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

SOUTHERN CO.
Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

     
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2004
 
OR
 
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___to___
         
Commission   Registrant, State of Incorporation,   I.R.S. Employer
File Number
  Address and Telephone Number
  Identification No.
1-3526
  The Southern Company   58-0690070
  (A Delaware Corporation)    
  270 Peachtree Street, N.W.    
  Atlanta, Georgia 30303    
  (404) 506-5000    
 
       
1-3164
  Alabama Power Company   63-0004250
  (An Alabama Corporation)    
  600 North 18th Street    
  Birmingham, Alabama 35291    
  (205) 257-1000    
 
       
1-6468
  Georgia Power Company   58-0257110
  (A Georgia Corporation)    
  241 Ralph McGill Boulevard, N.E.    
  Atlanta, Georgia 30308    
  (404) 506-6526    
 
       
0-2429
  Gulf Power Company   59-0276810
  (A Maine Corporation)    
  One Energy Place    
  Pensacola, Florida 32520    
  (850) 444-6111    
 
       
001-11229
  Mississippi Power Company   64-0205820
  (A Mississippi Corporation)    
  2992 West Beach    
  Gulfport, Mississippi 39501    
  (228) 864-1211    
 
       
1-5072
  Savannah Electric and Power Company   58-0418070
  (A Georgia Corporation)    
  600 East Bay Street    
  Savannah, Georgia 31401    
  (912) 644-7171    
 
       
333-98553
  Southern Power Company   58-2598670
  (A Delaware Corporation)    
  270 Peachtree Street, N.W.    
  Atlanta, Georgia 30303    
  (404) 506-5000    



 


Table of Contents

     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).

                 
Registrant
  Yes
  No
The Southern Company
    x          
Alabama Power Company
            x  
Georgia Power Company
            x  
Gulf Power Company
            x  
Mississippi Power Company
            x  
Savannah Electric and Power Company
            x  
Southern Power Company
            x  
             
    Description of   Shares Outstanding
Registrant
  Common Stock
  at March 31, 2004
The Southern Company
  Par Value $5 Per Share     737,463,215  
Alabama Power Company
  Par Value $40 Per Share     7,750,000  
Georgia Power Company
  Without Par Value     7,761,500  
Gulf Power Company
  Without Par Value     992,717  
Mississippi Power Company
  Without Par Value     1,121,000  
Savannah Electric and Power Company
  Par Value $5 Per Share     10,844,635  
Southern Power Company
  Par Value $0.01 Per Share     1,000  

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

2


INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2004

                 
            Page
            Number
DEFINITIONS  
 
    5  
       
PART I — FINANCIAL INFORMATION
       
Item 1.  
Financial Statements (Unaudited)
       
Item 2.  
Management’s Discussion and Analysis of Results of Operations and Financial Condition
       
       
The Southern Company and Subsidiary Companies
       
            8  
            9  
            10  
            12  
            13  
       
Alabama Power Company
       
            25  
            26  
            27  
            29  
            30  
       
Georgia Power Company
       
            38  
            39  
            40  
            42  
            43  
       
Gulf Power Company
       
            52  
            53  
            54  
            56  
            57  
       
Mississippi Power Company
       
            64  
            65  
            66  
            68  
            69  
       
Savannah Electric and Power Company
       
            77  
            78  
            79  
            81  
            82  
       
Southern Power Company
       
            89  
            90  
            91  
            93  
            94  
            100  
Item 3.  
Quantitative and Qualitative Disclosures about Market Risk
    22  
Item 4.  
Controls and Procedures
    23  

3


INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2004

                 
            Page
            Number
       
PART II — OTHER INFORMATION
       
Item 1.  
Legal Proceedings
    109  
Item 2.  
Changes in Securities, Unregistered Sales of Equity Securities and Use of Proceeds
    109  
Item 3.  
Defaults Upon Senior Securities
  Inapplicable
Item 4.  
Submission of Matters to a Vote of Security Holders
  Inapplicable
Item 5.  
Other Information
  Inapplicable
Item 6.  
Exhibits and Reports on Form 8-K
    109  
            113  

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DEFINITIONS

     
TERM
 
  MEANING
 
Alabama Power
  Alabama Power Company
Clean Air Act
  Clean Air Act Amendments of 1990
Dynegy
  Dynegy, Inc.
ECO Plan
  Environmental Compliance Overview Plan
EITF
  Emerging Issues Task Force
Energy Act
  Energy Policy Act of 1992
EPA
  U. S. Environmental Protection Agency
FASB
  Financial Accounting Standards Board
FERC
  Federal Energy Regulatory Commission
Form 10-K
  Combined Annual Report on Form 10-K of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric and Southern Power for the year ended December 31, 2003
Georgia Power
  Georgia Power Company
Gulf Power
  Gulf Power Company
IRC
  Internal Revenue Code
IRS
  Internal Revenue Service
LIBOR
  London Interbank Offered Rate
Mirant
  Mirant Corporation
Mississippi Power
  Mississippi Power Company
Mobile Energy
  Mobile Energy Services Company, L.L.C. and Mobile Energy Services Holdings, Inc.
Moody’s
  Moody’s Investors Service, Inc.
NRC
  Nuclear Regulatory Commission
PEP
  Performance Evaluation Plan
PPA
  Purchase Power Agreement
PSC
  Public Service Commission
PUHCA
  Public Utility Holding Company Act of 1935, as amended
retail operating companies
  Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric
RTO
  Regional Transmission Organization
S&P
  Standard and Poor’s, a division of The McGraw-Hill Companies, Inc.
Savannah Electric
  Savannah Electric and Power Company
SCS
  Southern Company Services, Inc.
SEC
  Securities and Exchange Commission
SMA
  Supply Margin Assessment
Southern Company
  The Southern Company
Southern Company GAS
  Southern Company Gas LLC
Southern Company system
  Southern Company, the retail operating companies, Southern Power and other subsidiaries
Southern LINC
  Southern Communications Services, Inc.
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
TVA
  Tennessee Valley Authority

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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:

  the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry and also changes in environmental, tax and other laws and regulations to which Southern Company and its subsidiaries are subject, as well as changes in application of existing laws and regulations;

  current and future litigation, regulatory investigations, proceedings or inquiries, including the pending EPA civil actions against certain Southern Company subsidiaries and current IRS audits;

  the effects, extent and timing of the entry of additional competition in the markets in which Southern Company’s subsidiaries operate;

  the impact of fluctuations in commodity prices, interest rates and customer demand;

  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 pending and future rate cases and negotiations;

  effects of and changes in political, legal and economic conditions and developments in the United States, including the current state of the economy;

  the performance of projects undertaken by the non-traditional business and the success of efforts to invest in and develop new opportunities;

  internal restructuring or other restructuring options that may be pursued;

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

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

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

  the direct or indirect effect on Southern Company’s business resulting from the terrorist incidents on September 11, 2001, or any similar incidents or responses to such incidents;

  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;

  weather and other natural phenomena;

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

  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.

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THE SOUTHERN COMPANY
AND SUBSIDIARY COMPANIES

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

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Operating Revenues:
               
Retail sales
  $ 2,144,089     $ 1,973,844  
Sales for resale
    350,798       334,613  
Other electric revenues
    93,420       91,877  
Other revenues
    165,743       148,020  
 
   
 
     
 
 
Total operating revenues
    2,754,050       2,548,354  
 
   
 
     
 
 
Operating Expenses:
               
Fuel
    807,619       692,758  
Purchased power
    119,758       132,554  
Other operations
    535,772       493,866  
Maintenance
    237,497       229,710  
Depreciation and amortization
    240,654       244,988  
Taxes other than income taxes
    158,484       148,826  
 
   
 
     
 
 
Total operating expenses
    2,099,784       1,942,702  
 
   
 
     
 
 
Operating Income
    654,266       605,652  
Other Income and (Expense):
               
Allowance for equity funds used during construction
    8,184       7,851  
Interest income
    7,654       4,498  
Equity in losses of unconsolidated subsidiaries
    (56,447 )     (44,736 )
Leveraged lease income
    15,927       17,715  
Interest expense, net of amounts capitalized
    (130,585 )     (123,761 )
Distributions on mandatorily redeemable preferred securities
    (31,168 )     (39,586 )
Preferred dividends of subsidiaries
    (5,472 )     (4,750 )
Other income (expense), net
    (8,162 )     (4,283 )
 
   
 
     
 
 
Total other income and (expense)
    (200,069 )     (187,052 )
 
   
 
     
 
 
Earnings Before Income Taxes
    454,197       418,600  
Income taxes
    123,055       121,168  
 
   
 
     
 
 
Earnings Before Cumulative Effect of Accounting Change
    331,142       297,432  
Cumulative effect of accounting change — less income taxes of $231
          367  
 
   
 
     
 
 
Consolidated Net Income
  $ 331,142     $ 297,799  
 
   
 
     
 
 
Common Stock Data:
               
Consolidated basic earnings per share
  $ 0.45     $ 0.41  
Consolidated diluted earnings per share
  $ 0.45     $ 0.41  
Average number of basic shares of common stock outstanding (in thousands)
    736,638       718,943  
Average number of diluted shares of common stock outstanding (in thousands)
    741,603       724,891  
Cash dividends paid per share of common stock
  $ 0.35     $ 0.3425  

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

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

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Operating Activities:
               
Consolidated net income
  $ 331,142     $ 297,799  
Adjustments to reconcile consolidated net income to net cash provided from operating activities —
               
Depreciation and amortization
    293,828       294,146  
Deferred income taxes and investment tax credits
    135,801       78,032  
Equity in losses of unconsolidated subsidiaries
    25,316       27,167  
Leveraged lease income
    (15,927 )     (17,715 )
Pension, postretirement, and other employee benefits
    10,208     1,040  
Tax benefit of stock options
    11,731       10,758  
Other, net
    (44,543 )     (3,790 )
Changes in certain current assets and liabilities —
               
Receivables, net
    101,118       200,043  
Fossil fuel stock
    23,978       6,831  
Materials and supplies
    (2,932 )     (9,542 )
Other current assets
    (70,044 )     (125,293 )
Accounts payable
    (26,804 )     (76,526 )
Accrued taxes
    (159,123 )     (8,259 )
Accrued compensation
    (240,163 )     (263,560 )
Other current liabilities
    (65,595 )     (43,736 )
 
   
 
     
 
 
Net cash provided from operating activities
    307,991       367,395  
 
   
 
     
 
 
Investing Activities:
               
Gross property additions
    (512,667 )     (530,642 )
Cost of removal net of salvage
    (9,767 )     (20,656 )
Other
    (32,395 )     (52,443 )
 
   
 
     
 
 
Net cash used for investing activities
    (554,829 )     (603,741 )
 
   
 
     
 
 
Financing Activities:
               
Increase in notes payable, net
    107,398       533,363  
Proceeds —
               
Long-term debt
    597,717       1,104,870  
Mandatorily redeemable preferred securities
    200,000        
Preferred stock
    100,000       125,000  
Common stock
    48,702       110,903  
Redemptions —
               
Long-term debt
    (280,732 )     (1,299,768 )
Mandatorily redeemable preferred securities
    (240,000 )     (40,000 )
Payment of common stock dividends
    (257,506 )     (245,745 )
Other
    (14,524 )     (15,892 )
 
   
 
     
 
 
Net cash provided from financing activities
    261,055       272,731  
 
   
 
     
 
 
Net Change in Cash and Cash Equivalents
    14,217       36,385  
Cash and Cash Equivalents at Beginning of Period
    311,274       273,010  
 
   
 
     
 
 
Cash and Cash Equivalents at End of Period
  $ 325,491     $ 309,395  
 
   
 
     
 
 
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $11,962 and $18,066 capitalized for 2004 and 2003, respectively)
  $ 139,478     $ 117,458  
Income taxes (net of refunds)
  $ 25,884       ($117 )

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

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

                 
    At March 31,   At December 31,
Assets
  2004
  2003
    (in thousands)
Current Assets:
               
Cash and cash equivalents
  $ 325,491     $ 311,274  
Receivables —
               
Customer accounts receivable
    629,415       695,042  
Unbilled revenues
    256,938       275,395  
Under recovered regulatory clause revenues
    247,055       187,866  
Other accounts and notes receivable
    255,328       338,557  
Accumulated provision for uncollectible accounts
    (33,817 )     (30,155 )
Fossil fuel stock, at average cost
    292,148       316,126  
Vacation pay
    101,361       96,700  
Materials and supplies, at average cost
    573,274       570,787  
Prepaid expenses
    177,886       125,477  
Other
    69,782       30,380  
 
   
 
     
 
 
Total current assets
    2,894,861       2,917,449  
 
   
 
     
 
 
Property, Plant, and Equipment:
               
In service
    40,532,540       40,339,785  
Less accumulated depreciation
    14,495,666       14,303,516  
 
   
 
     
 
 
 
    26,036,874       26,036,269  
Nuclear fuel, at amortized cost
    210,041       222,667  
Construction work in progress
    1,496,049       1,274,888  
 
   
 
     
 
 
Total property, plant, and equipment
    27,742,964       27,533,824  
 
   
 
     
 
 
Other Property and Investments:
               
Nuclear decommissioning trusts, at fair value
    830,817       807,893  
Leveraged leases
    853,770       837,843  
Other
    317,691       238,193  
 
   
 
     
 
 
Total other property and investments
    2,002,278       1,883,929  
 
   
 
     
 
 
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    870,348       874,443  
Prepaid pension costs
    928,624       911,442  
Unamortized debt issuance expense
    150,173       151,558  
Unamortized loss on reacquired debt
    331,974       326,389  
Other
    446,075       446,149  
 
   
 
     
 
 
Total deferred charges and other assets
    2,727,194       2,709,981  
 
   
 
     
 
 
Total Assets
  $ 35,367,297     $ 35,045,183  
 
   
 
     
 
 

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

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

                         
    At March 31,           At December 31,
Liabilities and Stockholders' Equity
  2004
          2003
    (in thousands)
Current Liabilities:
                       
Securities due within one year
  $ 1,070,362     $         741,073  
Notes payable
    674,992               567,771  
Accounts payable
    658,576               699,524  
Customer deposits
    189,934               189,000  
Accrued taxes —
                       
Income taxes
    126,048               153,757  
Other
    135,731               248,937  
Accrued interest
    170,373               186,935  
Accrued vacation pay
    131,758               128,505  
Accrued compensation
    137,480               436,854  
Other
    283,855               264,688  
 
   
 
             
 
 
Total current liabilities
    3,579,109               3,617,044  
 
   
 
             
 
 
Long-term Debt
    10,111,378               10,164,018  
 
   
 
             
 
 
Long-term Debt Payable to Affiliated Trusts
    1,960,644                
 
   
 
             
 
 
Mandatorily Redeemable Preferred Securities
                  1,900,486  
 
   
 
             
 
 
Deferred Credits and Other Liabilities:
                       
Accumulated deferred income taxes
    4,706,611               4,586,377  
Deferred credits related to income taxes
    400,496               409,339  
Accumulated deferred investment tax credits
    572,638               579,490  
Employee benefit obligations
    803,275               764,624  
Asset retirement obligations
    859,251               845,392  
Other cost of removal obligations
    1,268,682               1,268,729  
Miscellaneous regulatory liabilities
    541,232               576,393  
Other
    262,573               262,579  
 
   
 
             
 
 
Total deferred credits and other liabilities
    9,414,758               9,292,923  
 
   
 
             
 
 
Total Liabilities
    25,065,889               24,974,471  
 
   
 
             
 
 
Cumulative Preferred Stock of Subsidiaries
    523,126               423,126  
 
   
 
             
 
 
Common Stockholders’ Equity:
                       
Common stock, par value $5 per share —
                       
Authorized — 1 billion shares
                       
Issued — March 31, 2004: 737,666,597 Shares;
                       
— December 31, 2003: 735,021,270 Shares
                       
Treasury — March 31, 2004: 203,382 Shares;
                       
— December 31, 2003: 192,691 Shares
                       
Par value
    3,688,333               3,675,106  
Paid-in capital
    793,458               746,080  
Treasury, at cost
    (4,378 )             (4,066 )
Retained earnings
    5,415,465               5,343,471  
Accumulated other comprehensive loss
    (114,596 )             (113,005 )
 
   
 
             
 
 
Total Common Stockholders’ Equity
    9,778,282               9,647,586  
 
   
 
             
 
 
Total Liabilities and Stockholders’ Equity
  $ 35,367,297             $ 35,045,183  
 
   
 
             
 
 

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)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Net Income After Dividends on Preferred Stock
  $ 331,142     $ 297,799  
Other comprehensive loss:
               
Change in fair value of marketable securities, net of tax of $4,061 and $-, respectively
    7,623       112  
Changes in fair value of qualifying hedges, net of tax of $(7,711) and $(641), respectively
    (12,704 )     (717 )
Less: Reclassification adjustment for amounts included in net income, net of tax of $2,171 and $(4,698), respectively
    3,490       (7,367 )
 
   
 
     
 
 
COMPREHENSIVE INCOME
  $ 329,551     $ 289,827  
 
   
 
     
 
 

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

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

FIRST QUARTER 2004 vs. FIRST QUARTER 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 Item 1 – Business — The SOUTHERN System — “Retail Operating Companies,” “Southern Power” and “Other Business” in the Form 10-K.

Earnings

Southern Company’s first quarter 2004 earnings were $331 million ($0.45 per share) compared with $298 million ($0.41 per share) in the first quarter 2003. Earnings in the first quarter 2004 increased due to a number of positive factors including growth in the number of customers in the Southern Company service area, successful efforts to control costs and strong results from Southern Company’s competitive generation business. Southern Company’s regulated retail business results were positively impacted by customer growth, increased residential consumption per customer and increased demand by industrial customers, as well as favorable weather conditions. Earnings from the competitive generation business continued to favorably affect Southern Company’s net income due to new generating capacity available for sale in wholesale markets. This new capacity led to increases in capacity revenues from new contracts and sales of uncontracted capacity in those wholesale markets.

RESULTS OF OPERATIONS

Significant income statement items appropriate for discussion include the following:

                 
    Increase (Decrease)
    First Quarter
    (in thousands)
  %
Retail sales
  $ 170,245       8.6  
Sales for resale
    16,185       4.8  
Other revenues
    17,723       12.0  
Fuel expense
    114,861       16.6  
Purchased power
    (12,796 )     (9.7 )
Other operation and maintenance expenses
    49,693       6.9  
Taxes other than income taxes
    9,658       6.5  
Equity in losses of unconsolidated subsidiaries
    11,711       26.2  
Interest expense, net of amounts capitalized
    6,824       5.5  
Distributions on mandatorily redeemable preferred securities
    (8,418 )     (21.3 )

     Retail sales. Excluding fuel revenues, which generally do not affect net income, retail base revenues increased by $72 million, or 5.2%, in the first quarter 2004 when compared to the same period in 2003. In the first quarter, retail kilowatt-hour energy sales increased by 4.5% over the same period a year ago, primarily due

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

to customer and demand growth and the improving economy evidenced by increases in residential and industrial kilowatt-hour energy sales of 5.3% and 5.0%, respectively, when compared to the same period in 2003. The number of retail customers increased by 1.7% and weather-adjusted average consumption by residential customers increased by 4.4% in the first quarter 2004 when compared with the first quarter 2003.

     Sales for resale. During the first quarter 2004, sales for resale kilowatt-hours decreased by 2.6% when compared to the same period in the prior year. Sales for resale revenues increased $16.2 million, or 4.8%, when compared to the same period 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 first quarter 2004 as a result of capacity revenues from PPAs with neighboring utilities. In addition, sales from uncontracted capacity provided increased energy revenues. These increases in sales for resale revenues more than offset the reduction in revenues resulting from the termination of contracts with subsidiaries of Dynegy, Inc. 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 revenues. In the first quarter 2004, other revenues increased $17.7 million, or 12.0%. Revenues from Southern Company’s investments in synthetic fuels increased $18 million, primarily as a result of shifting 2004 production schedules to accelerate production earlier in the year, and retail gas marketing revenues increased $5 million, primarily as a result of colder than normal weather. These increases were partially offset by a decrease in revenues from energy-related services of $3 million.

     Fuel expense. During the first quarter 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 generation increased 3.1% for the first quarter 2004, when compared to the same period in the prior year. For the first quarter 2004, the average unit cost of fuel per net kilowatt-hour generated increased 3.0% when compared to the same period in the prior year. Increases in fuel expense at the retail operating companies are generally offset by fuel revenues and do not affect net income.

     Purchased power. The decrease in the first quarter 2004 for purchased power compared with the same period last year is primarily a result of lower demand for energy. These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues.

     Other operations and maintenance expenses. The increase in other operations and maintenance expenses in the first quarter 2004 is mainly attributable to increases in administrative and general, transmission and distribution maintenance and other production expenses. Administrative and general expenses increased $33.3 million, or 15.6%, primarily as a result of payroll and employee benefits costs as well as an increase of $12.2 million in freight costs related to the production of synthetic fuel. Transmission and distribution maintenance expenses increased $8.8 million as a result of completing work delayed from 2003. Other production expenses were up $7.0 million, or 5.4%, due to increased expenses primarily resulting from the operation of Southern Power’s new generating facilities.

     Taxes other than income taxes. The first quarter 2004 increase in taxes other than income taxes over the comparable period last year is primarily a result of increases in payroll taxes and property taxes on new facilities.

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RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     Equity in losses of unconsolidated subsidiaries. Losses from unconsolidated subsidiaries increased in the first quarter 2004 when compared to the corresponding period in 2003. These losses relate primarily to Southern Company’s investments in entities that produce synthetic fuel. Changes between periods are a result of fluctuations in production levels and are generally offset by income tax credits generated by such entities.

     Interest expense, net of amounts capitalized. The increase in interest expense, net of amounts capitalized in the first quarter 2004 when compared to the same period in 2003 is mainly attributable to an increase in the amount of senior notes outstanding and lower amounts of interest capitalized as projects have reached completion, partially offset by refinancing long-term debt with lower interest-rate debt. See Financial Condition and Liquidity – “Financing Activities” herein for additional information. Capitalized interest decreased by $6.1 million, or 33.8%, during the first quarter 2004 when compared to the corresponding period in 2003.

     Distributions on mandatorily redeemable preferred securities. The decrease in distributions on mandatorily redeemable preferred securities is a result of refinancing a portion of those securities with proceeds from long-term senior notes issuances or equity funds. See Accounting Policies – “New Accounting Standards” herein for related information regarding Southern Company’s adoption of FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities.”

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 Item 1 — Business — The SOUTHERN System — “Risk Factors” and Item 7 – Management’s Discussion and Analysis — “Future Earnings Potential” of Southern Company in the
Form 10-K.

Environmental Matters

Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be recovered. For additional information, including information on certain environmental litigation, see Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — Environmental Matters” of Southern Company and Note 3 to the financial statements of Southern Company in Item 8 of the Form 10-K under “New Source Review Actions” and “Plant Wansley Environmental Litigation.” 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

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

Source Review action against the TVA. The cases against Alabama Power, Georgia Power and Savannah Electric have been effectively stayed pending final resolution of the TVA appeal. With the denial of the EPA’s petition for review, the Court of Appeals’ decision is now final. 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.

     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.

     On April 21, 2004, the EPA published the final regional nitrogen oxide reduction rules applicable to Georgia. These rules specify that 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.

     Additionally, on April 15, 2004, the EPA announced proposed amendments to its Regional Haze rules with respect to Best Available Retrofit Technology (BART) 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 Matters

See Management’s Discussion and Analysis – “Future Earnings Potential – FERC Matters – Market-Based Rate Authority” 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. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. See Note (B) to the Condensed Financial Statements under “FERC Matters” herein for additional information. Southern Company anticipates filing a request for rehearing of the order. The final outcome of this matter cannot be determined at this time.

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

     Plant McIntosh Units 10 and 11 are currently under construction by Southern Power and are scheduled to be completed in June 2005. See Note 3 to Southern Company’s financial statements under “FERC Matters” in Item 8 of the Form 10-K and Note (C) to the Condensed Financial Statements herein for information regarding the FERC approval process for Southern Power’s PPAs with Georgia Power and Savannah Electric for Plant McIntosh Units 10 and 11.

     See Item 7 — Management’s Discussion and Analysis – “Future Earnings Potential — FERC Matters” of Southern Company in 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.

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 — “Future Earnings Potential – Other Matters” 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 Item 7— Management’s Discussion and Analysis — “Future Earnings Potential — Income Tax Matters” of Southern Company 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 leveraged leases. See Note (B) to the Condensed Financial Statements herein for information on potential additional challenges related to the international leveraged leases. The ultimate outcome of these matters cannot now be determined.

Other Matters

In January 2002, Georgia Power began operating under a three-year retail rate order. Under the terms of the 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 will be applied to rate refunds, with the remaining one-third retained by Georgia Power. Georgia Power is required to file a general rate case on July 1, 2004, in response to which the Georgia PSC would be expected to determine whether the rate order should be continued, modified, or discontinued. See Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential – Other Matters” and Note 3 to the financial statements of Southern Company under “Georgia Power Retail Rate Orders” in Item 8 of the Form 10-K for additional information.

     See Note 3 to Southern Company’s financial statements under “Mississippi Power Regulatory Filing” in Item 8 of the Form 10-K and Note (I) to the Condensed Financial Statements herein for information on Mississippi Power’s request to include 266 megawatts of Plant Daniel Units 3 and 4 generating capacity in jurisdictional cost of service. The final outcome of this matter cannot now be determined.

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

     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 Southern Company’s financial statements 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 — “Future Earnings Potential — Other Matters” 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 Item 7 - Management’s Discussion and Analysis – “Accounting Policies — Application of Critical Accounting Policies and Estimates” of Southern Company in 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 (I) 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.

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 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

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

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 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 (E) to the Condensed Financial Statements herein for additional information related to the adoption of Interpretation No. 46R.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Major changes in Southern Company’s financial condition during the first three months of 2004 included $513 million used for gross property additions to utility plant. The funds for these additions and other capital requirements were primarily obtained from operating activities and net proceeds from security issuances of approximately $533 million. See Southern Company’s Condensed Consolidated Statements of Cash Flows and “Financing Activities” herein for further details.

Capital Requirements and Contractual Obligations

See Item 7 — Management’s Discussion and Analysis — “Capital Requirements and Contractual Obligations” of Southern Company in 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 $1.1 billion will be required by March 31, 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 Item 1 — Business — “Financing Programs” and Item 7 — Management’s Discussion and Analysis — “Financial Condition And Liquidity – Sources of Capital” of Southern Company in 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 March 31, 2004 approximately $325 million of cash and cash equivalents and approximately $3.5 billion of unused credit arrangements with banks, of which $2.8 billion expire in 2004, $10 million expire in 2005 and $660 million expire in 2006 and beyond. Of the facilities maturing in 2004 and 2005, $2.2 billion contain provisions allowing two-year term loans executable at the expiration date and $225 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

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

needed, prior to expiration. The retail operating companies may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of each of the retail operating companies. At March 31, 2004, the Southern Company system had outstanding extendible commercial notes of $4 million and outstanding commercial paper of $671 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 Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity – Off-Balance Sheet Financing Arrangements” of Southern Company and Note 7 to the financial statements of Southern Company in Item 8 of the Form 10-K under “Operating Leases” 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 March 31, 2004, the maximum potential collateral requirements were approximately $426 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 programs at the instruction of their respective PSCs. The fair value of derivative energy contracts at March 31, 2004 was as follows:

         
    First Quarter
    2004
    Changes
    Fair Value
    (in thousands)
Contracts beginning of period
  $ 15,825  
Contracts realized or settled
    (5,647 )
New contracts at inception
     
Changes in valuation techniques
     
Current period changes
    33,334  
 
   
 
 
Contracts at March 31, 2004
  $ 43,512  
 
   
 
 

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RESULTS OF OPERATIONS AND FINANCIAL CONDITION

                         
    Source of March 31, 2004
    Valuation Prices
        Maturity
    Total  
    Fair Value
  Year 1
  1-3 Years
    (in thousands)
Actively quoted
  $ 43,512     $ 39,093       4,419  
External sources
                 
Models and other methods
                 
 
   
 
     
 
     
 
 
Contracts at March 31, 2004
  $ 43,512     $ 39,093     $ 4,419  
 
   
 
     
 
     
 
 

     For additional information, see Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity — Market Price Risk” of Southern Company in the Form 10-K 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 (G) to the Condensed Financial Statements herein.

Financing Activities

During the first quarter of 2004, Southern Company subsidiaries issued $590 million of senior notes, $208 million of other long-term debt, $100 million of preferred stock and $49 million of common stock through employee and directors stock plans. The issuances were primarily used to refund senior notes and other long-term debt. The remainder was used to repay short-term debt and fund ongoing construction programs. See Southern Company’s Condensed Consolidated Statements of Cash Flows herein for further details on financing activities during the first three 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.

     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.

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RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     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 5.625% Senior Notes due April 15, 2034. The proceeds from the sale will be used together with other funds to redeem, in May 2004, $200 million in aggregate principal amount of Alabama Power’s Series J 6.75% Senior Notes due June 30, 2039.

     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.

     Further, 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.

     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 March 31, 2004 was $30.50 per share and the book value was $13.26 per share, representing a market-to-book ratio of 230%, compared to $30.25, $13.13 and 230%, respectively, at the end of 2003. The dividend for the first quarter 2004 was $0.35 per share compared to $0.3425 per share in the first quarter 2003.

PART I

Item 3. Quantitative And Qualitative Disclosures About Market Risk.

     See Management’s Discussion and Analysis — “Financial Condition and Liquidity - Market Price Risk” herein for each registrant and Notes 1 and 6 to the financial statements of each registrant under “Financial Instruments” in Item 8 of the Form 10-K. Also, see Note (G) to the Condensed Financial Statements herein for information relating to derivative instruments.

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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, 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 controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the first quarter of 2004 that have materially affected or are reasonably likely to materially affect, Southern Company’s, the retail operating companies’ or Southern Power’s internal controls over financial reporting.

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ALABAMA POWER COMPANY

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ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Operating Revenues:
               
Retail sales
  $ 744,633     $ 670,829  
Sales for resale —
               
Non-affiliates
    111,945       119,281  
Affiliates
    65,788       61,987  
Other revenues
    37,328       38,024  
 
   
 
     
 
 
Total operating revenues
    959,694       890,121  
 
   
 
     
 
 
Operating Expenses:
               
Fuel
    271,979       239,744  
Purchased power —
               
Non-affiliates
    28,642       28,830  
Affiliates
    59,932       41,496  
Other operations
    146,386       134,543  
Maintenance
    80,387       74,575  
Depreciation and amortization
    105,353       100,211  
Taxes other than income taxes
    64,447       60,085  
 
   
 
     
 
 
Total operating expenses
    757,126       679,484  
 
   
 
     
 
 
Operating Income
    202,568       210,637  
Other Income and (Expense):
               
Allowance for equity funds used during construction
    4,110       4,737  
Interest income
    4,439       3,276  
Interest expense, net of amounts capitalized
    (50,079 )     (54,573 )
Distributions on mandatorily redeemable preferred securities
    (3,938 )     (3,441 )
Other income (expense), net
    (4,338 )     (5,719 )
 
   
 
     
 
 
Total other income and (expense)
    (49,806 )     (55,720 )
 
   
 
     
 
 
Earnings Before Income Taxes
    152,762       154,917  
Income taxes
    57,268       59,073  
 
   
 
     
 
 
Net Income
    95,494       95,844  
Dividends on Preferred Stock
    4,747       4,025  
 
   
 
     
 
 
Net Income After Dividends on Preferred Stock
  $ 90,747     $ 91,819  
 
   
 
     
 
 

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

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ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Operating Activities:
               
Net income
  $ 95,494     $ 95,844  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    124,220       121,910  
Deferred income taxes and investment tax credits, net
    35,416       14,105  
Deferred revenues
    (3,080 )     (14,577 )
Pension, postretirement, and other employee benefits
    (12,907 )     (10,633 )
Tax benefit of stock options
    4,091       4,195  
Other, net
    (7,712 )     15,062  
Changes in certain current assets and liabilities —
               
Receivables, net
    29,613       80,795  
Fossil fuel stock
    9,043       (3,949 )
Materials and supplies
    (3,448 )     (2,920 )
Other current assets
    (46,030 )     (58,344 )
Accounts payable
    (89,966 )     (112,134 )
Accrued taxes
    29,758       60,108  
Accrued compensation
    (47,924 )     (58,677 )
Other current liabilities
    6,368       35,666  
 
   
 
     
 
 
Net cash provided from operating activities
    122,936       166,451  
 
   
 
     
 
 
Investing Activities:
               
Gross property additions
    (204,249 )     (185,102 )
Cost of removal net of salvage
    (9,272 )     (10,865 )
Other
    14,048       2,160  
 
   
 
     
 
 
Net cash used for investing activities
    (199,473 )     (193,807 )
 
   
 
     
 
 
Financing Activities:
               
Increase (decrease) in notes payable, net
          (36,991 )
Proceeds —
               
Senior notes
    200,000       620,000  
Preferred stock
    100,000       125,000  
Common stock
    20,000        
Redemptions —
               
Senior notes
          (560,800 )
Other long-term debt
    (1,438 )     (236 )
Payment of preferred stock dividends
    (4,636 )     (3,200 )
Payment of common stock dividends
    (109,325 )     (107,550 )
Other
    (4,807 )     (2,949 )
 
   
 
     
 
 
Net cash provided from financing activities
    199,794       33,274  
 
   
 
     
 
 
Net Change in Cash and Cash Equivalents
    123,257       5,918  
Cash and Cash Equivalents at Beginning of Period
    42,752       22,685  
 
   
 
     
 
 
Cash and Cash Equivalents at End of Period
  $ 166,009     $ 28,603  
 
   
 
     
 
 
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $1,648 and $2,507 capitalized for 2004 and 2003, respectively)
  $ 36,445     $ 31,313  
Income taxes (net of refunds)
  $ 2,140     $  

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

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ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

                 
    At March 31,   At December 31,
Assets
  2004
  2003
    (in thousands)
Current Assets:
               
Cash and cash equivalents
  $ 166,009     $ 42,752  
Receivables —
               
Customer accounts receivable
    212,369       240,562  
Unbilled revenues
    83,130       95,953  
Under recovered regulatory clause revenues
    38,403        
Other accounts and notes receivable
    39,994       53,547  
Affiliated companies
    34,413       48,876  
Accumulated provision for uncollectible accounts
    (5,868 )     (4,756 )
Fossil fuel stock, at average cost
    77,950       86,993  
Vacation pay
    35,530       35,530  
Materials and supplies, at average cost
    215,138       211,690  
Prepaid expenses
    82,297       44,608  
Other
    27,797       19,454  
 
   
 
     
 
 
Total current assets
    1,007,162       875,209  
 
   
 
     
 
 
Property, Plant, and Equipment:
               
In service
    14,289,720       14,224,117  
Less accumulated provision for depreciation
    4,956,474       4,905,920  
 
   
 
     
 
 
 
    9,333,246       9,318,197  
Nuclear fuel, at amortized cost
    86,907       93,611  
Construction work in progress
    410,615       321,316  
 
   
 
     
 
 
Total property, plant, and equipment
    9,830,768       9,733,124  
 
   
 
     
 
 
Other Property and Investments:
               
Equity investments in unconsolidated subsidiaries
    47,279       47,811  
Nuclear decommissioning trusts, at fair value
    395,607       384,574  
Other
    25,495       16,992  
 
   
 
     
 
 
Total other property and investments
    468,381       449,377  
 
   
 
     
 
 
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    320,166       321,077  
Prepaid pension costs
    456,669       446,256  
Unamortized loss on reacquired debt
    108,886       110,946  
Other
    130,315       134,635  
 
   
 
     
 
 
Total deferred charges and other assets
    1,016,036       1,012,914  
 
   
 
     
 
 
Total Assets
  $ 12,322,347     $ 12,070,624  
 
   
 
     
 
 

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

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ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

                 
    At March 31,   At December 31,
Liabilities and Stockholder's Equity
  2004
  2003
    (in thousands)
Current Liabilities:
               
Securities due within one year
  $ 725,011     $ 526,019  
Accounts payable —
               
Affiliated
    120,047       135,017  
Other
    92,781       162,314  
Customer deposits
    48,513       47,507  
Accrued taxes —
               
Income taxes
    68,524       83,544  
Other
    44,169       22,273  
Accrued interest
    56,710       46,489  
Accrued vacation pay
    35,530       35,530  
Accrued compensation
    27,697       75,620  
Other
    43,945       34,513  
 
   
 
     
 
 
Total current liabilities
    1,262,927       1,168,826  
 
   
 
     
 
 
Long-term Debt
    3,376,165       3,377,148  
 
   
 
     
 
 
Long-term Debt Payable to Affiliated Trusts
    309,279        
 
   
 
     
 
 
Mandatorily Redeemable Preferred Securities
          300,000  
 
   
 
     
 
 
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    1,626,767       1,571,076  
Deferred credits related to income taxes
    158,555       162,168  
Accumulated deferred investment tax credits
    213,570       216,309  
Employee benefit obligations
    178,466       180,960  
Deferred capacity revenues
    33,486       36,567  
Asset retirement obligations
    364,775       358,759  
Asset retirement obligation regulatory liability
    136,356       127,346  
Other cost of removal obligations
    580,389       574,445  
Miscellaneous regulatory liabilities
    78,556       86,323  
Other
    34,873       37,525  
 
   
 
     
 
 
Total deferred credits and other liabilities
    3,405,793       3,351,478  
 
   
 
     
 
 
Total Liabilities
    8,354,164       8,197,452  
 
   
 
     
 
 
Cumulative Preferred Stock
    472,512       372,512  
 
   
 
     
 
 
Common Stockholder’s Equity:
               
Common stock, par value $40 per share —
               
Authorized - 15,000,000 shares
               
Outstanding - March 31, 2004: 7,750,000 Shares
               
- December 31, 2003: 7,250,000 Shares
    310,000       290,000  
Paid-in capital
    1,931,060       1,926,970  
Premium on preferred stock
    99       99  
Retained earnings
    1,271,210       1,291,558  
Accumulated other comprehensive loss
    (16,698 )     (7,967 )
 
   
 
     
 
 
Total common stockholder’s equity
    3,495,671       3,500,660  
 
   
 
     
 
 
Total Liabilities and Stockholder’s Equity
  $ 12,322,347     $ 12,070,624  
 
   
 
     
 
 

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

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ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Net Income After Dividends on Preferred Stock
  $ 90,747     $ 91,819  
Other comprehensive loss:
               
Changes in fair value of qualifying hedges, net of tax of $(6,162) and $(796), respectively
    (10,136 )     (1,308 )
Less: Reclassification adjustment for amounts included in net income, net of tax of $854 and $752, respectively
    1,405       1,236  
 
   
 
     
 
 
COMPREHENSIVE INCOME
  $ 82,016     $ 91,747  
 
   
 
     
 
 

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

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

FIRST QUARTER 2004 vs. FIRST QUARTER 2003

RESULTS OF OPERATIONS

Earnings

Alabama Power’s net income after dividends on preferred stock for the first quarter 2004 was $90.7 million compared to $91.8 million for the corresponding period of 2003. Earnings in the first quarter of 2004 decreased by $1.1 million, or 1.2%, primarily due to higher operation and maintenance expenses, depreciation expense and taxes other than income taxes. These increases were partially offset by an increase in retail base-rate revenues and a decrease in interest expense.

     Significant income statement items appropriate for discussion include the following:

                 
    Increase (Decrease)
    First Quarter
    (in thousands)   %
Retail sales
  $ 73,804       11.0  
Sales for resale — non-affiliates
    (7,336 )     (6.2 )
Sales for resale — affiliates
    3,801       6.1  
Fuel expense
    32,235       13.4  
Purchased power — affiliates
    18,436       44.3  
Other operation expense
    11,843       8.8  
Maintenance expense
    5,812       7.8  
Depreciation and amortization
    5,142       5.1  
Taxes other than income taxes
    4,362       7.3  
Interest expense, net of amounts capitalized
    (4,494 )     (8.2 )

     Retail sales. Excluding energy cost recovery revenues and revenues associated with PPAs certificated by the Alabama PSC, which generally do not affect net income, retail sales revenues increased by $21.6 million, or 4.3%, for the first quarter 2004 when compared to the corresponding period in 2003. See Note 3 to Alabama Power’s financial statements under “Retail Rate Adjustment Procedures” in Item 8 of the Form 10-K for additional information. Kilowatt-hour energy sales to residential, commercial, and industrial customers increased 4.4%, 2.6%, and 8.9%, respectively, for the first quarter 2004 when compared to the corresponding period of 2003 primarily due to favorable weather conditions and improved industrial sales mainly in the primary metal and automotive sectors.

     Sales for resale — non-affiliates. During the first quarter 2004, the revenues associated with sales for resale to non-affiliates decreased due to a 5.7% reduction in kilowatt-hour sales of energy while market based prices remained flat when compared to the first quarter of 2003. Kilowatt-hour sales of energy will vary depending on demand, market based prices and the availability of Southern Company system generation. These transactions did not have a significant impact on earnings since the energy is usually sold at variable cost.

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

     Sales for resale — affiliates and Purchased power — affiliates. Sales for resale to affiliates increased in the first quarter 2004 when compared to the corresponding period in 2003 due to a $1.0 million increase in capacity payments received in accordance with the affiliated company interchange agreement as a result of Alabama Power’s increased share of the total interchange capacity. Purchases of energy will vary depending on demand and the availability and cost of generating resources at each company. Purchased power from affiliates increased in the first quarter 2004 principally due to a PPA between Alabama Power and Southern Power that began in June 2003. The capacity component of these transactions was $9.4 million in the first quarter 2004. Excluding the capacity revenue received under the interchange agreement, these transactions did not have a significant impact on earnings since the related energy is sold at marginal cost, and energy purchases are generally offset by energy revenues through Alabama Power’s energy cost recovery clause.

     Fuel expense. Fuel expense was higher in the first quarter 2004 when compared to the corresponding period in 2003 mainly due to a 26.7% increase in natural gas prices and a 36.3% increase in generation from natural gas-fired generating facilities. The increase in generation from gas-fired facilities in the first quarter 2004 when compared to the first quarter 2003 is mainly due to a 27.1% decrease in generation from Alabama Power’s hydroelectric facilities. Since energy expenses are generally offset by energy revenues, these expenses do not have a significant impact on earnings.

     Other operation expense. The increase in other operation expense in the first quarter 2004 is a result of an $11.1 million increase in administrative and general expenses. This increase primarily relates to a $4.9 million increase in employee payroll and benefits, and legal expenses, a $1.9 million increase in property insurance, a $1.9 million increase in accrued expense for liability insurance, litigation and workers compensation and a $1.8 million increase in pension expense.

     Maintenance expense. The increase in maintenance expense for the first quarter 2004 when compared to the same period in 2003 is attributed to a $3.3 million increase in distribution expense and a $1.7 million increase in transmission expense. These increases are mainly related to scheduled work performed on overhead lines.

     Depreciation and amortization expense. The increase in depreciation and amortization expense during the first quarter 2004 is attributed to an increase in utility plant-in-service when compared to the same period in 2003. See Note 7 to Alabama Power’s financial statements under “Construction Program” in Item 8 of the Form 10-K for additional information.

     Taxes other than income taxes. The first quarter 2004 increase in taxes other than income taxes is due to a $2.3 million increase in payroll taxes and a $1.3 million increase in property taxes when compared to the corresponding period in 2003.

     Interest expense, net of amounts capitalized. The decrease in interest expense, net of amounts capitalized during the first quarter 2004 when compared to the same period in 2003 is the result of refinancing higher cost debt. For additional information, see “Financial Condition and Liquidity — Financing Activities” herein.

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ALABAMA POWER COMPANY
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 including Alabama Power’s ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs and to recover costs related to growing demand and increasingly strict environmental standards. Growth in energy sales 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 Item 1 — Business – The SOUTHERN System — “Risk Factors” and Item 7 – Management’s Discussion and Analysis – “Future Earnings Potential” of Alabama Power in the Form 10-K.

Environmental Matters

Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be recovered. For additional information about these issues, including the EPA litigation, see Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential - Environmental Matters” and Note 3 to the financial statements of Alabama Power under “New Source Review Actions” 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 the New Source Review 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 action against the TVA. The case against Alabama Power has been effectively stayed pending final resolution of the TVA appeal. With the denial of the EPA’s petition for review, the Court of Appeals’ decision is now final. An adverse outcome in this case 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.

     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. Within Alabama Power’s service area, Birmingham has been designated as nonattainment under the eight-hour ozone standard. Under the implementation provisions of the new rule, the EPA announced that the one-hour ozone standard will be revoked on June 15, 2005. 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. Additionally, on April 15, 2004, the EPA announced proposed amendments to its Regional Haze rules with respect to Best Available Retrofit Technology (BART) 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 Matters

See Management’s Discussion and Analysis – “Future Earnings Potential – FERC Matters – Market-Based Rate Authority” in Item 7 and Note 3 to the financial statements of Alabama Power under “FERC

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

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. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. See Note (B) to the Condensed Financial Statements under “FERC Matters” herein for additional information. Southern Company is filing a request for rehearing of the FERC’s order. The final outcome of this matter cannot be determined at this time.

     See Item 7 — Management’s Discussion and Analysis – “Future Earnings Potential – FERC Matters” of Alabama Power in 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.

Other Matters

See Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — Other Matters” of Alabama Power 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 currently estimates its expenditures related to these security measures to total $9.6 million of which $9.3 million will be capitalized. These estimates are subject to change in the event additional NRC guidance is provided.

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

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

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

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

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

New Accounting Standards

On March 31, 2004, Alabama Power 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 Interpretation No. 46R had no impact on Alabama Power’s net income. However, as a result of the adoption, Alabama Power deconsolidated certain wholly-owned trusts established to issue preferred securities since Alabama Power does not meet the definition of primary beneficiary established by Interpretation No. 46R. See Note (E) to the Condensed Financial Statements herein for additional information related to the adoption of Interpretation No. 46R.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Major changes in Alabama Power’s financial condition during the first three months of 2004 included the addition of approximately $204 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities and net proceeds from security issuances of $319 million. See Alabama Power’s Condensed Statements of Cash Flows herein for further details.

Capital Requirements and Contractual Obligations

See Item 7 — Management’s Discussion and Analysis — Financial Condition And Liquidity — “Capital Requirements and Contractual Obligations” of Alabama Power in of the Form 10-K for a description of Alabama Power’s capital requirements for its construction program, lease obligations, purchase commitments and trust funding requirements. Approximately $725 million will be required by March 31, 2005 for redemptions and maturities of long-term debt.

Sources of Capital

In addition to the financing activities described below, Alabama Power plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings — if needed — will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 — Business — “Financing Programs” in the Form 10-K for additional information.

     Alabama Power’s current liabilities exceed current assets primarily because of scheduled maturities of long-term debt. To meet short-term cash needs and contingencies, at March 31, 2004 Alabama Power had $166 million of cash and cash equivalents, unused committed lines of credit of approximately $865 million (including $504 million of such lines which are dedicated to funding purchase obligations relating to variable rate pollution control bonds) and an extendible commercial note program. These lines of credit will expire at various times during 2004. Alabama Power expects to renew its credit facilities, as needed, prior to expiration. Alabama Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Alabama Power and other Southern Company subsidiaries. Alabama Power has regulatory authority for up to $1 billion of short-term borrowings. At March 31, 2004, Alabama Power had no commercial paper or notes payable outstanding. Management believes that the need for working capital can be adequately met by issuing commercial paper or utilizing lines of credit without maintaining large cash balances.

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

Credit Rating Risk

Alabama Power does 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 contracts that could require collateral – but not accelerated payment – in the event of a credit rating change to below investment grade. These contracts are primarily for physical electricity purchases and sales, fixed price physical gas purchases and agreements covering interest rate swaps. At March 31, 2004, the maximum potential collateral requirements were approximately $27 million.

Market Price Risk

Alabama Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2003 reporting period. In addition, Alabama Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

     Due to cost-based rate regulations, Alabama Power has limited exposure to market volatility in interest rates, commodity fuel prices and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Alabama Power enters into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas purchases. Alabama Power has also implemented a retail fuel hedging program at the instruction of the Alabama PSC. The fair value of derivative energy contracts at March 31, 2004 was as follows:

         
    First Quarter
    2004
    Changes
    Fair Value
    (in thousands)
Contracts beginning of period
  $ 6,413  
Contracts realized or settled
    (3,189 )
New contracts at inception
     
Changes in valuation techniques
     
Current period changes
    14,634  
 
   
 
 
Contracts at March 31, 2004
  $ 17,858  
 
   
 
 
                         
    Source of March 31, 2004
    Valuation Prices
    Total   Maturity
    Fair Value
  Year 1
  1-3 Years
    (in thousands)
Actively quoted
  $ 17,858     $ 16,432     $ 1,426  
External sources
                 
Models and other methods
                 
 
   
 
     
 
     
 
 
Contracts at March 31, 2004
  $ 17,858     $ 16,432     $ 1,426  
 
   
 
     
 
     
 
 

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

     For additional information, see Item 7 — Management’s Discussion and Analysis — “Financial Condition And Liquidity — Market Price Risk” of Alabama Power in the Form 10-K 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 (G) to the Condensed Financial Statements herein.

Financing Activities

In February 2004, Alabama Power issued 500,000 shares of common stock to Southern Company at $40.00 a share ($20 million aggregate purchase price). The proceeds from the sale were used by Alabama Power for general corporate purposes.

     Also 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 the sale were used to repay a portion of Alabama Power’s outstanding short-term indebtedness and for other general corporate purposes, including Alabama Power’s continuous construction program.

     In April 2004, Alabama Power issued $150 million of Series AA 5.625% Senior Notes due April 15, 2034. The proceeds from the sale will be 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.

     Alabama Power plans to continue, when economically feasible, a program to retire higher-cost debt and replace these obligations with lower-cost capital if market conditions permit.

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GEORGIA POWER COMPANY

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GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Operating Revenues:
               
Retail sales
  $ 1,037,795     $ 965,707  
Sales for resale —
               
Non-affiliates
    65,456       73,986  
Affiliates
    54,142       47,486  
Other revenues
    41,996       39,259  
 
   
 
     
 
 
Total operating revenues
    1,199,389       1,126,438  
 
   
 
     
 
 
Operating Expenses:
               
Fuel
    285,214       242,503  
Purchased power —
               
Non-affiliates
    62,689       72,036  
Affiliates
    135,142       113,843  
Other operations
    198,393       185,990  
Maintenance
    108,468       110,944  
Depreciation and amortization
    67,737       85,742  
Taxes other than income taxes
    56,432       53,175  
 
   
 
     
 
 
Total operating expenses
    914,075       864,233  
 
   
 
     
 
 
Operating Income
    285,314       262,205  
Other Income and (Expense):
               
Allowance for equity funds used during construction
    3,347       2,956  
Interest income
    2,352       115  
Interest expense, net of amounts capitalized
    (45,650 )     (44,363 )
Distributions on mandatorily redeemable preferred securities
    (15,839 )     (14,919 )
Other income (expense), net
    (4,395 )     2,912  
 
   
 
     
 
 
Total other income and (expense)
    (60,185 )     (53,299 )
 
   
 
     
 
 
Earnings Before Income Taxes
    225,129       208,906  
Income taxes
    81,120       75,468  
 
   
 
     
 
 
Net Income
    144,009       133,438  
Dividends on Preferred Stock
    168       168  
 
   
 
     
 
 
Net Income After Dividends on Preferred Stock
  $ 143,841     $ 133,270  
 
   
 
     
 
 

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

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GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Operating Activities:
               
Net income
  $ 144,009     $ 133,438  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    91,462       102,770  
Deferred income taxes and investment tax credits, net
    56,823       29,956  
Pension, postretirement, and other employee benefits
    (7,342 )     (7,633 )
Tax benefit of stock options
    4,523       2,750  
Other, net
    (15,288 )     (8,924 )
Changes in certain current assets and liabilities —
               
Receivables, net
    42,798       114,048  
Fossil fuel stock
    (3,808 )     (11,235 )
Materials and supplies
    773       (2,166 )
Other current assets
    24,430       24,309  
Accounts payable
    5,576       (97,095 )
Accrued taxes
    (131,794 )     (56,058 )
Accrued compensation
    (93,468 )     (92,624 )
Other current liabilities
    (262 )     413  
 
   
 
     
 
 
Net cash provided from operating activities
    118,432       131,949  
 
   
 
     
 
 
Investing Activities:
               
Gross property additions
    (158,743 )     (190,895 )
Cost of removal net of salvage
    2,059       (4,950 )
Change in construction payables, net of joint owner portion
    (20,809 )     (53,462 )
Other
    5,210       6,865  
 
   
 
     
 
 
Net cash used for investing activities
    (172,283 )     (242,442 )
 
   
 
     
 
 
Financing Activities:
               
Increase in notes payable, net
    55,044       171,742  
Proceeds —
               
Senior notes
    350,000       400,000  
Mandatorily redeemable preferred securities
    200,000        
Redemptions —
               
Senior notes
    (200,000 )     (315,000 )
Mandatorily redeemable preferred securities
    (200,000 )      
Payment of common stock dividends
    (141,375 )     (141,450 )
Other
    (11,567 )     (8,371 )
 
   
 
     
 
 
Net cash provided from financing activities
    52,102       106,921  
 
   
 
     
 
 
Net Change in Cash and Cash Equivalents
    (1,749 )     (3,572 )
Cash and Cash Equivalents at Beginning of Period
    8,699       16,873  
 
   
 
     
 
 
Cash and Cash Equivalents at End of Period
  $ 6,950     $ 13,301  
 
   
 
     
 
 
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $1,180 and $1,846 capitalized for 2004 and 2003, respectively)
  $ 62,923     $ 54,160  
Income taxes (net of refunds)
  $ 16,494     $ (3,896 )

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

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GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

                 
    At March 31,   At December 31,
Assets
  2004
  2003
    (in thousands)
Current Assets:
               
Cash and cash equivalents
  $ 6,950     $ 8,699  
Receivables —
               
Customer accounts receivable
    235,414       261,771  
Unbilled revenues
    118,218       117,327  
Under recovered regulatory clause revenues
    177,935       151,447  
Other accounts and notes receivable
    66,067       101,783  
Affiliated companies
    38,004       52,413  
Accumulated provision for uncollectible accounts
    (5,350 )     (5,350 )
Fossil fuel stock, at average cost
    141,345       137,537  
Vacation pay
    54,811       50,150  
Materials and supplies, at average cost
    270,267       271,040  
Prepaid expenses
    16,787       46,157  
Other
    9,867       83  
 
   
 
     
 
 
Total current assets
    1,130,315       1,193,057  
 
   
 
     
 
 
Property, Plant, and Equipment:
               
In service
    18,272,064       18,171,862  
Less accumulated provision for depreciation
    6,978,797       6,898,725  
 
   
 
     
 
 
 
    11,293,267       11,273,137  
Nuclear fuel, at amortized cost
    123,133       129,056  
Construction work in progress
    354,607       341,783  
 
   
 
     
 
 
Total property, plant, and equipment
    11,771,007       11,743,976  
 
   
 
     
 
 
Other Property and Investments:
               
Equity investments in unconsolidated subsidiaries
    67,965       38,714  
Nuclear decommissioning trusts, at fair value
    435,210       423,319  
Other
    37,253       37,142  
 
   
 
     
 
 
Total other property and investments
    540,428       499,175  
 
   
 
     
 
 
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    506,916       509,887  
Prepaid pension costs
    416,031       405,164  
Unamortized debt issuance expense
    75,625       75,245  
Unamortized loss on reacquired debt
    185,024       177,707  
Other
    166,029       177,817  
 
   
 
     
 
 
Total deferred charges and other assets
    1,349,625       1,345,820  
 
   
 
     
 
 
Total Assets
  $ 14,791,375     $ 14,782,028  
 
   
 
     
 
 

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

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GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

                 
    At March 31,   At December 31,
Liabilities and Stockholder’s Equity
  2004
  2003
    (in thousands)
Current Liabilities:
               
Securities due within one year
  $ 252,352     $ 2,304  
Notes payable
    192,322       137,277  
Accounts payable —
               
Affiliated
    118,025       121,928  
Other
    220,435       238,069  
Customer deposits
    106,604       103,756  
Accrued taxes —
               
Income taxes
    116,667       107,532  
Other
    56,628       166,892  
Accrued interest
    70,102       70,844  
Accrued vacation pay
    42,749       38,206  
Accrued compensation
    40,536       134,004  
Other
    97,671       105,234  
 
   
 
     
 
 
Total current liabilities
    1,314,091       1,226,046  
 
   
 
     
 
 
Long-term Debt
    3,661,712       3,762,333  
 
   
 
     
 
 
Long-term Debt Payable to Affiliated Trusts
    969,073        
 
   
 
     
 
 
Mandatorily Redeemable Preferred Securities
          940,000  
 
   
 
     
 
 
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    2,322,259       2,303,085  
Deferred credits related to income taxes
    182,806       186,625  
Accumulated deferred investment tax credits
    309,384       312,506  
Employee benefit obligations
    299,314       295,788  
Asset retirement obligations
    482,593       475,585  
Other cost of removal obligations
    413,875       412,161  
Miscellaneous regulatory liabilities
    208,084       249,687  
Other
    66,732       63,432  
 
   
 
     
 
 
Total deferred credits and other liabilities
    4,285,047       4,298,869  
 
   
 
     
 
 
Total Liabilities
    10,229,923       10,227,248  
 
   
 
     
 
 
Cumulative Preferred Stock
    14,569       14,569  
 
   
 
     
 
 
Common Stockholder’s Equity:
               
Common stock, without par value —
Authorized — 15,000,000 shares
Outstanding — 7,761,500 shares
    344,250       344,250  
Paid-in capital
    2,213,021       2,208,498  
Premium on preferred stock
    40       40  
Retained earnings
    2,012,764       2,010,297  
Accumulated other comprehensive loss
    (23,192 )     (22,874 )
 
   
 
     
 
 
Total common stockholder’s equity
    4,546,883       4,540,211  
 
   
 
     
 
 
Total Liabilities and Stockholder’s Equity
  $ 14,791,375     $ 14,782,028  
 
   
 
     
 
 

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

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GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Net Income After Dividends on Preferred Stock
  $ 143,841     $ 133,270  
Other comprehensive loss:
               
Changes in fair value of qualifying hedges, net of tax of $(880) and $(966), respectively
    (1,395 )     (1,532 )
Less: Reclassification adjustment for amounts included in net income, net of tax of $679 and $-, respectively
    1,077       (7 )
 
   
 
     
 
 
COMPREHENSIVE INCOME
  $ 143,523     $ 131,731  
 
   
 
     
 
 

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
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

FIRST QUARTER 2004 vs. FIRST QUARTER 2003

RESULTS OF OPERATIONS

Earnings

Georgia Power’s net income after dividends on preferred stock for the first quarter 2004 was $143.9 million compared to $133.3 million for the corresponding period in 2003. Earnings in the first quarter 2004 increased by $10.6 million, or 7.9%, primarily due to higher retail revenues that were partially offset by higher non-fuel operating expenses when compared to the same period in 2003.

     Significant income statement items appropriate for discussion include the following:

                 
    Increase (Decrease)
    First Quarter
    (in thousands)   %
Retail sales
  $ 72,088       7.5  
Sales for resale — non-affiliates
    (8,530 )     (11.5 )
Sales for resale — affiliates
    6,656       14.0  
Other revenues
    2,737       7.0  
Fuel expense
    42,711       17.6  
Purchased power — non-affiliates
    (9,347 )     (13.0 )
Purchased power — affiliates
    21,299       18.7  
Other operation expense
    12,403       6.7  
Depreciation and amortization
    (18,005 )     (21.0 )
Interest income
    2,237       N/M  
Other income (expense), net
    (7,307 )     (250.9 )


    N/M Not meaningful

     Retail sales. Excluding fuel revenues, which generally do not affect net income, retail sales revenue increased by $31.8 million, or 4.7%, in the first quarter 2004 compared to the corresponding period in 2003. In the first quarter 2004, kilowatt-hour energy sales to residential, commercial and industrial customers increased by 5.3%, 3.9% and 2.1%, respectively, when compared to the same period in 2003. These increases in the retail sectors during the first quarter 2004 are mainly due to customer growth of 2% and an improving economy.

     Sales for resale — non-affiliates. The decrease in revenues from sales for resale to non-affiliates in the first quarter 2004 is mainly attributed to lower demand for energy by these customers when compared to the same period in 2003. These transactions did not have a significant impact on earnings since the energy is usually sold at variable cost.

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

     Sales for resale — affiliates. Revenues from sales for resale to affiliates increased in the first quarter 2004 when compared to the same period in 2003 despite lower demand for energy due to higher fuel costs associated with generating electricity. These transactions did not have a significant impact on earnings since this energy is generally sold at marginal cost.

     Other revenues. The increase in other revenues during the first quarter 2004 when compared to the corresponding period of 2003 is primarily attributed to a $1.4 million increase in outdoor lighting revenues and a $0.7 million increase in electric property rental revenues.

     Fuel expense. During the first quarter 2004, fuel expenses increased as a result of a 15.1% increase in the unit cost of fuel when compared to the corresponding period in 2003 and an increase of 2.5% in generation due to increased retail sales. 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.

     Purchased power — non-affiliates. The first quarter 2004 decrease in purchased power from non-affiliates is primarily due to fluctuations in off-system energy purchases used to meet off-system sales commitments. 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.

     Purchased power — affiliates. Purchased power from affiliates increased in the first quarter 2004 when compared to the first quarter 2003 due to a PPA between Georgia Power and Southern Power that began in June 2003. The capacity component of these transactions totaled $10.7 million in the first quarter 2004. The energy component of power purchased from affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company and will have no significant impact on earnings since energy expenses are generally offset by energy revenues through Georgia Power’s fuel cost recovery clause.

     Other operation expense. Other operation expense in the first quarter 2004 was higher when compared to the same period in 2003 due to increased administrative and general expenses of $10.8 million related to employee payroll and benefits and $3.2 million in workers compensation benefits.

     Depreciation and amortization. In the first quarter 2004, depreciation and amortization expense was lower compared to the first quarter of 2003. This decrease was 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. This decrease was offset by an increase in affiliated purchased power costs discussed above. See Note 1 to the financial statements under “Depreciation and Amortization” of Georgia Power in Item 8 of the Form 10-K for additional information.

     Interest income. During the first quarter 2004, interest income increased when compared to the corresponding period in 2003 due mainly to interest received from the State of Georgia for a favorable sales and use tax settlement.

     Other income (expense), net. The change in this item in the first quarter 2004 when compared to the first quarter 2003 reflects decreased income from a new electricity pricing program.

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GEORGIA POWER COMPANY
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 including Georgia Power’s ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stricter environmental standards. Growth in energy sales is subject to a number of factors, which 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 Item 1 — Business – The SOUTHERN System — “Risk Factors” and Item 7 – Management’s Discussion and Analysis – “Future Earnings Potential” of Georgia Power in the Form 10-K.

Environmental Matters

Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be recovered. For additional information, including information on certain environmental litigation, see Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — Environmental Matters” of Georgia Power and Note 3 to the financial statements of Georgia Power in Item 8 of the Form 10-K under “New Source Review Actions” and “Plant Wansley Environmental Litigation.” 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 action against the TVA. The case against Georgia Power has been effectively stayed pending final resolution of the TVA appeal. With the denial of the EPA’s petition for review, the Court of Appeals’ decision is now final. An adverse outcome in either 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.

     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 Georgia Power’s service area that have been designated as nonattainment under the eight-hour ozone standard include Macon 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.

     On April 21, 2004, the EPA published the final regional nitrogen oxide reduction rules applicable to the State of Georgia. These rules specify that 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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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     Additionally, on April 15, 2004, the EPA announced proposed amendments to its Regional Haze rules with respect to Best Available Retrofit Technology (BART) 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 Matters

See Management’s Discussion And Analysis – “Future Earnings Potential – FERC Matters – Market-Based Rate Authority” in Item 7 and Note 3 to the financial statements of Georgia Power 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. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. See Note (B) to the Condensed Financial Statements under “FERC Matters” herein for additional information. Southern Company is filing a request for rehearing the FERC’s order. The final outcome of this matter cannot be determined at this time.

     See Note 3 to the financial statements of Georgia Power under “FERC Matters” in Item 8 of the Form 10-K and Note (C) to the Condensed Financial Statements herein for information regarding the FERC approval process for Southern Power’s PPAs with Georgia Power and Savannah Electric for Plant McIntosh Units 10 and 11.

     See Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — FERC Matters” and Note 3 to the financial statements of Georgia Power under “FERC Matters” in Item 8 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.

Other Matters

In January 2002, Georgia Power began operating under a three-year retail rate order. Under the terms of the order, earnings will be 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 will be applied to rate refunds, with the remaining one-third retained by Georgia Power. Retail rates were decreased by $118 million effective January 1, 2002. Purchases under PPAs are required by the order to be reflected in rates evenly over the three year period ending December 31, 2004. Georgia Power is required to file a general rate case on July 1, 2004, in response to which the Georgia PSC would be expected to determine whether the rate order should be continued, modified, or discontinued. See Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential – Other Matters” and Note 3 to the financial statements of Georgia Power under “Retail Rate Orders” in Item 8 of the Form 10-K for additional information.

     In August 2003, the Georgia PSC issued an order allowing Georgia Power to increase customer fuel rates to recover existing under-recovered deferred fuel costs over the period October 1, 2003 through March 31, 2005. See Note 3 to the financial statements of Georgia Power under “Fuel Cost Recovery” in Item 8 of the Form 10-K for additional information.

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

     See Management’s Discussion and Analysis — “Future Earnings Potential — Other Matters” 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. Georgia Power, based on its ownership interest, currently estimates its expenditures related to these security measures will total $9.3 million, of which $1.3 million will be capitalized. These estimates are subject to change in the event additional NRC guidance is provided.

     In June 2002, Georgia Power entered into a fifteen-year PPA beginning in June 2005 with Southern Power to purchase 1,040 megawatts of capacity from Southern Power’s Plant McIntosh. See Management’s Discussion and Analysis – “Future Earnings Potential — FERC Matters – Market-Based Rate Authority” in Item 7 of the Form 10-K and Note 3 to the financial statements of Georgia Power under “FERC Matters” in Item 8 of the Form 10-K and Note (C) to the Condensed Financial Statements herein for information regarding the FERC approval process for this PPA.

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

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

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

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

New Accounting Standards

On March 31, 2004, Georgia Power 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 Interpretation No. 46R had no impact on Georgia Power’s net income. However, as a result of the adoption, Georgia Power deconsolidated certain wholly-owned trusts

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

established to issue preferred securities since Georgia Power does not meet the definition of primary beneficiary established by Interpretation No. 46R. See Note (E) to the Condensed Financial Statements herein for additional information related to the adoption of Interpretation No. 46R.

FINANCIAL CONDITION AND LIQUIDITY

Overview

The major change in Georgia Power’s financial condition during the first three months of 2004 was the addition of approximately $159 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities. See Georgia Power’s Condensed Statements of Cash Flows herein for further details.

Capital Requirements and Contractual Obligations

See Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity — Capital Requirements and Contractual Obligations” of Georgia Power in the Form 10-K for a description of Georgia Power’s capital requirements for its construction program, lease obligations, purchase commitments and trust funding requirements. Approximately $252 million will be required by March 31, 2005 for redemptions and maturities of long-term debt.

Sources of Capital

Georgia Power plans to obtain the funds required for construction and other purposes from sources similar to those used in the past, including funds from operations and new security issuances. The amount, type and timing of additional security issuances — if needed — will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 — Business — “Financing Programs” in the Form 10-K for additional information.

     Georgia Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet cash needs, which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Georgia Power had at March 31, 2004 approximately $7.0 million of cash and cash equivalents and $725 million of unused credit arrangements with banks. These credit arrangements expire in June 2004 and contain provisions allowing two-year term loans executable at the expiration. Georgia Power expects to renew its credit facilities, as needed, prior to expiration. The credit arrangements provide liquidity support to Georgia Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Georgia Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Georgia Power and other Southern Company subsidiaries. At March 31, 2004, Georgia Power had outstanding $192 million in notes payable. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances.

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

Credit Rating Risk

Georgia Power does 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 contracts that could require collateral — but not accelerated payment — in the event of a credit rating change to below investment grade. These contracts are primarily for physical electricity purchases and sales, fixed-price physical gas purchases, and agreements covering interest rate swaps. At March 31, 2004, the maximum potential collateral requirements were approximately $227 million.

Market Price Risk

Georgia Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2003 reporting period. In addition, Georgia Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

     Due to cost-based rate regulations, Georgia Power has limited exposure to market volatility in interest rates, commodity fuel prices and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Georgia Power enters into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas purchases. Georgia Power has also implemented a retail fuel hedging program at the instruction of the Georgia PSC. The fair value of derivative energy contracts at March 31, 2004 was as follows:

         
    First Quarter
    2004
    Changes
    Fair Value
    (in thousands)
Contracts beginning of period
  $ 3,155  
Contracts realized or settled
    (98 )
New contracts at inception
     
Changes in valuation techniques
     
Current period changes
    7,476  
 
   
 
 
Contracts at March 31, 2004
  $ 10,533  
 
   
 
 
                         
    Source of March 31, 2004
    Valuation Prices
            Maturity
    Total        
    Fair Value
  Year 1
  1-3 Years
    (in thousands)
Actively quoted
  $ 10,533     $ 9,238     $ 1,295  
External sources
                 
Models and other methods
                 
 
   
 
     
 
     
 
 
Contracts at March 31, 2004
  $ 10,533     $ 9,238     $ 1,295  
 
   
 
     
 
     
 
 

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

     For additional information, see Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity — Market Price Risk” of Georgia Power in the Form 10-K 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 (G) to the Condensed Financial Statements herein.

Financing Activities

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 the 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.

     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.

     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

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GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Operating Revenues:
               
Retail sales
  $ 165,084     $ 159,793  
Sales for resale —
               
Non-affiliates
    19,488       18,725  
Affiliates
    20,695       10,217  
Other revenues
    9,652       9,103  
 
   
 
     
 
 
Total operating revenues
    214,919       197,838  
 
   
 
     
 
 
Operating Expenses:
               
Fuel
    78,416       63,267  
Purchased power —
               
Non-affiliates
    6,433       5,956  
Affiliates
    7,428       12,587  
Other operations
    33,018       30,011  
Maintenance
    16,206       16,580  
Depreciation and amortization
    20,552       20,252  
Taxes other than income taxes
    17,063       16,388  
 
   
 
     
 
 
Total operating expenses
    179,116       165,041  
 
   
 
     
 
 
Operating Income
    35,803       32,797  
Other Income and (Expense):
               
Interest expense, net of amounts capitalized
    (7,894 )     (8,055 )
Distributions on mandatorily redeemable preferred securities
    (1,113 )     (2,028 )
Other income (expense), net
    18       (423 )
 
   
 
     
 
 
Total other income and (expense)
    (8,989 )     (10,506 )
 
   
 
     
 
 
Earnings Before Income Taxes
    26,814       22,291  
Income taxes
    9,921       8,265  
 
   
 
     
 
 
Net Income
    16,893       14,026  
Dividends on Preferred Stock
    54       54  
 
   
 
     
 
 
Net Income After Dividends on Preferred Stock
  $ 16,839     $ 13,972  
 
   
 
     
 
 

     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 Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Operating Activities:
               
Net income
  $ 16,893     $ 14,026  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    22,084       21,656  
Deferred income taxes
    5       1,621  
Pension, postretirement, and other employee benefits
    1,427       1,981  
Tax benefit of stock options
    932       943  
Other, net
    1,939       5,081  
Changes in certain current assets and liabilities —
               
Receivables, net
    16,812       16,220  
Fossil fuel stock
    2,303       (3,127 )
Materials and supplies
    624       (1,451 )
Other current assets
    (2,248 )     7,798  
Accounts payable
    (4,899 )     (7,211 )
Accrued taxes
    7,199       (6,544 )
Accrued compensation
    (8,591 )     (7,854 )
Other current liabilities
    1,999       5,819  
 
   
 
     
 
 
Net cash provided from operating activities
    56,479       48,958  
 
   
 
     
 
 
Investing Activities:
               
Gross property additions
    (33,145 )     (22,070 )
Cost of removal net of salvage
    (3,067 )     (3,559 )
Investment in property damage fund
    (6,700 )     (1,100 )
Other
    (1,327 )     (4,463 )
 
   
 
     
 
 
Net cash used for investing activities
    (44,239 )     (31,192 )
 
   
 
     
 
 
Financing Activities:
               
Decrease in notes payable, net
    (19,682 )     (489 )
Proceeds —
               
Senior notes
          65,000  
Capital contributions from parent company
    25,000       10,000  
Redemptions —
               
Senior notes
          (32 )
Mandatorily redeemable preferred securities
          (40,000 )
Payment of preferred stock dividends
    (54 )     (54 )
Payment of common stock dividends
    (17,500 )     (17,550 )
Other
    (203 )     (3,729 )
 
   
 
     
 
 
Net cash provided from (used for) financing activities
    (12,439 )     13,146  
 
   
 
     
 
 
Net Change in Cash and Cash Equivalents
    (199 )     30,912  
Cash and Cash Equivalents at Beginning of Period
    2,548       13,278  
 
   
 
     
 
 
Cash and Cash Equivalents at End of Period
  $ 2,349     $ 44,190  
 
   
 
     
 
 
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $233 and $20 capitalized for 2004 and 2003, respectively)
  $ 8,915     $ 9,957  
Income taxes (net of refunds)
  $ 1,849       ($21 )

     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 March 31,   At December 31,
Assets
  2004
  2003
    (in thousands)
Current Assets:
               
Cash and cash equivalents
  $ 2,349     $ 2,548  
Receivables —
               
Customer accounts receivable
    39,313       44,001  
Unbilled revenues
    28,284       31,548  
Under recovered regulatory clause revenues
    17,136       21,812  
Other accounts and notes receivable
    2,918       6,179  
Affiliated companies
    9,104       9,826  
Accumulated provision for uncollectible accounts
    (1,147 )     (947 )
Fossil fuel stock, at average cost
    33,052       35,354  
Vacation pay
    5,254       5,254  
Materials and supplies, at average cost
    35,306       35,930  
Prepaid expenses
    5,937       6,310  
Other
    7,571       4,985  
 
   
 
     
 
 
Total current assets
    185,077       202,800  
 
   
 
     
 
 
Property, Plant, and Equipment:
               
In service
    2,311,976       2,306,959  
Less accumulated provision for depreciation
    860,541       847,519  
 
   
 
     
 
 
 
    1,451,435       1,459,440  
Construction work in progress
    72,876       49,438  
 
   
 
     
 
 
Total property, plant, and equipment
    1,524,311       1,508,878  
 
   
 
     
 
 
Other Property and Investments
    21,530       12,597  
 
   
 
     
 
 
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    18,366       18,263  
Prepaid pension costs
    42,809       42,014  
Unamortized debt issuance expense
    6,853       6,877  
Unamortized premium on reacquired debt
    18,942       19,389  
Other
    28,857       28,235  
 
   
 
     
 
 
Total deferred charges and other assets
    115,827       114,778  
 
   
 
     
 
 
Total Assets
  $ 1,846,745     $ 1,839,053  
 
   
 
     
 
 

     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 March 31,   At December 31,
Liabilities and Stockholder's Equity
  2004
  2003
    (in thousands)
Current Liabilities:
               
Securities due within one year
  $ 50,000     $ 50,000  
Notes payable
    17,985       37,666  
Accounts payable —
               
Affiliated
    24,166       26,945  
Other
    18,134       21,952  
Customer deposits
    18,790       18,271  
Accrued taxes —
               
Income taxes
    10,681       6,405  
Other
    8,688       8,621  
Accrued interest
    7,534       8,077  
Accrued vacation pay
    5,254       5,254  
Accrued compensation
    4,865       13,456  
Other
    13,905       9,694  
 
   
 
     
 
 
Total current liabilities
    180,002       206,341  
 
   
 
     
 
 
Long-term Debt
    515,946       515,827  
 
   
 
     
 
 
Long-term Debt Payable to Affiliated Trusts
    72,166        
 
   
 
     
 
 
Mandatorily Redeemable Preferred Securities
          70,000  
 
   
 
     
 
 
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    179,409       175,685  
Deferred credits related to income taxes
    25,815       26,545  
Accumulated deferred investment tax credits
    19,960       20,451  
Employee benefit obligations
    54,616       52,395  
Other cost of removal obligations
    153,220       151,229  
Miscellaneous regulatory liabilities
    28,455       27,903  
Other
    26,241       27,083  
 
   
 
     
 
 
Total deferred credits and other liabilities
    487,716       481,291  
 
   
 
     
 
 
Total Liabilities
    1,255,830       1,273,459  
 
   
 
     
 
 
Cumulative Preferred Stock
    4,236       4,236  
 
   
 
     
 
 
Common Stockholder’s Equity:
               
Common stock, without par value —
Authorized — 992,717 shares
Outstanding — 992,717 shares
    38,060       38,060  
Paid-in capital
    390,784       364,852  
Premium on preferred stock
    12       12  
Retained earnings
    160,547       161,208  
Accumulated other comprehensive loss
    (2,724 )     (2,774 )
 
   
 
     
 
 
Total common stockholder’s equity
    586,679       561,358  
 
   
 
     
 
 
Total Liabilities and Stockholder’s Equity
  $ 1,846,745     $ 1,839,053  
 
   
 
     
 
 

     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 COMPREHENSIVE INCOME (UNAUDITED)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Net Income After Dividends on Preferred Stock
  $ 16,839     $ 13,972  
Other comprehensive income (loss):
               
   Less: Reclassification adjustment for amounts included in net income, net of tax of $31
    50        
 
   
 
     
 
 
COMPREHENSIVE INCOME
  $ 16,889     $ 13,972  
 
   
 
     
 
 

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

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

FIRST QUARTER 2004 vs. FIRST QUARTER 2003

RESULTS OF OPERATIONS

Earnings

Gulf Power’s net income after dividends on preferred stock for the first quarter 2004 was $16.8 million compared to $14.0 million for the corresponding period in 2003. First quarter 2004 net income increased by $2.8 million, or 21.0%, primarily due to higher operating revenues when compared to the same period in 2003.

     Significant income statement items appropriate for discussion include the following:

                 
    Increase (Decrease)
    First Quarter
    (in thousands)
  %
Retail sales
  $ 5,291       3.3  
Sales for resale — affiliates
    10,478       102.5  
Fuel expense
    15,149       23.9  
Purchased power — affiliates
    (5,159 )     (41.0 )
Other operations expense
    3,008       10.0  
Distributions on mandatorily redeemable preferred securities
    (915 )     (45.1 )

     Retail sales. Excluding the recovery of fuel expense and certain other expenses that do not affect net income, retail sales increased by $4.1 million, or 4.3%, for the first quarter 2004 when compared to the corresponding period in 2003. Energy sales to residential, commercial and industrial customers were higher by 5.2%, 3.6%, and 2.9%, respectively, in the first quarter 2004 as compared to the same period in 2003. The increase in retail sales revenue during the first quarter 2004 is primarily due to a 2.5% increase in customer growth and favorable weather conditions when compared to the same period in 2003.

     Sales for resale – affiliates and Purchased power — affiliates. Revenues from sales for resale to affiliates and purchases of energy by affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost and energy purchases are generally offset by energy revenues through Gulf Power’s fuel cost recovery mechanism. The increase in sales for resale to affiliates is due to available generation being sold to affiliate companies. The decrease in purchased power from affiliates is the result of a decrease in the demand for purchased power due to increased self-generation.

     Fuel expense. In the first quarter 2004, fuel expense was higher than the same period in 2003 due primarily to a 23.3% increase in generation to meet additional demand for energy as well as a 4.8% increase in coal prices and a 1.3% increase in natural gas prices. Since energy expenses are generally offset by energy revenues through Gulf Power’s fuel cost recovery mechanism, these expenses do not have a material impact on net income.

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

     Other operation expense. The increase in other operations expense during the first quarter 2004 is due to a $1.0 million increase in marketing expenses and a $1.3 million increase in employee benefit expenses when compared to the same period in 2003.

     Distributions on mandatorily redeemable preferred securities. The decrease in distributions on mandatorily redeemable preferred securities is due to the redemption of $40 million of 7.625% trust preferred securities during the first quarter 2003 and the redemption of $45 million of 7.000% trust preferred securities during the fourth quarter 2003.

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, including Gulf Power’s ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stricter environmental standards. Growth in energy sales is subject to a number of factors, which 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 Item 1 — Business – The SOUTHERN System — “Risk Factors” and Item 7 – Management’s Discussion and Analysis – “Future Earnings Potential” of Gulf Power in the Form 10-K.

Environmental Matters

Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs are not fully recovered through Gulf Power’s Environmental Cost Recovery Clause. See Management’s Discussion and Analysis — “Future Earnings Potential — Environmental Matters” in Item 7 of the Form 10-K and Note 3 to the financial statements of Gulf Power under “New Source Review Actions” 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 the New Source Review 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 action against the TVA. With the denial of the EPA’s petition for review, the Court of Appeals’ decision is now final. An adverse outcome of this matter 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.

     Additionally, on April 15, 2004, the EPA announced proposed amendments to its Regional Haze rules with respect to Best Available Retrofit Technology (BART) 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.

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

FERC Matters

See Management’s Discussion and Analysis – “Future Earnings Potential – FERC Matters – Market-Based Rate Authority” in Item 7 and Note 3 to the financial statements of Gulf Power 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. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. See Note (B) to the Condensed Financial Statements under “FERC Matters” herein for additional information. Southern Company is filing a request for rehearing of the FERC’s order. The final outcome of this matter cannot be determined at this time.

     See Item 7 — Management’s Discussion and Analysis – “Future Earnings Potential — FERC Matters” of Gulf Power in the Form 10-K for information on the FERC’s order related to RTOs and notice of proposed rulemaking regarding open access transmission service.

Other Matters

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

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

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 Item 7 — Management’s Discussion and Analysis — “Accounting Policies — Application of Critical Accounting Policies and Estimates” of Gulf Power in the Form 10-K for a complete discussion of Gulf Power’s critical accounting policies and estimates related to Electric Utility Regulation and Contingent Obligations.

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

New Accounting Standards

On March 31, 2004, Gulf Power 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 Interpretation No. 46R had no impact on Gulf Power’s net income. However, as a result of the adoption, Gulf Power deconsolidated certain wholly-owned trusts established to issue preferred securities since Gulf Power does not meet the definition of primary beneficiary established by Interpretation No. 46R. See Note (E) to the Condensed Financial Statements herein for additional information related to the adoption of Interpretation No. 46R.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Major changes in Gulf Power’s financial condition during the first three months of 2004 included the addition of approximately $33.1 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities. See Gulf Power’s Condensed Statements of Cash Flows herein for further details.

Capital Requirements and Contractual Obligations

Reference is made to Item 7 — Management’s Discussion and Analysis – “Financial Condition and Liquidity — Capital Requirements and Contractual Obligations” of Gulf Power in the Form 10-K for a description of Gulf Power’s capital requirements for its construction program, lease obligations, purchase commitments and trust funding requirements.

Sources of Capital

In addition to the financing activities described herein, Gulf Power plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. These sources include cash flows from operating activities, issuances of unsecured debt and pollution control bonds issued for Gulf Power’s benefit by public authorities. The amount, type and timing of any future financings — if needed — will depend upon market conditions and regulatory approval. See Item 1 — Business — “Financing Programs” in the Form 10-K for additional information.

     To meet short-term cash needs and contingencies, Gulf Power has various internal and external sources of liquidity. At March 31, 2004, Gulf Power had approximately $2.3 million of cash and cash equivalents and $56 million of unused committed lines of credit with banks that expire in 2004. Gulf Power expects to renew its credit facilities, as needed, prior to expiration. In addition, Gulf Power has substantial cash flow from operating activities. The credit arrangements provide liquidity support to Gulf Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Gulf Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Gulf Power and other Southern Company subsidiaries. At March 31, 2004, Gulf Power had $18 million of commercial paper outstanding. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances.

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

Credit Rating Risk

Gulf Power does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.

Market Price Risk

Gulf Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2003 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 regulations, Gulf Power has limited exposure to market volatility in interest rates, commodity fuel prices and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Gulf Power enters into fixed price contracts for purchase of coal supplies, the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas purchases. Gulf Power has received approval from the Florida PSC to recover prudently incurred costs related to its fuel hedging program through the fuel cost recovery mechanism. The fair value of derivative energy contracts at March 31, 2004 was as follows:

         
    First Quarter
    2004
    Changes
    Fair Value
    (in thousands)
Contracts beginning of period
  $ 2,504  
Contracts realized or settled
    (1,079 )
New contracts at inception
     
Changes in valuation techniques
     
Current period changes
    4,249  
 
   
 
 
Contracts at March 31, 2004
  $ 5,674  
 
   
 
 
                         
    Source of March 31, 2004
    Valuation Prices
            Maturity
    Total        
    Fair Value
  Year 1
  1-3 Years
    (in thousands)
Actively quoted
  $ 5,674     $ 5,154     $ 520  
External sources
                 
Models and other methods
                 
 
   
 
     
 
     
 
 
Contracts at March 31, 2004
  $ 5,674     $ 5,154     $ 520  
 
   
 
     
 
     
 
 

     See Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity — Market Price Risk” of Gulf Power in the Form 10-K 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 (G) to the Condensed Financial Statements herein for further information.

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

Financing Activities

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.

     Gulf Power plans to evaluate, and to the extent possible, retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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MISSISSIPPI POWER COMPANY

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MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Operating Revenues:
               
Retail sales
  $ 128,555     $ 113,970  
Sales for resale —
               
Non-affiliates
    65,800       70,425  
Affiliates
    11,809       6,223  
Other revenues
    3,564       3,268  
 
   
 
     
 
 
Total operating revenues
    209,728       193,886  
 
   
 
     
 
 
Operating Expenses:
               
Fuel
    76,525       51,124  
Purchased power —
               
Non-affiliates
    6,955       6,817  
Affiliates
    17,316       20,332  
Other operations
    34,978       35,163  
Maintenance
    15,072       14,260  
Depreciation and amortization
    14,143       13,073  
Taxes other than income taxes
    13,139       13,367  
 
   
 
     
 
 
Total operating expenses
    178,128       154,136  
 
   
 
     
 
 
Operating Income
    31,600       39,750  
Other Income and (Expense):
               
Interest expense
    (2,803 )     (3,770 )
Distributions on mandatorily redeemable preferred securities
    (630 )     (630 )
Other income (expense), net
    571       12  
 
   
 
     
 
 
Total other income and (expense)
    (2,862 )     (4,388 )
 
   
 
     
 
 
Earnings Before Income Taxes
    28,738       35,362  
Income taxes
    10,916       13,463  
 
   
 
     
 
 
Net Income
    17,822       21,899  
Dividends on Preferred Stock
    503       503  
 
   
 
     
 
 
Net Income After Dividends on Preferred Stock
  $ 17,319     $ 21,396  
 
   
 
     
 
 

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

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MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Operating Activities:
               
Net income
  $ 17,822     $ 21,899  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    15,247       15,910  
Deferred income taxes and investment tax credits, net
    5,872       (1,267 )
Pension, postretirement, and other employee benefits
    (272 )     250  
Tax benefit of stock options
    293       606  
Other, net
    869       (1,351 )
Changes in certain current assets and liabilities —
               
Receivables, net
    6,776       26,326  
Fossil fuel stock
    4,732       2,204  
Materials and supplies
    571       (529 )
Other current assets
    (244 )     (4,940 )
Accounts payable
    (7,781 )     (21,039 )
Accrued taxes
    (28,379 )     (18,080 )
Accrued compensation
    (14,552 )     (17,686 )
Other current liabilities
    (11,883 )     (7,884 )
 
   
 
     
 
 
Net cash used for operating activities
    (10,929 )     (5,581 )
 
   
 
     
 
 
Investing Activities:
               
Gross property additions
    (15,611 )     (11,806 )
Cost of removal net of salvage
    2,463       (1,236 )
Other
    (1,651 )     1,532  
 
   
 
     
 
 
Net cash used for investing activities
    (14,799 )     (11,510 )
 
   
 
     
 
 
Financing Activities:
               
Increase in notes payable, net
    34,939       19,975  
Proceeds — Senior notes
    40,000        
Redemptions —
               
First mortgage bonds
          (33,350 )
Pollution control bonds
          (850 )
Senior notes
    (80,000 )     (73 )
Payment of preferred stock dividends
    (503 )     (503 )
Payment of common stock dividends
    (16,550 )     (16,500 )
Other
          (1,178 )
 
   
 
     
 
 
Net cash used for financing activities
    (22,114 )     (32,479 )
 
   
 
     
 
 
Net Change in Cash and Cash Equivalents
    (47,842 )     (49,570 )
Cash and Cash Equivalents at Beginning of Period
    69,120       62,695  
 
   
 
     
 
 
Cash and Cash Equivalents at End of Period
  $ 21,278     $ 13,125  
 
   
 
     
 
 
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest
  $ 2,468     $ 2,612  
Income taxes (net of refunds)
  $ 1,615     $ (226 )

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

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MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

                 
    At March 31,   At December 31,
Assets
  2004
  2003
    (in thousands)
Current Assets:
               
Cash and cash equivalents
  $ 21,278     $ 69,120  
Receivables —
               
Customer accounts receivable
    27,103       30,514  
Unbilled revenues
    16,853       19,278  
Under recovered regulatory clause revenues
    13,581       14,607  
Other accounts and notes receivable
    7,194       8,088  
Affiliated companies
    12,693       12,160  
Accumulated provision for uncollectible accounts
    (451 )     (897 )
Fossil fuel stock, at average cost
    20,501       25,233  
Vacation pay
    5,766       5,766  
Materials and supplies, at average cost
    23,099       23,670  
Prepaid income taxes
    20,887       27,415  
Prepaid expenses
    5,775       4,517  
Other
    7,480       2,857  
 
   
 
     
 
 
Total current assets
    181,759       242,328  
 
   
 
     
 
 
Property, Plant, and Equipment:
               
In service
    1,844,475       1,841,668  
Less accumulated provision for depreciation
    676,236       672,730  
 
   
 
     
 
 
 
    1,168,239       1,168,938  
Construction work in progress
    40,427       25,844  
 
   
 
     
 
 
Total property, plant, and equipment
    1,208,666       1,194,782  
 
   
 
     
 
 
Other Property and Investments
    3,847       2,750  
 
   
 
     
 
 
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    11,941       12,125  
Prepaid pension costs
    18,375       18,167  
Unamortized debt issuance expense
    6,912       6,993  
Unamortized loss on reacquired debt
    10,000       10,201  
Prepaid rent
    14,287       14,758  
Other
    8,854       16,280  
 
   
 
     
 
 
Total deferred charges and other assets
    70,369       78,524  
 
   
 
     
 
 
Total Assets
  $ 1,464,641     $ 1,518,384  
 
   
 
     
 
 

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

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MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

                 
    At March 31,   At December 31,
Liabilities and Stockholder’s Equity
  2004
  2003
    (in thousands)
Current Liabilities:
               
Securities due within one year
  $     $ 80,000  
Notes payable
    34,939        
Accounts payable —
               
Affiliated
    26,113       21,259  
Other
    44,302       55,309  
Customer deposits
    8,215       11,863  
Accrued taxes —
               
Income taxes
    945       1,696  
Other
    13,241       42,834  
Accrued interest
    3,466       3,223  
Accrued vacation pay
    5,766       5,766  
Accrued compensation
    9,287       23,832  
Regulatory clauses over recovery
    26,439       31,118  
Other
    6,874       4,867  
 
   
 
     
 
 
Total current liabilities
    179,587       281,767  
 
   
 
     
 
 
Long-term Debt
    242,491       202,488  
 
   
 
     
 
 
Long-term Debt Payable to Affiliated Trusts
    36,082        
 
   
 
     
 
 
Mandatorily Redeemable Preferred Securities
          35,000  
 
   
 
     
 
 
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    145,043       142,088  
Deferred credits related to income taxes
    22,894       23,279  
Accumulated deferred investment tax credits
    19,538       19,841  
Employee benefit obligations
    53,704       54,830  
Plant Daniel lease guarantee obligation, at fair value
    14,287       14,758  
Plant Daniel capacity
    60,300       60,300  
Other cost of removal obligations
    83,291       80,588  
Miscellaneous regulatory liabilities
    15,511       11,899  
Other
    27,319       27,248  
 
   
 
     
 
 
Total deferred credits and other liabilities
    441,887       434,831  
 
   
 
     
 
 
Total Liabilities
    900,047       954,086  
 
   
 
     
 
 
Cumulative Preferred Stock
    31,809       31,809  
 
   
 
     
 
 
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
    292,807       292,515  
Premium on preferred stock
    326       326  
Retained earnings
    204,188       203,419  
Accumulated other comprehensive loss
    (2,227 )     (1,462 )
 
   
 
     
 
 
Total common stockholder’s equity
    532,785       532,489  
 
   
 
     
 
 
Total Liabilities and Stockholder’s Equity
  $ 1,464,641     $ 1,518,384  
 
   
 
     
 
 

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

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MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Net Income After Dividends on Preferred Stock
  $ 17,319     $ 21,396  
Other comprehensive income (loss):
               
Changes in fair value of qualifying hedges, net of tax of $(474)
    (765 )      
 
   
 
     
 
 
COMPREHENSIVE INCOME
  $ 16,554     $ 21,396  
 
   
 
     
 
 

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

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

FIRST QUARTER 2004 vs. FIRST QUARTER 2003

RESULTS OF OPERATIONS

Earnings

Mississippi Power’s net income after dividends on preferred stock for the first quarter 2004 was $17.3 million compared to $21.4 million for the corresponding period of 2003. Earnings in the first quarter 2004 decreased by $4.1 million, or 19%, primarily due to lower wholesale revenues as a result of the termination of a contract with a subsidiary of Dynegy, Inc. in October 2003. See Note 3 to the financial statements of Mississippi Power under “Contract Termination” in Item 8 of the Form 10-K for additional information.

     Significant income statement items appropriate for discussion include the following:

                 
    Increase (Decrease)
    First Quarter
    (in thousands)   %
Retail sales
    14,585       12.8  
Sales for resale — non-affiliates
    (4,625 )     (6.6 )
Sales for resale — affiliates
    5,586       89.8  
Fuel expense
    25,401       49.7  
Purchased power — affiliates
    (3,016 )     (14.8 )
Maintenance expense
    812       5.7  
Depreciation and amortization
    1,070       8.2  
Interest expense
    (967 )     (25.6 )
Income taxes
    (2,547 )     (18.9 )

     Retail sales. Retail sales revenue for the first quarter 2004 increased when compared to the same period in 2003 primarily as a result of a $13.6 million increase in fuel revenues, which generally do not have an effect on income. Retail sales revenues, excluding fuel revenues, for the first quarter 2004 to residential, commercial and industrial customers increased 2.7%, 2.5% and 2.3%, respectively, primarily as a result of economic growth in the service area when compared to the same period in 2003.

     Sales for resale — non-affiliates. The decrease in sales for resale to non-affiliates in the first quarter 2004 as compared to the same period in 2003 is primarily due to the termination of a contract with a subsidiary of Dynegy, Inc. in October 2003. See Note 3 to the financial statements of Mississippi Power under “Contract Termination” in Item 8 of the Form 10-K for additional information.

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

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

     Fuel expense. In the first quarter 2004, fuel expense increased when compared to the same period in 2003 as a result of a 16.5% increase in generation and a 57.6% increase in cost of oil and gas. 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.

     Maintenance expense. The first quarter 2004 increase in maintenance expense when compared to the same period in 2003 is a result of increased generation by the combined cycle units at Plant Daniel. Maintenance expense for the combined cycle units is based on fired operating hours which were 36.8% higher in the first quarter 2004 when compared to the same period in 2003.

     Depreciation and amortization. The first quarter 2004 increase in depreciation and amortization expense when compared to the same period in 2003 is primarily the result of a true-up in 2003 related to the Environmental Compliance Overview (ECO) Plan. See Note 3 to Mississippi Power’s financial statements under “Environmental Compliance Overview Plan” in Item 8 of the Form 10-K for additional information.

     Interest expense. The decreased interest expense for the first quarter 2004 as compared to the same period in 2003 is a result of lower interest rates on securities outstanding and a reduction in accrued interest expense related to prior years’ income tax adjustments. See Item 7 — Management’s Discussion and Analysis – Financial Condition and Liquidity – “Financing Activities” of Mississippi Power in the Form 10-K and Financial Condition and Liquidity – “Financing Activities” herein for further information on efforts to reduce interest rates.

     Income taxes. The decrease in income taxes of $2.5 million, or 18.9%, is a result of the $6.7 million reduction in pretax net income when compared to the same period in 2003.

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 including Mississippi Power’s ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stricter environmental standards. Growth in energy sales is subject to a number of factors, which 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 Item 1 — Business – The SOUTHERN System — “Risk Factors” and Item 7 – Management’s Discussion and Analysis – “Future Earnings Potential” of Mississippi Power in the Form 10-K.

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

Environmental Matters

Mississippi Power’s 2004 ECO Plan filing was approved, as filed, by the Mississippi PSC on March 15, 2004 and resulted in a slight decrease in rates effective April 2004. Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot continue to be recovered. See Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — Environmental Matters” and Note 3 to the financial statements of Mississippi Power under “New Source Review Actions” 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 the New Source Review 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 action against the TVA. With the denial of the EPA’s petition for review, the Court of Appeals’ decision is now final. An adverse outcome of this matter could require substantial capital expenditures and could possibly require substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates.

     Additionally, on April 15, 2004, the EPA announced proposed amendments to its Regional Haze rules with respect to Best Available Retrofit Technology (BART) 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 Matters

See Item 7 — Management’s Discussion and Analysis – “Future Earnings Potential – FERC Matters – Market-Based Rate Authority” and Note 3 to the financial statements of Mississippi Power 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. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. See Note (B) to the Condensed Financial Statements under “FERC Matters” herein for additional information. Southern Company is filing a request for rehearing of the FERC’s order. The final outcome of this matter cannot be determined at this time.

     See Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — FERC Matters” of Mississippi Power in the Form 10-K for information on the FERC’s order related to RTOs and the notice of proposed rulemaking regarding open access transmission service.

Other Matters

See Note 3 to Mississippi Power’s financial statements under “Retail Regulatory Filing” in Item 8 of the Form 10-K and Note (I) to the Condensed Financial Statements herein for information on Mississippi Power’s request to include 266 megawatts of Plant Daniel Units 3 and 4 generating capacity in jurisdictional cost of service. The final outcome of this matter cannot now be determined.

     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

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

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

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

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Mississippi Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Mississippi Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Mississippi Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See Item 7 — Management’s Discussion and Analysis — “Accounting Policies — Application of Critical Accounting Policies and Estimates” 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, Plant Daniel Capacity and Plant Daniel Operating Lease. Also see Note (I) to the condensed financial statements herein for additional information related to Mississippi Power’s request to include the additional Plant Daniel capacity in jurisdictional cost of service.

New Accounting Standards

On March 31, 2004, Mississippi Power 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 Interpretation No. 46R had no impact on Mississippi Power’s net income. However, as a result of the adoption, Mississippi Power deconsolidated certain wholly-owned trusts established to issue preferred securities since Mississippi Power does not meet the definition of primary beneficiary established by Interpretation No. 46R. See Note (E) to the Condensed Financial Statements herein for additional information related to the adoption of Interpretation No. 46R.

Financial Condition and Liquidity

Overview

Major changes in Mississippi Power’s financial condition during the first three months of 2004 included the addition of approximately $15.6 million to utility plant financed primarily from operating activities, a reduction in current liabilities of $102.5 million and a $40.1 million increase in long-term debt as a result of re-financing activities. See Mississippi Power’s Condensed Statements of Cash Flows and “Financing Activities” herein for further details.

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

Capital Requirements and Contractual Obligations

See Item 7 — Management’s Discussion and Analysis — Financial Condition and Liquidity — “Capital Requirements and Contractual Obligations” of Mississippi Power in the Form 10-K for a description of Mississippi Power’s capital requirements for its construction program, lease obligations, purchase commitments and trust funding requirements.

Sources of Capital

In addition to the financing activities described herein, Mississippi Power plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings — if needed — will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 — Business — “Financing Programs” in the Form 10-K for additional information.

     To meet short-term cash needs and contingencies, Mississippi Power had at March 31, 2004, approximately $21.3 million of cash and cash equivalents and $100 million of unused committed credit arrangements with banks that expire in 2004. Approximately $37.5 million of these credit arrangements contain provisions allowing two-year term loans executable at the expiration date. Mississippi Power expects to renew its credit facilities, as needed, prior to expiration. The credit arrangements provide liquidity support to Mississippi Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Mississippi Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Mississippi Power and other Southern Company subsidiaries. At March 31, 2004, Mississippi Power had $34.9 million in outstanding notes payable. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances.

Off-Balance Sheet Financing Arrangements

See Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity — Off-Balance Sheet Financing Arrangements” 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 agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.

Market Price Risk

Mississippi Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2003 reporting period. In addition, Mississippi Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

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

     Due to cost-based rate regulation, Mississippi Power has limited exposure to market volatility in interest rates, commodity fuel prices and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Mississippi Power enters into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market. Mississippi Power has also implemented retail fuel hedging programs at the instruction of its PSC and wholesale fuel hedging programs under agreements with wholesale customers. The fair values of derivative, fuel and energy contracts at March 31, 2004 were as follows:

         
    First Quarter
    2004
    Changes
    Fair Value
    (in thousands)
Contracts beginning of period
  $ 2,470  
Contracts realized or settled
    (733 )
New contracts at inception
     
Changes in valuation techniques
     
Current period changes
    3,884  
 
   
 
 
Contracts at March 31, 2004
  $ 5,621  
 
   
 
 
                         
    Source of March 31, 2004
    Valuation Prices
    Total   Maturity
    Fair Value
  Year 1
  1-3 Years
    (in thousands)
Actively quoted
  $ 5,621     $ 4,645     $ 976  
External sources
                 
Models and other methods
                 
 
   
 
     
 
     
 
 
Contracts at March 31, 2004
  $ 5,621     $ 4,645     $ 976  
 
   
 
     
 
     
 
 

     For additional information, see Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity — Market Price Risk” of Mississippi Power in the Form 10-K and Notes 1 and 6 to the financial statements under “ Financial Instruments” of Mississippi Power in Item 8 of the Form 10-K and Note (G) to the Condensed Financial Statements herein.

Financing Activities

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 at maturity $80 million aggregate principal amount of Mississippi Power’s Series D Floating Rate Senior Notes due March 12, 2004.

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

     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 higher cost preferred stock and the remainder was used for general corporate purposes.

     Mississippi Power plans to continue, to the extent possible, a program to retire higher-cost securities and replace these securities with lower-cost capital.

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SAVANNAH ELECTRIC
AND
POWER COMPANY

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SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Operating Revenues:
               
Retail sales
  $ 68,023     $ 63,546  
Sales for resale —
               
Non-affiliates
    1,410       1,926  
Affiliates
    2,437       2,324  
Other revenues
    965       1,078  
 
   
 
     
 
 
Total operating revenues
    72,835       68,874  
 
   
 
     
 
 
Operating Expenses:
               
Fuel
    10,484       11,425  
Purchased power —
               
Non-affiliates
    2,342       1,904  
Affiliates
    22,130       19,013  
Other operations
    14,101       13,099  
Maintenance
    6,431       5,910  
Depreciation and amortization
    5,204       5,061  
Taxes other than income taxes
    3,597       3,447  
 
   
 
     
 
 
Total operating expenses
    64,289       59,859  
 
   
 
     
 
 
Operating Income
    8,546       9,015  
Other Income and (Expense):
               
Interest expense, net of amounts capitalized
    (3,144 )     (2,621 )
Distributions on mandatorily redeemable preferred securities
    (109 )     (685 )
Other income (expense), net
    (347 )     (209 )
 
   
 
     
 
 
Total other income and (expense)
    (3,600 )     (3,515 )
 
   
 
     
 
 
Earnings Before Income Taxes
    4,946       5,500  
Income taxes
    1,798       1,991  
 
   
 
     
 
 
Net Income
  $ 3,148     $ 3,509  
 
   
 
     
 
 

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

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CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Operating Activities:
               
Net income
  $ 3,148     $ 3,509  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    5,739       5,582  
Deferred income taxes and investment tax credits, net
    1,516       (439 )
Pension, postretirement, and other employee benefits
    1,713       1,670  
Tax benefit of stock options
    263       101  
Other, net
    2,479       2,143  
Changes in certain current assets and liabilities —
               
Receivables, net
    5,420       5,284  
Fossil fuel stock
    122       (1,620 )
Materials and supplies
    (967 )     16  
Other current assets
    (2,193 )     (65 )
Accounts payable
    (2,275 )     (5,911 )
Accrued taxes
    790       (46 )
Accrued compensation
    (3,129 )     (4,107 )
Other current liabilities
    1,017       3,112  
 
   
 
     
 
 
Net cash provided from operating activities
    13,643       9,229  
 
   
 
     
 
 
Investing Activities:
               
Gross property additions
    (11,743 )     (10,798 )
Other
    (796 )     3,342  
 
   
 
     
 
 
Net cash used for investing activities
    (12,539 )     (7,456 )
 
   
 
     
 
 
Financing Activities:
               
Increase (decrease) in notes payable, net
    6,695       (2,897 )
Proceeds —
               
Pollution control bonds
          13,870  
Capital contributions from parent company
          5,000  
Redemptions —
               
Pollution control bonds
          (13,870 )
Other long-term debt
    281       (225 )
Mandatorily redeemable preferred securities
    (40,000 )      
Payment of common stock dividends
    (5,800 )     (5,750 )
Other
    1,105       (71 )
 
   
 
     
 
 
Net cash used for financing activities
    (37,719 )     (3,943 )
 
   
 
     
 
 
Net Change in Cash and Cash Equivalents
    (36,615 )     (2,170 )
Cash and Cash Equivalents at Beginning of Period
    37,943       3,978  
 
   
 
     
 
 
Cash and Cash Equivalents at End of Period
  $ 1,328     $ 1,808  
 
   
 
     
 
 
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $95 and $27 capitalized for 2004 and 2003, respectively)
  $ 1,392     $ 1,724  
Income taxes (net of refunds)
  $ 774     $  

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

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SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

                 
    At March 31,   At December 31,
Assets
  2004
  2003
    (in thousands)
Current Assets:
               
Cash and cash equivalents
  $ 1,328     $ 37,943  
Receivables —
               
Customer accounts receivable
    17,687       19,674  
Unbilled revenues
    10,452       11,288  
Other accounts and notes receivable
    1,073       1,138  
Affiliated companies
    2,464       4,872  
Accumulated provision for uncollectible accounts
    (765 )     (641 )
Fossil fuel stock, at average cost
    8,530       8,652  
Materials and supplies, at average cost
    10,038       9,070  
Prepaid income taxes
    24,982       24,419  
Prepaid expenses
    2,061       1,377  
Other
    2,131       623  
 
   
 
     
 
 
Total current assets
    79,981       118,415  
 
   
 
     
 
 
Property, Plant, and Equipment:
               
In service
    916,068       912,504  
Less accumulated provision for depreciation
    407,060       402,394  
 
   
 
     
 
 
 
    509,008       510,110  
Construction work in progress
    22,517       14,121  
 
   
 
     
 
 
Total property, plant, and equipment
    531,525       524,231  
 
   
 
     
 
 
Other Property and Investments
    2,265       2,248  
 
   
 
     
 
 
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    9,462       9,611  
Cash surrender value of life insurance for deferred compensation plans
    23,969       23,866  
Unamortized debt issuance expense
    4,481       5,652  
Unamortized loss on reacquired debt
    8,479       7,488  
Other
    17,499       18,410  
 
   
 
     
 
 
Total deferred charges and other assets
    63,890       65,027  
 
   
 
     
 
 
Total Assets
  $ 677,661     $ 709,921  
 
   
 
     
 
 

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

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CONDENSED BALANCE SHEETS (UNAUDITED)

                 
    At March 31,   At December 31,
Liabilities and Stockholder's Equity
  2004
  2003
    (in thousands)
Current Liabilities:
               
Securities due within one year
  $ 958     $ 40,910  
Notes payable
    6,695        
Accounts payable —
           
Affiliated
    10,751       13,797  
Other
    14,015       13,147  
Customer deposits
    7,012       6,922  
Accrued taxes —
           
Income taxes
    521       1,172  
Other
    2,913       1,473  
Accrued interest
    4,222       2,802  
Accrued vacation pay
    2,547       2,530  
Accrued compensation
    2,523       5,652  
Other
    4,609       5,107  
 
   
 
     
 
 
Total current liabilities
    56,766       93,512  
 
   
 
     
 
 
Long-term Debt
    222,725       222,493  
 
   
 
     
 
 
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    85,911       83,852  
Deferred credits related to income taxes
    9,550       9,804  
Accumulated deferred investment tax credits
    8,459       8,625  
Employee benefit obligations
    41,546       39,833  
Other cost of removal obligations
    37,907       36,843  
Miscellaneous regulatory liabilities
    13,968       12,932  
Other
    16,935       15,735  
 
   
 
     
 
 
Total deferred credits and other liabilities
    214,276       207,624  
 
   
 
     
 
 
Total Liabilities
    493,767       523,629  
 
   
 
     
 
 
Common Stockholder’s Equity:
               
Common stock, par value $5 per share —
Authorized - 16,000,000 shares
Outstanding - 10,844,635 shares
    54,223       54,223  
Paid-in capital
    24,680       24,417  
Retained earnings
    107,204       109,856  
Accumulated other comprehensive loss
    (2,213 )     (2,204 )
 
   
 
     
 
 
Total common stockholder’s equity
    183,894       186,292  
 
   
 
     
 
 
Total Liabilities and Stockholder’s Equity
  $ 677,661     $ 709,921  
 
   
 
     
 
 

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

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CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Net Income After Dividends on Preferred Stock
  $ 3,148     $ 3,509  
Other comprehensive income (loss):
               
    Changes in fair value of qualifying hedges, net of tax of $(20)
    (33 )      
    Less: Reclassification adjustment for amounts included in net income, net of tax of $15
    24        
 
   
 
     
 
 
COMPREHENSIVE INCOME
  $ 3,139     $ 3,509  
 
   
 
     
 
 

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

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

FIRST QUARTER 2004 vs. FIRST QUARTER 2003

RESULTS OF OPERATIONS

Earnings

Savannah Electric’s net income for the first quarter 2004 was $3.1 million compared to $3.5 million for the corresponding period of 2003. Earnings decreased by $0.4 million, or 10.3%, in the first quarter 2004, primarily due to higher operating expenses, partially offset by higher operating revenues.

     Significant income statement items appropriate for discussion include the following:

                 
    Increase (Decrease)
    First Quarter
    (in thousands)   %
Retail sales
    4,477       7.0  
Sales for resale — non-affiliates
    (516 )     (26.8 )
Fuel expense
    (941 )     (8.2 )
Purchased power — non-affiliates
    438       23.0  
Purchased power — affiliates
    3,117       16.4  
Other operation expense
    1,002       7.6  
Maintenance expense
    521       8.8  

     Retail sales. Excluding fuel revenues, which do not affect net income, retail sales revenue increased by $2.0 million, or 5.2%, in the first quarter 2004 when compared to the corresponding period in 2003. The first quarter 2004 increase in retail sales revenue is mainly attributed to a 3.4% increase in retail kilowatt-hour energy sales. Energy sales to residential and commercial customers were higher by 16.4% and 1.9%, respectively, mainly due to colder weather and growth in the number of customers when compared to the same period in 2003. Energy sales to industrial customers were lower by 16.6% in the first quarter 2004 compared to the first quarter 2003 primarily due to the installation of a cogeneration facility by one customer.

     Sales for resale — non-affiliates. In the first quarter 2004, revenues from sales for resale to non-affiliates is lower primarily due to fluctuations in off-system sale transactions that were generally offset by corresponding purchase transactions. These transactions had no significant effect on net income.

     Fuel expense. Fuel expense decreased in the first quarter 2004 primarily as a result of certain billing credits relating to the Plant McIntosh combustion turbines. Since fuel expenses are generally offset by fuel revenues through Savannah Electric’s fuel cost recovery clause, these expenses do not have a significant impact on net income.

     Purchased power — non-affiliates. In the first quarter 2004, the increase in purchased power from non-affiliates resulted from purchases used to meet a 103.1% increase in demand for energy from non-affiliates offset somewhat by a lower cost per kilowatt-hour. These transactions do not have a significant impact on earnings, as energy costs are generally recovered through Savannah Electric’s fuel cost recovery clause.

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RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     Purchased power — affiliates. Purchased power from affiliates increased in the first quarter 2004 as compared to the same period in the prior year partially as the result of an accounting order approved by the Georgia PSC in December 2002 which allows Savannah Electric to write-down a portion of the approximately $3.8 million annual deferral in Plant Wansley purchased power costs, which the Georgia PSC had ruled to be outside the test period in Savannah Electric’s base rate order. See Note 3 to the financial statements of Savannah Electric under “Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information. The net impact of these transactions compared to the prior year was a $0.3 million increase to expense. Purchased power from affiliates also includes energy purchases which will vary depending on demand and cost of generation resources at each company and higher energy costs. These energy costs are recovered through the fuel cost recovery clause and have no significant impact on earnings.

     Other operation expense. The increase for the first quarter 2004 as compared to the same period in the prior year in other operation expense is attributed to an increase in administrative and general expenses primarily relating to accounting and auditing services, employee benefits expenses and regulatory expenses.

     Maintenance expense. The increase in the first quarter 2004 as compared to the same period in the prior year is mainly due to scheduled generating plant maintenance and an increase in maintenance on distribution facilities.

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 including Savannah Electric’s ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stricter environmental standards. Growth in energy sales is subject to a number of factors, which 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 Item 1 — Business — The SOUTHERN System — “Risk Factors” and Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential” of Savannah Electric in the Form 10-K.

Environmental Matters

Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be recovered. See Management’s Discussion and Analysis — “Future Earnings Potential — Environmental Matters” in Item 7 of the Form 10-K and Note 3 to the financial statements of Savannah Electric under “New Source Review Actions” 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 the New Source Review 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 action against the TVA. The case against Savannah Electric has been effectively stayed pending final resolution of the TVA appeal. With the denial of the EPA’s petition for review, the Court of Appeals’ decision is now final. An adverse outcome

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in this case 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.

     On April 21, 2004, the EPA published the final regional nitrogen oxide reduction rules applicable to the State of Georgia. These rules specify that 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. Additionally, on April 15, 2004, the EPA announced proposed amendments to its Regional Haze rules with respect to Best Available Retrofit Technology (BART) 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 Matters

See Management’s Discussion and Analysis — “Future Earnings Potential — FERC Matters — Market-Based Rate Authority” in Item 7 and Note 3 to the financial statements of Savannah Electric 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. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. See Note (B) to the Condensed Financial Statements under “FERC Matters” herein for additional information. Southern Company is filing a request for rehearing of the FERC’s order. The final outcome of this matter cannot be determined at this time.

     See to Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — FERC Matters” of Savannah Electric in the Form 10-K for information on plans to retire a 102 megawatt peaking facility in May 2005 and a fifteen-year PPA with Southern Power to purchase 200 megawatts of capacity beginning in June 2005 from the planned combined-cycle plant at Plant McIntosh to be built and owned by Southern Power. The annual capacity cost is expected to be approximately $15 million. See Note (C) to the Condensed Financial Statements herein for information regarding the FERC approval process for this PPA.

     See Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — FERC Matters” of Savannah Electric in 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.

Other Matters

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

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

     Savannah Electric anticipates filing a base rate case in late 2004. 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

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

New Accounting Standards

On March 31, 2004, Savannah Electric 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. See Note 6 to the financial statements of Savannah Electric under “Mandatorily Redeemable Preferred Securities” in Item 8 of the Form 10-K regarding Savannah Electric’s redemption of all outstanding preferred securities in January 2004 and the dissolution of the issuing trust. Therefore, the adoption of Interpretation No. 46R had no impact on Savannah Electric’s financial statements.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Major changes in Savannah Electric’s financial condition during the first three months of 2004 included the addition of approximately $11.7 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities and short-term debt. See Savannah Electric’s Condensed Statements of Cash Flows herein for further details.

Capital Requirements and Contractual Obligations

Reference is made to Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity” of Savannah Electric under “Capital Requirements and Contractual Obligations,” in the Form 10-K for a description of Savannah Electric’s capital requirements for its construction program, lease obligations, purchase commitments and trust funding requirements.

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

Sources of Capital

Savannah Electric plans to obtain the funds required for construction and other purposes from sources similar to those used in the past including both internal and external funds. The amount, type and timing of any future financings — if needed — will depend upon market conditions and regulatory approval. See Item 1 — Business — “Financing Programs” in the Form 10-K for additional information.

     To meet short-term cash needs and contingencies, Savannah Electric had at March 31, 2004 approximately $1.3 million of cash and cash equivalents and $60 million of unused committed credit arrangements with banks, of which $40 million expires in 2004, $10 million expires in 2005 and $10 million expires in 2006 and beyond. Of the unused credit arrangements expiring in 2004 and 2005, $40 million include two year term loan options executable at the expiration date. The credit arrangements provide liquidity support to some of Savannah Electric’s obligations with respect to its variable rate debt and its commercial paper. Savannah Electric expects to renew its credit facilities, as needed, prior to expiration. Savannah Electric may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Savannah Electric and other Southern Company subsidiaries. At March 31, 2004, Savannah Electric had $6.7 million of outstanding commercial paper. Since Savannah Electric has no major generating plants under construction, management believes that the need for working capital can be adequately met by utilizing lines of credit.

Credit Rating Risk

Savannah Electric does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.

Market Price Risk

Savannah Electric’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2003 reporting period. In addition, Savannah Electric is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

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

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

The fair value of derivative energy contracts at March 31, 2004 was as follows:

         
    First Quarter
    2004
    Changes
    Fair Value
    (in thousands)
Contracts beginning of period
  $ 463  
Contracts realized or settled
    (1 )
New contracts at inception
     
Changes in valuation techniques
     
Current period changes
    1,497  
 
   
 
 
Contracts at March 31, 2004
  $ 1,959  
 
   
 
 
                         
    Source of March 31, 2004
    Valuation Prices
    Total   Maturity
    Fair Value
  Year 1
  1-3 Years
    (in thousands)
Actively quoted
  $ 1,959     $ 1,757     $ 202  
External sources
                 
Models and other methods
                 
 
   
 
     
 
     
 
 
Contracts at March 31, 2004
  $ 1,959     $ 1,757     $ 202  
 
   
 
     
 
     
 
 

     For additional information, see Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity — Market Price Risk” of Savannah Electric and Notes 1 and 6 to the financial statements of Savannah Electric under “Financial Instruments” in Item 8 of the Form 10-K and Note (G) to the Condensed Financial Statements herein.

Financing Activities

Savannah Electric plans to evaluate, and to the extent possible, retire higher-cost debt and replace these securities with lower-cost capital.

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SOUTHERN POWER COMPANY

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SOUTHERN POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Operating Revenues:
               
Sales for resale —
               
Non-affiliates
  $ 86,699     $ 50,269  
Affiliates
    86,795       55,290  
Other revenues
    2,111       1,880  
 
   
 
     
 
 
Total Operating Revenues
    175,605       107,439  
 
   
 
     
 
 
Operating Expenses:
               
Fuel
    30,335       20,038  
Purchased power —
               
Non-affiliates
    13,605       15,323  
Affiliates
    42,056       17,932  
Other operations
    14,725       5,908  
Maintenance
    3,012       2,177  
Depreciation and amortization
    12,778       6,544  
Taxes other than income taxes
    2,679       1,300  
 
   
 
     
 
 
Total operating expenses
    119,190       69,222  
 
   
 
     
 
 
Operating Income
    56,415       38,217  
Other Income and (Expense):
               
Interest expense, net of amounts capitalized
    (12,586 )     (1,399 )
Other income (expense), net
    493       303  
 
   
 
     
 
 
Total other income and (expense)
    (12,093 )     (1,096 )
 
   
 
     
 
 
Earnings Before Income Taxes
    44,322       37,121  
Income taxes
    17,137       14,363  
 
   
 
     
 
 
Earnings Before Cumulative Effect of Accounting Change
    27,185       22,758  
Cumulative effect of accounting change — less income taxes of $231 thousand
          367  
 
   
 
     
 
 
Net Income
  $ 27,185     $ 23,125  
 
   
 
     
 
 

     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
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Operating Activities:
               
Net income
  $ 27,185     $ 23,125  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    15,267       6,544  
Deferred income taxes and investment tax credits, net
    16,525       9,062  
Deferred capacity revenues
    (19,235 )     (12,392 )
Tax benefit of stock options
    109       41  
Other, net
    (4,957 )     844  
Changes in certain current assets and liabilities —
               
Receivables, net
    (9,435 )     (1,857 )
Fossil fuel stock
    2,867       7,917  
Materials and supplies
    (508 )     (79 )
Other current assets
    (161 )     (1,544 )
Accounts payable
    (9,961 )     (10,629 )
Accrued taxes
    2,884       1,764  
Accrued interest
    (16,166 )     (12,618 )
 
   
 
     
 
 
Net cash provided from operating activities
    4,414       10,178  
 
   
 
     
 
 
Investing Activities:
               
Gross property additions
    (68,779 )     (103,974 )
Change in construction payables, net
    (6,589 )     (8,042 )
Other
    185       239  
 
   
 
     
 
 
Net cash used for investing activities
    (75,183 )     (111,777 )
 
   
 
     
 
 
Financing Activities:
               
Increase (decrease) in notes payable, net — affiliated
    67,411       11,950  
Increase (decrease) in notes payable, net
    94       446,485  
Proceeds — Capital contributions from parent company
          113  
Redemptions — Other long-term debt
          (373,979 )
Other
    933       234  
 
   
 
     
 
 
Net cash provided from financing activities
    68,438       84,803  
 
   
 
     
 
 
Net Change in Cash and Cash Equivalents
    (2,331 )     (16,796 )
Cash and Cash Equivalents at Beginning of Period
    2,798       19,474  
 
   
 
     
 
 
Cash and Cash Equivalents at End of Period
  $ 467     $ 2,678  
 
   
 
     
 
 
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $8,739 and $13,526 capitalized for 2004 and 2003, respectively)
  $ 25,114     $ 12,767  
Income taxes (net of refunds)
  $ 1,684     $ 4,018  

     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
CONDENSED BALANCE SHEETS (UNAUDITED)

                 
    At March 31,   At December 31,
Assets
  2004
  2003
    (in thousands)
Current Assets:
               
Cash and cash equivalents
  $ 467     $ 2,798  
Receivables —
               
Customer accounts receivable
    10,501       10,772  
Affiliated companies
    23,506       14,130  
Accumulated provision for uncollectible accounts
    (350 )     (350 )
Other accounts receivable
    600       270  
Fossil fuel stock, at average cost
    2,931       5,798  
Materials and supplies, at average cost
    8,632       8,123  
Prepaid income taxes
    12,432       11,222  
Prepaid expenses
    1,478       2,528  
Other
    534       1,174  
 
   
 
     
 
 
Total current assets
    60,731       56,465  
 
   
 
     
 
 
Property, Plant, and Equipment:
               
In service
    1,830,846       1,831,139  
Less accumulated provision for depreciation
    72,810       60,005  
 
   
 
     
 
 
 
    1,758,036       1,771,134  
Construction work in progress
    573,169       504,097  
 
   
 
     
 
 
Total property, plant, and equipment
    2,331,205       2,275,231  
 
   
 
     
 
 
Deferred Charges and Other Assets:
               
Unamortized debt issuance expense
    17,433       18,315  
Accumulated deferred income taxes
    4,921       21,911  
Prepaid maintenance expenses
    24,224       21,728  
Prepaid transmission expenses — affiliated
    13,690       12,790  
Other
    2,885       2,845  
 
   
 
     
 
 
Total deferred charges and other assets
    63,153       77,589  
 
   
 
     
 
 
Total Assets
  $ 2,455,089     $ 2,409,285  
 
   
 
     
 
 

     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
CONDENSED BALANCE SHEETS (UNAUDITED)

                 
    At March 31,   At December 31,
Liabilities and Stockholder’s Equity
  2004
  2003
    (in thousands)
Current Liabilities:
               
Securities due within one year
  $ 200     $ 200  
Notes payable
    114,339       114,347  
Notes payable to parent
    67,411        
Accounts payable —
               
Affiliated
    35,335       51,442  
Other
    6,149       6,591  
Accrued taxes other than income taxes
    4,173       1,289  
Accrued interest
    13,846       30,012  
Other
    717       489  
 
   
 
     
 
 
Total current liabilities
    242,170       204,370  
 
   
 
     
 
 
Long-term Debt
    1,149,266       1,149,112  
 
   
 
     
 
 
Deferred Credits and Other Liabilities:
               
Deferred capacity revenues—
               
Affiliated
    9,727       28,799  
Other
    91       256  
Other—
               
Affiliated
    14,281       15,061  
Other
    143       211  
 
   
 
     
 
 
Total deferred credits and other liabilities
    24,242       44,327  
 
   
 
     
 
 
Total Liabilities
    1,415,678       1,397,809  
 
   
 
     
 
 
Common Stockholder’s Equity:
               
Common stock, par value $.01 per share —
Authorized - 1,000,000 shares
Outstanding - 1,000 shares
Paid-in capital
    850,421       850,312  
Retained earnings
    244,811       217,626  
Accumulated other comprehensive loss
    (55,821 )     (56,462 )
 
   
 
     
 
 
Total common stockholder’s equity
    1,039,411       1,011,476  
 
   
 
     
 
 
Total Liabilities and Stockholder’s Equity
  $ 2,455,089     $ 2,409,285  
 
   
 
     
 
 

     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
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

                 
    For the Three Months
    Ended March 31,
    2004
  2003
    (in thousands)
Net Income After Dividends on Preferred Stock
  $ 27,185     $ 23,125  
Other comprehensive income (loss):
               
Changes in fair value of qualifying hedges, net of tax of $(522) and $(2,400), respectively
    (928 )     (3,833 )
Less: Reclassification adjustment for amounts included in net income, net of tax of $987 and $166, respectively
    1,569       264  
 
   
 
     
 
 
COMPREHENSIVE INCOME
  $ 27,826     $ 19,556  
 
   
 
     
 
 

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

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

FIRST QUARTER 2004 vs. FIRST QUARTER 2003

RESULTS OF OPERATIONS

Earnings

Southern Power’s net income for first quarter 2004 was $27.2 million compared to $23.1 million for the corresponding period of 2003. The increase in first quarter 2004 earnings of $4.1 million, or 17.6%, was due primarily to increased wholesale capacity and energy revenues from units placed in service during 2003 (Plant Franklin Unit 2, Plant Harris Units 1 and 2 and Plant Stanton A). The increased revenues came from new PPAs with Alabama Power and Georgia Power for Plants Harris Unit 1 and Franklin Unit 2 that began in June 2003 and with the Stanton joint owners for Stanton A that began in October 2003. Additional sales of uncontracted capacity from Plant Harris Unit 2 also contributed to the increase.

     Significant income statement items appropriate for discussion include the following:

                 
    Increase (Decrease)
    First Quarter
    (in thousands)   %
Sales for resale — non-affiliates
  $ 36,430       72.5  
Sales for resale – affiliates
    31,505       57.0  
Fuel expense
    10,297       51.4  
Purchased power — non-affiliates
    (1,718 )     (11.2 )
Purchased power – affiliates
    24,124       134.5  
Other operation expense
    8,817       149.2  
Depreciation and amortization
    6,234       95.3  
Interest expense, net of amounts capitalized
    11,187       799.6  

     Sales for resale — non-affiliates. In the first quarter 2004, revenues from sales for resale to non-affiliates were higher when compared to the corresponding period in 2003. This increase was due primarily to additional wholesale capacity and energy sales to non-affiliates as a result of commercial operation of Plant Harris Unit 2, which was placed into commercial operation in June 2003 and Plant Stanton A, which was placed into commercial operation in October 2003.

     Sales for resale — affiliates. During the first quarter 2004, sales for resale to affiliates increased primarily due to energy and capacity sales through PPAs with Alabama Power and Georgia Power that commenced in June 2003. Revenues from sales to affiliated companies through the Southern Company system power pool and energy sales under PPAs will vary depending on demand and the availability and cost of generating resources accessible throughout the Southern Company system.

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

     Fuel expense. Fuel expense in the first quarter 2004 increased significantly when compared to the same period in 2003. The first quarter 2004 increase resulted primarily from commercial operation of Plant Harris Unit 2, and higher natural gas prices.

     Purchased power — non-affiliates. The decrease in purchased power from non-affiliates during the first quarter 2004 when compared to the first quarter 2003 is primarily due to the availability of lower cost energy from affiliates.

     Purchased power — affiliates. The availability of power at prices lower than Southern Power’s self-generation, which is primarily natural gas-fired, accounted for the first quarter 2004 increase in purchased power from affiliates when compared to the same period in the prior year. Expenses from purchased power transactions will vary depending on demand, availability and the cost of generating resources accessible throughout the Southern Company system.

     Other operation expense. During the first quarter 2004, other operation expense increased when compared to the same period in the prior year due mainly to administrative and general expenses associated with the commercial operation of Plant Franklin Unit 2 and Plant Harris Units 1 and 2, which were all placed into commercial operation in June 2003, and Plant Stanton A which was placed into commercial operation in October 2003.

     Depreciation and amortization. New generating units placed into service in June and October 2003, are the main drivers for the increases in depreciation and amortization in the first quarter 2004 as compared to the corresponding period in the prior year.

     Interest expense, net of amounts capitalized. In the first quarter 2004, interest expense, net of amounts capitalized increased when compared to the same period in 2003 due to an increase in the amount of senior notes outstanding and a lower percentage of interest costs being capitalized as projects have reached completion.

Future Earnings Potential

The results of operations are not necessarily indicative of future earnings. The level of future earnings depends on numerous factors including completion of construction on new generating facilities, regulatory matters including those related to affiliate contracts, energy sales, creditworthiness of customers, total generating capacity available in the Super Southeast and the remarketing of capacity. Another major factor is federal regulatory policy, which may impact Southern Power’s level of participation in the wholesale energy market. For additional information relating to these issues, see Item 1 - Business – The SOUTHERN System — “Risk Factors” and Item 7 – Management’s Discussion and Analysis – “Future Earnings Potential” of Southern Power in the Form 10-K.

     See Item 7 — Management’s Discussion and Analysis – “Future Earnings Potential – General” and “Power Sales Agreements” of Southern Power in the Form 10-K for additional information on long-term power sales agreements and PPAs. Southern Power’s PPAs with non-affiliated counterparties have provisions that require the posting of collateral or an acceptable substitute guarantee in the event that S&P or Moody’s downgrades the credit ratings of such counterparty to below-investment grade, or, if the counterparty is not rated, fails to maintain a minimum coverage ratio. The PPAs are expected to provide Southern Power with a stable source of revenue during their respective terms.

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

     In June 2003, Southern Power placed Plant Franklin Unit 2 and Plant Harris Units 1 and 2 into commercial operation. In October 2003, Southern Power placed Plant Stanton A into commercial operation. In June 2004, the PPA with Georgia Power for the remaining 200 MW of uncontracted capacity at Plant Franklin Unit 2 will begin. Also, in June 2004, the PPA with Georgia Power for Plant Harris Unit 2 will begin. PPAs for the other units became effective upon commercial operation. As these PPAs become effective, the opportunity for external sales out of uncontracted capacity will decline significantly. Plant McIntosh Units 10 and 11 are under construction and are scheduled to be completed in June 2005. See Note 3 to Southern Power’s financial statements under “FERC Matters” in Item 8 of the Form 10-K and Note (C) to the Condensed Financial Statements herein for information regarding the FERC approval process for Southern Power’s PPAs with Georgia Power and Savannah Electric for Plant McIntosh Units 10 and 11. Southern Power is also 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 Southern Power’s financial statements 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 Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — FERC Matters” of Southern Power in 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.

     See Management’s Discussion and Analysis – “Future Earnings Potential – FERC Matters – Market-Based Rate Authority” in Item 7 and Note 3 to the financial statements of Southern Power 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. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. See Note (B) to the Condensed Financial Statements under “FERC Matters” herein for additional information. Southern Company is filing a request for rehearing of the FERC’s order. The final outcome of this matter cannot be determined at this time.

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

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

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

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

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 Item 7 –Management’s Discussion and Analysis – “Accounting Policies — Application of Critical Accounting Policies and Estimates” of Southern Power in the Form 10-K for a complete discussion of Southern Power’s critical accounting policies and estimates related to Revenue Recognition and Asset Impairments.

FINANCIAL CONDITION AND LIQUIDITY

Overview

The major change in Southern Power’s financial condition during the first three months of 2004 was the addition of approximately $69 million to utility plant related to on-going construction of Southern Power’s combined-cycle units. The funds for these additions were provided by subordinated loans from Southern Company and ongoing operations. See Southern Power’s Condensed Statements of Cash Flows herein for further details.

Capital Requirements and Contractual Obligations

Reference is made to Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity — Capital Requirements and Contractual Obligations” of Southern Power in 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’s current liabilities exceed current assets because of the continued use of short-term debt as an interim funding source for Southern Power’s ongoing construction program and the seasonality of the electricity business. In February 2003, Southern Power initiated a commercial paper program to fund a portion of the construction costs of new generating facilities. The amount of commercial paper initially represented approximately 45% of total debt, but is forecasted to be less than 20% at year-end 2005. Southern Power’s strategy is to refinance most of such short-term borrowings with long-term securities following commercial operation of the generating facilities. At March 31, 2004, Southern Power had outstanding $114.3 million in commercial paper. See Note 6 to the financial statements of Southern Power under “Commercial Paper” in Item 8 of the Form 10-K for additional information.

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

     To meet liquidity and capital resource requirements, Southern Power had at March 31, 2004 approximately $650 million of an unused committed credit arrangement with banks expiring in 2006. This arrangement also provides liquidity support for Southern Power’s commercial paper program (as discussed above). Amounts drawn under the arrangements may be used to finance acquisition and construction costs related to gas-fired electric generating facilities and for general corporate purposes, subject to borrowing limitations for each generating facility. The arrangements permit Southern Power to fund construction of future generating facilities upon meeting certain requirements. Southern Power expects to renew its credit facility, as needed, prior to expiration. Financing of construction at the McIntosh facility is subject to FERC approval of the related PPAs. Reference is made to Note (C) to the Condensed Financial Statements herein for information regarding the FERC approval process for Southern Power’s PPAs with Georgia Power and Savannah Electric for Plant McIntosh Units 10 and 11. Southern Power also has access to loans from Southern Company to meet any additional Plant McIntosh funding needs should other funding sources not be adequate.

Credit Rating Risk

Southern Power does 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 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. Generally, collateral may be provided by a Southern Company guaranty, letter of credit or cash. At March 31, 2004, the maximum potential collateral requirements were approximately $172 million.

Market Price Risk

Southern Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2003 reporting period. In addition, Southern Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

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

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

      The fair values of derivative energy contracts at March 31, 2004 were as follows:

         
    First Quarter
    2004
    Changes
    Fair Value
    (in thousands)
Contracts beginning of period
  $ 665  
Contracts realized or settled
    (665 )
New contracts at inception
     
Current period changes
    (203 )
 
   
 
 
Contracts at March 31, 2004
  $ (203 )
 
   
 
 

     At March 31, 2004, all of these contracts mature within one year and are based on actively quoted market prices. For additional information, see Item 7 - Management’s Discussion and Analysis – “Financial Condition and Liquidity— Market Price Risk” and Notes 1 and 6 to the financial statements under “Financial Instruments” of Southern Power in Item 8 of the Form 10-K and Note (G) to the Condensed Financial Statements herein.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS
FOR
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SAVANNAH ELECTRIC AND POWER COMPANY
SOUTHERN POWER COMPANY

INDEX TO APPLICABLE NOTES TO
FINANCIAL STATEMENTS BY REGISTRANT

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

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

NOTES TO THE CONDENSED FINANCIAL STATEMENTS:

(A)   The condensed financial statements of the registrants included herein have been prepared by each registrant, without audit, pursuant to the rules and regulations of the SEC. In the opinion of each registrant’s management, the information regarding such registrant furnished herein reflects all adjustments necessary to present fairly the results of operations for the periods ended March 31, 2004 and 2003. 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 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 each of the registrants in Item 8 and “Legal Proceedings” in Item 3 of the Form 10-K for information relating to various lawsuits and other contingencies.
 
    NEW SOURCE REVIEW ACTIONS
 
    See Note 3 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric under “New Source Review Actions” and of Southern Company and Georgia Power under “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 action against the TVA. The cases against Alabama Power, Georgia Power and Savannah Electric have been effectively stayed pending final resolution of the TVA appeal. With the denial of the EPA’s petition for review, the Court of Appeals’ decision is now final. 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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    MIRANT RELATED MATTERS
 
    See Note 3 to the financial statements of Southern Company under “Mirant Related Matters — Mirant Bankruptcy” in Item 8 and Management’s Discussion and Analysis – “Future Earnings Potential — Other Matters” of Southern Company in Item 7 of the Form 10-K. On April 7, 2004, the U.S. Bankruptcy Court judge presiding over Mirant’s proceedings ordered that an examiner be appointed and identified a number of duties for the examiner, including preliminary investigation of potential causes of action against insiders, past or present, of Mirant. On April 13, 2004, the judge approved the appointment of William K. Snyder as examiner. In an April 29, 2004 Order, the judge further defined the duties of the examiner, including the investigation of any potential causes of action or any basis for objecting to or subordinating any claim that may be available to Mirant against any past or present insider or any member of a committee appointed in Mirant’s bankruptcy proceeding. As a former shareholder of Mirant, Southern Company could be considered a past insider. The final outcome of these matters cannot now be determined.
 
    See Note 3 to Southern Company’s financial statements in Item 8 of the Form 10-K under “Mirant Bankruptcy” and Note 5 to Southern Company’s financial statements in Item 8 of the Form 10-K for information related to potential contingent liabilities as a result of Mirant’s inclusion in the consolidated federal income tax return prior to the spin-off. In connection with the audit of tax years 2000 and 2001, the IRS has preliminarily indicated that they may challenge certain tax deductions arising from Mirant’s operations prior to the spin-off. The ultimate outcome of this matter cannot now be determined.
 
    See Note 3 to the financial statements of Southern Company under “Mobile Energy Services’ Petition for Bankruptcy” in Item 8 of the Form 10-K. On April 29, 2004, Mobile Energy Services Holdings (MESH) sold the electric generating facility. In connection with the sale, the pulp and paper complex owners released Southern Company from its contingent obligations associated with the guarantee of certain potential environmental obligations and with the potential obligation to fund a maintenance reserve account. Southern Company simultaneously released MESH from its indemnification obligations.
 
    FERC MATTERS
 
    See Note 3 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric and Southern Power 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 affiliate thereof, with a significant load service obligation and generation to satisfy that obligation to pass all aspects of the market power screens as currently designed; however, each of the companies believes that it has appropriate basis to rebut the generation market power presumption. In the event that 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. Southern Company is filing a request for

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    rehearing of the FERC’s order. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.
 
    INCOME TAX MATTERS
 
    See Note 3 to Southern Company’s financial statements under “Income Tax Issues — Leveraged Lease Transactions” in Item 8 of the Form 10-K. In connection with their current audits of Southern Company’s consolidated federal income tax returns for the 2000 and 2001 tax years, the IRS has indicated that they intend to propose a similar adjustment of $18 million to disallow the tax losses associated with the international leveraged lease transaction originally challenged in their 1996-1999 audits. The IRS has also preliminarily indicated that they may challenge Southern Company’s other three international leveraged lease transactions (so-called SILO or sale-in-lease-out transactions). See Note 1 to Southern Company’s financial statements under “Leveraged Leases” in Item 8 of the Form 10-K for additional details of the deferred taxes related to these transactions. The ultimate outcome of these matters cannot now be determined
 
(C)   See Note 3 under “FERC Matters” to the financial statements of Georgia Power, Savannah Electric and Southern Power, 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. The hearings previously scheduled to commence on March 1, 2004 were postponed pending the outcome of settlement negotiations. Settlement negotiations have been terminated and hearings have been rescheduled to begin on May 25, 2004. Management believes that the PPAs should be approved by the FERC; however, the ultimate outcome of this matter cannot now be determined.
 
(D)   See Note 1 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric under “Asset Retirement Obligations and Other Costs of Removal” in Item 8 of the Form 10-K. The following table reflects the details of the Asset Retirement Obligations included in the Condensed Balance Sheets.
                                                                 
    Balance at   Liabilities   Liabilities           Cash Flow   Balance at                
    12/31/03
  Incurred
  Settled
  Accretion
  Revisions
  03/31/04
               
    (in millions)                
Alabama Power
  $ 359     $     $     $ 6     $     $ 365                  
Georgia Power
    476             (1 )     8             483                  
Gulf Power
    4                               4                  
Mississippi Power
    2                         1       3                  
Savannah Electric
    4                               4                  
 
Southern Company
  $ 845     $     $ (1 )   $ 14     $ 1     $ 859                  

(E)   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 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

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

    definition of primary beneficiary established by Interpretation No. 46R. Therefore, the investments in these trusts are reflected as Equity Investments in Unconsolidated Subsidiaries for Alabama Power and Georgia Power and as Other Investments for Southern Company, Gulf Power and Mississippi Power. The related loans from the trusts to Southern Company and the retail operating companies are reflected as Notes Payable to Affiliated Trusts on the accompanying Balance Sheets. This treatment resulted in the following increases in both total assets and total liabilities as of March 31, 2004 (in millions):
         
Alabama Power
  $ 9  
Georgia Power
    29  
Gulf Power
    2  
Mississippi Power
    1  
 
Southern Company
  $ 60  

    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. At March 31, 2004, Southern Company’s investment totaled $25 million; Southern Company has committed to a maximum investment of $75 million. The assets of the venture capital fund are included in Cash and Other Investments on the accompanying Condensed Balance Sheets.
 
(F)   See Note 1 under “Stock Options” and Note 8 under “Stock Option Plan” to the financial statements of Southern Company in Item 8 of the Form 10-K for information regarding non-qualified employee stock options provided by Southern Company. Southern Company accounts for options granted in accordance with Accounting Principles Board Opinion No. 25; thus, no compensation expense is recognized because the exercise price of all options granted equaled the fair market value on the date of the grant. The estimated fair values of stock options granted during the three-month periods ending March 31, 2004 and 2003 have been derived using the Black-Scholes stock option pricing model. The following table shows the assumptions and the weighted average fair values of these stock options:
                 
    Three Months Ended   Three Months Ended
    March 31, 2004
  March 31, 2003
Interest Rate
    3.1 %     2.7 %
Average expected life of stock options (in years)
    5.0       4.3  
Expected volatility of common stock
    19.7 %     23.6 %
Expected annual dividends on common stock
  $ 1.40     $ 1.37  
Weighted average fair value of stock options granted
  $ 3.29     $ 3.59  

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

                 
    As Reported
  Pro Forma
Three Months Ended March 31, 2004
               
Net income (in millions)
  $ 331     $ 326  
Earnings per share (dollars):
               
Basic
  $ 0.45     $ 0.44  
Diluted
  $ 0.45     $ 0.44  
Three Months Ended March 31, 2003
               
Net income (in millions)
  $ 298     $ 294  
Earnings per share (dollars):
               
Basic
  $ 0.41     $ 0.41  
Diluted
  $ 0.41     $ 0.41  

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

    Diluted Earnings Per Share
                 
    Three Months Ended   Three Months Ended
    March 31, 2004
  March 31, 2003
    (in thousands)
As Reported Shares
    736,638       718,943  
Effect of options
    4,965       5,948  
Diluted Shares
    741,603       724,891  

(G)   See Note 6 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric and Southern Power under “Financial Instruments” in Item 8 of the Form 10-K. At March 31, 2004, the fair value of derivative energy contracts was reflected in the financial statements as follows:
                                                                 
    Southern   Alabama   Georgia   Gulf   Mississippi   Savannah   Southern        
    Company
  Power
  Power
  Power
  Power
  Electric
  Power
       
    Amounts        
    (in thousands)        
Regulatory liabilities, net
  $ 43,110     $ 18,078     $ 10,526     $ 5,673     $ 6,859     $ 1,974     $          
Other comprehensive income (loss)
    606       (226 )                 (1,239 )     (15 )     (216 )        
Net income
    (204 )     6       7       1       1             13          
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
         
Total fair value
  $ 43,512     $ 17,858     $ 10,533     $ 5,674     $ 5,621     $ 1,959     $ (203 )        
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
         

    For the three months ended March 31, 2004 and 2003, the amounts recognized in income for Southern Company, Alabama Power, Georgia, Power, Gulf Power, Mississippi Power, Savannah Electric and Southern Power were immaterial.
 
    In addition, approximately $2.7 million in pre-tax gains will be reclassified from Other Comprehensive Income to Fuel Expense by Southern Company for the twelve month period ended March 31, 2005.
 
    At March 31, 2004, Southern Company had $3.4 billion notional amount of interest rate swaps outstanding with net fair value gains of $21.1 million as follows:
 
    Fair Value Hedges
                                         
    Notional   Fixed Rate   Variable Rate   Maturity   Fair Value Gain (Loss)
    Amount
  Received
  Paid
  Date
  March 31, 2004
                                    (in millions)
Southern Company
  $400 million     5.3 %   6-month
LIBOR (in
arrears)
less 0.103%
  February 2007   $ 31.3  
Southern Company
  $40 million     7.625 %   6-month
LIBOR (in
arrears) plus
2.9225%
  December 2009   $ 2.2  
 
                                 
 
                                   

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

    Cash Flow Hedges
                             
            Weighted        
        Variable   Average       Fair Value
    Notional   Rate   Fixed Rate   Maturity   Gain (Loss)
    Amount
  Received
  Paid
  Date
  March 31, 2004
                        (in millions)
Variable Rate Securities
                           
Southern Company
  $200 million   1-month LIBOR     3.1975 %   June 2004   $ (1.0 )
Alabama Power
  $536 million   BMA Index     2.007 %   January 2007   $ (1.6 )
Alabama Power
  $195 million   3-month LIBOR     1.89 %   April 2006   $ (0.3 )
Alabama Power
  $250 million   3-month LIBOR     3.9198 %   September 2009   $ (5.0 )
Alabama Power
  $220 million   3-month LIBOR     3.4145 %   November 2007   $ (3.0 )
Alabama Power
  $150 million   3-month LIBOR     5.051 %   April 2034   $ 1.0  
Georgia Power
  $250 million   3-month LIBOR plus 0.125%     1.96 %   February 2005   $ (1.4 )
Georgia Power
  $50 million   3-month LIBOR plus 0.10%     1.5625 %   January 2005   $ (0.1 )
Georgia Power
  $873 million   BMA Index     1.3878 %   December 2004   $ (1.5 )
Georgia Power
  $250 million   3-month LIBOR     4.6629 %   February 2015   $ 0.6  
Savannah Electric
  $20 million   3-month LIBOR plus 0.375%     2.055 %   December 2004   $ (0.1 )

    For the twelve month period ended March 31, 2005, the following table reflects the estimated pre-tax losses that will be reclassified from Other Comprehensive Income to Interest Expense.
         
    (in Millions)
Alabama Power
  $ (11.6 )
Georgia Power
    (4.1 )
Gulf Power
    (0.3 )
Mississippi Power
     
Savannah Electric
    (0.1 )
Southern Power
    (10.6 )
 
Southern Company
  $ (27.8 )

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(H)   See Note 2 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric in Item 8 of the Form 10-K. Components of the pension plans’ and postretirement plans’ net periodic costs for the three-month periods ending March 31, 2004 and 2003 are as follows:
                                                         
    Southern   Alabama   Georgia   Gulf   Mississippi   Savannah        
    Company
  Power
  Power
  Power
  Power
  Electric
       
PENSION PLANS (in millions)
                                                       
 
Three Months Ended March 31, 2004
                                                       
 
Service cost
  $ 32     $ 8     $ 10     $ 1     $ 2     $ 1          
Interest cost
    68       18       26       3       3       1          
Expected return on plan assets
    (113 )     (35 )     (45 )     (5 )     (5 )     (1 )        
Recognized net gain
    (1 )     (1 )     (1 )                          
Net amortization
    4       1       2                            
Net cost (income)
  $ (10 )   $ (9 )   $ (8 )   $ (1 )   $     $ 1          
 
Three Months Ended March 31, 2003
                                                       
 
Service cost
  $ 29     $ 7     $ 10     $ 1     $ 1     $ 1          
Interest cost
    65       17       25       3       3       1          
Expected return on plan assets
    (112 )     (35 )     (45 )     (5 )     (4 )     (1 )        
Recognized net gain
    (11 )     (3 )     (5 )                          
Net amortization
    4       1       2                            
Net cost (income)
  $ (25 )   $ (13 )   $ (13 )   $ (1 )   $     $ 1          
 
POSTRETIREMENT PLANS (in millions)
                                                       
 
Three Months Ended March 31, 2004
                                                       
 
Service cost
  $ 7     $ 2     $ 2     $     $     $          
Interest cost
    24       6       11       1       1       1          
Expected return on plan assets
    (12 )     (4 )     (6 )                          
Net amortization
    9       2       5                            
Net cost (income)
  $ 28     $ 6     $ 12     $ 1     $ 1     $ 1          
 
Three Months Ended March 31, 2003
                                                       
 
Service cost
  $ 6     $ 2     $ 2     $     $     $          
Interest cost
    23       6       10       1       1       1          
Expected return on plan assets
    (12 )     (4 )     (6 )                          
Net amortization
    8       2       4                            
Net cost (income)
  $ 25     $ 6     $ 10     $ 1     $ 1     $ 1          

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(I)   See Note 3 to the financial statements in Item 8 of the Form 10-K for Southern Company under “Mississippi Power Regulatory Filing” and Mississippi Power under “Retail Regulatory Filing” in Item 8 of the Form 10-K regarding Mississippi Power’s request with the Mississippi PSC to include 266 megawatts of Plant Daniel Units 3 and 4 generating capacity not currently included in jurisdictional cost of service. The Mississippi PSC held hearings in April 2004 and a final decision in this matter is pending. The ultimate outcome of this matter cannot now be determined.
 
(J)   See Note 1 to Southern Company’s financial statements under “Leveraged Leases” in Item 8 of the Form 10-K. In April 2004, Southern Company entered into a commitment with KeySpan Corporation for the purchase and subsequent leaseback of the Ravenswood Expansion Facility, a 250 megawatt combined cycle gas turbine facility in New York, New York. The cost of the facility is estimated at $375 million. Southern Company’s net investment in the leveraged lease is currently anticipated to be approximately $70 million. The transaction is projected to close in the second quarter of 2004.
 
(K)   On March 23, 2004, Savannah Electric submitted a request to the Georgia PSC for an accounting order which, if approved by the Georgia PSC, would allow for the cost of a coal transloader currently under construction to be amortized over twenty-four months through fuel expense and recovered through Savannah Electric’s fuel cost recovery clause. This transloader will allow foreign coal to be off-loaded from ships at Savannah Electric’s Plant Kraft dock, and then transferred by rail to Savannah Electric’s Plant McIntosh. The total cost of the transloader, including carrying costs, is expected to be approximately $4.0 million.
 
(L)   Southern Company’s reportable business segment is the sale of electricity in the Southeast by the five retail operating companies and Southern Power. The All Other column includes parent Southern Company, which does not allocate operating expenses to business segments. Also, this category includes segments below the quantitative threshold for separate disclosure. These segments include investments in synthetic fuels and leveraged lease projects, telecommunications, energy-related services and natural gas marketing. Intersegment revenues are not material. Financial data for business segments and products and services for the periods covered in the Form 10-Q are as follows:
                                                                 
    Electric Utilities
                   
    Retail                                        
    Operating   Southern                   All   Reconciling            
    Companies
  Power
  Eliminations
  Total
  Other
  Eliminations
  Consolidated
       
    (in millions)        
Three Months Ended March 31, 2004:
                                                               
Operating revenues
  $ 2,542     $ 176     $ (130 )   $ 2,588     $ 173     $ (7 )   $ 2,754          
Segment net income (loss)
    272       27             299       33       (1 )     331          
Total assets at March 31, 2004
  $ 31,602     $ 2,455     $ (96 )   $ 33,961     $ 1,825     $ (419 )   $ 35,367          
 
Three Months Ended March 31, 2003:
                                                               
Operating revenues
  $ 2,366     $ 107     $ (73 )   $ 2,400     $ 153     $ (5 )   $ 2,548          
Segment net income (loss)
    264       23             287       11             298          
Total assets at December 31, 2003
  $ 31,412     $ 2,409     $ (122 )   $ 33,699     $ 1,671     $ (325 )   $ 35,045          

    Products and Services
                                 
    Electric Utilities Revenues
Period
  Retail
  Wholesale
  Other
  Total
    (in millions)
Three Months Ended March 31, 2004
  $ 2,144     $ 351     $ 93     $ 2,588  
Three Months Ended March 31, 2003
    1,974       334       92       2,400  

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PART II- OTHER INFORMATION

Item 1.  Legal Proceedings.

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

Item 2.  Changes in Securities, Unregistered Sales of Equity Securities and Use of Proceeds.

      On February 17, 2004, Alabama Power issued to Southern Company, in a private placement, 500,000 shares of Alabama Power’s common stock, $40.00 par value per share, for a price of $40.00 per share ($20,000,000 aggregate purchase price). There were no underwriting discounts or commissions. The issuance to Southern Company was exempt from registration under the Securities Act of 1933, as amended (the “Act”), pursuant to Section 4(2) of the Act because it was a transaction by an issuer that did not involve a public offering. The proceeds from the sale were used by Alabama Power for general corporate purposes.

Item 6.  Exhibits and Reports on Form 8-K.

(a)   Exhibits.
 
(3)   Articles of Incorporation and By-Laws
 
    Georgia Power
         
(c) 1
  -   By-laws of Georgia Power as amended effective August 20, 2003, and as presently in effect.

(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, 2003, 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, 2003, 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, 2003, File No. 1-6468 as Exhibit 24(c) and incorporated herein by reference.)

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Item 6.  Exhibits and Reports on Form 8-K.

(a)   Exhibits. (Continued)
 
    Gulf Power
         
(d) 1
  -   Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2003, 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, 2003, File No. 001-11229 as Exhibit 24(e) and incorporated herein by reference.)

    Savannah Electric
         
(f) 1
  -   Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2003, File No. 1-5072 as Exhibit 24(f) and incorporated herein by reference.)

    Southern Power
         
(g) 1
  -   Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2003, 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.

    Georgia Power
         
(c) 1
  -   Certificate of Georgia Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.

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Item 6.  Exhibits and Reports on Form 8-K.

(a)   Exhibits. (Continued)
         
(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.

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

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

(32)   Section 906 Certifications

    Southern Company
         
(a)
  -   Certificate of Southern Company’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

    Alabama Power
         
(b)
  -   Certificate of Alabama Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

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Item 6.  Exhibits and Reports on Form 8-K.

(a)   Exhibits. (Continued)
 
    Georgia Power
         
(c)
  -   Certificate of Georgia Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

    Gulf Power
         
(d)
  -   Certificate of Gulf Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

    Mississippi Power
         
(e)
  -   Certificate of Mississippi Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

    Savannah Electric
         
(f)
  -   Certificate of Savannah Electric’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

    Southern Power
         
(g)
  -   Certificate of Southern Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

(b)   Reports on Form 8-K.

      The registrants collectively and separately furnished Current Reports on Form 8-K dated January 29, 2004:
     
Item reported:
Financial statements filed:
  Item 12
None

      Alabama Power filed Current Reports on Form 8-K dated February 5, 2004 and February 10, 2004:
     
Items reported:
Financial statements filed:
  Items 5 and 7 None

      Georgia Power filed Current Reports on Form 8-K dated January 12, 2004, January 15, 2004 and February 12, 2004:
     
Item reported:
Financial statements filed:
  Items 5 and 7 None

      Mississippi Power filed Current Reports on Form 8-K both dated March 3, 2004:
     
Items reported:
Financial statements filed:
  Items 5 and 7 None

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THE SOUTHERN COMPANY

SIGNATURES

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

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

Date: May 6, 2004

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ALABAMA POWER COMPANY

SIGNATURES

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

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

Date: May 6, 2004

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GEORGIA POWER COMPANY

SIGNATURES

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

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

Date: May 6, 2004

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GULF POWER COMPANY

SIGNATURES

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

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

Date: May 6, 2004

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MISSISSIPPI POWER COMPANY

SIGNATURES

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

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

Date: May 6, 2004

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SAVANNAH ELECTRIC AND POWER COMPANY

SIGNATURES

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

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

Date: May 6, 2004

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SOUTHERN POWER COMPANY

SIGNATURES

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

       
  SOUTHERN POWER COMPANY
 
   
By
  William P. Bowers
  President and Chief Executive Officer
  (Principal Executive Officer)
 
   
By
  Cliff S. Thrasher
  Senior Vice President, Comptroller and Chief Financial Officer
  (Principal Financial and Accounting Officer)
 
   
By
  /s/ Wayne Boston
 
 
  (Wayne Boston, Attorney-in-fact)

Date: May 6, 2004

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