ALABAMA POWER CO - Quarter Report: 2004 June (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

     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 X   No ___

     Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934).

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

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INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2004

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INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2004

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DEFINITIONS

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     This Quarterly Report on Form 10-Q contains forward-looking statements in addition to historical information. Forward-looking information includes, among other things, statements concerning the strategic goals for Southern Company’s wholesale business, 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 comparable terminology. The registrants caution that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include:

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THE SOUTHERN COMPANY
AND SUBSIDIARY COMPANIES

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

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

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

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

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

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

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

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

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
SECOND QUARTER 2004 vs. SECOND QUARTER 2003
AND
YEAR-TO-DATE 2004 vs. YEAR-TO-DATE 2003

OVERVIEW

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

RESULTS OF OPERATIONS

Earnings

Southern Company’s second quarter and year-to-date 2004 earnings were $352 million ($0.48 per share) and $683 million ($0.93 per share), respectively, compared with $432 million ($0.60 per share) and $730 million ($1.01 per share) in the second quarter and year-to-date 2003. The decreases in second quarter and year-to-date 2004 results are attributed to a one-time after-tax gain of $88 million included in the second quarter 2003 from termination of capacity sales contracts with Dynegy. See Note 3 to the financial statements of Southern Company under “Uncontracted Generating Capacity” in Item 8 of the Form 10-K for additional information on these contract terminations. Earnings in the second quarter and year-to-date 2004 when compared to the same periods in 2003, excluding the Dynegy contract termination, increased due to a number of positive factors including growth in customers, increased consumption of electricity by existing customers in the Southern Company service area, and generally more favorable weather conditions, as well as new generating capacity available for sale in wholesale markets. This new capacity led to increases in wholesale revenues from new contracts and sales of uncontracted capacity in those wholesale markets. These positive factors were partially offset by higher operations and maintenance cost in the second quarter as some maintenance projects not completed in 2003 and earlier this year were undertaken in the second quarter of 2004.

     Significant income statement items appropriate for discussion include the following:

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

     Retail sales. Excluding fuel revenues, which generally do not affect net income, retail base revenues increased by $109 million, or 7.1%, in the second quarter 2004, and increased by $181 million, or 6.2%, year-to-date 2004 when compared to the same periods in 2003. In the second quarter and year-to-date 2004, retail kilowatt-hour energy sales increased by 5.3% and 4.9%, respectively, over the same periods a year ago, primarily due to customer and demand growth and the still improving economy evidenced by increases in residential, commercial and industrial second quarter kilowatt-hour energy sales of 8.5%, 5.1% and 3.0%, respectively. Year-to-date residential, commercial and industrial kilowatt-hour energy sales increased by 6.9%, 4.3% and 3.9%, respectively, when compared to the same period in 2003. In the second quarter and year-to-date 2004, temperatures were slightly above normal, while mild weather in the same periods last year resulted in reduced demand by retail customers. The number of retail customers increased by 1.8%, and average consumption by residential customers increased by 5.2% for the year-to-date 2004 when compared to year-to-date 2003.

     Sales for resale. Sales for resale revenues increased $20.8 million, or 6.4% and $37.0 million, or 5.6% for the second quarter and year-to-date 2004, respectively, when compared to the same periods in the prior year. The increase in revenues reflected new wholesale contracts and increases in fuel revenues. An additional 2,407 megawatts of generating capacity were added in June and October 2003 by Southern Power. A portion of this new capacity contributed to the increase in sales for resale revenues for the second quarter and year-to-date 2004 as a result of increased energy revenues from PPAs with neighboring utilities. These increases in sales for resale revenues more than offset the reduction in revenues resulting from the termination of contracts with subsidiaries of Dynegy in May 2003. See Note 3 to the financial statements of Southern Company under “Uncontracted Generating Capacity” in Item 8 of the Form 10-K for additional information on these contract terminations.

     Other electric revenues. In the second quarter and year-to-date 2004, other electric revenues decreased $133.9 million, or 58.7% and $132.3 million or 41.4%, respectively, because of the $142 million in contract termination revenues from Dynegy recorded in May 2003. See “Earnings” discussion above for additional information on these contract terminations. Excluding these contract termination revenues, other electric revenues increased $8.3 million or 9.6% and $9.8 million or 5.5% for the second quarter and year-to-date 2004, respectively, when compared to the same periods in 2003 primarily as a result of increased cogeneration sales and transmission revenue.

     Fuel expense. During the second quarter and year-to-date periods of 2004, fuel expense was higher due to an increase in the average unit cost of fuel, as well as increased generating capacity at Southern Power. Total fuel generation remained flat for the second quarter and increased 2.3% for the year-to-date 2004, when compared to the same periods in the prior year. For the second quarter and year-to-date periods in 2004, the average unit cost of fuel per kilowatt-hour generated increased 13.2% and 12.9%, respectively, when compared to the same periods in the prior year. Increases in fuel expense at the retail operating companies are generally offset by fuel revenues and do not affect net income. See “Future Earnings Potential – FERC and State PSC Matters – Retail Fuel Cost Recovery” herein for additional information. Southern Power’s PPAs generally provide that the purchasers are responsible for substantially all of the costs of fuel.

     Purchased power. The increases in purchased power for the second quarter and year-to-date 2004 when compared with the same periods last year were primarily due to increased demand for energy by retail customers and to purchase energy used to meet off-system sales commitments. Also, at times additional power was available for purchase from external parties at prices lower than Southern Company’s own system generation costs. These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues.

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

     Other operations and maintenance expenses. The increases in other operations and maintenance expenses in the second quarter and year-to-date 2004 are mainly attributable to increases in administrative and general, transmission and distribution maintenance and other production expenses. Administrative and general expenses increased $14.7 million, or 6.5% and $40.5 million, or 9.5%, for the second quarter and year-to-date 2004, respectively, primarily as a result of payroll and employee benefits costs. Transmission and distribution expenses increased $18.6 million or 13.7% and $30.3 million or 11.9% for the second quarter and year-to-date 2004, respectively, as a result of completing work delayed from 2003. Other production expenses were up $7.1 million or 2.2% and $14.5 million, or 2.3% for the second quarter and year-to-date 2004, respectively, due to increased expenses primarily resulting from the operation of Southern Power’s new generating facilities.

     Depreciation and amortization. The second quarter and year-to-date 2004 decreases of $24.8 million and $29.2 million, respectively, in depreciation and amortization expense when compared to the same periods in 2003 are primarily the result of increased amortization of regulatory liabilities at Georgia Power and Mississippi Power. The decreases in Georgia Power’s depreciation and amortization expenses ($17 million and $35 million for the second quarter and year-to-date 2004, respectively) were caused primarily by lower regulatory charges needed to levelize purchased power capacity costs under the terms of the retail rate order effective January 1, 2002. See Note 1 to the financial statements of Southern Company under “Depreciation and Amortization” in Item 8 of the Form 10-K for additional information. The decreases in Mississippi Power’s second quarter and year-to-date 2004 depreciation and amortization expenses ($8 million and $7 million for the second quarter and year-to-date 2004, respectively) are primarily the result of the amortization of a regulatory liability as approved by the Mississippi PSC. The Mississippi PSC issued an interim accounting order in December 2003 directing Mississippi Power to expense and record in 2003 a regulatory liability in the amount of approximately $60 million. Based on the final Mississippi PSC order issued May 25, 2004 that approved this treatment, Mississippi Power recorded a credit to amortization of the regulatory liability of $8.3 million during the second quarter of 2004. The year-to-date decreases are partially offset by increases in depreciable plant in service, primarily as a result of Southern Power’s Stanton Unit A, which was placed in service in October 2003. Reference is made to Note 3 to the financial statements of Southern Company under “Mississippi Power Regulatory Filing” in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements and “FERC and State PSC Matters” herein for additional information.

     Taxes other than income taxes. The second quarter and year-to-date 2004 increases in taxes other than income taxes over the comparable periods last year are primarily a result of increases in payroll taxes, property taxes on new facilities and higher tax assessments on property. Also, franchise and gross receipts taxes increased for the respective periods due to the increase in revenues from energy sales.

     Interest income. The second quarter and year-to-date 2004 decreases in interest income when compared to the same periods in the prior year resulted from $15.6 million of interest received from a federal income tax settlement in the second quarter of 2003.

     Other income (expense), net. The second quarter and year-to-date 2004 decreases in other income (expense), net reflect decreased rental income at Georgia Power of $4.0 million and $2.5 million, respectively, as well as the impact of the ESOP contribution in June 2004 of $6.2 million when compared to the same periods in 2003. The year-to-date 2004 decrease in other income (expense), net also reflects a $5.0 million decrease related to the 2003 favorable resolution of a loss contingency by Georgia Power.

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

Future Earnings Potential

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

Environmental Matters

New Source Review Actions and Plant Wansley Environmental Litigation

Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be recovered. For additional information, including information on certain environmental litigation, see MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — Environmental Matters” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “New Source Review Actions” and “Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K. As of March 15, 2004, civil penalties under the Clean Air Act were increased prospectively to a maximum of $32,500 per day, per violation. To the extent alleged violations under either the New Source Review litigation or Plant Wansley environmental litigation are deemed to be continuing, this increased civil penalty amount could apply to such violations found to continue after that date.

     On May 3, 2004, the U.S. Supreme Court denied the EPA’s petition to review the Eleventh Circuit Court of Appeals’ decision in the EPA’s similar New Source Review enforcement action against the TVA. The cases against Alabama Power, Georgia Power and Savannah Electric have been effectively stayed pending final resolution of the TVA case. With the denial of the EPA’s petition for review, the Court of Appeals’ decision became final. Alabama Power and the EPA jointly notified the District Court for the Northern District of Alabama, where the case against Alabama Power is pending and requested that the stay be lifted. On June 16, 2004, the District Court lifted the stay, placing the case back onto the District Court’s active docket. At this time, no party to the case against Georgia Power and Savannah Electric has sought to reopen that case, which remains administratively closed in the District Court for the Northern District of Georgia. On June 10, 2004, the U.S. District Court for the Northern District of Georgia granted Georgia Power’s motion in the Plant Wansley environmental litigation for partial summary judgment regarding emissions offsets. The case has been removed from the court’s trial calendar due to pending motions for summary judgment, and a new trial date has not been scheduled. An adverse outcome in any one of these cases could require substantial capital expenditures that cannot be determined at this time and could possibly require payment of substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates.

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

Global Warming Litigation

On July 21, 2004, attorneys general from eight states, each outside of Southern Company’s service territory, and the corporation counsel for New York City filed a complaint in U.S. District Court for the Southern District of New York against Southern Company and four other electric power companies. A nearly identical complaint was filed by three environmental groups in the same court. The complaints allege that the companies’ emissions of carbon dioxide, a greenhouse gas, contribute to global warming, which the plaintiffs assert is a public nuisance. Plaintiffs seek relief under the federal common law or, in the alternative, under state law, of public nuisance. The environmental groups also seek relief under common law private nuisance theories. The plaintiffs seek a judicial order (1) holding each defendant jointly and severally liable for creating, contributing to, and/or maintaining an ongoing public nuisance, global warming and (2) permanently enjoining each of the defendants to abate its contribution to the nuisance by capping its emissions of carbon dioxide and then reducing those emissions by a specified percentage each year for at least a decade. Plaintiffs have not, however, requested that damages be awarded in connection with their claims. Southern Company believes these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. Southern Company has not yet responded to the suits; however, it intends to vigorously defend against these claims. While the outcome cannot be determined at this time, an adverse judgment could result in substantial capital expenditures.

Other Environmental Matters

On March 12, 2004, the EPA redesignated the Birmingham, Alabama area from nonattainment to attainment under the one-hour ozone national ambient air quality standard. On April 30, 2004, the EPA published its eight-hour ozone nonattainment designations and a portion of the rules implementing the new eight-hour standard. Areas within the Southern Company’s service area that have been designated as nonattainment under the eight-hour ozone standard include Birmingham, Macon (Georgia), and a 20-county area within metropolitan Atlanta. Under the implementation provisions of the new rule, the EPA announced that the one-hour ozone standard will be revoked on June 15, 2005. Areas classified as “severe” nonattainment areas under the one-hour standard will not be required to impose emissions fees as a result of nonattainment. Georgia Power, therefore, will no longer be subject to imposition of emissions fees if the Atlanta area does not come into attainment with the one-hour standard. The impact of the eight-hour designations and the new standards will depend on the development and implementation of applicable state regulations and therefore cannot be determined at this time.

     In June 2004, the EPA issued its recommendations for areas to be designated “nonattainment” for the fine particle national ambient air quality standard. Areas within Southern Company’s service area that were included in the EPA’s proposed fine particulate matter designations include 24 counties in the metro-Atlanta area; counties surrounding Macon, Athens, and Columbus, Georgia; counties surrounding Birmingham, Alabama; and counties in Alabama and Georgia near Chattanooga, Tennessee. Alabama Power, Georgia Power and Southern Power own several plants located within the counties proposed for the nonattainment designations. The EPA plans to make final nonattainment designations for fine particulate matter by the end of 2004.

     On April 21, 2004, the EPA published the final regional nitrogen oxide reduction rules applicable to Georgia. These rules specify that the State of Georgia must submit a revised state implementation plan by April 2005, and affected sources must comply with the reduction requirements by May 1, 2007. The impact of these regulations will depend on the development and approval of Georgia’s state implementation plan and cannot be determined at this time.

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

     Additionally, on May 5, 2004, the EPA published proposed amendments to its Regional Haze rules with respect to Best Available Retrofit Technology guidelines and requirements. The impact of these regulations will depend on the development and implementation of the final rules and implementation by the states, and therefore cannot be determined at this time.

FERC and State PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “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” in Item 8 of the Form 10-K. On April 14, 2004, the FERC issued an order that abandoned the SMA test and adopted a new interim analysis for measuring generation market power. This new interim approach includes a pivotal supplier analysis and a wholesale market share analysis, the results of which provide a rebuttable presumption regarding generation market power. The FERC’s order also sets forth procedures for rebutting these presumptions and addresses mitigation measures for those entities that are found to have market power. In the absence of specific mitigation measures, the order includes several cost-based mitigation measures that would apply by default. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. Southern Company, the retail operating companies and Southern Power believe that it may be difficult for a traditional utility company, or an affiliate thereof, with a significant load service obligation and generation to satisfy that obligation, and that is not a member of a large, FERC-approved RTO, to pass all aspects of the market power screens as currently designed. However, each of the companies believes that it has an appropriate basis to rebut the generation market power presumption.

     On July 8, 2004, the FERC denied Southern Company’s request for rehearing, along with a number of others, and reaffirmed the interim tests that it adopted in April. Southern Company will submit the required analyses by August 9, 2004. In the event that the FERC’s default mitigation measures are ultimately applied, Southern Power and the retail operating companies may be required to charge cost-based rates, 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.

Transmission

See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — FERC Matters — Transmission” of Southern Company in Item 7 of the Form 10-K for information on the FERC’s order related to RTOs and the FERC’s notice of proposed rulemaking regarding open access transmission service and standard electricity market design.

Plant McIntosh Construction Project

See Note 3 to the financial statements of Southern Company under “FERC Matters” in Item 8 of the Form 10-K for information regarding PPAs between Southern Power and Georgia Power and Savannah Electric for Plant McIntosh capacity. In April 2003, Southern Power applied for FERC approval of these PPAs. In July 2003, the FERC accepted the PPAs to become effective June 1, 2005, subject to refund and ordered that hearings be held. To ensure the timely completion of construction on McIntosh units 10 and 11 and their availability in the summer of 2005 as supply side resources for the retail customers in the State of Georgia, on May 7, 2004, Savannah Electric and Georgia Power requested the Georgia PSC to direct them to acquire the McIntosh construction project. Savannah Electric and Georgia Power proposed to place the units in rate base at a cost

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

approved by the Georgia PSC and to recover the unit operation and maintenance costs as retail service expenses as may be approved by the Georgia PSC. The Georgia PSC issued such an order on May 18, 2004 and the transfer occurred on May 24, 2004. On May 20, 2004, Southern Power filed a request to withdraw the PPAs and to terminate the ongoing FERC proceedings. On August 4, 2004, the FERC issued a notice that it allowed the request to withdraw the PPAs to be accepted and to become effective by operation of law on July 20, 2004. However, the FERC made no determination on what additional steps may need to be taken with respect to testimony provided in the proceedings. The ultimate outcome of this matter cannot now be determined.

     The May 18, 2004 Georgia PSC order also directed Georgia Power and Savannah Electric to file an application within 10 days of completing such purchase to amend the resource certificate granted by the Georgia PSC in 2002 to describe the capacity resource as being the McIntosh units 10 and 11 (as opposed to the McIntosh PPAs), the approximate construction schedule (which is not expected to change) and the proposed rate base treatment. The application was filed on June 3, 2004 and the Georgia PSC will have 180 days to respond. The Georgia PSC is expected to review the application in accordance with its affiliate transaction guidelines, which require a lower of cost or market approach unless otherwise determined by the Georgia PSC. Georgia Power and Savannah Electric have submitted information showing that the book cost of the McIntosh construction project is lower than its market value. However, full recovery of the project costs depends on the outcome of the Georgia PSC’s review. In the event the Georgia PSC does not allow full recovery of the project costs, then part of such costs may have to be written off in accordance with FASB Statement No. 90, “Accounting for Abandonments and Disallowed Plant Costs.” At June 30, 2004, the investment in the McIntosh construction project totaled approximately $355.2 million and $69.7 million for Georgia Power and Savannah Electric, respectively. The ultimate outcome of the Georgia PSC’s review cannot now be determined.

Georgia Power Retail Rate Case

On July 1, 2004, Georgia Power filed a request with the Georgia PSC for an approximate 7 percent increase in retail revenues, effective January 1, 2005. The requested increase is based on a future test year ending July 31, 2005 and a proposed retail return on common equity of 12.5 percent. Georgia Power is currently operating under a three-year retail rate order that expires December 31, 2004. Under the terms of the existing order, earnings are evaluated annually against a retail return on common equity range of 10 percent to 12.95 percent. Two-thirds of any earnings above the 12.95 percent return are applied to rate refunds, with the remaining one-third retained by Georgia Power. The order required Georgia Power to file a general rate case on July 1, 2004.

     The increase in retail revenues is being requested to cover the higher costs of purchased power; operating and maintenance expenses; environmental compliance; and continued investment in new generation, transmission and distribution facilities to support growth and ensure reliability. Georgia Power expects the Georgia PSC to issue a final order in this matter during December 2004. The final outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — Other Matters” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Georgia Power Retail Rate Orders” in Item 8 of the Form 10-K and Note (I) to the Condensed Financial Statements herein for additional information.

Alabama Power Environmental Rate Filing

On August 2, 2004, Alabama Power made a filing with the Alabama PSC to establish a specific rate mechanism for the recovery of retail costs associated with environmental laws, regulations or other such mandates. If approved, the rate mechanism would begin operation in January 2005 and provide for the recovery of these costs pursuant to a factor that will be calculated annually. It is anticipated that for the first two years of the increase, retail rates would increase under the proposed mechanism by approximately 1% ($33 million) in 2005 and approximately an additional 1% ($30 million) in 2006. Such environmental cost recovery would include operations and maintenance expense, depreciation and a return on invested capital. The outcome of this matter cannot now be determined.

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

Mississippi Power Retail Rate Filing

On December 5, 2003, Mississippi Power filed a request with the Mississippi PSC to include 266 megawatts of Plant Daniel Units 3 and 4 generating capacity not included in jurisdictional cost of service. As part of Mississippi Power’s proposal to include the additional Plant Daniel capacity in retail rates, the Mississippi PSC, at the time of such filing, issued an interim accounting order in December 2003 directing Mississippi Power to expense and record in 2003 a regulatory liability in the amount of approximately $60 million while the Mississippi PSC fully considered the entire request. On May 25, 2004, the Mississippi PSC issued an order related to this matter. The Mississippi PSC approved Mississippi Power’s request to reclassify the 266 megawatts of Plant Daniel Unit 3 and 4 capacity to jurisdictional cost of service effective January 1, 2004 and authorized Mississippi Power to include the related costs and revenue credits in jurisdictional rate base, cost of service and revenue requirement calculations for purposes of retail rate recovery. Mississippi Power will amortize the regulatory liability established pursuant to the Mississippi PSC’s interim order in December 2003 as an increase to earnings as follows: $16.5 million in 2004, $25.1 million in 2005, $13.0 million in 2006 and $5.7 million in 2007.

     In addition, the Mississippi PSC also approved Mississippi Power’s requested changes to PEP, including the use of a forward-looking test year, with appropriate oversight; annual, rather than semi-annual, filings; and certain changes to the performance indicator mechanisms. Rate changes will be limited to 4% of retail revenues annually under the revised PEP. The Mississippi PSC will review all aspects of PEP in 2007. See Note 3 to the financial statements of Southern Company under “Mississippi Power Regulatory Filing” 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 recent months, the companies have experienced higher than expected fuel costs for coal and gas. Those higher fuel costs have increased the under recovered fuel costs included in the Condensed Balance Sheets herein. The companies will continue to monitor the under recovered fuel cost balance in light of these higher fuel costs.

Mirant Related Matters

See Note 3 to the financial statements of Southern Company under “Mirant Related Matters” in Item 8 and MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — Other Matters” of Southern Company in Item 7 of the Form 10-K and Note (B) to the Condensed Financial Statements herein under “Mirant Related Matters”. In July 2003, Mirant filed for voluntary reorganization under Chapter 11 of the Federal Bankruptcy Code. Southern Company has various contingent liabilities associated with Mirant, including guarantees of contractual commitments, litigation and joint and several liabilities in connection with the consolidated federal income tax return. The ultimate outcome of such contingent liabilities cannot now be determined.

Income Tax Matters

See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — Income Tax Matters” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Income Tax Issues” in Item 8 of the Form 10-K for information regarding IRS and other challenges to Southern Company’s transactions related to synthetic fuel tax credits and international

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

leveraged leases. See Note (B) to the Condensed Financial Statements herein under “Income Tax Matters” for information on potential additional challenges related to the international leveraged leases that could have material impacts on Southern Company’s financial statements. The ultimate outcome of these matters cannot now be determined.

Other Matters

Southern Power is completing limited construction activities on Plant Franklin Unit 3 to preserve the long-term viability of the project but has deferred final completion until the 2008-2011 period. See Note 3 to the financial statements of Southern Company under “Uncontracted Generating Capacity” in Item 8 of the Form 10-K for additional information. The final outcome of these matters cannot now be determined.

     See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — Other Matters” of Southern Company in Item 7 of the Form 10-K for information on nuclear security measures. Implementation plans for the measures ordered by the NRC to be in effect by October 29, 2004 have been finalized based on current interpretations of the requirements. Alabama Power and Georgia Power — based on its ownership interest — currently estimate their respective expenditures related to these security measures to total $9.6 million and $9.3 million, of which $9.3 million and $1.3 million will be capitalized. These estimates are subject to change in the event additional NRC guidance is provided.

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

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

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Southern Company prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Southern Company in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Company’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS — ACCOUNTING POLICIES — “Application of Critical Accounting Policies and Estimates” of Southern Company in Item 7 of the Form 10-K for a complete discussion of Southern Company’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Plant Daniel Capacity. Also see Note (K) to the Condensed Financial Statements herein for additional information related to Mississippi Power’s request to include the Plant Daniel capacity in jurisdictional cost of service and the related Mississippi PSC order.

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

New Accounting Standards

On March 31, 2004, Southern Company prospectively adopted FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities,” which requires the primary beneficiary of a variable interest entity to consolidate the related assets and liabilities. The adoption of FASB Interpretation No. 46R had no impact on Southern Company’s net income. However, as a result of the adoption, Southern Company and the retail operating companies deconsolidated certain wholly-owned trusts established to issue preferred securities since Southern Company and the retail operating companies do not meet the definition of primary beneficiary established by FASB Interpretation No. 46R. In addition, Southern Company consolidated its 85% limited partnership investment in an energy/telecom venture capital fund that was previously accounted for under the equity method. See Note (D) to the Condensed Financial Statements herein for additional information related to the adoption of FASB Interpretation No. 46R.

     In May 2004, the FASB approved Staff Position (FSP) No. 106-2, “Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “Medicare Act”).” FSP No. 106-2 requires recognition of the impacts of the Medicare Act in the accumulated post-retirement benefit obligation and future cost of service for post-retirement medical plans and may be applied retroactively to the enactment of the Medicare Act in December 2003 or prospectively effective for the third quarter 2004. Southern Company has elected to apply this treatment prospectively. Pending the finalization of federal regulations governing the subsidy effected in the Medicare Act, Southern Company does not anticipate a material impact on its financial statements from the adoption of FSP No. 106-2.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Major changes in Southern Company’s financial condition during the first six months of 2004 included $1.0 billion used for gross property additions to utility plant. The funds for these additions and other capital requirements were primarily obtained from net proceeds from short- and long-term security issuances of approximately $685 million and operating activities. See Southern Company’s Condensed Consolidated Statements of Cash Flows and “Financing Activities” 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 Southern Company in Item 7 of the Form 10-K for a description of Southern Company’s capital requirements for its construction program and other funding requirements associated with scheduled maturities of long-term debt, as well as the related interest, preferred stock dividends, leases, trust funding requirements and other purchase commitments. Approximately $924 million will be required by June 30, 2005 for redemptions and maturities of long-term debt.

Sources of Capital

Southern Company intends to meet its future capital needs through internal cash flow and external security issuances. The amounts and timing of additional equity capital to be raised will be contingent on Southern Company’s investment opportunities. The retail operating companies and Southern Power plan to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from operating cash flows, security issuances and term loan and short-term borrowings. However, the amount, type and timing of any financings, if needed, will depend upon market conditions and regulatory approval. See BUSINESS — “Financing Programs” in Item 1 and MANAGEMENT’S DISCUSSION AND

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

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 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, 2004 approximately $191 million of cash and cash equivalents and approximately $3.5 billion of unused credit arrangements with banks, of which $251 million expire in 2004, $1.5 billion expire in 2005 and $1.7 billion expire in 2006 and beyond. Of the facilities maturing in 2004 and 2005, $1.22 billion contain provisions allowing two-year term loans executable at the expiration date and $215 million contain provisions allowing one-year term loans executable at the expiration date. These unused credit arrangements also provide liquidity support to variable rate pollution control bonds and commercial paper programs. Southern Company expects to renew its credit facilities, as needed, prior to expiration. The retail operating companies may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of each of the retail operating companies. At June 30, 2004, the Southern Company system had outstanding commercial paper of $727 million and extendible commercial notes of $10.9 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 and its subsidiaries do not have any credit agreements 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 below investment grade. These contracts are primarily for physical electricity purchases and sales, fixed-price physical gas purchases and agreements covering interest rate swaps. At June 30, 2004, the maximum potential collateral requirements were approximately $429.8 million. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit or cash.

Market Price Risk

Southern Company’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2003 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. To mitigate residual risks relative to movements in electricity prices, the retail operating companies and Southern Power enter into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas purchases. Also, the retail operating companies have each implemented fuel-hedging

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

programs at the instruction of their respective PSCs. The fair value of derivative energy contracts at June 30, 2004 was as follows:

     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 2004, Southern Company subsidiaries issued $775 million of senior notes, $265 million of other long-term debt, $175 million of preferred stock and $62 million of common stock through employee and director stock plans. The issuances were primarily used to refund senior notes and other long-term debt and to fund ongoing construction projects. The remainder was used to repay short-term debt. See Southern Company’s Condensed Consolidated Statements of Cash Flows herein for further details on financing activities during the first six months of 2004.

     In January 2004, Georgia Power issued $100 million of Series S 4.00% Senior Notes due January 15, 2011 and $100 million of Series T 5.75% Senior Public Income Notes due January 15, 2044. The proceeds from these sales were used in March 2004 to redeem all of its outstanding Series H 6.70% Senior Insured Quarterly Notes due March 1, 2011 and Series D 6 5/8% Senior Notes due March 31, 2039.

     Further in January 2004, Georgia Power Capital Trust VII, a statutory trust, sold $200 million of its 5 7/8% Trust Preferred Securities, which are guaranteed by Georgia Power. The net proceeds from this issuance were used to redeem 6.85% Trust Preferred Securities of Georgia Power Capital Trust IV. In connection with this transaction, Georgia Power issued $206 million of its junior subordinated debentures to Georgia Power Capital Trust VII.

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

     In February 2004, Alabama Power issued 4,000,000 shares ($100 million aggregate stated capital) of 5.30% Class A Preferred Stock, Cumulative, Par Value $1 Per Share (Stated Capital $25 Per Share) and $200 million of Series Z 5.125% Senior Notes due February 15, 2019. The proceeds from these sales were used to repay a portion of Alabama Power’s outstanding short-term indebtedness and for other general corporate purposes, including Alabama Power’s continuous construction program.

     Also in February 2004, Georgia Power issued $150 million of Series U Floating Rate Senior Notes due February 17, 2009. The proceeds of this sale were used for general corporate purposes.

     In March 2004, Mississippi Power issued $40 million of Series F Floating Rate Senior Notes due March 9, 2009. The proceeds from this sale, along with other monies of Mississippi Power were used to repay $80 million aggregate principal amount of Mississippi Power’s Series D Floating Rate Senior Notes due March 12, 2004.

     Additionally, in April 2004, Alabama Power issued $150 million of Series AA 5 5/8% Senior Notes due April 15, 2034 and terminated $150 million of swaps at a gain of $6 million. The proceeds from the sale were used together with other funds to redeem, in May 2004, $200 million in aggregate principal amount of the Series J 6.75% Senior Notes due June 30, 2039. The gain from the terminated swaps was deferred in Other Comprehensive Income and will be amortized to income over the life of the Series AA Senior Notes.

     Also in April 2004, Gulf Power issued $35 million of Series J 5.875% Senior Notes due April 1, 2044. The proceeds from this issue were used for general corporate purposes, including Gulf Power’s continuous construction program.

     Also, in April 2004, Mississippi Power issued 1,200,000 Depositary Shares ($30 million aggregate stated capital) each representing one-fourth of a share of 5.25% Series Preferred Stock, cumulative, par value $100 per share. The proceeds from this sale were primarily used to redeem various issues of preferred stock and the remainder was used for general corporate purposes.

     Further, in June, 2004, Savannah Electric issued 1,800,000 shares ($45 million aggregate par value) of 6.00% Series Preferred Stock, non-cumulative, par value $25 per share. The proceeds from this sale were used to repay a portion of its outstanding short-term indebtedness that had been incurred primarily to finance the purchase of its share of Units 10 and 11 of Plant McIntosh.

     Subsequent to June 30, 2004, Alabama Power has entered into interest rate hedging transactions related to the anticipated issuance of senior notes totaling approximately $125 million. The notes are expected to be issued in 2005.

     Southern Company and its subsidiaries plan to continue, to the extent possible, a program to retire higher-cost debt and replace these securities with lower-cost capital.

     The market price of Southern Company’s common stock at June 30, 2004 was $29.15 per share and the book value was $13.43 per share, representing a market-to-book ratio of 217%, compared to $30.25, $13.13 and 230%, respectively, at the end of 2003. The dividend for the second quarter 2004 was $0.35 per share compared to $0.3425 per share in the second quarter 2003.

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PART I

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

     (a)     Evaluation of disclosure controls and procedures.

As of the end of the period covered by this quarterly report, Southern Company, the retail operating companies 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 disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon those 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 each company (including its consolidated subsidiaries) required to be included in periodic filings with the SEC.

     (b)     Changes in internal controls.

There have been no changes in Southern Company’s, the retail operating companies’ 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 2004 that have materially affected or are reasonably likely to materially affect, Southern Company’s, the retail operating companies’ or Southern Power’s internal control over financial reporting.

26

ALABAMA POWER COMPANY

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