property Taxes	49
ARTICLE X CERTAIN REMEDIES AND LIMITATIONS			50
	10.1	Review	50
	10.2	Limitation of Representations and Warranties	50
	10.3	No Consequential or Punitive Damages	51
	10.4	No Recourse	51

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	10.5	Expiration of Representations, Warranties and Covenants	51
	10.6	Indemnification	52
	10.7	No Set-Off	55
	10.8	Effect of Investigation	55
	10.9	Procedure for Environmental Indemnification	56
	10.10	Specific Performance	57
ARTICLE XI MISCELLANEOUS			57
	11.1	Employees and Employee Benefits	57
	11.2	Expenses	59
	11.3	Incorporation of Exhibits and Schedules	59
	11.4	Submission to Jurisdiction	59
	11.5	Waiver of Jury Trial	59
	11.6	No Right of Set-Off	60
	11.7	Entire Agreement; Amendments and Waivers	60
	11.8	Governing Law	60
	11.9	Table of Contents and Headings	60
	11.10	Notices	60
	11.11	Severability	62
	11.12	Binding Effect; Assignment	62
	11.13	Counterparts	62

List of Exhibits

Exhibit A	Form of Conveyancing Instrument
Exhibit B	Form of Seller Officer’s Certificate
Exhibit C	Form of Seller Secretary’s Certificate
Exhibit D	Form of Progress Energy Secretary’s Certificate
Exhibit E	Form of Release of the Project Company from Liability
Exhibit F	Form of Assignment and Assumption Agreement for Agreements
Exhibit G	Form of Assignment and Assumption Agreement for Excluded Assets
Exhibit H	Form of Seller Officer’s Certificate of Facility Performance
Exhibit I	Form of Purchaser Officer’s Certificate
Exhibit J	Form of Purchaser Secretary’s Certificate
Exhibit K	Form of Southern Power Secretary’s Certificate
Exhibit L-1	Form of PGN Guaranty Termination and Release Agreement for Duke Power

Exhibit L-2  Form of PGN Guaranty Termination and Release Agreement for Duke Electric Transmission

Exhibit L-3	Form of PGN Guaranty Termination and Release Agreement for NCMPA
Exhibit M	Form of PGN Parent Guaranty
Exhibit N	Form of Southern Power Parent Guaranty
Exhibit O	List of Individuals with Knowledge
Exhibit P	Capacity Test Procedures

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List of Schedules

Seller’s Disclosure Schedule

Section 1.1(A):		Permitted Encumbrances
Section 1.1(B):		Information Technology Excluded Assets
Section 1.1(C):		Permitted Real Property Encumbrances
Section 3.2(g):		Agreements Assigned to and Assumed by the Project Company
Section 3.2(h):		Agreements To Be Terminated or Amended and Restated
Section 5.3(a):		Violations
Section 5.3(b):		Seller Approvals
Section 5.4(a):	Actions and Orders

Section 5.4(b): Outstanding Orders and Pending and Threatened Litigation Known by the Seller

Section 5.5(a):	Notices of Violations
Section 5.5(b)(i):	Necessary Approvals
Section 5.5(b)(ii):	Expired or Challenged Necessary Approvals

Section 5.5(b)(iii): Necessary Approvals Invalidated by Transfer of Membership Interest

Section 5.6:	Environmental Violations
Section 5.6(b):	The Project Company’s Material Environmental Approvals
Section 5.8:	Recently-Acquired Assets
Section 5.9:	Description of Real Property
Section 5.10(b):	Pending Claims for Defective Work, Equipment or Materials
Section 5.12(c):	Employee Agreements
Section 5.12(f):	Non-Compliance with Laws Relating to Employees
Section 5.14:	Annual Unaudited Balance Sheets and Statements of Income
Section 5.15:	Events Subsequent to Most Recent Fiscal Year End
Section 5.16:	Undisclosed Minute Books
Section 5.17:	Emissions Allowances
Section 5.18:	Disclosed Liabilities
Section 5.19(a):	Untimely Tax Returns; Unpaid Taxes; Other Tax Jurisdictions
Section 5.19(b):	Waivers and Extensions of Statutes of Limitations

Section 5.19(c): Taxes Not Withheld; Untimely Tax Returns Related to Withholding

Section 5.19(f):	Special Property Tax Treatment
Section 5.20:	Intellectual Property
Section 5.21:	Insurance Policies
Section 5.22:	Material Agreements
Section 7.17:	Third Party Assets in Excess of $100,000

Purchaser’s Disclosure Schedule

Section 6.3(a):	Violations
Section 6.3(b):	Purchaser Approvals

Schedule 1.1(A) Capital Spare Parts

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Schedule 1.1(B) Title Insurance Policy

Schedule 7.8(b) Intercompany Accounts and Obligations Not Assigned

Schedule 7.8(c) Liabilities Not Released

Schedule 7.12(c) Survey

Schedule 7.19(b) Progress Insurance Policies

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PURCHASE AND SALE AGREEMENT

This PURCHASE AND SALE AGREEMENT (this “Agreement”), dated as of May 8, 2006 (the “Effective Date”), is made and entered into by and between Progress Genco Ventures, LLC, a North Carolina limited liability company (the “Seller”), and Southern Power Company – Rowan LLC, a Delaware limited liability company (the “Purchaser”). Certain capitalized terms used in this Agreement have the meanings assigned to them in Article I.

W I T N E S S E T H:

WHEREAS, the Seller is a direct wholly-owned subsidiary of Progress Ventures, Inc., a North Carolina corporation (d/b/a Progress Energy Ventures, Inc.) (“Progress Ventures”), and Progress Ventures is an indirect wholly-owned subsidiary of Progress Energy, Inc., a North Carolina corporation (“Progress Energy”);

WHEREAS, the Purchaser is a wholly-owned subsidiary of Southern Power Company, a Delaware corporation (“Southern Power”);

WHEREAS, the Seller owns a 100% limited liability company membership interest (the “Membership Interest”) in Rowan County Power, LLC, a North Carolina limited liability company (the “Project Company”);

WHEREAS, the Project Company is engaged in the generation of electric power utilizing three GE 7FA gas and oil fired combustion turbines and one 2x1 combined cycle unit (each a “Unit” and collectively the “Units”); and

WHEREAS, the Seller desires to sell to the Purchaser, and the Purchaser desires to purchase from the Seller, the Membership Interest pursuant to the terms of this Agreement.

NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties agree as follows:

ARTICLE I

DEFINITIONS

1.1     Certain Definitions. For purposes of this Agreement, the following terms shall have the meanings specified in this Section 1.1:

“Action” means any action, suit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority of any nature, civil, criminal, regulatory or otherwise, at law or in equity.

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“Affiliate” (and, with a correlative meaning “Affiliated”) means, with respect to any Person, any direct or indirect subsidiary of such Person, and any other Person that directly, or through one or more intermediaries, controls or is controlled by or is under common control with such first Person. As used in this definition, “control” (including with correlative meanings, “controlled by” and “under common control with”) means possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise).

“Affiliated Contracts” means the agreements between the Project Company and its Affiliates identified as such in Section 5.22 of the Seller’s Disclosure Schedule.

“Agreement” shall have the meaning set forth in the preamble hereof.

“Applicable Law” means, with respect to any Person, any Law applicable to such Person or its business, properties or assets.

“Approvals” means the approvals, authorizations, grants of authority, consents, Orders, qualifications, permits, licenses, variances, exemptions, franchises, concessions, certificates, filings, or registrations or any waivers of any of the foregoing, and the notices, statements or other communications required to be filed with, delivered to or obtained from any Governmental Authority or other Person.

“Assets” means the Project, the Intellectual Property Assets and any other tangible or intangible personal property (including books, records, files and reports, without eliminating the Seller’s right to retain originals pursuant to Section 3.2(e)) owned or leased by the Project Company that is used to own, operate or maintain the Project or otherwise conduct the business of the Project Company, but excluding any Excluded Assets.

“Business Day” means a day other than a Saturday, Sunday or other day on which commercial banks in Alabama, Georgia, North Carolina or New York City are authorized or required by Law to close. Any event the scheduled occurrence of which would fall on a day that is not a Business Day shall be deferred until the next succeeding Business Day.

“Capital Spare Parts” means the spare parts listed on Schedule 1.1(A) attached hereto.

“Casualty Insurance Claims” shall have the meaning set forth in Section 7.19(b).

“Closing” shall have the meaning set forth in Section 3.1.

“Closing Date” means the date on which the Closing occurs.

“Closing Fuel Oil Statement” has the meaning set forth in Section 2.6(a).

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“Code” means the Internal Revenue Code of 1986, as amended.

“Confidentiality Agreement” shall have the meaning set forth in Section 7.5.

“Consents” means any consent or waiver required from, or any notification that must be granted to, a third party other than a Governmental Authority.

“Contract” means any written contract, indenture, note, bond, loan, instrument, lease, commitment or other agreement.

“Copyrights” means all U.S. and foreign copyrights, and applications and registrations for the foregoing.

“CP&L” means Carolina Power & Light Company, a North Carolina corporation d/b/a Progress Energy Carolinas, Inc.

“DeSoto Agreement” means that certain Purchase and Sale Agreement, dated as of the date hereof made by and between the Seller and Southern Power Company – DeSoto LLC, a Delaware limited liability company, relating to the purchase and sale of the Seller’s 100% limited liability company membership interest in DeSoto County Generating Company, LLC, a Delaware limited liability company.

“Duke Electric Transmission” means Duke Electric Transmission, a division of Duke Energy Corporation, a Delaware corporation.

“Duke Power” means Duke Power Company, a North Carolina corporation.

“Duke Power Contracts” means each of (i) the Power Sales Agreement, dated as of January 19, 2001, between CP&L and Duke Power with respect to Unit 1, as assigned by CP&L to the Project Company pursuant to the Assignment and Assumption Agreement, dated as of February 1, 2002, between CP&L and the Project Company, (ii) the Power Sales Agreement, dated as of December 22, 2003, between Progress Ventures and Duke Power with respect to Unit 1, (iii) the Power Sales Agreement, dated as of December 22, 2003, between Progress Ventures and Duke Power with respect to Unit 2, (iv) the Power Sales Agreement, dated as of September 18, 2002, between the Project Company and Duke Power with respect to Unit 3 and (v) the Power Sales Agreement, dated as of December 22, 2003, between Progress Ventures and Duke Power with respect to Unit 3.

“Effective Date” has the meaning set forth in the preamble.

“Emissions Allowances” means any and all “Allowances” as that term is defined in the Clean Air Act, 42 U.S.C. § 7401 et seq., as amended from time to time, and any regulations and requirements promulgated thereunder, including but not limited to the definition of “Allowance” as set forth in Title IV of the Clean Air Act or any other cap-and-trade program or any other program requiring Allowances or credits under the

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Clean Air Act, as amended from time to time, and any regulations and requirements thereunder.

“Employee” means an employee of the Seller or an Affiliate of the Seller who is performing services primarily in respect of the Facility.

“Employee Plans” means all “employee benefit plans” as defined by Section 3(3) of ERISA, all specified fringe benefit plans as defined in Section 6039D of the Code, and all other bonus, incentive compensation, deferred compensation, profit-sharing, stock-option, stock-appreciation right, stock-bonus, stock-purchase, employee-stock-ownership, savings, severance, change in control, supplemental unemployment, layoff, salary-continuation, retirement, pension, health, life-insurance, disability, accident, group-insurance, vacation, holiday, sick-leave, fringe-benefit, or welfare plan, and any other employee compensation or benefit plan, agreement, policy, practice, commitment, contract or understanding (whether qualified or non-qualified, currently effective or terminated, written or unwritten) and any trust, escrow or other agreement related thereto.

“Encumbrances” means any and all liens, charges, security interests, options, claims, mortgages, deeds of trust, leases, rights of first refusal, easements, servitudes, pledges, proxies, voting trusts or agreements, obligations, understandings or arrangements or other restrictions on title or transfer of any nature whatsoever.

“Environmental Claim” means any claim, action, cause of action, investigation or notice by any person or entity alleging potential liability (including potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) arising out of, based on or resulting from (i) the presence, or release into the environment, of any Material of Environmental Concern at the Project or (ii) circumstances forming the basis of any violation, or alleged violation, of any Environmental, Health and Safety Law by the Project Company.

“Environmental, Health and Safety Laws” means all Applicable Laws in effect on the date hereof relating to the protection of health, worker safety with respect to exposure, the environment, natural resources or the protection thereof including laws and regulations relating to emissions, discharges, releases or threatened releases of Materials of Environmental Concern, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern.

“Environmental Professional” shall have the meaning set forth in Section 7.11(e).

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

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“ERISA Affiliate” means any entity controlled by, controlling or under common control with the Project Company within the meaning of Section 414 of the Code or Section 4001(a)(14) or Section 4001(b) of ERISA.

“Excluded Assets” means all Capital Spare Parts, all Wilson-Bohannon padlocks and keys; income Tax Returns and work papers relating to such Tax Returns; Tax Assets; prepaid insurance; cash and cash equivalents; accounts receivable (including Intercompany Receivables), except for accounts receivable accruing after the Closing Date; operational, compliance and governance procedures (contained in written manuals or otherwise) that pertain, in addition to the Facility, to one or more other electric generation facilities owned or operated by Progress Energy; and all information technology items listed on Section 1.1(B) of the Seller’s Disclosure Schedule.

“Facility” means that certain power generation facility known as the “Rowan County Plant," which is located at the Real Property, including the Units and all Tangible Personal Property.

“Financial Statements” shall have the meaning set forth in Section 5.14.

“Good Utility Practices” means the generally accepted and sound industry practices, methods and acts from time to time applicable to the operation of similar power facilities situated in the United States in a manner consistent with Applicable Law and Approvals, safety and reliability. Good Utility Practices are not intended to be limited to any particular set of optimum practices, methods, or acts to the exclusion of all others, but rather are intended to include a range of possible practices, methods or acts consistent with the above stated criteria.

“Governing Documents” means with respect to any particular entity, (i) if a corporation, the articles or certificate of incorporation and the bylaws; (ii) if a limited liability company, the articles of organization and operating agreement; (iii) if another type of Person, any other charter or similar document adopted or filed in connection with the creation, formation or organization of the Person; (iv) all equityholders’ agreements, voting agreements, voting trust agreements, joint venture agreements, registration rights agreements or other agreements or documents relating to the organization, management or operation of any Person or relating to the rights, duties and obligations of the equityholders of any Person; and (v) any amendment or supplement to any of the foregoing.

“Governmental Authority” means any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including any governmental authority, agency, department, board, commission or instrumentality of the United States of America or any state or political subdivision thereof, and any tribunal, court or arbitrator(s) of competent jurisdiction.

“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and any rules or regulations promulgated pursuant to such Act.

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“Improvements” means all buildings, structures, fixtures and improvements located on the Real Property, including the Facility.

“Indemnitee” shall have the meaning set forth in Section 10.6(e).

“Indemnitor” shall have the meaning set forth in Section 10.6(e).

“Independent Accounting Firm” shall have the meaning set forth in Section 2.4.

“Intellectual Property” means Trademarks, Patents, Copyrights and Trade Secrets.

“Intellectual Property Assets” has the meaning set forth in Section 5.20.

“Intercompany Payables” has the meaning set forth in Section 3.2(f).

“Intercompany Receivables” has the meaning set forth in Section 7.8(a).

“Knowledge” means, with respect to a party, the actual knowledge of the individuals listed in Exhibit O under the name of such party.

“Law” means any federal, state or local law, statute, code, ordinance, rule, regulation, Order or other requirement enacted, promulgated, issued or entered by a Governmental Authority.

“Liabilities” means any and all debts, losses, liabilities, accounts payable, claims, damages, expenses, fines, costs, royalties, proceedings, deficiencies or obligations (including those arising out of any Action, such as any settlement or compromise thereof or judgment or award therein), of any nature, whether known or unknown, absolute, accrued, contingent or otherwise and whether due or to become due, and whether or not resulting from third party claims, and any reasonable out-of-pocket costs and expenses (including reasonable legal counsels’, accountants’, or other fees and expenses incurred in defending any Action or in investigating any of the same or in asserting any rights hereunder).

“Listed Employees” shall have the meaning set forth in Section 11.1(a).

“Loss” shall have the meaning set forth in Section 10.6(a).

“Material Agreements” shall have the meaning set forth in Section 5.22.

“Materials of Environmental Concern” means chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, radioactive materials, asbestos, petroleum and petroleum products and any other materials or substances regulated under any Environmental, Health and Safety Laws.

“Membership Interest” shall have the meaning set forth in the recitals.

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“Most Recent Fiscal Year End” shall have the meaning set forth in Section 5.14.

“NCMPA” means North Carolina Municipal Power Agency No. 1.

“NCMPA Contracts” means each of (i) the Master Power Purchase and Sales Agreement Confirmation Letter, dated as of January 12, 2004, between Progress Ventures and NCMPA, as such Confirmation Letter is governed by the EEI Master Power Purchase and Sale Agreement, dated as of March 5, 2003, between Progress Ventures and NCMPA and (ii) the Master Power Purchase and Sales Agreement Confirmation Letter, dated as of January 24, 2006, between Progress Ventures and NCMPA, as such Confirmation Letter is governed by the EEI Master Power Purchase and Sale Agreement, dated as of March 5, 2003, between Progress Ventures and NCMPA.

“Necessary Approvals” shall have the meaning set forth in Section 5.5(b)(i).

“Order” means any order, injunction, judgment, decree, ruling, writ, assessment or arbitration award issued by a Governmental Authority.

“Ordinary Course of Business” shall refer to the ordinary course of business of the Project Company consistent with Good Utility Practice, where applicable, and past practice with reference to the two-year period immediately preceding the date hereof.

“Ozone Season” shall have the meaning set forth in Section 7.20.

“Outside Date” shall have the meaning set forth in Section 4.1(b)(i).

“Patents” means all U.S. and foreign patents, patent applications, patent disclosures, and all related continuations, continuations-in-part, divisionals, reissues, re-examinations, substitutions, and extensions thereof, and applications and registrations for the foregoing.

“Permitted Encumbrances” means:

(a)    requirements under Applicable Law or restrictions necessitating any Consent to the transfer of the Membership Interest;

(b) Encumbrances created by this Agreement;

(c)    Encumbrances identified in Section 1.1(A) of the Seller’s Disclosure Schedule, or reflected or referred to in the Financial Statements (including the notes thereto);

(d)    liens for Taxes and other governmental levies not yet due and payable or, if due, being contested in good faith by appropriate proceedings in

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accordance with Applicable Law and for which reserves are set aside in the Ordinary Course of Business;

(e)     mechanics’, workmen’s, repairmen’s, warehousemen’s, carriers’ or other liens, including all statutory liens, arising or incurred in the Ordinary Course of Business up to fifty thousand U.S. dollars ($50,000) in the aggregate;

(f)     conditional sales contracts and equipment leases with third parties entered into in the Ordinary Course of Business; or

(g) Permitted Real Property Encumbrances.

“Permitted Real Property Encumbrances” means (i) zoning, planning and building codes and other Applicable Laws regulating the use, development and occupancy of the Project and permits, consents and rules under such laws; (ii) matters shown on the title insurance policy identified in Schedule 1.1(B) (other than a mortgage or other lien securing indebtedness of the Seller, the Project Company or any of their Affiliates); and (iii) matters identified in Section 1.1(C) of the Seller’s Disclosure Schedule.

“Person” means and includes natural persons, corporations, limited partnerships, limited liability companies, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and all Governmental Authorities.

“PGN Guaranties” means each of (i) the Guaranty Agreement, dated as of September 18, 2002, by Progress Energy in favor of Duke Power, (ii) the Guaranty Agreement, dated as of December 22, 2003, by Progress Energy in favor of Duke Power, (iii) the Guaranty Agreement, dated as of April 15, 2003, by Progress Energy in favor of Duke Electric Transmission, (iv) the Guaranty Agreement, dated as of February 1, 2006, by Progress Energy in favor of NCMPA and (v) the Guaranty Agreement, dated as of April 7, 2003, by Progress Energy in favor of NCMPA.

“PGN Guaranty Termination and Release Agreements” means each of (i) the PGN Guaranty Termination and Release Agreements by and between Progress Energy and Duke Power, substantially in the form of Exhibit L-1, which terminate the PGN Guaranties by Progress Energy in favor of Duke Power, (ii) the PGN Guaranty Termination and Release Agreement by and between Progress Energy and Duke Electric Transmission, substantially in the form of Exhibit L-2, which terminates the PGN Guaranty by Progress Energy in favor of Duke Electric Transmission and (iii) the PGN Guaranty Termination and Release Agreements by and between Progress Energy and NCMPA, substantially in the form of Exhibit L-3, which terminate the PGN Guaranties by Progress Energy in favor of NCMPA.

“PGN Parent Guaranty” shall have the meaning set forth in Section 7.18.

8

“Pre-Closing Accounts Payable” shall have the meaning set forth in Section 10.6(c).

“Pre-Closing Fuel Oil Statement” shall have the meaning set forth in Section 2.5(a).

“Pre-Closing Period” shall have the meaning set forth in Section 9.2.

“Proceedings” means all proceedings, actions, claims, suits, investigations and inquiries by or before any arbitrator or Governmental Authority.

“Progress Energy” shall have the meaning set forth in the recitals.

“Progress Insurance Policies” shall have the meaning set forth in Section 7.19(b).

“Project” means the Improvements and the Real Property.

“Project Company” shall have the meaning set forth in the recitals.

“Project Company Material Adverse Effect” means any change, circumstance or event that would have a materially adverse effect on the Assets or liabilities of the Project Company, taken as a whole, excluding any such change, circumstance or event to the extent resulting from (i) the economy or securities markets in general, or any outbreak of hostility, terrorist activities or war, (ii) the announcement, pendency or consummation of the sale of the Membership Interest or any other action by the Seller or its Affiliates contemplated by or required by this Agreement, or (iii) any changes in general economic (including changes in commodity prices or foreign exchange rates), political or regulatory conditions in the electricity generation industry. Without limiting the generality of the foregoing, such definition of Project Company Material Adverse Effect shall specifically include adverse consequences reasonably likely to result in Liabilities and lost revenues on a net present value basis calculated using an 8% discount rate, to the Project Company of twelve million U.S. dollars ($12,000,000) or more, subject to the exclusions set forth in clauses (i), (ii) and (iii) above.

“Property Taxes” shall have the meaning set forth in Section 9.2.

“Property Tax Rebate” shall have the meaning set forth in Section 9.2.

“Purchase Price” shall have the meaning set forth in Section 2.2.

“Purchaser” shall have the meaning set forth in the preamble hereof.

“Purchaser Approvals” means the Approvals and Consents necessary for the authorization, execution, delivery and performance of this Agreement by the Purchaser and the consummation by the Purchaser of the transactions contemplated by this Agreement.

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“Purchaser Indemnitees” shall have the meaning set forth in Section 10.6(c).

“Purchaser Indemnitees’ Threshold” shall have the meaning set forth in Section 10.6(d).

“Purchaser Material Adverse Effect” means any change, circumstance or event that would materially hinder the Purchaser’s ability to consummate the transactions contemplated by this Agreement, excluding any such change, circumstance or event to the extent resulting from (i) the economy or securities markets in general, or any outbreak of hostility, terrorist activities or war, (ii) the announcement, pendency or consummation of the sale of the Membership Interest or any other action by the Purchaser or its Affiliates contemplated by or required by this Agreement, or (iii) any changes in general economic (including changes in commodity or energy prices), political or regulatory conditions in the electricity generation industry.

“Purchaser’s Disclosure Schedule” means the schedule attached to this Agreement and dated as of the date hereof, containing all lists, descriptions, exceptions and other information and materials as are required to be included by the Purchaser pursuant to this Agreement.

“Real Property” means the land described in Section 5.9 of the Seller’s Disclosure Schedule.

“Retention Period” has the meaning set forth in Section 7.4.

“Rowan Oil Inventory Price” means the sum of (a) the product of (i) one and eleven thousandths (1.011) multiplied by (ii) the OPIS daily average Charlotte rack price per gallon for low sulfur No. 2 dyed oil, measured at the close of business two (2) Business Days prior to the Closing Date, and (b) two and five tenths cents ($0.025) per gallon.

“Securities Act” means the Securities Act of 1933, as amended.

“Seller” shall have the meaning set forth in the preamble hereof.

“Seller Approvals” means the Approvals and Consents necessary for the authorization, execution, delivery and performance of this Agreement by the Seller and the consummation by the Seller of the transactions contemplated by this Agreement.

“Seller Indemnitees” shall have the meaning set forth in Section 10.6(a).

“Seller Indemnitees’ Threshold” shall have the meaning set forth in Section 10.6(b).

“Seller Material Adverse Effect” means any change, circumstance or event that would materially hinder the Seller’s ability to consummate the transactions contemplated by this Agreement, excluding any such change, circumstance or event to

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the extent resulting from (i) the economy or securities markets in general, or any outbreak of hostility, terrorist activities or war, (ii) the announcement, pendency or consummation of the sale of the Member Interest or any other action by the Seller or its Affiliates contemplated by or required by this Agreement, or (iii) any changes in general economic (including changes in commodity or energy prices), political or regulatory conditions in the electricity generation industry.

“Seller’s Closing Fuel Oil Statement” has the meaning set forth in Section 2.6(a).

“Seller’s Disclosure Schedule” means the schedule attached to this Agreement and dated as of the date hereof, containing all lists, descriptions, exceptions and other information and materials as are required to be included by the Seller pursuant to this Agreement.

“Southern Power Parent Guaranty” has the meaning set forth in Section 7.18.

“Subsidiary” or “subsidiary” means, with respect to any Person, any corporation, limited liability company, joint venture or partnership of which such Person (a) beneficially owns, either directly or indirectly, more than fifty percent (50%) of (i) the total combined voting power of all classes of voting securities of such entity, (ii) the total combined equity interest, or (iii) the capital or profit interests, in the case of a partnership; or (b) otherwise has the power to vote or to direct the voting of sufficient securities to elect a majority of the board of directors or similar governing body.

“Survey Objections” shall have the meaning set forth in Section 7.12(c).

“Tangible Personal Property” means all machinery, equipment, parts, spare parts, tools, furniture, office equipment, computer hardware, computer software and licenses, electronic files, printed reference and procedures documents, supplies, materials, inventory, vehicles and other items of tangible personal property of every kind owned or leased by the Project Company, together with any express or implied warranty by the manufacturers or sellers or lessors of any item or component part thereof, without in the case of books, records, files and reports eliminating the Seller’s right to retain originals pursuant to Section 3.2(e).

“Tax” means all federal, state, provincial, territorial, municipal, local or foreign income, profits, franchise, gross receipts, environmental, customs, duties, net worth, sales, use, goods and services, withholding, value added, ad valorem, employment, social security, disability, occupation, pension, real property, personal property (tangible and intangible), stamp, transfer, conveyance, severance, production, excise and other taxes, withholdings, duties, levies, imposts and other similar charges and assessments (including any and all fines, penalties and additions attributable to or otherwise imposed on or with respect to any such taxes, charges, fees, levies or other assessments, and interest thereon) imposed by or on behalf of any Taxing Authority.

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“Tax Asset” means any item of income, gain, loss, deduction or credit, or other attribute arising from or attributable to a Pre-Closing Period, or with respect to any taxable year or period that includes the Closing Date, the portion of such taxable year or period through and including the Closing Date, that may have the effect of increasing or decreasing any Tax that has accrued for Tax purposes, but has not been used during a taxable period, and that could reduce a Tax in another taxable period, including a net operating loss, prepaid Tax, anticipated refunds of Taxes, net capital loss, investment tax credit, foreign tax credit, research and experimentation credit, charitable deduction or credit related to alternative minimum tax or any other Tax credit.

“Tax Benefit” means the amount of any refund, credit or reduction in otherwise required Tax payments, including interest payable thereon, actually received or recognized.

“Tax Returns” means any report, return, declaration, claim for refund, information report or return or statement required to be supplied to a Taxing Authority in connection with Taxes, including any schedule or attachment thereto or amendment thereof.

“Taxing Authority” means any Governmental Authority exercising any authority to impose, regulate, levy, assess or administer the imposition of any Tax.

“Third-Party Assets” shall have the meaning set forth in Section 7.17.

“Title Objections” shall have the meaning set forth in Section 7.12(b).

“Total 2006 Ozone Emission Allowances” shall have the meaning set forth in Section 7.20.

“Trade Secrets” means trade secrets, proprietary processes and methodologies.

“Trademarks” means all U.S. and foreign trademarks, service marks, corporate and trade names, Internet domain names, logos, slogans, trade dress, and other similar designations of source or origin, together with the goodwill symbolized by any of the foregoing, and applications and registrations for the foregoing.

“Transaction Documents” means this Agreement, and any other agreement or instrument executed in connection therewith or pursuant thereto.

“Transfer Taxes” shall have the meaning set forth in Section 9.1.

“Transition Committee” shall have the meaning set forth in Section 7.13(e).

“Units” shall have the meaning set forth in the Recitals.

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1.2     Other Terms. Other terms may be defined elsewhere in this Agreement and, unless otherwise indicated, shall have such meaning throughout this Agreement.

1.3     Rules as to Usage. Except as otherwise expressly provided herein, the following rules shall apply to the usage of terms in this Agreement:

(a)     The terms defined above have the meanings set forth above for all purposes, and such meanings are equally applicable to both the singular and plural forms of the terms defined. If a term is defined as one part of speech (such as a noun), it shall have a corresponding meaning when used as another part of speech (such as a verb).

(b)     “Include,” “includes” and “including” shall be deemed to be followed by “without limitation” whether or not they are in fact followed by such words or words of like import.

(c)     “Writing,” “written” and comparable terms refer to printing, typing, and other means of reproducing in a visible form.

(d)     Any Law defined or referred to herein means such Law as from time to time amended, modified or supplemented, including by succession of comparable successor Law and any rules and regulations promulgated thereunder.

(e)     References to a Person are also to its permitted successors and assigns.

(f)     Any term defined above by reference to any agreement, instrument or Law has such meaning whether or not such agreement, instrument or Law is in effect.

(g)     “Hereof,” “herein,” “hereunder” and comparable terms refer, unless otherwise expressly indicated, to the entire agreement or instrument in which such terms are used and not to any particular article, section or other subdivision thereof or exhibit or schedule or other attachment thereto. References in an instrument to “Article,” “Section,” or another subdivision or to an exhibit or schedule or other attachment are, unless the context otherwise requires, to an article, section, subsection or subdivision of or an exhibit or schedule or other attachment to such agreement or instrument.

(h)     Pronouns, whenever used in any agreement or instrument that is governed by this Agreement and of whatever gender, shall include all Persons. References to any gender include, unless the context otherwise requires, references to all genders.

(i) “Shall” and “will” have equal force and effect.

(j)      Whenever the consent or approval of any party is required pursuant to this Agreement, unless expressly stated that such consent or approval is to be given in the sole discretion of such party, such consent or approval shall not be unreasonably withheld, conditioned or delayed.

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(k)     Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified. Whenever any action must be taken hereunder on or by a day that is not a Business Day, then such action may be validly taken on or by the next day that is a Business Day.

(l)      All accounting terms used herein and not expressly defined herein shall have the meanings given to them under GAAP.

1.4     Schedules and Exhibits. This Agreement consists of the Articles contained herein and the Schedules and Exhibits attached hereto, all of which comprise part of one and the same agreement with equal force and effect.

ARTICLE II

PURCHASE AND SALE OF MEMBERSHIP INTEREST

2.1     Sale and Transfer of the Membership Interest. Upon the terms and subject to the conditions contained herein, on the Closing Date, the Seller shall sell, assign, transfer, convey and deliver to the Purchaser, and the Purchaser shall purchase from the Seller, the Membership Interest, free and clear of all Encumbrances, except for any Encumbrances imposed pursuant to Applicable Law or this Agreement.

2.2     Purchase Price. The aggregate purchase price for the Membership Interest shall be an amount equal to three hundred twenty-five million U.S. dollars ($325,000,000.00) (the “Purchase Price”) as the same may be adjusted if and as required pursuant to the provisions of Sections 2.5 and 2.6.

2.3     Payment of Purchase Price. The Purchaser shall transfer the Purchase Price if and as adjusted pursuant to Section 2.5 to the Seller at the Closing. Adjustments, if any, pursuant to Sections 2.5 and 2.6 shall be paid in accordance with the provisions of such applicable Section.

2.4     Allocation of Purchase Price; Tax Filings. For federal Tax purposes and relevant state income Tax purposes, the Project Company is classified as a disregarded entity. Consequently, the sale and purchase of the Membership Interest hereunder is to be treated as a sale and purchase of the Assets for all such purposes. The Purchase Price, plus the amount of the Project Company’s Liabilities that constitute part of the amount realized for federal income Tax purposes, shall be allocated among the Assets, which allocation shall be arrived at by an independent appraisal, conducted at the Purchaser’s sole expense by Navigant Consulting or another nationally recognized appraiser mutually agreeable to the Purchaser and the Seller, in compliance with Section 1060 of the Code and the regulations promulgated thereunder. The Purchaser shall provide the allocation arrived at by such independent appraisal to the Seller by July 15, 2006. In the event that the Seller disagrees with the allocation arrived at by such independent appraisal, the Purchaser and the Seller shall jointly appoint PricewaterhouseCoopers or another independent accounting firm of international reputation mutually acceptable to the Seller and the Purchaser (the “Independent

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Accounting Firm”), which shall, at the Purchaser’s and the Seller’s equal expense, within fifteen (15) days (or such other period mutually agreed upon by the Purchaser and the Seller) determine the appropriate allocation with respect to the issues in dispute. The finding of such Independent Accounting Firm shall be binding on the Purchaser and the Seller. Promptly after the determination of the post-Closing Purchase Price adjustment pursuant to Section 2.6, the parties shall mutually revise the allocation to the extent necessary to reflect the Purchase Price adjustments made pursuant to Sections 2.5 and 2.6, and references to “such allocation” in this Section 2.4 shall refer to the allocation after such revision. Each of the Purchaser and the Seller shall (i) timely file all forms (including Internal Revenue Service Form 8594) and Tax Returns required to be filed in connection with such allocation, (ii) be bound by such allocation for purposes of determining Taxes, (iii) prepare and file, and cause its Affiliates to prepare and file, its Tax Returns on a basis consistent with such allocation and (iv) take no position, and cause its Affiliates to take no position, inconsistent with such allocation on any applicable Tax Return, in any audit or proceeding before any Taxing Authority, in any report made for Tax, financial accounting or any other purposes, or otherwise. Notwithstanding the foregoing, the parties agree that it will not be inconsistent with such allocation for (a) the Purchaser’s cost for the Assets to differ from the total amount allocated hereunder to reflect capitalized acquisition costs not included in the total amount allocated pursuant to this Section 2.4 and (b) the amount realized by the Seller to differ from the total amount allocated pursuant to this Section 2.4 to reflect transaction costs that reduce the amount realized for federal income Tax purposes. In the event that the allocation pursuant to this Section 2.4 is disputed by any Taxing Authority, the party receiving notice of such dispute shall promptly notify the other party hereto concerning the existence and resolution of such dispute.

2.5 Closing Purchase Price Adjustments.

(a)     Fuel Oil. Not less than ten (10) Business Days prior to the Closing Date, the Seller shall deliver to the Purchaser a statement of the amount of fuel oil owned by the Project Company or any Affiliate of the Project Company and held for use by the Project Company at the Facility as of a date within twenty (20) Business Days prior to the Closing Date that is certified by an authorized officer of the Seller as having been prepared in good faith (the “Pre-Closing Fuel Oil Statement”); provided, that for the avoidance of doubt, the Pre-Closing Fuel Oil Statement shall not include any fuel oil owned by Duke Power pursuant to the Duke Power Contracts or otherwise or any fuel oil purchased by Duke Power pursuant to the Duke Power Contracts prior to the Closing Date.The Pre-Closing Fuel Oil Statement shall be accompanied by such backup information and schedules as are reasonably required in order for the Purchaser to understand and verify the accuracy of the computation of the amount of fuel oil reflected on the Pre-Closing Fuel Oil Statement.

(b)     Adjustments. The Purchase Price shall be adjusted upward by the product of the Rowan Oil Inventory Price multiplied by the amount of fuel oil reflected on the Pre-Closing Fuel Oil Statement.

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2.6     Post-Closing Purchase Price Adjustment. The Purchase Price shall be subject to adjustment after the Closing as specified in this Section 2.6.

(a)     Closing Fuel Oil Statement. As promptly as practicable, but in no event later than forty-five (45) days following the Closing Date, the Seller shall deliver to the Purchaser a statement of the amount of fuel oil owned by the Project Company at the Facility as of the Closing Date that is certified by an authorized officer of the Seller as having been prepared in good faith (the “Seller’s Closing Fuel Oil Statement”); provided, that for the avoidance of doubt, the Seller’s Closing Fuel Oil Statement shall not include any fuel oil owned by Duke Power pursuant to the Duke Power Contracts or otherwise or any fuel oil purchased by Duke Power pursuant to the Duke Power Contracts prior to the Closing Date.The Seller’s Closing Fuel Oil Statement shall be accompanied by such backup information and schedules as are reasonably required in order for the Purchaser to understand and verify the accuracy of the computation of the amount of fuel oil reflected on the Seller’s Closing Fuel Oil Statement. The Seller’s Closing Fuel Oil Statement shall be deemed final for the purposes of this Section 2.6(a) (and as and when deemed final shall be referred to as the “Closing Fuel Oil Statement”) upon the earlier of (A) the failure of the Purchaser to notify the Seller of a dispute within twenty (20) Business Days after the delivery of the Seller’s Closing Fuel Oil Statement to the Purchaser, (B) the resolution of all disputes, pursuant to Section 2.6(b)(i), by the Seller’s accountants and the Purchaser’s accountants, and (C) the resolution of all disputes, pursuant to Section 2.6(b)(ii), by the Independent Accounting Firm.

(b) Fuel Oil Statement Issue Resolution Process.

(i) The Seller may in good faith dispute any amounts reflected on the Seller’s Closing Fuel Oil Statement delivered pursuant to Section 2.6(a), to the extent that the net effect of such disputed amounts would affect the adjustment pursuant to Section 2.6(c), but only on the basis that the amounts reflected on such statements are incorrect or were not arrived at in accordance with GAAP in a manner consistent with the Financial Statements. The Purchaser shall deliver notice of such a dispute to the Seller setting forth in reasonable detail the items or amounts disputed and the Purchaser’s proposed corrections. In the event of such a dispute, the Seller’s and the Purchaser’s respective accountants shall attempt to reconcile their differences, and any resolution by them as to any disputed amounts shall be final, binding and conclusive on the parties hereto. If the Seller’s and the Purchaser’s respective accountants are unable to reach a resolution within sixty (60) days of the delivery of the Seller’s Closing Fuel Oil Statement, the items remaining in dispute shall be submitted for resolution to the Independent Accounting Firm.

(ii) The Independent Accounting Firm shall, within thirty (30) days after the items remaining in dispute are submitted to the Independent Accounting Firm, or such longer period of time as the Independent Accounting Firm determines is necessary, deliver its written determination to the Seller and the Purchaser upon such items. The Independent Accounting Firm’s determination shall be final, binding and conclusive on the Seller and the Purchaser. The fees and disbursements of the Independent Accounting Firm shall be allocated between the Seller and the Purchaser in

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the same proportion that the aggregate amount of such remaining disputed items so submitted to the Independent Accounting Firm that is unsuccessfully disputed by each such party as finally determined by the Independent Accounting Firm bears to the total amount of such remaining disputed items. The Purchaser and the Seller shall make readily available to the Independent Accounting Firm all relevant information, books and records and any work papers relating to the dispute and all other items reasonably requested by the Independent Accounting Firm. In no event may the Independent Accounting Firm’s resolution of any difference be for an amount which is outside the range of the Purchaser’s and the Seller’s disagreement.

(c)  Adjustment. The post-Closing Purchase Price adjustment shall be an amount equal to the product of the Rowan Oil Inventory Price multiplied by the amount (positive or negative) equal to the amount of fuel oil reflected on the Closing Fuel Oil Statement minus the amount of fuel oil reflected on the Pre-Closing Fuel Oil Statement. If the result is a positive number, then the Purchase Price shall be adjusted upward in an amount equal to the result obtained under this Section 2.6(c), and within three (3) Business Days after the finalization of the Closing Fuel Oil Statement pursuant to Section 2.6(a), such amount shall be paid by the Purchaser to the Seller by wire transfer in immediately available funds. If the result obtained in this Section 2.6(c) is a negative number, then the Purchase Price shall be adjusted downward in an amount equal to such result, and within three (3) Business Days after the finalization of the Closing Fuel Oil Statement pursuant to Section 2.6(a), such amount shall be paid by the Seller to the Purchaser by wire transfer in immediately available funds.

ARTICLE III

CLOSING

3.1     Time and Place of Closing. The closing of the purchase and sale of the Membership Interest (the “Closing”) shall take place at the offices of Troutman Sanders LLP in Atlanta, Georgia, within three (3) Business Days after the conditions to Closing set forth in Article VIII (excluding conditions that, by their terms, cannot be satisfied until the Closing) have been satisfied (or waived by the party entitled to waive such condition), but no earlier than August 31, 2006, or at such other place, date and time as the parties may agree. The Closing shall be deemed effective as of 11:59 P.M. Atlanta, Georgia time on the Closing Date.

3.2     Deliveries by the Seller. At the Closing, the Seller shall deliver, or cause to be delivered, to the Purchaser:

(a)     an executed counterparty of the instrument conveying title to the Membership Interest substantially in the form of Exhibit A;

(b)     executed copies of the Seller Approvals;

(c)     an executed officer’s certificate of the Seller in the form attached hereto as Exhibit B;

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(d)     executed secretary’s certificates of the Seller and Progress Energy in the forms attached as Exhibit C and Exhibit D, respectively;

(e)     except as set forth in Section 5.16 of the Seller’s Disclosure Schedule, the books, records and files of the Project Company related to the Project and to the operation and maintenance of the Project and copies of any records of Progress Ventures related to any Employee (as permitted by Applicable Law) to whom the Purchaser or one of its Affiliates has extended an offer of employment which has been accepted on or prior to the Closing Date (in lieu of any originals of any such books, records and files, the Seller may provide copies thereof provided that it identifies them as such and such books, records and files do not relate solely to the business of the Project Company);

(f)     a release of the Project Company from all Liabilities incurred by the Project Company prior to the Closing and owing to the Seller or any of its Affiliates as of the Closing (“Intercompany Payables”), other than those Liabilities set forth on Schedule 7.8(c), in the form attached as Exhibit E;

(g)     assignment and assumption agreements substantially in the form of Exhibit F, properly executed by the Seller or its Affiliates and (i) the Project Company or (ii) the Purchaser or its Affiliates, pursuant to which all rights and obligations of the Seller or its Affiliates (A) to the fuel oil held for use by Seller or an Affiliate of Seller (other than the Project Company) for use at the Facility but not owned by the Project Company, and (B) under the agreements set forth in Section 3.2(g) of the Seller’s Disclosure Schedule were assigned to, and assumed by, the Project Company, the Purchaser or an Affiliate of the Purchaser at or prior to the Closing;

(h)     proof of the termination of, or removal of the Project Company as a party to, the agreements with the Seller or its Affiliates and other intercompany arrangements set forth in Section 3.2(h) of the Seller’s Disclosure Schedule, in a form reasonably acceptable to the Purchaser;

(i)      an assignment and assumption agreement in the form attached as Exhibit G, properly executed by the Seller, pursuant to which all Excluded Assets owned by the Project Company and all Pre-Closing Accounts Payable of the Project Company are assigned by the Project Company to, and assumed by, the Seller or an Affiliate of the Seller other than the Project Company at or prior to the Closing;

(j)      a receipt for the payment of the Purchase Price;

(k)     an executed certificate from an officer of the Seller in the form attached as Exhibit H, dated as of the Closing Date, that:

(i)      each Unit is operational, dispatchable and capable of meeting the scheduling requirements of Duke Power and NCMPA in accordance with the Duke Power Contracts and the NCMPA Contracts, respectively;

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(ii)     each Unit is in compliance with all noise and emissions limitations and other material Applicable Laws and Approvals; and

(iii)     the combined cycle Unit is capable of delivering net electrical output of no less than ninety-six percent (96%) of 468 MW, and the simple cycle Units 1, 2 and 3 are collectively capable of simultaneously delivering net electrical output of no less than ninety-six percent (96%) of 453 MW; provided, that such certification shall not constitute a representation or warranty by the Seller to such net electrical output under such conditions;

(l)     resignations from all officers of the Project Company; and

(m)    any other documents or instruments or copies thereof as may be reasonably necessary to effect or facilitate the transactions contemplated hereunder to the extent reasonably requested by the Purchaser not less than five (5) Business Days prior to the Closing.

3.3       Deliveries by the Purchaser. At the Closing, the Purchaser shall deliver, or cause to be delivered, to the Seller:

(a)     an executed counterparty of the instrument conveying title to the Membership Interest substantially in the form attached hereto as Exhibit A;

(b)     the Purchase Price (less any net amounts, if any, for which Seller is liable, or plus any net amounts, if any, for which Purchaser is liable, pursuant to Section 9.2) to an account designated by the Seller in writing by wire transfer in immediately available funds;

(c)     executed copies of the Purchaser Approvals;

(d)     an executed officer’s certificate of the Purchaser in the form attached hereto as Exhibit I;

(e)     executed secretary’s certificates of the Purchaser and Southern Power in the forms attached hereto as Exhibit J and Exhibit K, respectively; and

(f)     any other documents or instruments or copies thereof as may be reasonably necessary to effect or facilitate the transactions contemplated hereunder to the extent reasonably requested by the Seller not less than five (5) Business Days prior to the Closing.

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ARTICLE IV

TERMINATION

4.1     Termination of Agreement. Subject to the limitations set forth in Section 4.2, this Agreement may be terminated prior to the Closing Date as follows:

(a)     At any time prior to the Closing Date by the written consent of the Seller and the Purchaser;

(b) By either the Seller or the Purchaser if:

(i)      the Closing has not occurred on or before November 1, 2006 (as may be extended pursuant to a written agreement of the parties, the “Outside Date”); provided, however, that the terminating party is not in default of its obligations hereunder; provided further, that if following November 1, 2006 the only condition set forth in Article VIII that remains unsatisfied is a Purchaser Approval or Seller Approval required from the Federal Energy Regulatory Commission, then the Outside Date shall automatically be extended to December 1, 2006, or

(ii)     there shall be any Applicable Law that makes consummation of the transactions contemplated hereby illegal or otherwise prohibited (and such Law is not overturned or otherwise made inapplicable to the transactions contemplated hereby within a period of ninety (90) days) or if any Order is entered by a Governmental Authority of competent jurisdiction having valid enforcement authority permanently restraining, prohibiting or enjoining the Seller or the Purchaser from consummating the transactions contemplated hereby and such Order shall become final and non-appealable.

(c)     By the Seller if the Purchaser has breached any of its representations, warranties, covenants or other agreements contained in this Agreement; provided, however, that such breach (i) cannot be or has not been cured within thirty (30) days of the Seller’s written notice of such breach, and (ii) would cause the failure of any condition set forth in Article VIII.

(d) By the Purchaser:

(i)      if the Seller has breached any of its representations, warranties, covenants or other agreements contained in this Agreement; provided, however, that such breach (A) cannot be or has not been cured within thirty (30) days of the Purchaser’s written notice of such breach, and (B) would cause the failure of any condition set forth in Article VIII;

(ii)     if a supplement or amendment to the Schedules is made pursuant to Section 7.10 to cure a materially inaccurate or incomplete representation and warranty and the Purchaser has made a valid and timely written objection thereto in accordance with Section 7.10;

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(iii)	at any time prior to June 15, 2006;
(iv)	if permitted pursuant to Section 7.11; or

(v)          if (x) the combined cycle Unit or the simple cycle Units collectively are unable to complete the performance tests contemplated by Section 7.15 such that the Seller is not able to provide the certification required under Section 3.2(k), and (y) the Seller fails to retest the combined cycle Unit or the simple cycle Units, as the case may be, which failed to meet the required performance criteria within thirty (30) days of the failed performance test or any such retest, as provided for in Section 7.15, fails to meet the required performance criteria.

4.2     Effect of Termination. No termination of this Agreement pursuant to Section 4.1 shall be effective until written notice thereof is given in accordance with Section 11.10 to the non-terminating party specifying the provision hereof pursuant to which such termination is made. If validly terminated pursuant to Section 4.1, this Agreement shall become wholly void and of no further force and effect without liability to the Purchaser, the Seller, the Project Company or any of its or their respective Subsidiaries, Affiliates, officers, directors, employees, agents, advisors or other representatives, and each shall be fully released and discharged from any liability or obligation under or resulting from this Agreement, and neither the Seller nor the Purchaser shall have any other remedy or cause of action under or relating to this Agreement or any Applicable Law, including, without limitation, for reimbursement of expenses, except that the obligations of the Seller and the Purchaser under the Confidentiality Agreement and the obligations of the parties under this Section 4.2 and Sections 7.5, 7.6 and 7.18 and Articles X and XI of this Agreement shall remain in full force and effect; provided, however, that nothing in this Section 4.2 shall be deemed to release any party from liability for any fraud or willful breach of its obligations under this Agreement in any material respect.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE SELLER

As of the Effective Date and again on the Closing Date, the Seller hereby represents and warrants to the Purchaser as follows:

5.1 Organization and Good Standing.

(a)     The Seller is a limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is formed and has the requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted.

(b)     The Project Company is a limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is formed and has the requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted. The Project

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Company has no subsidiaries and does not own any shares of capital stock or other securities of another Person.

(c)     The Seller has delivered to the Purchaser complete and accurate copies of the Governing Documents of the Project Company.

5.2     Authorization; Enforceability. The Seller has the requisite power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Seller and the consummation by the Seller of the transactions contemplated by this Agreement have been duly authorized by all necessary action on the part of the Seller and its Affiliates. This Agreement has been duly executed and delivered by the Seller and, assuming the due execution and delivery by the Purchaser, constitutes a legal, valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms.

5.3 No Violation; Consents.

(a)     Except as set forth on Section 5.3(a) of the Seller’s Disclosure Schedule, and subject to obtaining the Seller Approvals set forth on Section 5.3(b) of the Seller’s Disclosure Schedule, the execution and delivery by the Seller of this Agreement and the consummation by the Seller of the transactions contemplated hereby do not and will not:

(i)      violate, contravene, conflict with or result in the breach of any provision of the Governing Documents of, or resolutions of the boards of directors of, the Seller or the Project Company,

(ii)     violate, contravene, conflict with, result in the breach of or give rise to any right to revoke, withdraw, suspend, modify or terminate any Approval or Consent to which the Seller or the Project Company or any Asset is bound or subject,

(iii)     violate, contravene, conflict with or result in the breach of any Applicable Law,

(iv)    except for Permitted Encumbrances, result in the imposition or creation of any Encumbrance upon the Membership Interest or

(v)     permit any Person the right to declare a default or exercise any remedy under, to accelerate the maturity, performance or payment of or to cancel, terminate or modify any note, bond, mortgage, indenture, license or agreement.

Clauses (ii), (iii), (iv) and (v) shall not apply to any conflict, violation, breach, default, requirement for Consents, rights of acceleration, cancellation, termination or Encumbrance that would not reasonably be expected to have, individually or in the aggregate, a Seller Material Adverse Effect or a Project Company Material Adverse Effect.

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(b)     Except for such Seller Approvals set forth on Section 5.3(b) of the Seller’s Disclosure Schedule, no Approval or Consent issued by, or declaration or filing with, or notification to, or waiver from any Person, is required on the part of the Seller in connection with the execution and delivery of this Agreement, or the performance by the Seller of any provision contained in this Agreement, except for any such requirements the failure of which to obtain or make would not reasonably be expected to have, individually or in the aggregate, a Seller Material Adverse Effect or a Project Company Material Adverse Effect.

5.4 Litigation.

(a)     Except as set forth in Section 5.4(a) of the Seller’s Disclosure Schedule, no Action or Order is pending or, to the Seller’s Knowledge, threatened against the Seller, the Project Company or its business, any Asset or any of the Seller’s Affiliates that seeks to restrain or prohibit or otherwise challenge the consummation, legality or validity of this Agreement or the transactions contemplated hereby.

(b)     Except as set forth in Section 5.4(b) of the Seller’s Disclosure Schedule, none of the Seller, the Project Company or its business or any Asset (i) is subject to any outstanding Order or (ii) is a party or, to the Seller’s Knowledge, is contemplated or threatened to be made a party to any action, suit, proceeding, hearing or investigation of, in, or before any court or quasi judicial or administrative agency of any federal, state, local or foreign jurisdiction or before any arbitrator that would reasonably be expected to have, individually or in the aggregate a Seller Material Adverse Effect or Project Company Material Adverse Effect.

5.5 Compliance with Law.

(a)     Applicable Law. The Seller and the Project Company have complied in all material respects with all Necessary Approvals and all Applicable Laws other than Environmental, Health and Safety Laws, which are the subject of Section 5.6. Except as set forth in Section 5.5(a) of the Seller’s Disclosure Schedule, the Seller has not received notification that it has violated any Necessary Approval or any Applicable Law other than Environmental, Health and Safety Laws, which are the subject of Section 5.6.

(b) Necessary Approvals.

(i)      Except as set forth on Part A of Section 5.5(b)(i) of the Seller’s Disclosure Schedule, the Project Company holds all Approvals, including occupancy permits, that are required to be obtained from a Governmental Authority under Applicable Laws other than Environmental, Health and Safety Laws, which are the subject of Section 5.6, in connection with the use, operation or ownership of the Project and the conduct of the Project Company’s business as currently conducted (“Necessary Approvals”). All Necessary Approvals are listed in Part B of Section 5.5(b)(i) of the Seller’s Disclosure Schedule. Any application for the renewal of any such Necessary

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Approval due prior to the Closing Date has been, or will be, timely filed prior to the Closing Date.

(ii)     Except as set forth in Section 5.5(b)(ii) of the Seller’s Disclosure Schedule, all Necessary Approvals are in full force and effect, and no proceeding to modify, suspend, revoke, withdraw, terminate or otherwise limit any Necessary Approval is pending or, to the Knowledge of the Seller, threatened. No administrative or governmental action has been taken or, to the Knowledge of the Seller, threatened in connection with the expiration, continuance or renewal of any Necessary Approval.

(iii)     Except as noted in Section 5.5(b)(iii) of the Seller’s Disclosure Schedule, the sale of the Membership Interest contemplated herein will not cause any Necessary Approval material to the continuing operation of the Project to become invalid or subject to reissuance or modification.

5.6   Environmental Matters. Except as set forth in Section 5.6 of the Seller’s Disclosure Schedule:

(a)     the Project Company is and has been at all times and in all material respects in compliance with all applicable Environmental, Health and Safety Laws, which compliance includes, but is not limited to, the possession of all Approvals required under applicable Environmental, Health and Safety Laws to own and operate the Project, and compliance with the terms and conditions thereof;

(b)     all material Approvals currently held by the Project Company pursuant to the Environmental, Health and Safety Laws are identified in Section 5.6(b) of the Seller’s Disclosure Schedule;

(c)     the Project Company has not received any communication that alleges that the Project Company is not in compliance with all applicable Environmental, Health and Safety Laws;

(d)     no Environmental Claim is pending or, to the Seller’s Knowledge, threatened against the Project Company;

(e)     to the Knowledge of the Seller, there are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge, presence or disposal of any Material of Environmental Concern that could reasonably be expected to form the basis of any material Environmental Claim against the Project Company;

(f)     neither the Seller nor the Project Company has entered into, and the Facility is not subject to, any Action, Order, judgment, suit, proceeding, decree, agreement, injunction or, to the Knowledge of the Seller, any material investigation or inquiry, of any Governmental Authority relating to Liabilities under any Environmental, Health and Safety Laws, other than matters that have been resolved in a final and binding

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proceeding and for which neither the Project Company nor the Facility has any further Liability; and

(g)     to Seller’s Knowledge neither Seller nor the Project Company has received from any Governmental Authority, notification of a material requirement to take action to comply with any applicable Environmental, Health and Safety Laws (including Approvals required thereunder) with respect to the Project, and which action has not yet been completed.

5.7     Ownership. The Seller is, and on the Closing Date will be, the sole record and beneficial owner of the Membership Interest, free and clear of all Encumbrances other than those created by this Agreement and requirements under Applicable Law. The Seller does not own any securities issued by, or other obligations of, the Project Company other than the Membership Interest, and other than by virtue of its sole ownership of the Membership Interest, the Seller does not own any of the Assets. Such Membership Interest has been duly authorized and validly issued, is fully paid and, except as may be expressly set forth in the Governing Documents, has no requirements for the owner thereof to make additional contributions to, or be liable for, the obligations of the Project Company. Other than pursuant to this Agreement there are not, and at the Closing there will not be, any existing options, warrants, calls, rights of preemption, subscriptions or other rights or other agreements or commitments of any character to acquire any membership interests of the Project Company, or securities convertible into or exchangeable for or which otherwise confer on the holder thereof any right to acquire any interest in the Project Company, nor is the Project Company committed to issue, sell or otherwise cause to become outstanding any such option, warrant, right or security.

5.8     Title to Assets. The Project Company has good, valid and marketable title to all the Assets that it purports to own free and clear of all Encumbrances (except for Permitted Encumbrances and except for properties and assets disposed of in the Ordinary Course of Business since the date of the Financial Statements) including all the Assets reflected in the Financial Statements and all Assets purchased by the Project Company since the Most Recent Fiscal Year End, which subsequently acquired personal properties and assets (other than inventory and short term investments) are listed in Section 5.8 of the Seller’s Disclosure Schedule; provided that the Project shall only be subject to Permitted Real Estate Encumbrances.

5.9     Description of Real Property. Section 5.9 of the Seller’s Disclosure Schedule contains a correct legal description of the Real Property. The Project constitutes all real property currently owned by the Project Company. Ownership of the Project is sufficient for the Project Company to conduct its business in the Ordinary Course of Business. Neither the Seller nor the Project Company has received notice of the institution or proposed institution of any condemnation proceedings in respect of any of the Real Property. Except as set forth in Section 1.1(C) of the Seller’s Disclosure Schedule and in the last sentence of this Section 5.9, the Project Company is not a party to any lease, sublease, license or occupancy agreement of or with respect to the Project or any other real property, nor is the Project subject to any lease, sublease, license or occupancy agreement. A true and complete copy of each of the following

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documents have either been delivered or made available to the Purchaser(all recording references are to the Register of Deeds of Rowan County, North Carolina): (a) North Carolina Special Warranty Deed (Book 931, Page 740 and Book 955, Page 825); (b) North Carolina Non-Warranty Deed (Book 931, Page 741); (c) Easement (Book 868, Page 340); (d) Assignment and Assumption of Easement, dated as of May 22, 2000, between CP&L and Duke Energy Corporation (Recording information unknown); (e) Right of Way Agreement (Book 377, Page 535); (f) General Permit (Book 380, Page 3); (g) Easement (Book 889, Page 282): (h) Easement (Book 404, Page 237); (i) Right of Way Agreement (Book 890, Page 257); (j) Easement, dated April 30, 2001, from CP&L in favor of BellSouth Telecommunications, Inc. (Recording information unknown); (k) Right of Way Agreement (Book 935, Page 737); (l) Agricultural Lease, dated October 26, 1999, between CP&L and Bobby K. Waller (unrecorded); and (m) Lease, dated August 28, 2000, between CP&L and Duke Energy Corporation (unrecorded).

5.10 Condition of Facilities.

(a)     Other than as part of routine or planned maintenance in the Ordinary Course of Business, no material item of Tangible Personal Property or any portion of the Improvements is in need of major repair or replacement.

(b)     Except as set forth in Section 5.10(b) of the Seller’s Disclosure Schedule, there are no pending material claims for defective work, equipment or materials relating to the Facility made by the Project Company or the Seller against any Person.

(c)     To Seller’s Knowledge, (i) use of the Real Property for the various purposes for which it is presently being used is permitted as of right under all applicable zoning Laws, and (ii) all Improvements are in compliance with all Applicable Laws, including those pertaining to zoning, building and the disabled. The Seller has not received notice, written or otherwise, to the effect that there is an existing or proposed plan to modify or realign any street or highway or any existing or proposed eminent domain proceeding that would result in the taking of all or any part of the Facility or that would prevent or hinder the continued use of the Facility as heretofore used in the conduct of the business of the Project Company.

(d)     The Seller has delivered to the Purchaser the most current “as-built” drawings of the Facility in the possession or control of the Project Company or the Seller.

5.11    Financial Advisors. The Purchaser is not and will not become obligated to pay any fee or commission or like payment to any broker, finder or financial advisor as a result of the consummation of the transactions contemplated by this Agreement based upon any arrangement made by or on behalf of the Project Company, the Seller or any Affiliates of the Seller.

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5.12 Employees; Employee Benefits.

(a)     The Project Company does not have, and on the Closing Date will not have, any employees. The Project Company has no liabilities or obligations with respect to any Employees or any other individuals (including, but not limited to, contract workers, lease employees or temporary employees) that have performed work at or in connection with the Facility or in connection with the business of the Project Company.

(b)     The Project Company does not sponsor and has not in the past sponsored any Employee Plans. The Project Company has no liability or obligation with respect to any Employee Plans of any ERISA Affiliate.

(c)     Except as set forth on Section 5.12(c) of the Seller’s Disclosure Schedule, no Employee is covered by an employment agreement or any other contractual obligation to continue employment with either the Seller or any Affiliate of the Seller.

(d)     None of the Project Company, the Seller or any Affiliate of the Seller has made any commitments or representations to any Person regarding (i) employment by the Purchaser at the Facility after the Closing Date, (ii) any benefits to be provided by the Purchaser or Affiliates of the Purchaser after the Closing Date, or (iii) any other terms and conditions of employment by the Purchaser following the Closing Date.

(e)     With respect to the Employees, the Project Company, the Seller and all Affiliates of the Seller are in compliance with the Worker Adjustment and Retraining Notification Act (the “WARN Act”), if applicable, and the Project Company, the Seller or Affiliates of the Seller have provided all affected Employees with all notices, if any, required under the WARN Act within the time periods required by the WARN Act.

(f)     Except as set forth in Section 5.12(f) of the Seller’s Disclosure Schedule, the Project Company, the Seller and all Affiliates of the Seller have complied in all material respects with all Applicable Laws relating to the employment of the Employees, including terms and conditions of employment, equal employment opportunity, nondiscrimination, immigration, wages, hours, benefits and other employment practices, the payment of social security and similar Taxes and occupational safety and health.

5.13    Labor Matters. None of the Seller, the Project Company or any of their Affiliates is a party to or bound by any collective bargaining or similar agreement with any labor organization relating to the Employees, all of whom are employees of Progress Ventures and not of the Project Company, and the Seller has no Knowledge of (a) any current or planned employee union or organizing activities relating to the Employees, (b) any union claiming to represent any of the Employees, and (c) any current or threatened strike, dispute, slowdown, stoppage or lockout actually pending relating to the Employees.

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5.14    Financial Statements. Provided as Section 5.14 of the Seller’s Disclosure Schedule are annual unaudited balance sheets and statements of income as of and for the periods ended December 31, 2003, December 31, 2004 and December 31, 2005 (with the period ended December 31, 2005 being, the “Most Recent Fiscal Year End”) for the Project Company (with respect to the Most Recent Fiscal Year End, the “Financial Statements”). Except with respect to the operations, assets and liabilities reflected in the agreements to be assigned and assumed pursuant to Sections 3.2(g) and 3.2(i), the Financial Statements (including the notes thereto) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, present fairly the financial condition of the Project Company as of such dates and the results of operations (and changes in financial position, if any) of the Project Company for such periods, are correct and complete, and are consistent with the books and records of the Project Company.

5.15    Events Subsequent to Most Recent Fiscal Year End. Except with respect to the operations, assets and liabilities reflected in the agreements to be assigned and assumed pursuant to Sections 3.2(g), and 3.2(i), since the Most Recent Fiscal Year End, no event, condition or circumstance has arisen that has caused or is reasonably expected to cause a Project Company Material Adverse Effect.

5.16    Minute Books. The minute books of the Project Company are complete and correct in all material respects and have been maintained in accordance with sound business practices. The minute books of the Project Company contain accurate and complete records of all meetings of, and corporate action taken by, the Seller in its capacity as sole owner of the Membership Interest in the Project Company, and no meeting of the Seller acting in such capacity has been held for which minutes have not been prepared and are not contained in such minute books. Except as set forth in Section 5.16 of the Seller’s Disclosure Schedule, the Seller has heretofore delivered to the Purchaser true and complete copies of all minute books of the Project Company.

5.17    Emissions Allowances. The Project Company owns all right, title and interest in and to all Emissions Allowances as they relate to the Facility, which such Emissions Allowances are set forth in Section 5.17 to the Seller’s Disclosure Schedule.

5.18    Undisclosed Liabilities. Except (a) as set forth in Section 5.18 of the Seller’s Disclosure Schedule and the other exhibits and schedules hereto, (b) as disclosed in the Financial Statements or in any notes thereto, (c) for liabilities and obligations incurred in the Ordinary Course of Business and (d) with respect to the operations, assets and liabilities reflected in the agreements to be assigned and assumed pursuant to Sections 3.2(g) and 3.2(i), to the Knowledge of the Seller, the Project Company does not have any other material Liabilities. Other than as set forth in the Financial Statements or as to which the Project Company in good faith has disputed or determined to dispute or not pay, no unpaid invoices, bills representing amounts alleged to be owed by the Project Company or other alleged obligations of the Project Company exist which are material to the business or operations of the Project Company.

5.19 Taxes.

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(a)     Except as set forth in Section 5.19(a) of the Seller’s Disclosure Schedule, the Seller, with respect to the Project Company, and the Project Company have filed or caused to be filed on a timely basis all Tax Returns with respect to Taxes that are or were required to be filed pursuant to Applicable Laws. All such Tax Returns filed by the Seller, with respect to the Project Company, and the Project Company are true, correct and complete in all material respects. The Seller, with respect to the Project Company, and the Project Company have paid, or made provision for the payment of, all Taxes that have or may have become due for all periods covered by such Tax Returns, or pursuant to any assessment received by the Seller, with respect to the Project Company, or the Project Company, except such Taxes, if any, as are not yet delinquent or are listed in Section 5.19(a) of the Seller’s Disclosure Schedule and are being contested in good faith. Except as set forth in Section 5.19(a) of the Seller’s Disclosure Schedule, no claim has ever been made or, to the Knowledge of the Seller, proposed or threatened by any Taxing Authority in a jurisdiction where the Seller, with respect to the Project Company, or the Project Company does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. There are no Encumbrances for Taxes on any Assets, except to the extent of statutory Encumbrances for Taxes accruing but not yet due and payable or which are being contested in good faith by appropriate proceedings.

(b)     There is no dispute or claim concerning any Taxes of the Seller, with respect to the Project Company, or the Project Company claimed or raised by any Governmental Authority in writing or, to the Knowledge of the Seller, proposed or threatened. Except as described in Section 5.19(b) of the Seller’s Disclosure Schedule to this Agreement, the Seller, with respect to the Project Company, and the Project Company have not given or been requested to give waivers or extensions of any statute of limitations relating to the payment of Taxes of the Seller, with respect to the Project Company, or the Project Company for any open taxable years or periods.

(c)     Except as set forth in Section 5.19(c) of the Seller’s Disclosure Schedule, all Taxes that the Seller, with respect to the Project Company, or the Project Company is or was required by Applicable Law to withhold, deduct or collect have been duly withheld, deducted and collected and, to the extent required, have been paid to the proper Governmental Authority or other Person, and all Tax Returns, including but not limited to Forms W-2 and 1099 (and any similar forms, reports or statements required under state, local or foreign law), required with respect thereto have been properly completed and timely filed.

(d)     The Project Company is classified as a “disregarded entity” within the meaning of Treasury Regulation Section 301.7701-2(a), and has not made an election to be treated as an association within the meaning of Treasury Regulation Section 301.7701-3.

(e)     None of Progress Energy ortheSeller, with respect to the Project Company, or the Project Company has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could obligate the Project Company to make any payments that are not deductible under Code Section 280G subsequent to the Closing Date.

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(f)     Except as set forth in Section 5.19(f) of the Seller’s Disclosure Schedule, the Assets have not been classified by any Taxing Authority under the designation authorized by Law to obtain a special low Property Tax rate or to receive a reduction, abatement or deferment of Property Taxes.

5.20  Intellectual Property. Except as set forth in Section 5.20 of the Seller’s Disclosure Schedule, the Project Company does not own, or directly license from a third party, any Intellectual Property. The Project Company either owns free and clear of all Encumbrances, or possesses sufficient rights to use, all Intellectual Property listed in Section 5.20 of the Seller’s Disclosure Schedule (the “Intellectual Property Assets”).

5.21 Insurance.

(a)     Section 5.21 of the Seller’s Disclosure Schedule to this Agreement sets forth a list of (1) all insurance policies (A) to which the Seller, with respect to the Project Company, or the Project Company is a party, named insured or otherwise the beneficiary and (B) which are currently in force or under which the Seller, with respect to the Project Company, or the Project Company could potentially still submit claims for losses with respect to the Project, and (2) all pending applications therefor as are applicable to cover the Assets. The Seller has delivered to the Purchaser:

(i)      accurate and complete copies of all policies of insurance (and material correspondence relating to coverage thereunder) listed in Section 5.21 of the Seller’s Disclosure Schedule to this Agreement; and

(ii)     accurate and complete copies of all pending applications by the Project Company for policies of insurance as listed in Section 5.21 of the Seller’s Disclosure Schedule.

(b)     All policies of insurance described in Section 5.21 of the Seller’s Disclosure Schedule to this Agreement: (A) are valid and enforceable; (B) are sufficient for compliance with all Applicable Laws and Material Agreements; and (C) do not provide for any retrospective premium adjustment or other experienced-based liability on the part of the Project Company.

(c)     As regards the policies described in Section 5.21 of the Seller’s Disclosure Schedule to this Agreement, the Project Company has not received (i) any refusal of coverage or any notice that a defense will be afforded with reservation of rights or (ii) any notice of cancellation or any other indication that any such policy of insurance is no longer in full force or effect or that the issuer of any such policy of insurance is not willing or able to perform its obligations thereunder.

(d)     As regards the policies described in Section 5.21 of the Seller’s Disclosure Schedule to this Agreement, the Project Company has paid all premiums due, and has otherwise performed all of its material obligations under each such policy of insurance.

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5.22    Contracts. Section 5.22 of the Seller’s Disclosure Schedule lists the following types of contracts and other agreements, as they may have been amended, (“Material Agreements”) to which the Project Company is a party:

(a)     any agreement that involves delivery of power, including the Duke Power Contracts and the NCMPA Contracts, performance of services or procurement or delivery of equipment, materials or supplies, or the conveyance of rights (e.g., transmission rights), to the Project Company of an amount or value in excess of one hundred thousand U.S. dollars ($100,000);

(b)     any agreement affecting the ownership of, leasing of, title to, use of or any leasehold or other interest in any real or personal property that, in the case of personal property, is of an amount or value in excess of one hundred thousand U.S. dollars ($100,000);

(c)     any agreement (however named) involving a sharing of profits, losses, costs or liabilities by the Project Company with any other Person;

(d)     any agreement containing covenants that in any material way purport to restrict the Project Company’s business activity or limit the freedom of the Project Company to engage in business or to compete with any Person;

(e)     any power of attorney of the Project Company that is currently effective and outstanding;

(f)     any material written warranty, guaranty or other similar undertaking with respect to contractual performance, which was extended (i) by or on behalf of the Project Company or (ii) to the Project Company;

(g)     each Affiliated Contract or other intercompany arrangement between the Project Company and its Affiliates, exclusive of any agreement set forth on Section 3.2(h) of the Seller’s Disclosure Schedule; and

(h)     any amendment, supplement and modification (whether oral or written) in respect of any of the foregoing.

With respect to each Material Agreement of the Project Company: (A) a true and complete copy of such Material Agreement was made available to the Purchaser in connection with its due diligence; (B) such Material Agreement will in all material respects continue to be legal, valid, binding and enforceable against the Project Company, without amendment, except as permitted in Section 7.2(b), and, to the Seller’s Knowledge, enforceable against the other party thereto, following the consummation of the transactions contemplated hereby except for Affiliated Contracts; (C) the Project Company is not in material breach or default and has not given or received any notice regarding any alleged material violation or breach of, or material default under, any Material Agreement being transferred to the Purchaser, and, to the Seller’s Knowledge, no other party is in material breach or default, and no event or circumstance has occurred which with provision of notice or expiration of any applicable cure period would

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constitute a material breach or default, or permit termination, modification, or acceleration, under the Material Agreement; (D) no party has repudiated any material provision of any Material Agreement; and (E) there are no negotiations or attempts to renegotiate any material amounts paid or payable to the Project Company under the Material Agreements with any Person having the right to demand or require such renegotiation and no written notice of such demand has been received by the Project Company.

5.23  Guaranties. The Project Company is not a guarantor or otherwise liable for any liability or obligation (including indebtedness) of any other Person, and no other Person is a guarantor or otherwise liable for any liability or obligation of the Project Company except with respect to the PGN Guaranties.

5.24    Bank Accounts. The Project Company does not maintain any accounts or safety deposit boxes of any nature with any bank, trust company, savings and loan association, brokerage house or other financial institution.

5.25    Business. The only business engaged in by the Project Company is the construction, ownership, operation and maintenance of the Project, the generation and wholesale sale of electric energy and capacity from the Facility and any and all other activities related or incidental to the foregoing.

5.26    Accounts Receivable. The Seller and the Project Company have provided to the Purchaser a true and correct aging report for all material accounts receivable of the Project Company, and neither the Seller nor the Project Company has received any notice of any contest claim or request of setoff from any obligor of any such accounts receivable relating to the amount or validity of such accounts receivable.

5.27    Solvency. The Seller is not insolvent and will not be rendered insolvent by any of the transactions contemplated hereunder. As used in this Section 5.27, “insolvent” means the inability of a Person to pay his debts when they become due.

ARTICLE VI

REPRESENTATIONS AND WARRANTIES OF PURCHASER

As of the Effective Date and again on the Closing Date, the Purchaser hereby represents and warrants to the Seller as follows:

6.1     Organization and Good Standing. The Purchaser is a limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is formed and has the requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted.

6.2     Authorization; Enforceability. The Purchaser has the requisite power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Purchaser and the consummation by the Purchaser of the transactions contemplated

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hereby have been duly authorized by all necessary action on the part of the Purchaser and its Affiliates. This Agreement has been duly executed and delivered by the Purchaser and, assuming the due execution and delivery by the Seller, constitutes a legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms.

6.3 No Violation; Consents.

(a)     Except as set forth on Section 6.3(a) of the Purchaser’s Disclosure Schedule, and subject to obtaining the Purchaser Approvals set forth on Section 6.3(b) of the Purchaser’s Disclosure Schedule, the execution and delivery by the Purchaser of this Agreement and the consummation by the Purchaser of the transactions contemplated hereby do not and will not:

(i)      violate, contravene, conflict with or result in the breach of any provision of the Governing Documents of, or resolutions of the board of directors of, the Purchaser,

(ii)     violate, contravene, conflict with, result in the breach of or give rise to any right to revoke, withdraw, suspend, modify or terminate any Approval or Consent to which the Purchaser is bound or subject,

(iii)     violate, contravene, conflict with or result in the breach of any Applicable Law or

(iv)    permit any Person the right to declare a default or exercise any remedy under, to accelerate the maturity, performance or payment of or to cancel, terminate or modify any note, bond, mortgage, indenture, license or agreement.

Clauses (ii), (iii) and (iv) shall not apply to any conflict, violation, breach, default, requirement for Consents, rights of acceleration, cancellation, termination or Encumbrance that would not reasonably be expected to have, individually or in the aggregate, a Purchaser Material Adverse Effect.

(b)     Except for such Purchaser Approvals set forth on Section 6.3(b) of the Purchaser’s Disclosure Schedule, no Approval or Consent issued by, or declaration or filing with, or notification to, or waiver from any Person, exclusive of internal and corporate authorizations that have been obtained, is required on the part of the Purchaser in connection with the execution and delivery of this Agreement, or the performance by the Purchaser of any provision contained in this Agreement, except for any such requirements the failure of which to obtain or make would not reasonably be expected to have, individually or in the aggregate, a Purchaser Material Adverse Effect.

6.4     Litigation. There is no Action or Order pending or, to the Knowledge of the Purchaser, threatened against the Purchaser or any of its Affiliates or Subsidiaries that seeks to restrain or prohibit or otherwise challenge the consummation, legality or validity of the transactions contemplated hereby.

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6.5     Investment Intent.The Purchaser is buying the Membership Interest for investment purposes and not with a view toward, or for sale in connection with, any distribution thereof, nor with any present intention of distributing or selling the Membership Interest.

6.6     Financial Capability. The Purchaser will have on the Closing Date sufficient cash to purchase the Membership Interest and to consummate the transactions contemplated by this Agreement, including, without limitation, payments of fees and expenses contemplated hereunder.

6.7     Financial Advisors. None of the Seller or any of its Affiliates is or will become obligated to pay any fee or like payment to any broker, finder or financial advisor as a result of the consummation of the transactions contemplated by this Agreement based upon any arrangement made by or on behalf of the Purchaser.

6.8     Solvency. The Purchaser is not insolvent and will not be rendered insolvent by any of the transactions contemplated hereunder. As used in this Section 6.8, “insolvent” means the inability of a Person to pay his debts when they become due.

ARTICLE VII

COVENANTS

7.1     Access to Information. Prior to the date hereof, the Purchaser has conducted due diligence on the Project Company and has had access to or received the properties, books, records and personnel of the Project Company. Between the date hereof and the Closing, the Seller shall, and shall cause the Project Company to, in response to reasonable requests of the Purchaser and its representatives (including its legal advisors and accountants) therefor, provide additional access, during normal business hours and upon reasonable advance notice, to the properties, books, records and personnel of the Project Company and the Facility and Real Property; provided, that in no event shall the Seller or the Project Company be obligated to provide (i) any access to information that is repetitive or duplicative of access previously provided, (ii) access or information in violation of Applicable Law, (iii) bids, letters of intent, expressions of interest, or other proposals received from others in respect of the Project Company or in connection with the transactions contemplated by this Agreement or otherwise, and information and analyses relating to such communications, or (iv) any information, the disclosure of which would jeopardize any privilege available to the Seller, the Project Company or any of their respective Affiliates relating to such information or would cause the Seller, the Project Company or any of their respective Affiliates to breach a confidentiality obligation to which it is bound. In connection with such access, the Purchaser’s representatives shall cooperate with the Seller’s and the Project Company’s representatives and shall use their reasonable best efforts to minimize any disruption of the business of the Seller and the Project Company. The Purchaser agrees to abide by the terms of the Confidentiality Agreement and any safety rules or rules of conduct reasonably imposed by the Seller, the Project Company or their respective Affiliates or the operator of any such entity, as the case may be, with respect to such access and any

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information furnished to them or their representatives pursuant to this Section 7.1. Without regard to Section 10.6(b), the Purchaser shall indemnify, defend and hold harmless the Seller, the Project Company, their Affiliates and their respective officers, directors, employees and agents from and against any and all Liabilities asserted against or suffered by them relating to, resulting from, or arising out of, the examinations or inspections made by the Purchaser or its representatives pursuant to this Section 7.1.

7.2 Conduct of the Business Pending the Closing.

(a)     Except as otherwise expressly contemplated by this Agreement and the schedules attached hereto or with the prior written consent of the Purchaser (which consent shall not be unreasonably withheld, delayed or conditioned), during the period from the date hereof to and through the Closing Date, the Seller shall preserve in all material respects its business operations, organization and goodwill and shall use commercially reasonable efforts, subject to compliance with any contractual obligations, to cause the Project Company to: (i) conduct its business in the Ordinary Course of Business and in material compliance with all Applicable Laws, Approvals and contractual obligations; (ii) operate and maintain the Facility in accordance with Good Utility Practices; (iii) pay all Liabilities as and when due; (iv) continue in full force and effect the insurance coverage under the policies set forth in Section 5.21 of the Seller’s Disclosure Schedule; and (v) use commercially reasonable efforts to maintain the existing Employees. Further, the Seller will reasonably inform and involve, to the extent practicable provided no privilege is waived, the Purchaser in any defense of the Seller or the Project Company against any audit or investigation by the Federal Energy Regulatory Commission or any other Governmental Authority (except for any audit or investigation during the period prior to the Closing Date relating to U.S. federal income Taxes) that specifically relates in any way to the Assets prior to the Closing Date.

(b)     Except as otherwise expressly contemplated by this Agreement and the schedules attached hereto or with the prior written consent of the Purchaser (which consent shall not be unreasonably withheld, delayed or conditioned), during the period from the date hereof to and through the Closing Date, the Seller shall not and shall cause the Project Company not to (i) make any material modification, amendment or extension to any existing Contract or enter into any additional Contract with a payment commitment by the Project Company in excess of one hundred thousand U.S. dollars ($100,000); (ii) enter into any compromise or settlement of litigation, proceeding or investigation by a Governmental Authority relating to the Assets, other than in the Ordinary Course of Business; (iii) allow the Membership Interest or the Assets to become subject to any Encumbrance other than a Permitted Encumbrance; (iv) issue any additional Membership Interests; (v) merge or consolidate the Project Company with any other Person or allow the Project Company to acquire any assets outside of the Ordinary Course of Business; (vi) sell, lease or otherwise dispose of any Assets other than in the Ordinary Course of Business; (vii) waive any claims or rights of the Project Company in excess of fifty thousand U.S. dollars ($50,000) other than in the Ordinary Course of Business; (viii) incur any indebtedness for borrowed money; (ix) take any affirmative action or fail to take any reasonable action within its control that could result in a Project Company Material Adverse Effect or Seller Material Adverse Effect; (x) make any

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material changes in the levels of inventory of parts or other supplies or materials included in the Tangible Personal Property; (xi) enter into any Affiliated Contracts or other arrangement with its Affiliates; (xii) make any change in management personnel located at the Facility; (xiii) grant any Employee an increase in compensation or benefits other than in the Ordinary Course of Business if any such increase would be applicable for any period after the Closing Date; (xiv) make any Tax election, or enter into any agreement concerning Taxes, with respect to the Assets, if such election or agreement would apply to the Project Company or the Assets for any period after the Closing Date; (xv) sell, lease or otherwise dispose of any Emission Allowance except to the extent necessary to operate the Facility within the Ordinary Course of Business; or (xvi) agree or commit to do any of the foregoing.

(c)     For the avoidance of doubt, the foregoing shall not require the Seller, the Project Company or any of their Affiliates or representatives to make any payments, incur any costs, or enter into or amend any contractual arrangements, agreements or understandings, unless such payment, incurrence or other action is required by any Applicable Law or Approval by any Governmental Entity or by contractual obligation.

7.3     Appropriate Action; Consents; Filings. Through the Closing Date, the Seller and the Purchaser shall cooperate with each other and use (and will cause their respective Affiliates and Subsidiaries to use) commercially reasonable efforts (i) to take, or to cause to be taken, all actions, and to do, or to cause to be done, all things reasonably necessary, proper or advisable on their part under this Agreement, Applicable Law or otherwise to consummate and make effective the transactions contemplated by this Agreement, (ii) as soon as practicable after execution of this Agreement, to obtain promptly all Purchaser Approvals and Seller Approvals and (iii) to provide prompt notification to the other parties hereto of any actions pursuant to clauses (i) through (ii) of this Section 7.3. The Purchaser agrees and acknowledges that it must obtain all Necessary Approvals the issuance or renewal of which is required after the Closing Date. For the avoidance of doubt, the Seller shall not be obligated to pay any consideration or incur any additional costs to obtain any Consents from third parties that may be necessary, proper or advisable to consummate the transactions contemplated by this Agreement if such Consents would cost individually, or in the aggregate, more than fifty thousand U.S. dollars ($50,000). No party shall have any Liability to the other in the event it is unable to obtain any of the Seller Approvals or the Purchaser Approvals, as the case may be. Except with respect to a party’s failure to cooperate and take actions contemplated by this Section 7.3, any failure to obtain any Seller Approval or Purchaser Approval hereunder shall not constitute a breach of any representations, warranties or covenants of a party.

7.4     Preservation of Records; Cooperation. Each of the Seller and the Purchaser shall, and on and following the Closing the Purchaser shall cause the Project Company to, preserve and keep in its possession all records held by the Seller or delivered to the Purchaser, as applicable, (including any Tax Returns of the Project Company) on and after the date hereof relating to the business of the Project Company, for a period of the longer of (i) three (3) yearsfollowing the Closing Date or (ii) the

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expiration of the applicable statute of limitations (including extension or waivers thereof) (the applicable period, the “Retention Period”); and shall make such records and personnel available to the other party as may reasonably be required by such party in connection with, among other things, any insurance claims involving, legal proceedings involving, or governmental investigations of the Seller or the Purchaser, as applicable, or any of their respective Affiliates; provided, however, that in no event shall the Seller or the Purchaser be obligated to provide any information the disclosure of which would jeopardize any privilege available to the Seller, the Purchaser, the Project Company or their respective Affiliates relating to such information or which would cause any of the Seller, the Purchaser, the Project Company or their respective Affiliates to breach a confidentiality obligation to which it is bound. In addition, for the applicable Retention Period, the Purchaser shall, and shall cause its Affiliates to, use commercially reasonable efforts to make available to the Seller and its Affiliates all records held by any third party operator of the Project Company as may reasonably be required by the Seller or any of its Affiliates in connection with, among other things, any insurance claims involving, legal proceedings involving, or governmental investigations of, the Seller or any of its Affiliates; provided, however, that in no event shall the Seller or the Purchaser be obligated to provide any information the disclosure of which would jeopardize any privilege available to the Seller, the Purchaser, or their respective Affiliates relating to such information or which would cause any of the Seller, the Purchaser, or their respective Affiliates to breach a confidentiality obligation to which it is bound. Within thirty (30) days of the expiration of any applicable Retention Period, each party shall have the opportunity (but not the obligation), at its sole cost and expense and upon written notice to the other party, to remove and retain all or any part of the records preserved by the other party as the first party may in its sole discretion select.

7.5     Confidentiality. The parties acknowledge that the Purchaser or its Affiliate and the Seller or its Affiliate previously executed a Confidentiality Agreement, dated June 4, 2004 (the “Confidentiality Agreement”), between Progress Ventures, Inc. and Southern Company Services Inc., which Confidentiality Agreement shall continue in full force and effect in accordance with its terms. In addition, the parties agree that the terms and conditions of the transactions contemplated hereby and any access or information provided to the Seller, the Purchaser, or their respective representatives hereunder in connection with the execution hereof shall be subject to the same standards and obligations of confidentiality as set forth in the Confidentiality Agreement.

7.6     Public Announcements. Prior to the Closing Date, none of the Seller, the Purchaser, or any of their Affiliates, or any of their agents or representatives, shall issue any press release or public statement concerning this Agreement or the transactions contemplated hereby without obtaining the prior written approval of the other parties hereto, unless such disclosure is required by Applicable Law, Order or obligations pursuant to any agreement with any national securities exchange or national securities association; provided, that the party intending to make such release shall give the other parties prior notice and shall use its commercially reasonable efforts consistent with such Applicable Law, Order or obligation to consult with the other parties with respect to the text thereof.

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7.7     Use of Name. Following the Closing Date, neither the Purchaser nor any of its Affiliates shall have any right, title or interest in the name “Progress” or “Progress Energy” (or any variation thereof) or any trademarks, trade names, logos or symbols related thereto. As soon as reasonably practicable following the Closing (and in any event, within sixty (60) days thereafter), the Purchaser shall cause the removal of all trademarks, trade names, logos and symbols related to the name “Progress” or “Progress Energy” from any Assets (including all signs) that are visible to, or obtainable by, members of the public.

7.8 Certain Dividends, Assignments and Releases.

(a)     Subject to Section 7.2, prior to or at the Closing, the Seller shall be permitted to cause the Project Company to make dividends, distributions or assignments for nominal consideration of all (i) cash, (ii) cash equivalents and (iii) all intercompany accounts and obligations of the Seller or any of its Affiliates in favor of the Project Company, including without limitation each contract that the Project Company has, as of the date hereof, with the Seller or any of its Affiliates (such accounts and obligations, the “Intercompany Receivables”) until the Seller or any of its Affiliates (other than the Project Company) is the owner and beneficiary of such cash, cash equivalents and Intercompany Receivables and the parties hereto expressly agree that such cash, cash equivalents and Intercompany Receivables or any value related thereto shall not be part of the Membership Interest or any of the value transferred pursuant to this Agreement.

(b)     Prior to or at the Closing, except as set forth on Schedule 7.8(b) the Seller shall cause all Affiliated Contracts, intercompany accounts and obligations that are obligations of the Project Company to the Seller or any of its Affiliates (other than the Project Company), including without limitation each contract that the Project Company has, as of the date hereof, with the Seller or any Affiliate of the Seller, to be assigned to, and assumed by, an entity other than the Project Company, repaid, terminated or otherwise satisfied, without Liability to the Project Company.

(c)     Prior to or at the Closing, the Seller and any Affiliates of the Seller to which the Project Company has any Liabilities shall have released the Project Company from all Intercompany Payables, other than those Liabilities set forth on Schedule 7.8(c).

7.9     Further Assurances. The Seller and the Purchaser agree that from and after the Effective Date, each of them will, and will cause their respective Affiliates to, execute and deliver such further instruments of conveyance and transfer and take such other action as may reasonably be requested by any party hereto to carry out the purposes and intent hereof.

7.10    Supplements to Schedules. The Seller may from time to time prior to ten (10) Business Days preceding any anticipated Closing Date by notice in accordance with this Agreement supplement or amend the Schedules to correct any matter that would otherwise constitute a breach of any representation or warranty contained herein; provided, that if the Purchaser identifies and notifies the Seller of any

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matter that would otherwise constitute a breach of any representation or warranty to the Seller, the Seller shall be required to supplement or amend the Schedules to correct such matter. If any supplement or amendment materially adversely affects the benefits to be obtained by the Purchaser under this Agreement and the Purchaser objects in writing, within the earlier of (i) ten (10) Business Days of receiving notice of any such supplement or amendment or (ii) the anticipated Closing Date, to any purported breach sought to be so cured, then the Purchaser shall have the right to terminate this Agreement. If any such amendment or supplement is necessitated by events (or items that have come to the Seller’s Knowledge where such representation is qualified by the Seller’s Knowledge) subsequent to the Effective Date, then, without prejudice to the Purchaser’s rights related to Casualty Insurance Claims as provided in Section 7.19, the Purchaser’s right of termination shall be the Purchaser’s sole remedy relating to the matters set forth in amendments or supplements to the applicable Schedules. If any amendment or supplement is needed to cure any breach of the Seller’s representations and warranties that were inaccurate or incomplete on the Effective Date, then in addition to any right of termination, the Purchaser shall be entitled to close notwithstanding Knowledge of such breach, the Schedules will not be deemed amended and supplemented for the purposes of the indemnification provisions of Article X and the Purchaser shall not be prohibited pursuant to Section 10.8 from seeking indemnification pursuant to Article X. In all other cases, to the extent the Agreement is not terminated, the Schedules and representations and warranties shall be deemed for all purposes to include and reflect such supplements and amendments as of the date hereof and at all times thereafter, including the Closing Date.

7.11 Environmental Due Diligence.

(a)     Subject to Section 7.1, the Seller and the Project Company shall permit the Purchaser to have reasonable access to the Project during normal business hours, in such a manner as will not unreasonably interfere with operations at the Project, to perform, at the Purchaser’s sole expense, a Phase I environmental assessment of the Project pursuant to ASTM Standard E 1527-05 conducted by a nationally recognized environmental consultant approved by the Seller (whose approval shall not be unreasonably withheld), and, if determined necessary by the Purchaser, a Phase II environmental site assessment conducted by a nationally recognized environmental consultant approved by the Seller. The Purchaser or its representative shall provide notice of the date of the site visit to the designated Project manager at least three (3) Business Days in advance of the commencement of such visit. The Purchaser shall disclose to the Seller and the Project Company all of the results of any such Phase I or II environmental investigation, including providing copies of all reports generated in or as a result of such investigation (excluding any draft reports prepared at the direction of counsel or reports prepared by such counsel for the Purchaser) within three (3) Business Days of the Purchaser’s receipt thereof.

(b)     The scope of work for such Phase II assessments or sampling shall be approved by the Seller prior to the commencement of any such assessment or sampling. The Purchaser shall provide the Seller the opportunity to take, at Seller’s expense, split sampling during any sampling event. The Purchaser shall provide to Seller

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the complete results of any such assessment or sampling, including all laboratory analyses, field notes, boring logs, and the like, including the interpretation of the results by the Purchaser’s environmental consultant (and in the event the Seller elects to take split sampling, the Seller shall provide such results to the Purchaser). Except as provided in this Section 7.11, Purchaser shall not disclose the proposed Phase II assessments or sampling or the results thereof to any Person. The Purchaser shall be solely responsible for the disposal of all sampling material and media.

(c)     In the event that the results of Phase II assessments or sampling indicate a condition for which Environmental, Health and Safety Laws require further investigation, remediation, or other similar response, the Seller shall be entitled to exercise, at its sole discretion, one of the following options: within five (5) Business Days of receiving such assessment (including all of the information required by this Section 7.11 to be disclosed to Seller), notifying the Purchaser in writing of the Seller’s intention to either (A) further investigate, remediate or otherwise respond to any such condition indicated by the Phase II assessments or sampling, at Seller’s sole expense, prior to the Closing or within a reasonable time thereafter or (B) not further investigate, remediate or otherwise respond to any such condition, in which event, the Purchaser may either (1) remediate or otherwise respond to such condition at the Purchaser’s sole expense subsequent to the Closing or (2) terminate this Agreement; provided, that if the condition indicated by the Phase II assessments or sampling is reasonably likely to result in a Project Company Material Adverse Effect, then the Seller shall have the right to terminate this Agreement.

(d)     In the event that Seller and Purchaser fail to agree, after exercising good faith efforts to agree, on any of the following issues, the Seller or the Purchaser may initiate arbitration of such dispute as provided in this Section 7.11. The issues for which such arbitration shall be available include: (i) whether the results of Purchaser’s Phase II investigation, taking into account any results of such Phase II investigation conducted by Seller, constitute a condition for which Environmental, Health and Safety Laws require further investigation, remediation or further similar response; (ii) if Seller exercises the option set forth in Subsection 7.11(c)(A) hereof, whether Seller has performed or completed such further investigation, remediation or further similar response required by Environmental, Health and Safety Laws (including whether Seller has so performed or completed within a reasonable time after the Closing); or (iii) whether the results of Purchaser’s Phase II investigation, taking into account any results of such Phase II investigation conducted by Seller, constitute a condition that is reasonably likely to result in a Project Company Material Adverse Effect.

(e)     In the event either the Seller or the Purchaser elects to initiate arbitration pursuant to Subsection 7.11(d) hereof by written notice to the other, such dispute shall be resolved by the decision of a panel of Environmental Professionals, one each chosen by the Seller and the Purchaser, and the third (to act as chairman) chosen by the other two arbiters (the “Arbitration Panel”); provided, that if the chairman of the Arbitration Panel is not appointed within five (5) days of the notice of a dispute, then the parties may apply to the American Arbitration Association for the purpose of appointing such chairman, who shall have the qualifications set forth herein..

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“Environmental Professional” means a qualified professional who is either an attorney or an environmental or professional engineer, or similar expert, and in any case experienced in matters arising under Environmental, Health and Safety Laws and who is professionally so licensed by the State of North Carolina; and in the case of the chairman of the Arbitration Panel, who is not and has not been employed or retained by either Seller or Purchaser or any Affiliate thereof. Within thirty (30) days after the naming of the Arbitration Panel, the Arbitration Panel shall issue a report resolving the dispute. The Arbitration Panel may at its sole discretion retain the services of a environmental or professional engineer, or similar expert (acceptable to and approved by both Purchaser and Seller) to assist in the Arbitration Panel’s resolution of the dispute. The Arbitration Panel shall resolve the dispute based on a review of the Purchaser’s Phase I or Phase II environmental assessments, the Seller’s split sampling (if any) and written submissions by the Purchaser and Seller setting forth their positions and the reasons in support thereof, after meeting with the parties. The decision of the Arbitration Panel shall be binding upon the Seller and the Purchaser with respect to the dispute so resolved, shall be final, and shall not be subject to judicial review. Each party shall bear its own attorney’s and expert’s costs and fees, and the costs and fees of the chairman of the Arbitration Panel or expert retained by the Arbitration Panel in accordance with this Section 7.11 shall be borne equally by the Purchaser and the Seller.

7.12 Title Insurance and Surveys.

(a)     Title Insurance. In the event the Purchaser elects to purchase a title insurance policy with regard to the Project, such policy shall be purchased from First American Title Insurance Company, Fidelity National Title Insurance Company or Land America. The commitment, any policy of title insurance, and other title costs or charges, including search and exam fees, shall be at the Purchaser’s sole cost and expense.

(b)     Certain Exceptions to Title. The Purchaser shall have the right to object in writing to any title matters that are not Permitted Real Property Encumbrances that are disclosed in any title commitment (or any update thereof) within ten (10) Business Days after receipt thereof by delivering written notice to the Seller. Unless the Purchaser shall timely object to any such title matters, all such title matters shall be deemed to constitute additional Permitted Real Property Encumbrances. Any such title matters which are not Permitted Real Property Encumbrances and which are timely objected to by the Purchaser shall be herein collectively called the “Title Objections.” The Seller may elect (but shall not be obligated) to remove or cause to be removed any Title Objections, which removal will be effected by the issuance of title insurance omitting the Title Objections as exceptions to coverage; provided, that the Seller must so remove and satisfy of record any mortgage, lien, judgment or other Title Objection which may be so removed and satisfied by the payment of a liquidated sum of money. In the event that the Purchaser elects to purchase an owner’s title insurance policy, such policy shall be an ALTA 1992 form owner’s title insurance policy with respect to the Real Property and the Improvements, insuring the Project Company as the fee simple owner in the amount of that portion of the Purchase Price allocated to the Real Property and Improvements, deleting all requirements listed in ALTA Schedule B-1, subject only to the Permitted Real Property Encumbrances, and providing for endorsements requested by

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the Purchaser which may be issued by title insurance companies in the State of North Carolina, including, without limitation, ALTA 9 (comprehensive endorsement), same-as-survey, access, tax lot, contiguity, subdivision and non-imputation endorsements. The Seller hereby agrees to execute and deliver any affidavit, indemnification or other information reasonably required by the title insurer in connection with the issuance of a non-imputation endorsement (or any other endorsement) or otherwise in connection with the issuance of such title insurance policy.

(c)     Survey. The Purchaser hereby accepts the state of facts shown on the survey identified in Schedule 7.12(c). The Purchaser, at its sole cost and expense, may have the aforementioned survey updated. The Purchaser shall have the right to object in writing to any new state of facts not shown on the aforementioned survey that are not Permitted Real Property Encumbrances within ten (10) days after receipt of the updated survey by delivering written notice to the Seller. Any such new state of facts which are timely objected to by the Purchaser shall be herein collectively called the “Survey Objections.” The Seller may elect (but shall not be obligated) to remove or cause to be removed or insured over any Survey Objections, which removal will be deemed effected by the issuance of title insurance eliminating the Survey Objections.

7.13 Transition Plan.

(a)     The parties acknowledge and agree that in order to ensure that upon Closing the transition of the ownership and operation of the Facility is as smooth and orderly as is reasonably practicable, representatives of the Purchaser shall be entitled to become familiar with the Facility and other Assets, and be introduced to, and have the opportunity to meet with, suppliers, other vendors and customers of the Project Company, and to conduct other activities as set forth on the transition plan as determined by the Transition Committee. In connection with such transition, the Purchaser will have reasonable access to the Facility including the communications room, control room and equipment rooms. After the Closing Date, the Seller and Purchaser shall reasonably cooperate to effect the termination of any agreement that is related to the Project and to which the Seller or one of its Affiliates is a party.

(b)     Promptly after the Effective Date, the Seller will inform the Purchaser regarding the planned operation schedule of each Unit for the next six (6) months. The Purchaser shall be allowed to send observers to the Facility to observe the operation of each of the Units. Such observers may return to the Facility on multiple occasions, including such occasions as may be necessary for the observers to observe each Unit’s operations immediately after the Effective Date and to observe their operations immediately prior to the scheduled Closing Date. The observers shall be allowed to monitor and record performance of each Unit and shall be allowed access to historical performance data following operation and shutdown of each of the Units; provided, that the Seller or its Affiliates shall not be required to incur any expenses for such monitoring or access other than expenses the Seller or its Affiliates would incur in the absence of such monitoring or access unless the Purchaser agrees to pay for such incremental expenses. Items that may be monitored will include, without limitation: (i) individual CT gross power output (at the generator terminals); (ii) individual CT fuel

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consumption; (iii) ambient temperature; (iv) ambient pressure; (v) ambient relative humidity; (vi) average exhaust temperature; (vii) exhaust temperature profile; (viii) compressor discharge pressure; (ix) compressor discharge temperature; (x) IGV angle; (xi) water injection flow rate (if applicable for oil firing); (xii) NOx emissions; and (xiii) CO2 emissions.

(c)     In order to provide a space for the Purchaser to conduct its business in furtherance of the transition procedures contained in this Section 7.13, the Seller shall, and shall cause the Project Company to, allow the Purchaser to bring onto and maintain on the Real Property a mobile office unit (e.g., a trailer) immediately following the Effective Date. The exact location for the mobile office unit will be agreed to by the Transition Committee and will allow for reasonable access to the Facility. The Seller shall provide a method and labor to connect the mobile office electrical service to the Facility’s station service. Furthermore, the Purchaser shall be permitted to use a third-party contractor to come onto the Real Property and provide services for temporary voice and data connectivity and to stage materials for permanent installation during the transition and post-Closing.

(d)     Except as provided in the foregoing clauses of this Section 7.13, any access to the Project, and any activities undertaken at the Project, by the Purchaser or its Affiliates, any representative of the Purchaser or its Affiliates, or any third party acting on behalf of the Purchaser or its Affiliates must receive the prior express consent of the Seller, its Affiliates or a representative of the Seller or its Affiliates.

(e)     As soon as possible after the date of this Agreement, the Seller and the Purchaser shall create a special transition committee (the “Transition Committee”) that shall be composed of two representatives of the Seller and two representatives of the Purchaser. After the date of this Agreement and prior to the Closing, subject to Applicable Law, the Transition Committee shall exchange information and examine various alternatives regarding the manner in which to best transition management of the Project Company and the Facility to the Purchaser effective as of the Closing Date. The Transition Committee shall hold periodic meetings, which meetings may be held telephonically or in person, and shall act by majority vote.

7.14    Replacement of Credit Support. The parties shall cooperate and use commercially reasonable efforts in order that, effective as of the Closing Date, (a) the PGN Guaranties may be terminated and the credit support procured by Progress Energy or its Affiliates on behalf of the Project Company in connection with the PGN Guaranties, the Duke Contracts or the NCMPA Contracts may be returned and (b) substitute credit support arrangements, if required, of the Purchaser or an Affiliate of the Purchaser shall be in effect.

7.15    Performance Testing. Upon written request and at the direction of the Purchaser, the Seller shall cause the Project Company to conduct performance tests of the Facility in accordance with the testing procedures contained in the Duke Power Contracts, which may be reviewed by the Purchaser, and in accordance with any additional procedures set out in Exhibit P; provided, that the Purchaser shall have the

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option of monitoring and recording the results of such tests or requiring the Project Company to monitor and record such tests; provided, further, that the costs of any such tests shall be paid by the Purchaser. Any such performance tests shall be coordinated to the maximum extent possible to mitigate the costs of such performance tests, including the purchase of fuel for such performance tests. If any such performance test of the combined cycle Unit or the collective combustion turbine Units does not meet the requirements such that the certificate set forth in Section 3.2(k) may be provided, then Seller, at its sole expense shall be permitted to retest such combined cycle Unit or collective combustion turbine Units in order to achieve such requirements; provided that Seller shall only be permitted to perform one such retest with thirty (30) days from the date of the failed test and at least five (5) days prior to Closing.

7.16    No Solicitation. Until such time as this Agreement shall be terminated neither the Seller nor any of its Affiliates shall directly or indirectly solicit, initiate, encourage, discuss or negotiate with or provide any nonpublic information to any Person (other than the Purchaser) relating to any business combination transaction involving the Project Company, including the sale by the Seller of any of the Project Company’s Membership Interest, the merger or consolidation of the Project Company or the sale of the Project Company’s business or any of the Assets.

7.17  Removing Excluded Assets. On or before the Closing Date, the Seller shall remove from the Facility and the Real Property all Excluded Assets as well as any assets and equipment that, as of the Effective Date, are located at the Project and are owned or leased by an Affiliate of the Project Company or some other third party (“Third-Party Assets”). All Third Party Assets valued in excess of one hundred thousand U.S. dollars ($100,000) are set forth in Section 7.17 of the Seller’s Disclosure Schedule. Such removal shall be undertaken in such manner as to avoid any damage to the Facility and other Assets and any disruption of the business operations of the Project Company after the Closing. The cost of any damage to the Facility or any other Assets resulting from such removal shall be paid by the Seller at the Closing. Should the Seller fail to remove the Excluded Assets and Third-Party Assets as required by this Section 7.17, the Purchaser shall have the right, but not the obligation, (a) to remove the Excluded Assets and Third-Party Assets at the Seller’s sole cost and expense; (b) to store the Excluded Assets and Third-Party Assets as unclaimed and to charge the Seller all storage costs associated therewith; (c) thirty (30) days after the Closing Date, to treat the Excluded Assets and Third-Party Assets, except for those Third-Party Assets owned by third parties that are not Affiliates of the Project Company, as unclaimed and to proceed to dispose of the same under the laws governing unclaimed property; or (d) to exercise any other right or remedy conferred by this Agreement or otherwise available at law or in equity. The Seller shall promptly reimburse the Purchaser for all costs and expenses incurred by the Purchaser in connection with any Excluded Assets and Third-Party Assets not removed by the Seller on or before the Closing Date.

7.18 Credit Support.

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(a)     On or before the Effective Date, the Seller will cause Progress Energy to issue a payment and performance guaranty in favor of the Purchaser in the form attached to this Agreement as Exhibit M (the “PGN Parent Guaranty”).

(b)     On or before the Effective Date, the Purchaser will cause Southern Power Company to issue a payment and performance guaranty in favor of the Seller in the form attached to this Agreement as Exhibit N (the “Southern Power Parent Guaranty”).

7.19 Insurance.

(a)     The parties acknowledge and agree that effective upon the Closing, the Seller’s insurance policies shall be terminated or modified to exclude coverage of the Facility by the Seller. Consequently, the Purchaser will at or before the Closing obtain at its sole cost and expense replacement insurance policies providing coverage for claims made and arising after the Closing Date.

(b)     The Seller and the Purchaser agree that Casualty Insurance Claims relating to the Assets or the business of the Project Company (including those already reported and those relating to events that have occurred prior to the Closing but have not yet been reported) shall remain with the Project Company following the Closing. For purposes hereof, “Casualty Insurance Claims” shall mean any claims in respect of events that occurred prior to the Closing under any of the casualty insurance policies relating to business interruption or property or physical damage maintained by the Seller or its Affiliates prior to the Closing with respect to the Assets or business of the Project Company and listed on Schedule 7.19(b) (the “Progress Insurance Policies”). The Seller will, and will cause its Affiliates to, maintain all Progress Insurance Policies in full force and effect at all times prior to the Closing. The parties acknowledge that the Casualty Insurance Claims shall be subject to the terms and conditions of the Progress Insurance Policies. With respect to the Casualty Insurance Claims, the following procedures shall apply: (i) an authorized officer of the Purchaser or the Project Company shall deliver written notice to the Seller of any Casualty Insurance Claim of which it becomes aware following the Closing and which such authorized officer believes in good faith may be covered by any of the Progress Insurance Policies, and (ii) the Seller and its Affiliates shall, in good faith and in cooperation and consultation with the Purchaser, promptly and with due expediency submit, administer, investigate, evaluate and dispose of all Casualty Insurance Claims with the appropriate insurer and the insurance claims service company on behalf of the Purchaser or the Project Company, such that any and all proceeds from such Casualty Insurance Claim will be paid by the Seller or its Affiliates over to the Project Company; provided, however, that from and after the Closing, in no event shall the Seller or any of its Affiliates be required to file any Action or initiate any other proceeding against any underwriter of any Progress Insurance Policy in respect of any Casualty Insurance Claim. For the avoidance of doubt, the Purchaser shall have the right to seek indemnification pursuant to Section 10.6 from the Seller for breaches of the Seller’s obligations pursuant to this Section 7.19(b), but shall not have the right to seek indemnification pursuant to Section 10.6 for any insurer’s failure to pay with respect to any Casualty Insurance Claim.

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(c)     The Purchaser shall pay to the Seller, its Affiliate or any authorized insurance claims service provider the amount of any invoice received from the Seller, its Affiliates or any authorized insurance claims service provider for any reasonable and demonstrable costs and expenses incurred by any such Person in connection with the administration, investigation, evaluation or disposal of any Casualty Insurance Claims on behalf of the Project Company pursuant to Section 7.19(b) within twenty (20) Business Days of receipt of any such invoice; providedthat, the Seller shall pay the cost of any premiums and deductibles due and owing under the respective Progress Insurance Policy relating to any such Casualty Insurance Claims.

(d)     Nothing in this Agreement is intended to provide or shall be construed as providing a benefit or release to any insurer or claims service organization of any obligation under any Progress Insurance Policy. The Seller and the Purchaser confirm that the sole intention of Sections 7.19(b) and (c) is to divide and allocate the benefits and obligations under the Progress Insurance Policies between them as of the Closing Date and not to alter in any manner the rights and obligations of any insurer or contract claims service company thereunder or the rights and obligations of the Seller or the Project Company thereunder. Nothing herein shall be construed as creating or permitting any insurer or contract claims service company the right of subrogation against the Seller or the Purchaser or any of their respective Affiliates in respect of payments made by one to the other under any Progress Insurance Policy.

7.20 Emission Credits.

(a)    If the Closing occurs, the actual total emissions generated by the Facility on or after January 1, 2006, until the Closing Date for which sulfur dioxide Emissions Allowances (“SO2 Emissions Allowances”) are required shall be determined by the parties as soon as practicable after the Closing Date and the Seller shall at its option promptly after such determination either (a) transfer, or cause another Person to transfer, to the Purchaser SO2 Emissions Allowances in the amount required for such emissions or (b) reimburse the Purchaser in an amount equal to the cost of such SO2 Emissions Allowances at the price per such Emission Allowance as published in the Cantor Environmental Brokerage Monthly Market Price Indices (or its successor index) as of the Closing Date.

(b)    If the Closing occurs, Seller and Purchaser agree that the cost of purchasing Emission Allowances required for emissions of oxides of nitrogen generated by operation of the plant (the “NOX Emissions Allowances”) from May 1, 2006 through September 30, 2006 (“Ozone Season”) shall be allocated by determining, as soon as practicable after the end of the Ozone Season, the actual total of such emissions by the Facility for which such Emission Allowances are required from May 1, 2006 through the Closing Date, the actual total of such emissions by the Facility for which such NOX Emission Allowances are required from May 1, 2006 through September 30, 2006, and the difference between such totals. The total NOX Emission Allowances required for operation of the Facility during the entire 2006 Ozone Season shall also be determined and shall be referred to in herein as “Total 2006 Ozone Emission Allowances”. In the event that the Total 2006 Ozone Emission Allowances is 136 or lower, Purchaser shall

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reimburse Seller for 11 NOX Emission Allowances in an amount equal to the cost of such NOX Emission Allowances as of the Closing Date. In the event that the Total 2006 Ozone Emission Allowance is greater than 136 but less than 148, Purchaser shall reimburse Seller in an amount equal to the proportion of the amount of emissions of oxides of nitrogen which were generated by the Facility from the Closing Date through September 30, 2006 compared to the total of such emissions generated by the Facility during the Ozone Season multiplied by the cost of 11 NOX Emission Allowances required for such emissions based on the cost of such NOX Emission Allowances in the open market as of the Closing Date. In the event that the Total 2006 Ozone Emission Allowance is greater than 147, Seller shall reimburse Purchaser in an amount equal to the proportion of the amount of emissions of oxides of nitrogen which were generated by the Facility from May 1, 2006 through the Closing Date compared to the total of such emissions generated by the Facility during the Ozone Season multiplied by the difference between 147 and the Total 2006 Ozone Emission Allowances multiplied by the cost of one such Emission Allowance on the open market as of the Closing Date. Determination of the cost of a NOX Emission Allowance shall be governed by the price of the applicable NOX Emission Allowance as published in the Cantor Environmental Brokerage Monthly Market Price Indices (or its successor index). Seller and Purchaser shall have the option of transferring NOX Emission Allowances to the other in lieu of reimbursing the other for the cost of such NOX Emission Allowances.

ARTICLE VIII

CONDITIONS TO CLOSING

8.1     Conditions Precedent to Obligations of Each Party. The respective obligations of the Seller and the Purchaser to consummate the transactions contemplated by this Agreement are subject to the fulfillment, on or prior to the Closing Date, of each of the following conditions:

(a)     No Order issued by any Governmental Authority of competent jurisdiction preventing the consummation of the transactions contemplated hereby shall be in effect, nor shall any material proceeding initiated by any Governmental Authority of competent jurisdiction having valid enforcement authority seeking such an Order be pending, nor shall there be any action taken, nor any Law or Order enacted, entered or enforced that has not been subsequently overturned or otherwise made inapplicable to this Agreement, that makes the consummation or performance of any of the transactions contemplated hereby illegal;

(b)     Any waiting period (including any extension thereof) applicable to the purchase and sale of the Membership Interest to the Purchaser under the HSR Act shall have been terminated or expired; and

(c)     The Seller Approvals and the Purchaser Approvals shall have been obtained and do not contain or result in any condition, requirement or other term that (i) requires the divestiture or transfer of control of any assets by Purchaser or any of its

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Affiliates or (ii) would result in a Seller Material Adverse Effect, Purchaser Material Adverse Effect or Project Company Material Adverse Effect.

8.2     Conditions Precedent to Obligations of the Purchaser. The obligations of the Purchaser to consummate the transactions contemplated by this Agreement are subject to the fulfillment, on or prior to the Closing Date, of each of the following conditions (any or all of which may be waived by the Purchaser, in whole or in part, subject to Applicable Law):

(a)     The representations and warranties of the Seller contained herein that are qualified as to materiality shall be true and complete in all respects and each such representation or warranty that is not so qualified shall be true and complete in all material respects, in each case as of the date hereof and at and as of the Closing Date, except to the extent that any of such representations or warranties refers specifically to a date other than to the date hereof or the Closing Date, in which case as of such other date;

(b)     The Seller shall have performed and complied with its obligations and covenants required by this Agreement to be performed or complied with by the Seller on or prior to the Closing Date, in all material respects; and

(c)     The Seller shall have delivered to the Purchaser the deliveries contemplated by Section 3.2.

8.3     Conditions Precedent to Obligations of the Seller. The obligations of the Seller to consummate the transactions contemplated by this Agreement are subject to the fulfillment, prior to or on the Closing Date, of each of the following conditions (any or all of which may be waived by the Seller, in whole or in part, subject to Applicable Law):

(a)     The representations and warranties of the Purchaser contained herein that are qualified as to materiality shall be true and complete in all respects and each such representation or warranty that is not so qualified shall be true and complete in all material respects, in each case as of the date hereof and at and as of the Closing Date, except to the extent that any of such representations or warranties refers specifically to a date other than to the date hereof or the Closing Date, in which case as of such other date;

(b)     The Purchaser shall have performed and complied with all obligations and covenants required by this Agreement to be performed or complied with by them on or prior to the Closing Date, in all material respects;

(c)     Progress Energy and Duke Power or NCMPA, as applicable, shall have executed the PGN Guaranty Termination and Release Agreements and any credit support provided under the PGN Guaranties, the Duke Contracts or the NCMPA Contracts returned or terminated;

(d)     The transactions contemplated in the DeSoto Agreement shall have closed, unless any failure to close such transactions was due solely to the Seller’s material breach of the DeSoto Agreement; and

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(e)     The Purchaser shall have delivered to the Seller the deliveries contemplated by Section 3.3.

ARTICLE IX

TAXES

9.1     Sales and Transfer Taxes. All transfer, documentary, recording, notarial, sales, use, registration, stamp, real or personal property (except for Property Taxes described in Section 9.2) and other similar Taxes, fees and expenses (including, but not limited to, all applicable stock transfer or real estate transfer Taxes and including any penalties, interest and additions to such Tax) (“Transfer Taxes”) incurred in connection with this Agreement and the transactions contemplated thereby shall be borne one-half by the Purchaser and one-half by the Seller, regardless of whether any Taxing Authority seeks to collect such Taxes from the Purchaser or the Seller. If required by Applicable Law, the Seller shall duly and timely file all Tax Returns in connection with such Transfer Taxes after consultation with the Purchaser. The Purchase Price does not include any Transfer Taxes imposed in connection with the sale of the Membership Interest. The parties shall cooperate to comply with all requirements relating to Tax Returns for such Transfer Taxes and shall provide each other with such documentation and take such other actions as may be reasonably necessary to minimize the amount of any such Transfer Taxes.

9.2     Property Taxes. Real and personal property ad valorem taxes with respect to the Project (“Property Taxes”), and any rebates relating to such Property Taxes provided for in the Location Assistance Agreement between Rowan County, North Carolina and Carolina Power & Light Company, an Affiliate of the Project Company (“Property Tax Rebate”), for the taxable period that includes the Closing Date shall be prorated on a daily basis through the Closing Date. The Seller shall be liable only for the portion of such Property Taxes attributable to the portion of such taxable period ending on the Closing Date (the “Pre-Closing Period”), and shall be entitled to the portion of any Property Tax Rebate attributable to such Pre-Closing Period. In the event that such Property Tax Rebate is received by either party after the Closing Date, such party shall promptly pay over to the other party the prorated portion of such refund such other party is entitled to under this Section 9.2. If a tax bill in respect of the Property Taxes for the taxable period during which the Closing Date occurs has not been received by the Seller, the pro-ration shall be based upon the actual amount of Property Taxes for the preceding taxable period, and such Property Taxes shall be reprorated promptly following the date that the actual amount of Property Taxes becomes available. Notwithstanding any other provision of this Agreement, (i) if the Seller pays any such Property Tax not attributable to a Pre-Closing Period, the Purchaser will reimburse the Seller upon demand for the amount of such Property Tax paid, and (ii) if the Purchaser pays any such Property Tax attributable to a Pre-Closing Period, the Seller will reimburse the Purchaser upon demand for the amount of such Property Tax paid.

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ARTICLE X

CERTAIN REMEDIES AND LIMITATIONS

10.1 Review.

(a)     No Reliance. The Purchaser has reviewed and has had access to certain documents, records and information and has had the opportunity to ask questions in connection with its decision to enter into this Agreement and to consummate the transactions contemplated hereby. In connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, the Purchaser has not relied upon, and the Purchaser expressly waives and releases the Seller from any liability for any claims (including claims based upon fraudulent inducement) relating to or arising from, any representation, warranty, statement, advice, document, projection, or other information of any type provided by the Seller or any of its Affiliates or any of its representatives, except for those representations and warranties expressly set forth in Article V. In deciding to enter into this Agreement, and to consummate the transactions contemplated hereby, the Purchaser has relied solely upon its own knowledge, investigation, and analysis (and that of its attorneys, accountants, consultants and representatives) and not on any disclosure or representation made by, or any duty to disclose on the part of, the Seller or its Affiliates or any of its representatives, other than the express representations and warranties of the Seller set forth in Article V.

(b)     Limited Duties. Any and all duties and obligations which any party hereto may have to any other party hereto with respect to or in connection with the Membership Interest, the Intercompany Receivables, the Project Company, this Agreement or the transactions contemplated hereby are limited to those specifically set forth in this Agreement. Neither the duties nor obligations of any party hereto, nor the rights of any party hereto, shall be expanded beyond the terms of this Agreement on the basis of any legal or equitable principle or on any other basis whatsoever. Neither any equitable nor legal principle nor any implied obligation of good faith or fair dealing nor any other matter requires any party hereto to incur, suffer or perform any act, condition or obligation contrary to the terms of this Agreement, whether or not existing and whether foreseeable or unforeseeable. Each of the parties hereto acknowledges that it would be unfair, and that it does not intend, to increase any of the obligations of any other party under this Agreement on the basis of any implied obligation or otherwise.

10.2    Limitation of Representations and Warranties. Except for the representations and warranties set forth in Article V, the Seller is not making any other representations or warranties, written or oral, statutory, express or implied, concerning the Membership Interest, or the business, Assets or Liabilities of the Seller or the Project Company. The Purchaser acknowledges that, except as expressly provided in this Agreement, the Seller has not made, and that the Seller hereby expressly disclaims and negates, and the Purchaser hereby expressly waives, any representation or warranty, express, implied, at common law, by statute or otherwise relating to, and the Purchaser hereby expressly waives and relinquishes any and all rights, claims and causes of action against the Seller and any of its Affiliates and representatives in connection with the

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accuracy, completeness or materiality of any information, data or other materials (written or oral) heretofore furnished to the Purchaser and its Affiliates or representatives by or on behalf of the Seller or any of its Affiliates or its representatives in connection therewith. Without limiting the foregoing, the Seller is not making any representation or warranty to the Purchaser with respect to any financial projection or forecast relating to the business, Assets or Liabilities of the Seller or of the Project Company. With respect to any projection or forecast delivered on behalf of the Seller to the Purchaser or its Affiliates or representatives, the Purchaser acknowledges that (i) there are uncertainties inherent in attempting to make such projections and forecasts, (ii) the Purchaser is familiar with such uncertainties, (iii) the Purchaser is taking full responsibility for making its own evaluation of the adequacy and accuracy of all such projections and forecasts furnished to it, and (iv) the Purchaser shall have no claim against the Seller or any of its Affiliates or representatives with respect thereto.

10.3    No Consequential or Punitive Damages. Except with respect to matters involving Losses brought or asserted by third parties obligating either party to indemnify the other pursuant to Section 10.6, no party hereto (or its Affiliates) shall, under any circumstance, be liable to the other party hereto (or its Affiliates) for any consequential, exemplary, special, incidental or punitive damages claimed by such other party under the terms of or due to any breach of this Agreement, including, but not limited to, loss of revenue or income, cost of capital, or loss of business reputation or opportunity.

10.4    No Recourse. No past, present or future director, officer, employee, member, shareholder, incorporator, partner or Affiliate of either party or its Affiliates shall have any Liability for any obligations of such party under this Agreement or for any claim based on, in respect of or by reason of such obligations or their creation, except, with respect to Affiliates, as provided under the terms of the PGN Parent Guaranty and the Southern Power Parent Guaranty.

10.5 Expiration of Representations, Warranties and Covenants.

All of the representations and warranties of the Seller set forth in this Agreement and the other Transaction Documents shall terminate and expire, and shall cease to be of any force or effect, at 5:00 P.M. (Eastern U.S. time) on the date that is two (2) years after the Closing Date (except with respect to the representations and warranties contained in Section 5.19, which shall survive until the applicable statute of limitations expires), and all liability with respect to such representations and warranties shall thereupon be extinguished, except to the extent that notice of an alleged breach of such representations or warranties has been provided to the Seller by the Purchaser before such date; provided, that claims by the Purchaser Indemnitees for indemnification pursuant to Section 10.6(c)(i) due to the breach or inaccuracy of any representation and warranty as of the Effective Date or the Closing Date by the Seller in Sections 5.1, 5.2 and 5.3(a) shall not be subject to any such limitation. All of the representations and warranties of the Purchaser set forth in this Agreement and the other Transaction Documents shall terminate and expire, and shall cease to be of any force or effect, at 5:00 P.M. (Eastern U.S. time) on the date that is two (2) years after the Closing Date, and all liability with respect to such

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representations and warranties shall thereupon be extinguished, except to the extent that notice of an alleged breach of such representations or warranties has been provided to the Purchaser by the Seller before such date; provided, that claims by the Seller Indemnitees for indemnification pursuant to Section 10.6(a)(i) due to the breach or inaccuracy of any representation and warranty as of the Effective Date or the Closing Date by the Purchaser in Sections 6.1, 6.2 and 6.3(a) shall not be subject to any such limitation. No claim or cause of action arising out of the inaccuracy or breach of any representation or warranty may be made following the termination of the applicable survival period referred to in this Section 10.5.

10.6 Indemnification.

(a)     By the Purchaser. Subject to the provisions of this Article X relating to the survival of representations and warranties and the other limitations contained herein, from and after the Closing, the Purchaser agrees to indemnify, defend and hold harmless the Seller and its Affiliates, and their officers, directors, partners, employees, agents, representatives, successors and assigns (“Seller Indemnitees”) against all claims, losses, liabilities, damages, deficiencies, costs and expenses, including, without limitation, losses resulting from the defense, settlement or compromise of a claim or demand or assessment, reasonable attorneys’, accountants’ and expert witnesses’ fees, costs and expenses of investigation, and the costs and expenses of enforcing the indemnification provided hereunder (hereafter individually a “Loss” and collectively “Losses”) incurred by any of the Seller Indemnitees (after deduction of the amount of any insurance proceeds recoverable and any net Tax Benefit) and arising out of or relating to: (i) any breach of any representation or warranty made by the Purchaser in this Agreement or any other Transaction Document, (ii) any breach of any covenant, agreement or other obligation of the Purchaser contained in this Agreement or any other Transaction Document, (iii) any claim for Taxes attributable to the Project Company for periods ending after the Closing Date, (iv) the Purchaser’s share of any Transfer Taxes and Property Taxes determined under Article IX of this Agreement, (v) any Liability of Progress Energy under the PGN Guaranties arising from and after the Closing, and (vi) any Liability of the Project Company from and after the Closing other than those liabilities for which the Seller has agreed to indemnify the Purchaser pursuant to Section 10.6(c) of this Agreement.

(b)     Limitations on Rights of the Seller Indemnitees. Except as set forth below, the Purchaser shall not be required to indemnify the Seller Indemnitees with respect to any claim for indemnification resulting from or arising out of matters described in Section 10.6(a)(i) except to the extent that (i) any such claim is in an amount in excess of [**], and (ii) the aggregate amount of all such claims by the Seller Indemnitees in excess of [**] per claim exceeds [**] (the “Seller Indemnitees’ Threshold”), and then the Seller Indemnitees will be entitled to recover Losses in excess of the Seller Indemnitees’ Threshold; provided, however, that the Purchaser’s maximum combined liability under Section 10.6(a)(i) of this Agreement and Section 10.6(a)(i) of the DeSoto Agreement shall not exceed [**]; provided, however, that claims by the Seller Indemnitees for indemnification pursuant to Section 10.6(a)(i) due to the breach or inaccuracy of any representation and warranty as of the Effective Date or Closing Date by the Purchaser in

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Sections 6.1, 6.2 or 6.3(a) shall not be subject to any such limitations and shall not count toward any such limitations.

(c)     By the Seller. Subject to the provisions of this Article X, from and after the Closing, the Seller agrees to indemnify, defend and hold harmless the Purchaser and its Affiliates, officers, directors, employees, agents and stockholders (collectively, the “Purchaser Indemnitees”) against all Losses incurred by any of the Purchaser Indemnitees (after deduction of the amount of any insurance proceeds recoverable and any net Tax Benefit) and arising out of or relating to: (i) any breach of any representation or warranty made by the Seller in this Agreement or any other Transaction Document, (ii) any breach of any covenant, agreement or other obligation of the Seller contained in this Agreement or any other Transaction Document, (iii) any claim for Taxes attributable to the Project Company for periods ending on or prior to the Closing Date, (iv) any Liability arising from any Affiliated Contract, any Intercompany Payable or any intercompany arrangement referenced in Sections 7.8(b) or 7.8(c) prior to the Closing Date, (v) any Liability with respect to any Excluded Asset, (vi) the Seller’s share of any Transfer Taxes and Property Taxes determined under Article IX of this Agreement, (vii) any Liability of Progress Energy under the PGN Guaranties arising prior to the Closing and (viii) any Liability with respect to any accounts payable (as such term is used and defined under generally accepted accounting practices) by the Project Company, or by the Seller or its Affiliates in connection with the business of the Project Company, accrued prior to the Closing Date (the “Pre-Closing Accounts Payable”).

(d)     Limitations on Rights of the Purchaser Indemnitees. Except as set forth below, the Seller shall not be required to indemnify the Purchaser Indemnitees with respect to any claim for indemnification resulting from or arising out of matters described in Section 10.6(c)(i) except to the extent that (i) any such claim is in an amount in excess of [**] and (ii) the aggregate amount of all such claims by the Purchaser Indemnitees in excess of [**] per claim exceeds [**] (the “Purchaser Indemnitees’ Threshold”), and then the Purchaser Indemnitees will be entitled to recover Losses in excess of the Purchaser Indemnitees’ Threshold; provided, however, that the Seller’s maximum combined liability under Section 10.6(c)(i) of this Agreement and Section 10.6(c)(i) of the DeSoto Agreement shall not exceed [**]; provided, however, that claims by the Purchaser Indemnitees for indemnification pursuant to Section 10.6(c)(i) due to the breach or inaccuracy of any representation and warranty as of the Effective Date or Closing Date by the Seller in Sections 5.1, 5.2, 5.3(a) or 5.19 shall not be subject to any such limitations and shall not count toward any such limitations.

(e) Procedure.

(i)     Third-Party Actions. Any Purchaser Indemnitee or Seller Indemnitee (the “Indemnitee”) shall give the other parties hereto prompt notice of any third-party claim or portion thereof that may give rise to any indemnification obligation under this Article X, together with the estimated amount of such claim and a summary of the material facts known by the Indemnitee regarding the claim, and the indemnitor with respect to such claim (the “Indemnitor”) shall have the right to assume the defense (at the Indemnitor’s expense) of any such claim through counsel of the Indemnitor’s choosing

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by so notifying the Indemnitee within thirty (30) days of the first receipt by the Indemnitor of notice of such claim from the Indemnitee; provided, however, that any such counsel shall be reasonably satisfactory to the Indemnitee. Failure to give such notice shall not affect the indemnification obligations hereunder in the absence of actual and material prejudice. If, under applicable standards of professional conduct, a conflict with respect to any significant issue between any Indemnitee and any Indemnitor exists in respect of such third-party claim, the Indemnitor shall pay the reasonable fees and expenses of such additional counsel as may be required to be retained in order to resolve such conflict. The Indemnitor shall be liable for the fees and expenses of counsel employed by the Indemnitee for any period during which the Indemnitor has not assumed the defense of or is not diligently pursuing the defense of any such third-party claim (other than during any period in which the Indemnitee will have failed to give notice of the third-party claim as provided above). If the Indemnitor assumes such defense, the Indemnitee shall have the right to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by the Indemnitor, it being understood that the Indemnitor controls such defense. If the Indemnitor chooses to defend or prosecute a third-party claim, the Indemnitee shall, at the Indemnitor’s expense, cooperate in the defense or prosecution thereof, which cooperation shall include, to the extent reasonably requested by the Indemnitor, the retention, and the provision to the Indemnitor, of records and information reasonably necessary to the defense of such third-party claim, and making employees of the Indemnitee and its Affiliates available on a mutually convenient basis to provide additional information and explanation of any materials provided hereunder; provided, that the parties shall enter into a reasonable joint defense agreement if necessary to protect any privilege available to the Indemnitee or its Affiliates. If the Indemnitor chooses to defend or prosecute any third-party claim, the Indemnitee shall agree to any settlement, compromise or discharge of such third-party claim that the Indemnitor may recommend and that, by its terms, discharges the Indemnitee and its Affiliates from the full amount of liability in connection with such third-party claim; provided, however, that, without the consent of the Indemnitee, the Indemnitor shall not consent to, and the Indemnitee shall not be required to agree to, the entry of any judgment or enter into any settlement that (A) provides for injunctive or other non-monetary relief affecting the Indemnitee or any of its Affiliates, including a finding or admission of any violation of any Law or Approval of a Government Authority or a violation of the rights of any Person, and (B) does not include as an unconditional term thereof the giving of a release from all liability with respect to such claim by each claimant or plaintiff to each indemnified Person that is the subject of such third-party claim. Notwithstanding the foregoing, if an Indemnitee determines in good faith that there is a reasonable probability that a third-party claim may adversely affect it or its Affiliates other than as a result of monetary damages for which it would be entitled to indemnification under the Agreement (determined without regard to the Threshold), the Indemnitee may, by notice to the Indemnitor, assume the exclusive right to defend, compromise or settle such third-party claim (except for any third-party claim relating to U.S. federal income Taxes), but the Indemnitor will not be bound by any determination of any third-party claim so defended for the purposes of this Agreement or any compromise or settlement effected without its consent.

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(ii)    Other Claims. Any claims for indemnification other than as provided in Section 10.6(a) and 10.6(c) may be asserted by notice from the Indemnitee to the Indemnitor.

(f)     Exclusivity. Except for the right to specific performance provided in Section 10.10 with respect to covenants, the right of each party hereto to refuse to close as and if applicable pursuant to Sections 8.2(a) or 8.3(a) or to terminate the Agreement as and if applicable pursuant to Section 4.1 or following Closing to assert indemnification claims and receive indemnification payments pursuant to this Section 10.6 shall be the sole and exclusive right and remedy exercisable by such party with respect to any breach by the other party hereto of any representation, warranty or covenant in this Agreement or any other Transaction Document.

(g)     Subrogation. To the extent that the Indemnitor makes or is required to make any indemnification payment to the Indemnitee, the Indemnitor shall be entitled to exercise, and shall be subrogated to, any rights and remedies (including rights of indemnity, rights of contribution and other rights of recovery) that the Indemnitee or any of the Indemnitee’s Affiliates may have against any other Person with respect to any Losses, circumstances or matter to which such indemnification payment is directly or indirectly related. The Indemnitee shall permit the Indemnitor to use the name of the Indemnitee and the names of the Indemnitee’s Affiliates in any transaction or in any proceeding or other matter involving any of such rights or remedies; and the Indemnitee shall take such actions as the Indemnitor may reasonably request for the purpose of enabling the Indemnitee to perfect or exercise the Indemnitor’s right of subrogation hereunder. This Section 10.6(g) shall not grant the Indemnitor any rights to sue or otherwise seek recovery from the Indemnitee or any of its Affiliates; provided, that the Indemnitor shall not be limited hereby in raising any action or inaction on the part of the Indemnitee or any of its Affiliates as a defense to any such indemnification.

(h)     Effect of Indemnity Payments. The Purchaser and the Seller hereby agree that any and all indemnity payments made pursuant to this Agreement shall, to the maximum extent permitted by Applicable Law, be treated for all Tax purposes as an adjustment to the Purchase Price.

10.7  No Set-Off. Neither the Purchaser nor the Seller shall have any right to set-off any indemnification obligations that either may have under Section 10.6 against any other obligations or amounts due to the Purchaser or the Seller, as applicable, including, without limitation, under any other provisions of this Agreement or under any other Transaction Document.

10.8    Effect of Investigation. For purposes of this Article X, the Seller shall not be deemed to have breached any representation or warranty if (i) the Purchaser, prior to the Closing Date, had Knowledge of the breach, or facts and circumstances constituting or resulting in a breach, of such representation or warranty, (ii) the breach could have been cured by, or at the direction of, the Seller if the Seller had known of the breach, (iii) the Purchaser did not notify the Seller of the breach pursuant to Section 7.10 and consummated the transactions contemplated hereby notwithstanding such Knowledge

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of the breach and (iv) for the avoidance of doubt, the Purchaser did not acquire its Knowledge of the breach from an amendment or supplement to the Schedules or Exhibits pursuant to Section 7.10 that cured a breach of the Seller’s representations and warranties that were inaccurate or incomplete on the Effective Date.

10.9 Procedure for Environmental Indemnification.

(a)     In the event that the Purchaser tenders notice of a claim for indemnification for a matter or circumstances which is or could become the subject of an Environmental Claim, the Seller shall have the right but not the obligation to undertake defense of any such claim made by third parties, pursuant to Section 10.6(e) hereof, or to otherwise resolve such claim by conducting an investigation or remediation (if appropriate) thereof, at the Seller’s expense. The Seller shall notify the Purchaser of the Seller’s intent to exercise such right promptly after receiving the Purchaser’s notice of claim for indemnification for such matter, circumstances, or Environmental Claim. In the event that the Purchaser provides such notice to the Seller and undertakes to resolve such claim, both the Purchaser and the Seller shall have all the respective rights provided in Section 10.6(e) hereof with respect to such claim and, in addition, the Purchaser shall make the Project available to the Seller to reasonably investigate or remediate or otherwise resolve such claim, provided that, (i) the Seller’s activities do not unreasonably interfere with the operation of the Project, (ii) the Purchaser shall have the right, but not the obligation, at the Purchaser’s sole expense, to take split samples, and (iii) the Seller shall share with the Purchaser the results of the Seller’s investigation including sampling results.

(b)     Except to the extent required to satisfy or otherwise resolve a claim for injury or damages by a third party pursuant to any Environmental, Health and Safety Laws and for which indemnification is provided in this Agreement, the Seller and the Purchaser agree that with respect to any investigation, remediation, or correction of noncompliance, or other action to be undertaken by the Seller or the Purchaser that is the subject of an indemnification claim by the Purchaser Indemnitees pursuant to this Agreement, the Seller’s obligation pursuant to Section 10.6(c) shall be limited to conducting or reimbursing the Purchaser for (as the case may be and, in the case of reimbursing the Purchaser, subject to the limitations provided in Section 10.6(d)) (i) the most commercially reasonable method under the circumstances and based upon the understanding that the Project is and will continue to be used for the purposes to which it was put as of the Closing Date (including the potential expansion of the Facility to include an additional combustion turbine unit; provided, that the Seller’s indemnification obligations remain subject to the provisions of Section 10.5), and (ii) which method shall not exceed the least stringent requirements of any applicable Environmental, Health and Safety Law or any clean-up standards set forth, established, published, proposed or promulgated under, pursuant to or by an Environmental, Health and Safety Law or Governmental Authority having jurisdiction over such remedial action, correction of noncompliance, or action, in each case as in effect on the Closing Date or any requirement or order of any Governmental Authority specifically with respect to such investigation, remediation, or correction of noncompliance, or action. To the extent necessary to achieve the purposes set forth in the preceding sentence, the Purchaser shall

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agree to a deed restriction or other institutional controls on the Project provided that such deed restriction or other institutional controls shall not restrict or limit the use to which the Project was put as of the Closing Date (including the potential expansion of the Facility to include an additional combustion turbine unit; provided, that the Seller’s indemnification obligations remain subject to the provisions of Section 10.5). The Purchaser agrees that it shall, in good faith, seek to enter, when necessary, into an agreement with the Governmental Authority having jurisdiction over the investigation, remediation, or correction of noncompliance or other action, to allow the Purchaser to use the most commercially reasonable method and least stringent standard in connection with investigation, remediation, correction of noncompliance, or other action under such circumstances and use.

(c)     If the Closing occurs, with respect to any Environmental Claim, the Purchaser’s rights to indemnification set forth in this Agreement shall constitute a Purchaser Indemnitee’s exclusive remedy for such claim, and the Purchaser expressly waives and relinquishes, on behalf of itself, its successors and any assigns, any and all rights, claims, or remedies such person may have against any and all of the Seller Indemnitees under any Environmental, Health and Safety Laws, as presently in force or hereafter enacted, promulgated, or amended (including, without limitation, under the Comprehensive Environmental Response Compensation and Liability Act, or any similar state or local law) or at common law.

10.10  Specific Performance. The Purchaser and the Seller acknowledge that the transactions contemplated hereunder are unique and that the parties will be irreparably injured should such transactions not be consummated in accordance with the terms and conditions of this Agreement. Consequently, the Purchaser will not have an adequate remedy at law if the Seller shall fail to consummate the transactions hereunder, and the Seller will not have an adequate remedy at law if the Purchaser shall fail to consummate the transactions hereunder. The Purchaser or the Seller, as applicable, shall have the right, in addition to any other remedy available under this Agreement, to specific performance of the other party’s obligations hereunder subject to its having performed its obligations hereunder, and both parties agree not to take a position in any proceeding to the effect that the other party has an adequate remedy at law.

ARTICLE XI

MISCELLANEOUS

11.1 Employees and Employee Benefits.

(a)     Neither the Purchaser nor any Affiliate of the Purchaser shall have any obligation to hire or make offers of employment to any Employee or to assume any liabilities or obligations related to any Employee Plans. However, the Seller agrees that the Purchaser or an Affiliate of the Purchaser may offer employment to any Employee on such terms and conditions as determined by the Purchaser or an Affiliate of the Purchaser with such employment commencing immediately following the Closing Date. To that end, within ten (10) days after execution of this Agreement, the Seller shall provide the

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Purchaser with a list of all Employees and their job titles, compensation and benefits; provided, that the Purchaser shall not disclose such information to any third party other than an Affiliate of the Purchaser or a third party engaged by the Purchaser or an Affiliate of the Purchaser to assist in employment or employee benefit matters. The Purchaser or an Affiliate of the Purchaser shall have reasonable access to the Facility, and all Employees shall be made available to the Purchaser or an Affiliate of the Purchaser for the purpose of conducting employment interviews with Employees. The Purchaser or an Affiliate of the Purchaser shall conduct the interviews as expeditiously as possible prior to the Closing Date. Access and availability shall be provided by the Seller and the Project Company upon reasonable prior notice by the Purchaser during normal business hours. At least fifteen (15) days prior to the scheduled Closing Date, the Purchaser shall provide the Seller with a list of Employees (the “Listed Employees”) to whom the Purchaser or an Affiliate of the Purchaser intends to make offers of employment with such offers to be contingent on (i) the Closing, and (ii) the standard hiring requirements or conditions of the Purchaser or an Affiliate of Purchaser, including completion of background checks and drug tests. Nothing herein shall be deemed to require the Purchaser or any Affiliate of the Purchaser to hire any Employee or to continue the employment of or provide any particular level of compensation or benefits to any Listed Employee actually hired by the Purchaser or any Affiliate of the Purchaser. The Purchaser and its Affiliates shall indemnify and hold harmless the Seller and its Affiliates and their officers, directors, employees and shareholders in connection with any Liability or Loss arising from the decision of the Purchaser or any of its Affiliates to hire or not to hire any Employee without regard to the limitations in Article X. The Seller and its Affiliates shall indemnify and hold harmless the Purchaser and its Affiliates and their officers, directors, employees and shareholders in connection with any Liability or Loss arising from the Seller’s or its Affiliate’s breach of the representation in Section 5.12(d) or from employment practices related to the termination of any Employee on or before the Closing Date without regard to the limitations in Article X.

(b)     Subject to the Seller’s obligations under Section 7.2, nothing in this Agreement shall be deemed to require the Seller to continue the employment of, or provide any particular level of compensation or benefits to, any Employee, including any Listed Employee, prior to the Closing Date; provided, however, that the Seller or an Affiliate of the Seller shall be responsible for (i) the payment of all wages and other remuneration due to Employees or former Employees with respect to their services as employees of the Seller or an Affiliate of the Seller through the close of business on the Closing Date, including all bonuses and vacation pay earned on or prior to the Closing Date, (ii) the payment of any termination or severance payments and the provision of health plan continuation coverage in accordance with the requirements of COBRA, (iii) any claims made or incurred by Employees, former Employees and their beneficiaries under the Employee Plans and (iv) compliance with the requirements, if any, of the WARN Act.

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11.2    Expenses. Except as otherwise set forth in this Agreement, each of the Seller and the Purchaser shall bear its own expenses (including, without limitation, attorney’s fees) incurred in connection with the preparation, negotiation, execution and performance of this Agreement and each other agreement, document and instrument contemplated by this Agreement and the consummation of the transactions contemplated hereby and thereby; provided, that the Seller and the Purchaser shall equally share the expenses incurred in obtaining clearance under the HSR Act.

11.3    Incorporation of Exhibits and Schedules. The exhibits and schedules identified in this Agreement are incorporated herein by reference and made a part hereof.

11.4 Submission to Jurisdiction.

(a)     Each of the parties hereto (i) consents to submit itself to the exclusive personal jurisdiction of any federal court located in the State of New York or any New York state court in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement, (ii) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, and (iii) agrees that it will not bring any action relating to this Agreement or any of the transactions contemplated by this Agreement in any court other than a federal court located in the State of New York or a New York state court.

(b)     The parties hereby unconditionally and irrevocably waive, to the fullest extent permitted by Applicable Law, any objection which they may now or hereafter have to the laying of venue of any dispute arising out of or relating to this Agreement or any of the transactions contemplated hereby brought in any court specified in paragraph (a) above, or any defense of inconvenient forum for the maintenance of such dispute. Each of the parties hereto agrees that a judgment in any such dispute may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.

(c)     Each of the parties hereto hereby consents to process being served by any party to this Agreement in any suit, action or proceeding by the mailing of a copy thereof in accordance with the provisions of Section 11.10.

11.5    Waiver of Jury Trial. The parties hereby irrevocably and unconditionally waive, to the fullest extent permitted by Applicable Law, any right that they may have to trial by jury of any claim or cause of action, or in any legal proceeding, directly or indirectly based upon or arising out of this Agreement or the transactions contemplated by this Agreement. Each party (a) certifies that no representative, agent, or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver and (b) acknowledges that it and the other parties have been induced to enter into this Agreement by, among other things, the mutual waivers and certifications in this Section 11.5.

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11.6    No Right of Set-Off. The Purchaser for itself and for its Affiliates, successors and assigns hereby unconditionally and irrevocably waives any rights of set-off, netting, offset, recoupment, or similar rights that the Purchaser or any of its respective Affiliates, successors and assigns has or may have with respect to the payment of the Purchase Price or any other payments to be made by the Purchaser pursuant to this Agreement or any other document or instrument delivered by the Purchaser in connection herewith. The Seller for itself and for its Affiliates, successors and assigns hereby unconditionally and irrevocably waives any rights of set-off, netting, offset, recoupment or similar rights that the Seller or any of its respective Affiliates, successors or assigns has or may have with respect to any document or instrument delivered by the Seller or its Affiliates in connection herewith.

11.7    Entire Agreement; Amendments and Waivers. This Agreement (including the schedules and exhibits hereto), together with the other Transaction Documents and the Confidentiality Agreement represent the entire understanding and agreement between the parties hereto with respect to the subject matter hereof and can be amended, supplemented or changed, and any provision hereof or thereof can be waived, only by written instrument making specific reference to this Agreement, the other Transaction Documents or the Confidentiality Agreement, as applicable, signed by the party against whom enforcement of any such amendment, supplement, modification or waiver is sought. No action taken pursuant to this Agreement, including without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representation, warranty, covenant or agreement contained herein. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a further or continuing waiver of such breach or as a waiver of any other or subsequent breach and shall apply only to the specific instance for which it is given. No failure on the part of any party to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or remedy by such party preclude any other or further exercise thereof or the exercise of any other right, power or remedy.

11.8    Governing Law. This Agreement, the rights and obligations of the parties under this Agreement, and any claim or controversy arising out of this Agreement or the transactions contemplated by this Agreement (whether based on contract, tort, or any other theory), including all matters of construction, validity and performance, shall in all respects be governed by and interpreted, construed, and determined in accordance with, the internal Laws of the State of New York (without regard to any conflict of laws provision that would require the application of the Law of any other jurisdiction).

11.9    Table of Contents and Headings. The table of contents and section headings of this Agreement are for reference purposes only and are to be given no effect in the construction or interpretation of this Agreement.

11.10  Notices. All notices and other communications under this Agreement shall be in writing and shall be deemed duly given (a) when delivered personally or by prepaid overnight courier, with a record of receipt, (b) the fourth day

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after mailing if mailed by certified mail, return receipt requested, or (c) the day of transmission, if sent by facsimile, telecopy or e-mail during regular business hours, or the day after transmission, if sent after regular business hours (with a copy promptly sent by prepaid overnight courier with record of receipt or by certified mail, return receipt requested), to the parties at the following addresses or telecopy numbers (or to such other address or telecopy number as a party may have specified by notice given to the other party pursuant to this provision):

If to the Seller:

c/o Progress Energy Services Company

410 South Wilmington Street

P.O. Box 1551

Raleigh, NC 27601

Telephone: (919) 546-7504

e-mail: mark.mcquade@pgnmail.com

Fax: (919) 546-2920

Attention:	David Fountain, Esq.
	Mark McQuade, Esq.

With a copy to:

Skadden, Arps, Slate, Meagher & Flom LLP

1440 New York Avenue, N.W.

Washington, DC 20005

Telephone: (202) 371-7000

Fax: (202) 393-5760

e-mail: jmatte@skadden.com

Attention: Jeanine Matte, Esq.

If to the Purchaser:

Southern Power Company – Rowan LLC

600 North 18^th Street

Birmingham, AL 35291

Attention: President and CEO

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With a copy to:

Troutman Sanders LLP

Bank of America Plaza, Suite 5200

600 Peachtree Street, N.W.

Atlanta, Georgia 30308

Telephone: (404) 885-3360

Fax: (404) 962-6610

e-mail: john.lamberski@troutmansanders.com

Attention:	John Lamberski, Esq.
	Richard E. Thompson II, Esq.

11.11  Severability. Any term or provision of this Agreement that is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction.

11.12  Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. Except as set forth in Sections 7.1, 10.6, and 11.1, nothing in this Agreement shall create or be deemed to create any third party beneficiary rights in any Person not a party to this Agreement. No assignment of this Agreement or of any rights or obligations hereunder may be made by the Seller or the Purchaser (by operation of law or otherwise) without the prior written consent of the other parties hereto and any attempted assignment without the required consents shall be void; provided, that prior to Closing the Purchaser may assign this Agreement to Southern Power without the consent of Seller, in which case the Purchaser and Southern Power shall enter into an assignment and assumption agreement in a form reasonably acceptable to the Seller pursuant to which Southern Power shall assume all of the obligations of the Purchaser hereunder, following execution and delivery of a copy of such executed assignment and assumption agreement to the Seller, the Seller shall promptly return the Southern Power Parent Guaranty, marked “canceled”, to Southern Power and Section 7.16(b) shall be void and of no further force or effect.

11.13  Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument.

[The Remainder of this Page Is Intentionally Left Blank.]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first written above.

PROGRESS GENCO VENTURES, LLC

By: /s/Mark F. Mulhern

Name: Mark F. Mulhern

Title: President

SOUTHERN POWER COMPANY – ROWAN LLC

By: /s/Ronnie L. Bates

Name: Ronnie L. Bates

Title: President and Chief Executive Officer

EX-10.F.5

Exhibit 10(f)5

ASSIGNMENT AND ASSUMPTION AGREEMENT

This ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Assignment Agreement"), effective as of May 24, 2006, is between Southern Power Company – Rowan LLC, a Delaware limited liability company ("Assignor"), and Southern Power Company, a Delaware corporation ("Assignee").

W I T N E S S E T H:

WHEREAS, Assignor and Progress Genco Ventures, LLC, a North Carolina limited liability company ("Seller"), entered into that certain Purchase and Sale Agreement, dated May 8, 2006 (the "Assigned Agreement"), providing for, among other things, the transfer and sale to Assignor of Seller's 100% limited liability company membership interest in Rowan County Power, LLC;

WHEREAS, pursuant to Section 11.12 of the Assigned Agreement, Assignor has the right, without the consent of Seller, to assign the Assigned Agreement to Assignee;

WHEREAS, upon receipt of an executed copy of this Assignment Agreement, Seller will be required pursuant to Section 11.12 of the Assigned Agreement to return promptly to Assignee the Southern Power Parent Guaranty (as defined in the Assigned Agreement) marked "canceled," and Section 7.18(b) of the Assigned Agreement will be void and of no further force or effect;

WHEREAS, Assignor desires to assign and transfer to Assignee all of its right, title and interest in, to and under the Assigned Agreement, as provided by and subject to the terms of this Assignment Agreement; and

WHEREAS, Assignee desires to accept such assignment and to assume and discharge all of the liabilities, obligations and contractual commitments of Assignor under the Assigned Agreement, as provided by and subject to the terms of this Assignment Agreement.

NOW, THEREFORE, in consideration of the recitals and the mutual promises, covenants and agreements contained herein and in the Assigned Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1.        Assignment. Assignor hereby assigns, transfers and conveys to Assignee all of its right, title and interest in, to and under the Assigned Agreement, and delegates to Assignee all of its duties and obligations under the Assigned Agreement.

2.        Acceptance and Assumption. Assignee hereby accepts the foregoing assignment and delegation and expressly assumes, confirms and agrees to perform and observe all of the covenants, agreements, terms, conditions, obligations, duties and liabilities of Assignor under the Assigned Agreement, including any future obligations set forth therein. Subject to any limitation set forth in the Assigned Agreement, from and after the date of this Assignment Agreement, Assignee is and shall be bound by, and shall enjoy the benefits of, the Assigned Agreement as if Assignee had been a party thereto from the original execution and delivery thereof, pursuant to the terms and conditions of the Assigned Agreement.

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3.        Release. From and after the date of this Assignment Agreement, Assignor shall cease to be a party to the Assigned Agreement. Accordingly, from and after the date of this Assignment Agreement, Assignor shall have no rights, and shall be released from any and all of its obligations, under the Assigned Agreement, and Assignor shall release Seller from any and all of its obligations to Assignor under the Assigned Agreement.

4.        Representations and Warranties. Each of Assignor and Assignee represents and warrants that (a) it is an entity duly formed, validly existing and in good standing under the laws of the jurisdiction in which it is organized; (b) it has the necessary power and authority to enter into and perform its obligations under this Assignment Agreement; (c) it has duly authorized the person signing this Assignment Agreement to execute this Assignment Agreement on its behalf; (d) upon execution, this Assignment Agreement will be a legal, valid and binding obligation of such party, enforceable against such party in accordance with its terms except to the extent limited by bankruptcy or other similar laws affecting the enforcement of creditors' rights and the application of general principles of equity or law; (e) execution and delivery of this Assignment Agreement and its performance by such party will not violate, result in a breach or conflict with any law, rule, regulation, order or decree applicable to such party, its governing documents or the terms of any other agreement binding on such party; and (f) it is not in breach or default in any material respect under any covenant or obligation under the Assigned Agreement, and to its knowledge, no such material breach or default has occurred prior to the date hereof.

5.        Governing Law. This Assignment Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York.

6.         Amendments and Modifications. This Assignment Agreement may not be amended, supplemented or otherwise modified, nor may any obligations hereunder be deemed waived, except by a written instrument signed by each of the parties hereto.

7.         Further Assurances. The parties hereto agree to execute all documents and instruments, and to take any other action, that may be necessary or useful to carry out the assignment and assumption contemplated by this Assignment Agreement.

8.        Counterpart Execution. This Assignment Agreement may be executed in counterparts, each of which shall be fully effective as an original and all of which together shall constitute one and the same instrument.

9.         Successors and Assigns. This Assignment Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective successors and permitted assigns.

10.       Severability. If any provision of this Assignment Agreement is invalid or unenforceable, the balance of this Assignment Agreement shall remain in effect, and this Assignment Agreement shall be interpreted so as to give full effect to its terms and still be valid and enforceable.

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11.       Notices; Demand and Payment. All notices, requests, demands and other communications under the Assigned Agreement to Assignee as Purchaser under the Assigned Agreement must be in writing and must be delivered in person or sent by certified mail, postage prepaid, or by overnight delivery, and properly addressed as follows:

If to Assignee:

Southern Power Company

600 North 18th Street

Birmingham, AL 35291

Attention: President and Chief Executive Officer

With a copy to:

Troutman Sanders LLP

Bank of America Plaza, Suite 5200

600 Peachtree Street, N.W.

Atlanta, Georgia 30308

Telephone: (404) 885-3360

Fax: (404) 962-6610

Attention:	John Lamberski, Esq.
	Richard E. Thompson II, Esq.

12.       Reliance; Third Party Beneficiary. Seller shall be entitled to rely on, and shall be considered an intended third party beneficiary of, this Assignment Agreement. For the avoidance of doubt, Assignor and Assignee agree that Seller may exercise any right or remedy under the Assigned Agreement directly against Assignee as Purchaser thereunder, and otherwise enforce the Assigned Agreement directly against Assignee as Purchaser thereunder, at any time and from time to time, without the necessity of proceeding against Assignor. Assignee hereby waives any right to require Seller to proceed against Assignor, to exercise any right or remedy against Assignor as Purchaser under the Assigned Agreement or to pursue any other remedy or to enforce any other right.

[Signature page follows]

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IN WITNESS WHEREOF, this Assignment Agreement has been duly executed by the parties hereto as of the date first above written.

SOUTHERN POWER COMPANY – ROWAN LLC

By: /s/Ronnie L. Bates

Name: Ronnie L. Bates

Title: President and Chief Executive Officer

SOUTHERN POWER COMPANY

By: /s/Ronnie L. Bates

Name: Ronnie L. Bates

Title: President and Chief Executive Officer

EX-31.A.1

Exhibit 31(a)1

THE SOUTHERN COMPANY

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, David M. Ratcliffe, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Southern Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 3, 2006

/s/David M. Ratcliffe

David M. Ratcliffe

Chairman, President and Chief Executive Officer

EX-31.A.2

Exhibit 31(a)2

THE SOUTHERN COMPANY

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Thomas A. Fanning, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Southern Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 3, 2006

/s/Thomas A. Fanning

Thomas A. Fanning

Executive Vice President, Chief Financial Officer and Treasurer

EX-31.B.1

Exhibit 31(b)1

ALABAMA POWER COMPANY

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Charles D. McCrary, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Alabama Power Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 3, 2006

/s/Charles D. McCrary

Charles D. McCrary

President and Chief Executive Officer

EX-31.B.2

Exhibit 31(b)2

ALABAMA POWER COMPANY

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Art P. Beattie, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Alabama Power Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 3, 2006

/s/Art P. Beattie

Art P. Beattie

Executive Vice President, Chief Financial Officer and Treasurer

EX-31.C.1

Exhibit 31(c)1

GEORGIA POWER COMPANY

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Michael D. Garrett, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Georgia Power Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 3, 2006

/s/Michael D. Garrett

Michael D. Garrett

President and Chief Executive Officer

EX-31.C.2

Exhibit 31(c)2

GEORGIA POWER COMPANY

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Cliff S. Thrasher, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Georgia Power Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 3, 2006

/s/Cliff S. Thrasher

Cliff S. Thrasher

Executive Vice President, Chief Financial Officer and Treasurer

EX-31.D.1

Exhibit 31(d)1

GULF POWER COMPANY

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Susan N. Story, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Gulf Power Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 3, 2006

/s/Susan N. Story

Susan N. Story

President and Chief Executive Officer

EX-31.D.2

Exhibit 31(d)2

GULF POWER COMPANY

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Ronnie R. Labrato, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Gulf Power Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 3, 2006

/s/Ronnie R. Labrato

Ronnie R. Labrato

Vice President and Chief Financial Officer

EX-31.E.1

Exhibit 31(e)1

MISSISSIPPI POWER COMPANY

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Anthony J. Topazi, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Mississippi Power Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 3, 2006

/s/Anthony J. Topazi

Anthony J. Topazi

President and Chief Executive Officer

EX-31.E.2

Exhibit 31(e)2

MISSISSIPPI POWER COMPANY

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Frances V. Turnage, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Mississippi Power Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 3, 2006

/s/Frances V. Turnage

Frances V. Turnage

Vice President, Treasurer and Chief Financial Officer

EX-31.F.1

Exhibit 31(f)1

SOUTHERN POWER COMPANY

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Ronnie L. Bates, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Southern Power Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 3, 2006

/s/Ronnie L. Bates

Ronnie L. Bates

President and Chief Executive Officer

EX-31.F.2

Exhibit 31(f)2

SOUTHERN POWER COMPANY

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Michael W. Southern, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Southern Power Company;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 3, 2006

/s/Michael W. Southern

Michael W. Southern

Senior Vice President and Chief Financial Officer

EX-32.A

Exhibit 32(a)

CERTIFICATION

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report on Form 10-Q of The Southern Company for the quarter ended June 30, 2006, we, the undersigned, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of our individual knowledge and belief, that:

(1)	such Quarterly Report on Form 10-Q of The Southern Company for the quarter ended June 30, 2006, which this statement accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in such Quarterly Report on Form 10-Q of The Southern Company for the quarter ended June 30, 2006, fairly presents, in all material respects, the financial condition and results of operations of The Southern Company.

/s/David M. Ratcliffe

David M. Ratcliffe

Chairman, President and

Chief Executive Officer

/s/Thomas A. Fanning

Thomas A. Fanning

Executive Vice President,

Chief Financial Officer and Treasurer

Date: August 3, 2006

EX-32.B

Exhibit 32(b)

CERTIFICATION

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report on Form 10-Q of Alabama Power Company for the quarter ended June 30, 2006, we, the undersigned, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of our individual knowledge and belief, that:

(1)	such Quarterly Report on Form 10-Q of Alabama Power Company for the quarter ended June 30, 2006, which this statement accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in such Quarterly Report on Form 10-Q of Alabama Power Company for the quarter ended June 30, 2006, fairly presents, in all material respects, the financial condition and results of operations of Alabama Power Company.

/s/Charles D. McCrary

Charles D. McCrary

President and Chief Executive Officer

/s/Art P. Beattie

Art P. Beattie

Executive Vice President,

Chief Financial Officer and Treasurer

Date: August 3, 2006

EX-32.C

Exhibit 32(c)

CERTIFICATION

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report on Form 10-Q of Georgia Power Company for the quarter ended June 30, 2006, we, the undersigned, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of our individual knowledge and belief, that:

(1)	such Quarterly Report on Form 10-Q of Georgia Power Company for the quarter ended June 30, 2006, which this statement accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in such Quarterly Report on Form 10-Q of Georgia Power Company for the quarter ended June 30, 2006, fairly presents, in all material respects, the financial condition and results of operations of Georgia Power Company.

/s/Michael D. Garrett

Michael D. Garrett

President and Chief Executive Officer

/s/Cliff S. Thrasher

Cliff S. Thrasher

Executive Vice President,

Chief Financial Officer and Treasurer

Date: August 3, 2006

EX-32.D

Exhibit 32(d)

CERTIFICATION

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report on Form 10-Q of Gulf Power Company for the quarter ended June 30, 2006, we, the undersigned, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of our individual knowledge and belief, that:

(1)	such Quarterly Report on Form 10-Q of Gulf Power Company for the quarter ended June 30, 2006, which this statement accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in such Quarterly Report on Form 10-Q of Gulf Power Company for the quarter ended June 30, 2006, fairly presents, in all material respects, the financial condition and results of operations of Gulf Power Company.

/s/Susan N. Story

Susan N. Story

President and Chief Executive Officer

/s/Ronnie R. Labrato

Ronnie R. Labrato

Vice President and Chief Financial Officer

Date: August 3, 2006

EX-32.E

Exhibit 32(e)

CERTIFICATION

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report on Form 10-Q of Mississippi Power Company for the quarter ended June 30, 2006, we, the undersigned, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of our individual knowledge and belief, that:

(1)	such Quarterly Report on Form 10-Q of Mississippi Power Company for the quarter ended June 30, 2006, which this statement accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in such Quarterly Report on Form 10-Q of Mississippi Power Company for the quarter ended June 30, 2006, fairly presents, in all material respects, the financial condition and results of operations of Mississippi Power Company.

/s/Anthony J. Topazi

Anthony J. Topazi

President and Chief Executive Officer

/s/Frances V. Turnage

Frances V. Turnage

Vice President, Treasurer and

Chief Financial Officer

Date: August 3, 2006

EX-32.F

Exhibit 32(f)

CERTIFICATION

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report on Form 10-Q of Southern Power Company for the quarter ended June 30, 2006, we, the undersigned, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of our individual knowledge and belief, that:

(1)	such Quarterly Report on Form 10-Q of Southern Power Company for the quarter ended June 30, 2006, which this statement accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in such Quarterly Report on Form 10-Q of Southern Power Company for the quarter ended June 30, 2006, fairly presents, in all material respects, the financial condition and results of operations of Southern Power Company.

/s/Ronnie L. Bates

Ronnie L. Bates

President and Chief Executive Officer

/s/Michael W. Southern

Michael W. Southern

Senior Vice President and

Chief Financial Officer

Date: August 3, 2006