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

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

     Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No___

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

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

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

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

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DEFINITIONS

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     This Quarterly Report on Form 10-Q contains forward-looking statements in addition to historical information. Forward-looking information includes, among other things, statements concerning the strategic goals for Southern Company’s wholesale business, estimated construction and other expenditures. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. The registrants caution that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include:

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THE SOUTHERN COMPANY
AND SUBSIDIARY COMPANIES

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

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

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

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

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

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

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

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

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

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

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

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:

     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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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
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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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
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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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
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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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
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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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
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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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
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:

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

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)

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)

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

26

ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

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

27

ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

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

28

ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)