GEORGIA POWER CO - Quarter Report: 2005 March (Form 10-Q)

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

FIRST QUARTER 2005 vs. FIRST QUARTER 2004

OVERVIEW

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

     Southern Company continues to focus on several key performance indicators. These indicators include customer satisfaction, peak season equivalent forced outage rate, return on equity, and earnings per share. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Southern Company in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Southern Company’s first quarter 2005 earnings were $323 million ($0.43 per share) compared with $331 million ($0.45 per share) in the first quarter 2004. Earnings in the first quarter 2005 decreased due to milder than normal weather, the expiration of certain provisions of Georgia Power’s three-year retail rate plan ending December 31, 2004 (2001 Retail Rate Plan), and higher non-fuel operation and maintenance costs as compared to the first quarter of 2004. These decreases were partially offset by a base rate increase at Georgia Power and customer growth in the Southern Company service area.

     Significant income statement items appropriate for discussion include the following:

     Retail revenues. The chart below reflects the primary drivers of the 5.8% increase in retail revenues in the first quarter 2005 compared to the prior year. Changes in revenue related to cost recovery mechanisms such as fuel and environmental have no effect on net income. In the first quarter 2005, retail kilowatt-hour energy sales decreased by 0.8% from the same period a year ago, primarily due to milder weather. The decrease was partially offset by continued customer and demand growth due to sustained economic growth in the Southeast. The number of retail customers increased by 1.6% and weather-adjusted average consumption by retail customers increased by 1.1% in the first quarter 2005 when compared with the first quarter 2004.

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     Details of retail revenues are as follows:

     Other electric revenues. In the first quarter 2005, when compared to the same period in 2004, other electric revenues increased $7.5 million, or 8.0%, primarily due to higher transmission and outdoor lighting revenues of $2.4 million and $1.5 million, respectively.

     Fuel expense. During the first quarter 2005, fuel expense was higher due to a 10.7% increase in the average unit cost of fuel per net kilowatt-hour generated 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 expense. The decrease in the first quarter 2005 for purchased power compared with the same period last year is primarily a result of lower kilowatt-hour purchases and a decrease in the cost of purchased power per kilowatt-hour. These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues.

     Other operations and maintenance expense. The $68.7 million increase in other operations and maintenance in the first quarter 2005 is mainly attributable to $45 million of expenses recorded by Alabama Power in accordance with an accounting order approved by the Alabama PSC to offset the costs of Hurricane Ivan and restore the natural disaster reserve. In accordance with the accounting order, Alabama Power also returned certain regulatory liabilities related to deferred taxes to its retail customers; therefore, the combined effects of this accounting order had no impact on net income. See Note 3 to the financial statements of Southern Company under “Gulf Power and Alabama Power Storm Damage Recovery” in Item 8 of the Form 10-K and “Income taxes” below for additional information. In addition, fossil and hydro expenses increased $13.3 million as compared to the prior year primarily due to lower than normal operation and maintenance spending in the first quarter 2004.

     Depreciation and amortization expense. The $52 million increase in depreciation and amortization in the first quarter of 2005 is due to the expiration in 2004 of certain provisions in Georgia Power’s 2001 Retail Rate Plan. In accordance with the 2001 Retail Rate Plan, Georgia Power amortized an accelerated cost recovery liability equally as a credit to amortization expense and recognized new Georgia PSC-certified purchased power costs in rates evenly over the three years ended December 31, 2004. This treatment resulted in a credit to amortization expense of $47 million during the first quarter of 2004. See Note 3 to the financial statements of Southern Company under “Georgia Power Retail Rate Activity” in Item 8 of the Form 10-K for additional information.

     Allowance for equity funds used during construction. The first quarter 2005 increase in AFUDC compared to the same period in the prior year relates primarily to construction of the McIntosh combined cycle units 10 and 11 by Georgia Power and Savannah Electric. See Note 3 to the financial statements of Southern Company under “Plant McIntosh Construction Project” in Item 8 of the Form 10-K for further information.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Interest expense, net of amounts capitalized. The increase in interest expense, net of amounts capitalized in the first quarter 2005 when compared to the same period in 2004 is mainly attributed 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 MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Financing Activities” of Southern Company in Item 7 of the Form 10-K and herein for additional information.

     Income taxes. The decrease in income taxes in the first quarter 2005 compared to the prior year is primarily due to the impact of the Alabama PSC accounting order discussed under “Other operations and maintenance expense” above and is expected to maintain Southern Company’s annual effective income tax rate at approximately 27% for 2005. See Note 5 to the financial statements of Southern Company in Item 8 of the Form 10-K and Note (N) to the Condensed Financial Statements herein for additional information.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of future earnings potential. The level of Southern Company’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Company’s primary business of selling electricity. These factors include the 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 stringent 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. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in the service area. For additional information relating to these issues, see BUSINESS – The SOUTHERN System – “Risk Factors” in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form 10-K.

Environmental Matters

Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be recovered. For additional information, including information on certain environmental litigation, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters” in Item 8 of the Form 10-K.

Plant Wansley Environmental Litigation

On March 11, 2005, the U.S. Court of Appeals for the Eleventh Circuit accepted Georgia Power’s petition for review of the U.S. District Court for the Northern District of Georgia’s December 15, 2004 order related to the Plant Wansley environmental litigation. Oral argument on that appeal has not been scheduled. See Note 3 to the financial statements of Southern Company under “Environmental Matters – Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K for additional information. The ultimate outcome of this matter cannot now be determined.

Other Environmental Matters

The EPA issued the final Clean Air Interstate Rule on March 10, 2005. The rule addresses sulfur dioxide (SO₂) and nitrogen oxide (NO_x) emissions that contribute to nonattainment of the eight-hour ozone and fine particulate matter National Ambient Air Quality Standards. Twenty-eight eastern states, including each of the

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states within Southern Company’s service area, are subject to the fine particulate and/or the eight-hour ozone requirements set forth within the rule. The rule may require additional reductions of NO_x and/or SO₂ to be achieved by the installation of additional controls at Southern Company facilities or through the purchase of allowances. The impact of this final rule on Southern Company will, however, depend on the development and implementation of applicable state regulations and therefore cannot be determined at this time.

     On March 15, 2005, the EPA announced the final Clean Air Mercury Rule, selecting a cap-and-trade approach to be implemented in two phases, 2010 and 2018. The rule sets a permanent cap on emissions at the 2018 level and provides for an emissions allowance trading market. The impact of this final rule on Southern Company will depend on resolution of legal challenges and the development and implementation of applicable state regulations and therefore cannot be determined at this time.

     On April 15, 2005, the EPA announced plans to extend the deadline for issuance of final rules addressing Best Available Retrofit Technology standards under its Regional Haze program until June 15, 2005.

     The EPA published a proposed rule on April 20, 2005 to approve redesignation of the Atlanta metro area to “attainment” under the one-hour ozone standard.

FERC and State PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC and State PSC Matters – Market-Based Rate Authority” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Each of the retail operating companies and Southern Power has authorization from the FERC to sell power to non-affiliates at market-based prices. The retail operating companies and Southern Power also have FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. As directed by this order, on February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. Any new market-based rate transactions in its retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. In the event that the FERC’s default mitigation measures are ultimately applied, the retail operating companies and Southern Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The impact of such sales through March 31, 2005 is not material to Southern Company’s net income. 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.

Generation Interconnection Agreements

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC and State PSC Matters – Generation Interconnection Agreements” of Southern Company in Item 7 of the Form 10-K for information on the FERC’s Order 2003 related to standardization of generation interconnection agreements and procedures. The FERC has indicated that Order 2003, which was effective January 20, 2004, is to be applied prospectively to interconnection agreements. Subsidiaries of Tenaska, Inc., as counterparties to three previously executed interconnection agreements with subsidiaries of Southern Company, have filed complaints at the FERC requesting that the FERC modify the agreements and that Southern Company refund a total of $19 million previously paid for interconnection facilities, with interest. Southern Company has also received similar requests from other entities totaling approximately $14 million. Southern Company has

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
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opposed such relief, and the proceedings are still pending. The impact of Order 2003 and its subsequent rehearings on Southern Company and the final results of these matters cannot be determined at this time.

Retail Fuel Cost Recovery

The retail operating companies each have established fuel cost recovery rates approved by their respective state PSCs. In recent quarters, the retail operating companies have experienced higher than expected fuel costs for coal and gas. These higher fuel costs have increased the under recovered fuel costs included in the balance sheets. The retail operating companies will continue to monitor the under recovered fuel cost balance in light of these higher fuel costs.

     Alabama Power fuel costs are recovered under Rate ECR (Energy Cost Recovery), which provides for the addition of a fuel and energy cost factor to base rates. Alabama Power’s under recovered fuel costs as of March 31, 2005 totaled $96.4 million as compared to $101.6 million at December 31, 2004. Alabama Power increased its fuel billing factor in April 2005. See Note 3 to the financial statements of Southern Company under “Alabama Power Retail Regulatory Matters” in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements herein for additional information.

     On February 18, 2005, Georgia Power filed a request with the Georgia PSC for a fuel cost recovery rate increase. The requested increase, representing an average annual increase in revenues of approximately 11.8%, will allow for the recovery of fuel costs based on an estimate of future fuel costs, as well as the collection of the existing under recovery of fuel costs. The Georgia PSC may require that this existing under recovery be collected over a period greater than twelve months. Georgia Power’s under recovered fuel costs as of March 31, 2005 totaled $455.2 million. Hearings before the Georgia PSC were held in April 2005. A final decision from the Georgia PSC is expected in May 2005 with the new fuel rate effective June 1. The final outcome of the filing cannot be determined at this time. For additional information on Georgia Power’s current fuel cost recovery rate, see Note 3 to the financial statements of Southern Company under “Georgia Power Retail Rate Activity” in Item 8 of the Form 10-K and Note (I) to the Condensed Financial Statements herein.

Storm Damage Cost Recovery

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC and State PSC Matters — Storm Damage Cost Recovery” of Southern Company in Item 7 and Notes 1 and 3 to the financial statements of Southern Company under “Storm Damage Reserves” and “Gulf Power and Alabama Power Storm Damage Recovery,” respectively, in Item 8 of the Form 10-K. Each retail operating company maintains a reserve for property damage to cover the cost of damages from major storms to its transmission and distribution lines and the cost of uninsured damages to its generation facilities and other property.

     Hurricane Ivan hit Gulf Power’s service territory in September 2004. In March 2005, the Florida PSC approved a Stipulation and Settlement between Gulf Power, the Office of Public Counsel for the State of Florida, and the Florida Industrial Power Users Group which allows Gulf Power to recover the retail portion of $51.7 million, the projected reserve deficiency, plus interest and revenue taxes, from customers over a 24-month period beginning in April 2005. In connection with the Stipulation, Gulf Power has agreed that it will not seek any additional increase in its base rates and charges to become effective on or before March 1, 2007.

Mirant Related Matters

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Other Matters” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Mirant Related Matters” in Item 8 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

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
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11 of the U.S. Bankruptcy Code. In June 2004, Mirant’s bankruptcy counsel notified Southern Company that it was investigating, on behalf of a committee of independent Mirant directors, potential claims against Southern Company. On March 25, 2005, Mirant filed with the U.S. Bankruptcy Court for the Northern District of Texas a First Amended Disclosure Statement relating to Mirant’s plan of reorganization. In the First Amended Disclosure Statement, Mirant disclosed that its board of directors has authorized litigation against Southern Company to recover certain transfers made by Mirant to Southern Company from 1999 through 2001. Other than identifying these transfers, the First Amended Disclosure Statement provided no factual or legal basis for any claim against Southern Company. Southern Company believes there is no meritorious basis for a claim and intends to vigorously defend itself in the event that Mirant brings an action to recover any amounts in connection with these transfers. The ultimate outcome of any potential action by Mirant cannot be determined at this time. Southern Company has various other 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

Leveraged Lease Transactions

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Income Tax Matters - Leveraged Lease Transactions” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Income Tax Matters — Leveraged Lease Transactions” in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for information regarding IRS challenges to Southern Company’s transactions related to international leveraged leases that could have material impacts on Southern Company’s financial statements. The ultimate outcome of these matters cannot now be determined.

Synthetic Fuel Tax Credits

As discussed in Note 3 to the financial statements of Southern Company under “Income Tax Matters - Synthetic Fuel Tax Credits” in Item 8 of the Form 10-K, Southern Company has investments in two entities that produce synthetic fuel and receive tax credits under Section 29 of the IRC. In accordance with Section 29 of the IRC, these tax credits are subject to limitation as the annual average price of oil (as determined by the DOE) increases over a specified, inflation-adjusted dollar amount published in the spring of the subsequent year. Southern Company, along with its partners in these investments, will continue to monitor oil prices. Any indicated potential limitation on these credits could affect either the timing or the amount of the credit recognition and could also require an impairment analysis of these investments by Southern Company. Subsequent to March 31, 2005, Southern Company entered into a derivative transaction designed to reduce its exposure to the potential phase-out of these credits in 2005. The purchased option, which had an initial fair value of approximately $7 million, will be marked to market over the remainder of the year through other income (expense), net.

Other Matters

On April 8, 2005, Southern Power entered into an agreement with Constellation Power, Inc. and certain other subsidiaries of Constellation Energy Group, Inc. to acquire all of the outstanding general and limited partnership interests of Oleander Power Project, L.P. (Oleander), for an aggregate purchase price of approximately $206 million. The purchase price is subject to certain working capital and timing of closing adjustments. Oleander owns a dual-fueled generating plant in Brevard County, Florida with a nominal installed capacity of 680 MW. The entire output of the plant is sold under separate PPAs with Florida Power & Light Company and Seminole Electric Cooperative, Inc. The PPAs expire in 2007 and 2009, respectively. The acquisition is subject to certain regulatory approvals, including the approval of the FERC, as well as review by the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act.

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

New Accounting Standards

FASB Statement No. 123R, Share-Based Payments, was issued in December 2004. This statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. In April 2005, the SEC amended the compliance dates for FASB Statement No. 123R. For Southern Company, this statement is now effective beginning January 1, 2006. Although the compensation expense calculation required under the revised statement differs slightly, the impacts on Southern Company’s financial statements are expected to be similar to the pro forma disclosures included in Note 1 to the financial statements of Southern Company under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein.

     FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations, was issued in March 2005. This interpretation requires that asset retirement obligations be recorded when a legal obligation exists even though the timing and/or the method of settlement are conditional on a future event. For Southern Company, FIN 47 is effective no later than December 31, 2005. Southern Company is currently assessing the impact of FIN 47 on its balance sheet; however, adoption is not currently expected to have a material impact on Southern Company’s income statement.

     In December 2004, the FASB issued Staff Position No. 109-1 (FSP 109-1), Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities provided by the American Jobs Creation Act of 2004, which requires that the generation deduction for utilities be accounted for as a special tax deduction rather than as a tax rate reduction. Southern Company adopted FSP 109-1 in the first quarter of 2005 with no material impact on its financial statements.

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FINANCIAL CONDITION AND LIQUIDITY

Overview

Southern Company’s financial condition continued to be strong at March 31, 2005. Net cash flow from operating activities totaled $170 million for the first quarter 2005, compared to $307 million for the first quarter 2004. The $137 million decrease in 2005 resulted primarily from higher fuel costs at the retail operating companies. Those costs are recoverable in future periods and are reflected on the balance sheets as under recovered regulatory clause revenues. Gross property additions to utility plant were $480 million in the first quarter 2005. The majority of funds needed for gross property additions since 2000 has been provided from operating activities.

     Significant balance sheet changes include a $237 million increase in long-term debt for the first quarter 2005 due to the replacement of short-term financing with long-term debt, consistent with Southern Company’s finance policy, and an increase of $178 million in property, plant, and equipment.

     The market price of Southern Company’s common stock at March 31, 2005 was $31.83 per share and the book value was $13.98 per share, representing a market-to-book ratio of 228%, compared to $33.52, $13.86, and 242%, respectively, at the end of 2004. The dividend for the first quarter 2005 was $0.3575 per share compared to $0.35 per share in the first quarter 2004. In April 2005, the dividend was increased to $0.3725 per share for the dividend payable in June 2005.

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

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY –“Capital Requirements and Contractual Obligations” of Southern Company in Item 7 of the Form 10-K for a description of Southern Company’s capital requirements for its construction program and other funding requirements associated with scheduled maturities of long-term debt, as well as the related interest, preferred stock dividends, leases, trust funding requirements, and other purchase commitments. Approximately $745 million will be required by March 31, 2006 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 a mount, type, and timing of any financings, if needed, will depend upon market conditions and regulatory approval. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Southern Company in Item 7 of the Form 10-K for additional information.

     To meet short term cash needs and contingencies, the Southern Company system had at March 31, 2005 approximately $382 million of cash and cash equivalents and approximately $3.2 billion of unused credit arrangements with banks, of which $1.8 billion expire in 2005 and $1.4 billion expire in 2006 and beyond. Of the facilities maturing in 2005 and 2006, $1.2 billion contain provisions allowing two-year term loans executable at the expiration date and $275 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

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facilities, as needed, prior to expiration. The retail operating companies may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of each of the retail operating companies. At March 31, 2005, the Southern Company system had outstanding commercial paper of $714.5 million and extendible commercial notes of $24.6 million. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.

Off-Balance Sheet Financing Arrangements

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

Credit Rating Risk

Southern Company does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- or Baa3 or below. These contracts are primarily for physical electricity purchases and sales. At March 31, 2005, the maximum potential collateral requirements at a BBB- or Baa3 rating were approximately $43 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $326 million. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit, or cash. Southern Company is also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade. These agreements are primarily for natural gas price and interest rate risk management activities. At March 31, 2005, Southern Company and its subsidiaries had no exposure under these contracts.

Market Price Risk

Southern Company’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2004 reporting period. In addition, Southern Company is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

     Due to cost-based rate regulations, the retail operating companies have limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. In addition, Southern Power’s exposure to market volatility in commodity fuel prices and prices of electricity is limited because its long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. To mitigate residual risks relative to movements in electricity prices, the retail operating companies and Southern Power enter into fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, into similar contracts for gas purchases. The retail operating companies have implemented fuel hedging programs at the instruction of their respective state PSCs. Southern Company GAS also has in place a risk management program to substantially mitigate its exposure to price volatility for its natural gas purchases.

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     The fair value of derivative energy contracts at March 31, 2005 was as follows:

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

Financing Activities

In the first three months of 2005, Southern Company and its subsidiaries issued $500 million of senior notes and $55 million of common stock through employee and director stock plans. The proceeds were primarily used to refund senior notes and other long-term debt and to fund ongoing construction projects. The remainder was used to repay short-term indebtedness. See Southern Company’s Condensed Consolidated Statements of Cash Flows herein for further details on financing activities during the first three months of 2005.

     Subsequent to March 31, 2005, Georgia Power issued $125 million of Series Y 5.80% Senior Notes. Additionally, Georgia Power refinanced $85 million of obligations incurred in connection with pollution control bonds. Also, subsequent to March 31, 2005, Georgia Power entered into an interest rate swap related to the Series Y 5.80% Senior Notes issued in April 2005. The interest rate swap had a fixed rate of 4.984%, a final maturity of 2015, and was terminated at a cost of $0.3 million. This cost will be amortized over a 10-year period.

     In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Company and its subsidiaries plan to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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PART I

Item 3. Quantitative And Qualitative Disclosures About Market Risk.

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

Item 4. Controls and Procedures.

     (a) Evaluation of disclosure controls and procedures.

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

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

Savannah Electric

     As of the end of the period covered by this quarterly report, Savannah Electric conducted an evaluation under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Section 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon these evaluations, which took into consideration the revisions made in February 2005 to Savannah Electric’s process and controls related to unbilled revenues which are described below, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures were effective in alerting them in a timely manner to material information relating to Savannah Electric required to be included in periodic filings with the SEC.

     As disclosed in the Form 10-K, in connection with the review and preparation of the financial statements of Savannah Electric for the year ended December 31, 2004, errors in Savannah Electric’s estimates of unbilled revenues for the years ended December 31, 2003 and 2002 and periods prior to 2002 were identified. The errors also affected Savannah Electric’s previously issued financial statements for the quarters ended March 31, June 30, and September 30, 2004 and 2003. Savannah Electric’s financial statements were restated to reflect adjustments to the financial information previously reported. See Note 9 to the financial statements of Savannah Electric in Item 8 of the Form 10-K.

     In February 2005, management revised its process and controls related to estimating unbilled revenues to utilize a gross change methodology that reverses each period’s estimate in total in the following period.

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     (b) Changes in internal controls.

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

     There have been no changes in Southern Company’s, Alabama Power’s, Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the first quarter of 2005 that have materially affected or are reasonably likely to materially affect Southern Company’s, Alabama Power’s, Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s internal control over financial reporting.

Savannah Electric

     As described above under “Disclosure Controls and Procedures,” Savannah Electric made changes to its process and controls related to estimating unbilled revenues in February 2005. Otherwise, there have been no changes in Savannah Electric’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the first quarter of 2005 that have materially affected or are reasonably likely to materially affect Savannah Electric’s internal control over financial reporting.

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ALABAMA POWER COMPANY

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ALABAMA POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

CONDENSED STATEMENTS OF COMPREHENSIVE 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