Mississippi Power (MSPWP) 10-Q 2004 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____

Commission	Registrant, State of Incorporation,	I.R.S. Employer
File Number	Address and Telephone Number	Identification No.
1-3526	The Southern Company	58-0690070
	(A Delaware Corporation)
	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

     Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or15(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  o

     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 September 30, 2004
The Southern Company	Par Value $5 Per Share		739,686,919
Alabama Power Company	Par Value $40 Per Share		8,250,000
Georgia Power Company	Without Par Value		7,761,500
Gulf Power Company	Without Par Value		992,717
Mississippi Power Company	Without Par Value		1,121,000
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
September 30, 2004

	Page
	Number
DEFINITIONS		5
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION		6
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
The Southern Company and Subsidiary Companies
Condensed Consolidated Statements of Income		8
Condensed Consolidated Statements of Cash Flows		9
Condensed Consolidated Balance Sheets		10
Condensed Consolidated Statements of Comprehensive Income		12
Management’s Discussion and Analysis of Results of Operations and Financial Condition		13
Alabama Power Company
Condensed Statements of Income		29
Condensed Statements of Comprehensive Income		29
Condensed Statements of Cash Flows		30
Condensed Balance Sheets		31
Management’s Discussion and Analysis of Results of Operations and Financial Condition		33
Georgia Power Company
Condensed Statements of Income		45
Condensed Statements of Comprehensive Income		45
Condensed Statements of Cash Flows		46
Condensed Balance Sheets		47
Management’s Discussion and Analysis of Results of Operations and Financial Condition		49
Gulf Power Company
Condensed Statements of Income		61
Condensed Statements of Comprehensive Income		61
Condensed Statements of Cash Flows		62
Condensed Balance Sheets		63
Management’s Discussion and Analysis of Results of Operations and Financial Condition		65
Mississippi Power Company
Condensed Statements of Income		75
Condensed Statements of Comprehensive Income		75
Condensed Statements of Cash Flows		76
Condensed Balance Sheets		77
Management’s Discussion and Analysis of Results of Operations and Financial Condition		79
Savannah Electric and Power Company
Condensed Statements of Income		89
Condensed Statements of Comprehensive Income		89
Condensed Statements of Cash Flows		90
Condensed Balance Sheets		91
Management’s Discussion and Analysis of Results of Operations and Financial Condition		93
Southern Power Company
Condensed Statements of Income		103
Condensed Statements of Comprehensive Income		103
Condensed Statements of Cash Flows		104
Condensed Balance Sheets		105
Management’s Discussion and Analysis of Results of Operations and Financial Condition		107
Notes to the Condensed Financial Statements		115
Item 3. Quantitative and Qualitative Disclosures about Market Risk		27
Item 4. Controls and Procedures		27

3

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

	Page
	Number
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		129
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	Inapplicable
Item 3. Defaults Upon Senior Securities	Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders	Inapplicable
Item 5. Other Information	Inapplicable
Item 6. Exhibits		129
Signatures		134

4

DEFINITIONS

TERM	MEANING
Alabama Power	Alabama Power Company
AFUDC	Allowance for funds used during construction
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
ESOP	Employee Stock Ownership Plan
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 of 1986, as amended
IRS	Internal Revenue Service
LIBOR	London Interbank Offered Rate
Mirant	Mirant Corporation
Mississippi Power	Mississippi Power Company
Moody’s	Moody’s Investors Service, Inc.
MW	Megawatts
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

5

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, storm damage cost recovery, completion of construction projects and estimated construction and other expenditures. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” or “continue” or the negative of these terms or other 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 incidents similar to the August 2003 power outage in the Northeast;

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

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

6

THE SOUTHERN COMPANY
AND SUBSIDIARY COMPANIES

7

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
Operating Revenues:
Retail sales	$	2,915,085		$	2,757,014		$	7,537,030		$	6,906,564
Sales for resale		343,298			376,002			1,037,915			1,033,609
Other electric revenues		99,635			90,644			287,339			410,598
Other revenues		82,787			77,187			319,731			315,077
Total operating revenues		3,440,805			3,300,847			9,182,015			8,665,848
Operating Expenses:
Fuel		982,511			936,982			2,691,261			2,385,357
Purchased power		187,753			137,860			525,577			385,108
Other operations		545,778			519,899			1,629,236			1,556,460
Maintenance		209,497			195,871			715,453			664,535
Depreciation and amortization		241,134			260,623			715,237			763,908
Taxes other than income taxes		161,165			155,263			474,232			446,826
Total operating expenses		2,327,838			2,206,498			6,750,996			6,202,194
Operating Income		1,112,967			1,094,349			2,431,019			2,463,654
Other Income and (Expense):
Allowance for equity funds used during construction		14,333			5,025			31,984			17,049
Interest income		6,174			4,994			20,283			30,081
Equity in losses of unconsolidated subsidiaries		(21,624	)		(21,983	)		(68,193	)		(75,425	)
Leveraged lease income		18,776			16,168			51,708			49,581
Interest expense, net of amounts capitalized		(132,773	)		(129,153	)		(401,971	)		(387,102	)
Interest expense to affiliate trusts		(31,930	)		—			(63,915	)		—
Distributions on mandatorily redeemable preferred securities		—			(36,393	)		(31,168	)		(115,930	)
Preferred dividends of subsidiaries		(7,402	)		(5,473	)		(22,413	)		(15,695	)
Other income (expense), net		(8,433	)		(29,483	)		(31,897	)		(31,314	)
Total other income and (expense)		(162,879	)		(196,298	)		(515,582	)		(528,755	)
Earnings Before Income Taxes		950,088			898,051			1,915,437			1,934,899
Income taxes		305,615			279,216			587,690			586,378
Consolidated Net Income	$	644,473		$	618,835		$	1,327,747		$	1,348,521
Common Stock Data:
Consolidated basic earnings per share	$	0.87		$	0.85		$	1.80		$	1.86
Consolidated diluted earnings per share	$	0.87		$	0.84		$	1.79		$	1.85
Average number of basic shares of common stock outstanding (in thousands)		739,345			729,816			738,056			724,462
Average number of diluted shares of common stock outstanding (in thousands)		743,695			734,855			742,271			729,671
Cash dividends paid per share of common stock	$	0.3575		$	0.35		$	1.0575		$	1.035

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

8

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Nine Months
	Ended September 30,
	2004			2003
	(in thousands)
Operating Activities:
Consolidated net income	$	1,327,747		$	1,348,521
Adjustments to reconcile consolidated net income to net cash provided from operating activities —
Depreciation and amortization		866,839			893,880
Deferred income taxes and investment tax credits		475,009			282,798
Allowance for equity funds used during construction		(31,984	)		(17,049	)
Equity in losses of unconsolidated subsidiaries		68,193			75,425
Leveraged lease income		(51,708	)		(49,581	)
Pension, postretirement, and other employee benefits		6,695			(29,837	)
Tax benefit of stock options		21,949			25,917
Hedge settlements		(8,762	)		(120,483	)
Other, net		(73,953	)		32,162
Changes in certain current assets and liabilities —
Receivables, net		(419,831	)		(82,678	)
Fossil fuel stock		31,814			(11,719	)
Materials and supplies		(18,039	)		(20,202	)
Other current assets		(36,373	)		26,758
Accounts payable		(77,340	)		(190,336	)
Accrued taxes		118,811			294,004
Accrued compensation		(105,807	)		(164,023	)
Other current liabilities		(11,369	)		90,323
Net cash provided from operating activities		2,081,891			2,383,880
Investing Activities:
Gross property additions		(1,457,161	)		(1,452,870	)
Cost of removal net of salvage		(47,420	)		(51,767	)
Construction receivables/payable, net		(30,638	)		(55,280	)
Investment in unconsolidated subsidiaries		(73,810	)		(81,238	)
Other		(19,411	)		54,579
Net cash used for investing activities		(1,628,440	)		(1,586,576	)
Financing Activities:
Decrease in notes payable, net		(210,457	)		(539,091	)
Proceeds —
Long-term debt		1,426,125			2,880,495
Mandatorily redeemable preferred securities		200,000			—
Preferred stock		175,000			125,000
Common stock		89,678			370,305
Redemptions —
Long-term debt		(1,081,146	)		(2,294,303	)
Mandatorily redeemable preferred securities		(240,000	)		(240,000	)
Preferred stock		(28,388	)		—
Payment of common stock dividends		(779,875	)		(748,111	)
Other		(31,633	)		(41,682	)
Net cash used for financing activities		(480,696	)		(487,387	)
Net Change in Cash and Cash Equivalents		(27,245	)		309,917
Cash and Cash Equivalents at Beginning of Period		311,274			273,032
Cash and Cash Equivalents at End of Period	$	284,029		$	582,949
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $29,785 and $39,673 capitalized for 2004 and 2003, respectively)	$	428,944		$	471,001
Income taxes (net of refunds)	$	35,973		$	55,282

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

9

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	At September 30,			At December 31,
Assets	2004			2003
	(in thousands)
Current Assets:
Cash and cash equivalents	$	284,029		$	311,274
Receivables —
Customer accounts receivable		870,838			678,345
Unbilled revenues		321,292			275,395
Under recovered regulatory clause revenues		449,432			204,563
Other accounts and notes receivable		272,826			338,557
Accumulated provision for uncollectible accounts		(31,363	)		(30,155	)
Fossil fuel stock, at average cost		284,312			316,126
Vacation pay		101,595			96,700
Materials and supplies, at average cost		588,604			570,787
Prepaid expenses		137,950			125,477
Other		92,645			30,196
Total current assets		3,372,160			2,917,265
Property, Plant, and Equipment:
In service		41,098,890			40,339,785
Less accumulated depreciation		14,820,297			14,310,726
		26,278,593			26,029,059
Nuclear fuel, at amortized cost		202,581			222,667
Construction work in progress		1,577,221			1,274,888
Total property, plant, and equipment		28,058,395			27,526,614
Other Property and Investments:
Nuclear decommissioning trusts, at fair value		839,046			807,893
Leveraged leases		957,539			837,843
Other		346,175			238,377
Total other property and investments		2,142,760			1,884,113
Deferred Charges and Other Assets:
Deferred charges related to income taxes		866,481			874,443
Prepaid pension costs		966,169			911,442
Unamortized debt issuance expense		153,808			151,558
Unamortized loss on reacquired debt		327,495			326,389
Other regulatory assets		249,667			121,676
Other		361,217			324,474
Total deferred charges and other assets		2,924,837			2,709,982
Total Assets	$	36,498,152		$	35,037,974

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

10

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

	At September 30,			At December 31,
Liabilities and Stockholders' Equity	2004			2003
	(in thousands)
Current Liabilities:
Securities due within one year	$	455,242		$	741,073
Notes payable		357,243			567,771
Accounts payable		708,023			698,758
Customer deposits		196,253			189,000
Accrued taxes —
Income taxes		315,711			153,757
Other		318,135			248,937
Accrued interest		173,341			186,935
Accrued vacation pay		132,640			128,505
Accrued compensation		325,548			436,854
Other		264,951			264,688
Total current liabilities		3,247,087			3,616,278
Long-term Debt		10,746,392			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		4,971,302			4,586,377
Deferred credits related to income taxes		382,819			409,339
Accumulated deferred investment tax credits		558,953			579,490
Employee benefit obligations		830,839			765,390
Asset retirement obligations		889,145			845,392
Other cost of removal obligations		1,286,581			1,261,519
Miscellaneous regulatory liabilities		433,347			576,393
Other		319,895			262,580
Total deferred credits and other liabilities		9,672,881			9,286,480
Total Liabilities		25,627,004			24,967,262
Cumulative Preferred Stock of Subsidiaries		569,738			423,126
Common Stockholders’ Equity:
Common stock, par value $5 per share —
Authorized — 1 billion shares
Issued — September 30, 2004: 739,918,278 Shares;
— December 31, 2003: 735,021,270 Shares
Treasury — September 30, 2004: 231,359 Shares;
— December 31, 2003: 192,691 Shares
Par value		3,699,591			3,675,106
Paid-in capital		833,332			746,080
Treasury, at cost		(5,140	)		(4,066	)
Retained earnings		5,889,918			5,343,471
Accumulated other comprehensive loss		(116,291	)		(113,005	)
Total Common Stockholders’ Equity		10,301,410			9,647,586
Total Liabilities and Stockholders’ Equity	$	36,498,152		$	35,037,974

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

11

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
Consolidated Net Income	$	644,473		$	618,835		$	1,327,747		$	1,348,521
Other comprehensive loss:
Change in fair value of marketable securities, net of tax of $(796), $-, $2,511 and $-, respectively		(1,330	)		(284	)		4,572			(188	)
Changes in fair value of qualifying hedges, net of tax of $(17,897), $5,781, $(10,094) and $(4,325), respectively		(30,658	)		(6,399	)		(18,088	)		(19,903	)
Less: Reclassification adjustment for amounts included in net income, net of tax of $1,969, $2,723, $6,354 and $(1,937), respectively		3,170			4,401			10,230			(1,956	)
COMPREHENSIVE INCOME	$	615,655		$	616,553		$	1,324,461		$	1,326,474

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

12

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

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

THIRD QUARTER 2004 vs. THIRD QUARTER 2003
AND
YEAR-TO-DATE 2004 vs. YEAR-TO-DATE 2003

OVERVIEW

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

RESULTS OF OPERATIONS

Earnings

Southern Company’s third quarter and year-to-date 2004 earnings were $644 million ($0.87 per share) and $1.33 billion ($1.80 per share), respectively, compared with $619 million ($0.85 per share) and $1.35 billion ($1.86 per share) in the third quarter and year-to-date 2003. Earnings in the third quarter 2004 increased despite mild weather, primarily due to increased consumption of electricity by existing customers in the Southern Company service area reflecting continued improvement in the economy and continued customer growth. The decrease in year-to-date 2004 earnings is primarily attributed to a one-time after-tax gain of $88 million included in the second quarter 2003 from termination of capacity sales contracts with Dynegy. Excluding the Dynegy contract termination, year-to-date 2004 earnings increased primarily due to increased consumption of electricity by existing customers in the Southern Company service area reflecting continued improvement in the economy and continued customer growth. 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.

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Third Quarter						Year-To-Date
	(in thousands)			%			(in thousands)			%
Retail sales	$	158,071			5.7		$	630,466			9.1
Sales for resale		(32,704	)		(8.7	)		4,306			0.4
Other electric revenues		8,991			9.9			(123,259	)		(30.0	)
Fuel expense		45,529			4.9			305,904			12.8
Purchased power expense		49,893			36.2			140,469			36.5
Other operations and maintenance expenses		39,505			5.5			123,694			5.6
Depreciation and amortization expense		(19,489	)		(7.5	)		(48,671	)		(6.4	)
Taxes other than income taxes		5,902			3.8			27,406			6.1
Interest income		1,180			23.6			(9,798	)		(32.6	)
Other income (expense), net		21,050			71.4			(583	)		(1.9	)

13

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

     Retail sales.Excluding fuel revenues, which generally do not affect net income, retail base revenues increased by $47 million, or 2.4%, in the third quarter 2004 and increased by $228 million, or 4.7%, year-to-date 2004 when compared to the same periods in 2003. In the third quarter and year-to-date 2004, retail kilowatt-hour energy sales increased by 0.8% and 3.4%, respectively, over the same periods in 2003, primarily due to growth in the number of customers and demand and the continued improvement in the economy. In the third quarter 2004, retail kilowatt-hour energy sales in the commercial and industrial sectors were up by 0.8% and 2.7%, respectively, while the residential sector was down slightly by 0.9%, reflecting the impact of hurricane related outages, when compared to the same period in 2003. Year-to-date 2004, retail kilowatt-hour energy sales to residential, commercial and industrial customers were up by 3.7%, 3% and 3.5%, respectively, from the amounts recorded in the corresponding period in 2003. The number of retail customers increased by 1.7% for the year-to-date 2004 when compared to year-to-date 2003.

     Sales for resale.In the third quarter 2004, sales for resale revenues decreased when compared to the same period in 2003 primarily due to lower opportunity sales in the wholesale generation business following the June 2004 start of a PPA for 618 megawatts, which significantly reduced the amount of uncontracted capacity available for such sales. The level of opportunity sales in 2003 was also higher as a result of an unusual combination of mild weather in Southern Company’s service territory making more coal-fired generation available for sale to utilities outside the service territory that depend heavily on gas-fired generation. Southern Power added 2,407 megawatts of generating capacity in June and October 2003. A portion of this new capacity contributed to the increase in sales for resale revenues year-to-date 2004 as a result of increased energy revenues from PPAs with neighboring utilities. These increases in sales for resale revenues offset the reduction in revenues resulting from the termination of contracts with subsidiaries of Dynegy in May 2003. See Note 3 to the financial statements of Southern Company under “Uncontracted Generating Capacity” in Item 8 of the Form 10-K for additional information on these contract terminations.

     Other electric revenues.Other electric revenues increased $9 million, or 9.9%, in the third quarter 2004 when compared to the same period in 2003 primarily due to increases of $3 million in transmission revenue, $2 million in rent from other electric property and $1.6 million in outdoor lighting revenue. Year-to-date 2004, other electric revenues decreased from 2003 as a result of the $142 million in contract termination revenues from Dynegy recorded 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. Excluding these contract termination revenues, other electric revenues increased $18.8 million, or 7%, year-to-date 2004 when compared to the same period in 2003 primarily as a result of increases of $6 million in transmission revenue, $3.6 million in rent from other electric property, $3.4 million in revenues from cogeneration sales and $3.4 million in outdoor lighting revenue.

     Fuel expense. Fuel expense in the third quarter and year-to-date 2004 increased due to the higher average unit cost of fuel. The year-to-date 2004 increase in fuel expense was also impacted by increased generating capacity at Southern Power. For the third quarter and year-to-date periods in 2004, the average unit cost of fuel per kilowatt-hour generated increased 9.2% and 14%, respectively, when compared to the corresponding periods in 2003. Increases in fuel expense at the retail operating companies are generally offset by fuel revenues and do not affect net income. See “Future Earnings Potential — FERC and State PSC Matters — Retail Fuel Cost Recovery” herein for additional information. In addition, Southern Power’s PPAs generally provide that the purchasers are responsible for substantially all of the costs of fuel.

     Purchased power expense.During the third quarter and year-to-date 2004, purchased power expense increased when compared with the same periods in 2003 mainly due to increased demand for energy by retail customers and purchased energy used to meet off-system sales commitments. In some instances, power was available for purchase from external parties at prices lower than Southern Company’s own system generation costs. These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues.

14

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

     Other operations and maintenance expenses.Other operations and maintenance expenses increased in the third quarter and year-to-date 2004 when compared to the same periods in 2003 due to higher scheduled transmission and distribution maintenance and other production expenses and year-to-date 2004 higher administrative expenses. Transmission and distribution expenses increased $1.9 million, or 1.3%, and $32.2 million, or 8.2%, for the third quarter and year-to-date 2004, respectively, due to completion of work postponed in 2003. Other production expenses were up $45.6 million, or 19.2%, and $60.1 million, or 7%, for the third quarter and year-to-date 2004, respectively, due to increased expenses primarily resulting from the operation of Southern Power’s new generating facilities. Administrative and general expenses increased $35 million, or 5.3%, year-to-date 2004 primarily as a result of payroll and employee benefits costs.

     Depreciation and amortization expense.Depreciation and amortization expense decreased in the third quarter and year-to-date 2004 as a direct result of increased amortization of regulatory liabilities at Georgia Power and Mississippi Power when compared to the corresponding periods in 2003. Georgia Power’s depreciation and amortization expenses decreased $19 million and $55 million for the third quarter and year-to-date 2004, respectively, primarily due to lower regulatory charges needed to levelize purchased power capacity costs under the terms of the retail rate order effective January 1, 2002. See Note 1 to the financial statements of Southern Company under “Depreciation and Amortization” in Item 8 of the Form 10-K for additional information. Mississippi Power’s decreases in depreciation and amortization expenses during the third quarter and year-to-date 2004 of $4 million and $11 million for the third quarter and year-to-date 2004, respectively, are primarily the result of the amortization of a $60 million regulatory liability as approved by the Mississippi PSC. See Note 3 to the financial statements of Southern Company under “Mississippi Power Regulatory Filing” in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements and “FERC and State PSC Matters” herein for additional information. The year-to-date 2004 decreases are partially offset by increases in depreciable plant in service, primarily as a result of Southern Power’s Stanton Unit A, which was placed in service in October 2003.

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

     Interest income.The year-to-date 2004 $9.8 million decrease in interest income when compared to the same period last year is primarily the result of $15.6 million of interest received from a federal income tax settlement in the second quarter of 2003 partially offset by $3.2 million of interest received in August 2004 from a state income tax settlement.

     Other income (expense), net.In the third quarter 2004, net expense decreased primarily as a result of a $10 million increase in income from customer growth, weather and changes in customer consumption related to a Georgia Power electricity pricing program that was partially offset by increased charitable donations and lower revenues from miscellaneous customer contracts 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. 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

15

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

factors, including weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand and the rate of economic growth in the service area. For additional information relating to these issues, see BUSINESS — The SOUTHERN System — “Risk Factors” in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential” of Southern Company in Item 7 of the Form 10-K.

Environmental Matters

New Source Review Actions and Plant Wansley Environmental Litigation

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

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

Global Warming Litigation

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

16

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

vigorously defend against these claims. While the outcome of this matter cannot be determined at this time, an adverse judgment could result in substantial capital expenditures.

Other Environmental Matters

On March 12, 2004, the EPA redesignated the Birmingham, Alabama area from nonattainment to attainment under the one-hour ozone national ambient air quality standard. On April 30, 2004, the EPA published its eight-hour ozone nonattainment designations and a portion of the rules implementing the new eight-hour standard. Areas within the Southern Company’s service area that have been designated as nonattainment under the eight-hour ozone standard include Birmingham, Macon (Georgia) and a 20-county area within metropolitan Atlanta. Under the implementation provisions of the new rule, the EPA announced that the one-hour ozone standard will be revoked on June 15, 2005. Areas classified as “severe” nonattainment areas under the one-hour standard will not be required to impose emissions fees as a result of nonattainment. Georgia Power, therefore, will no longer be subject to imposition of emissions fees if the Atlanta area does not come into attainment with the one-hour standard. In any event, however, based on the last three years of data, the State of Georgia believes that the Atlanta area has attained the one-hour standard and is in the process of applying for redesignation from the EPA. 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 May 5, 2004, the EPA published proposed amendments to its Regional Haze rules with respect to Best Available Retrofit Technology guidelines and requirements. The impact of these regulations will depend on the development and implementation of the final rules and implementation by the states and therefore cannot be determined at this time.

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

     On April 21, 2004, the EPA published the final regional nitrogen oxide reduction rules applicable to Georgia. These rules specified that the State of Georgia must submit a revised state implementation plan by April 2005, and affected sources must comply with the reduction requirements by May 1, 2007. However, on October 22, 2004, the EPA announced it was granting a petition for reconsideration filed with the EPA by a coalition of Georgia industries. The EPA will stay implementation of the rule, as it relates to Georgia, while it initiates rulemakings to address the petition. The impact of the nitrogen oxide reduction rules will depend on the outcome of the petition for reconsideration and/or any subsequent development and approval of Georgia’s state implementation plan and cannot be determined at this time.

FERC and State PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — FERC Matters — Market-Based Rate Authority” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “FERC Matters” in Item 8 of the Form 10-K. On April 14,

17

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

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 requires utilities to submit 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.

     On July 8, 2004, the FERC denied Southern Company’s request for rehearing, along with a number of others, and reaffirmed the interim tests that it adopted in April. Southern Company submitted the required analyses on August 9, 2004. In that filing, Southern Company passed the pivotal supplier analysis for all markets and the wholesale market share analysis for all markets except the Southern Company control area. Southern Company also submitted other analyses to demonstrate that it lacks generation market power. This filing remains pending at the FERC. Southern Company, along with other utilities, has also filed an appeal of the FERC’s April 14, 2004 order with the Circuit Court of Appeals in Washington, D.C. In the event that the FERC’s default mitigation measures are ultimately applied, Southern Power and the retail operating companies may be required to charge cost-based rates for certain wholesale sales, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

Transmission

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

Plant McIntosh Construction Project

See Note 3 to the financial statements of Southern Company under “FERC Matters” in Item 8 of the Form 10-K for information regarding PPAs between Southern Power and Georgia Power and Savannah Electric for Plant McIntosh capacity. In April 2003, Southern Power applied for FERC approval of these PPAs. In July 2003, the FERC accepted the PPAs to become effective June 1, 2005, subject to refund, and ordered that hearings be held. To ensure the timely completion of construction on Plant McIntosh Units 10 and 11 and their availability in the summer of 2005 as supply side resources for the retail customers in the State of Georgia, on May 7, 2004, Savannah Electric and Georgia Power requested the Georgia PSC to direct them to acquire the McIntosh construction project. Savannah Electric and Georgia Power proposed to place the units in rate base at a cost approved by the Georgia PSC and to recover the unit operation and maintenance costs as retail service expenses as may be approved by the Georgia PSC. The Georgia PSC issued such an order on May 18, 2004 and the transfer occurred on May 24, 2004. On May 20, 2004, Southern Power filed a request to withdraw the PPAs and to terminate the ongoing FERC proceedings. On August 4, 2004, the FERC issued a notice that it allowed the request to withdraw the PPAs to be accepted and to become effective by operation of law on July 20, 2004. However, the FERC made no determination on what additional steps may need to be taken with respect to testimony provided in the proceedings. The ultimate outcome of this matter cannot now be determined.

     The May 18, 2004 Georgia PSC order also directed Georgia Power and Savannah Electric to file an application within 10 days of completing such purchase to amend the resource certificate granted by the Georgia PSC in 2002 to describe the capacity resource as being the McIntosh Units 10 and 11 (as opposed to the McIntosh PPAs), the approximate construction schedule (which is not expected to change) and the proposed

18

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

rate base treatment. The application was filed on June 3, 2004 and the Georgia PSC will have 180 days to respond. The Georgia PSC is expected to review the application in accordance with its affiliate transaction guidelines, which require a lower cost or market approach unless otherwise determined by the Georgia PSC. Georgia Power and Savannah Electric have submitted information showing that the book cost of the McIntosh construction project is lower than its market value. In direct testimony filed on October 14, 2004, the Georgia PSC staff proposed a different valuation that shows the market value for the Plant McIntosh construction project is less than book value. Georgia Power and Savannah Electric disagree with the proposed valuation methodology. Georgia Power and Savannah Electric plan to file rebuttal testimony in November with hearings being held in that same month. The Georgia PSC is expected to issue a final order in this matter in December 2004. However, full recovery of the project costs depends on the outcome of the Georgia PSC’s review. In the event the Georgia PSC does not allow full recovery of the project costs, then part of such costs may have to be written off in accordance with FASB Statement No. 90, “Accounting for Abandonments and Disallowed Plant Costs.” At September 30, 2004, the investment in the McIntosh construction project totaled approximately $381.1 million and $74.2 million for Georgia Power and Savannah Electric, respectively. The ultimate outcome of the Georgia PSC’s review cannot now be determined. See Note (J) to the Condensed Financial Statements herein for additional information.

Georgia Power Retail Rate Case

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

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

Alabama Power Environmental Rate Filing

On August 2, 2004, Alabama Power made a filing with the Alabama PSC to establish a specific rate mechanism for the recovery of retail costs associated with environmental laws, regulations or other such mandates. On October 5, 2004, the Alabama PSC voted to approve the rate mechanism as filed. The rate mechanism will begin operation in January 2005 and provide for the recovery of these costs pursuant to a factor that will be calculated annually. Environmental costs to be recovered will include operation and maintenance expense, depreciation and a return on invested capital. It is anticipated that for the first two years of the increase, retail rates will increase by approximately 1% ($33 million) in 2005 and approximately an additional 1% ($30 million) in 2006. In conjunction with the Alabama PSC’s approval, Alabama Power agreed to a moratorium until March 2007 on any retail rate increase under the previously approved Rate Stabilization and Equalization

19

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

Plan. Any increase in March 2007 would be based upon the earned return on retail common equity at December 31, 2006. See Note 3 to the financial statements of Southern Company under “Alabama Power Retail Rate Adjustment Procedures” in Item 8 of the Form 10-K for further information on Alabama Power’s Rate Stabilization and Equalization Plan.

Mississippi Power Retail Rate Filing

On December 5, 2003, Mississippi Power filed a request with the Mississippi PSC to include 266 megawatts of Plant Daniel Units 3 and 4 generating capacity not previously included in jurisdictional cost of service. As part of Mississippi Power’s proposal to include the additional Plant Daniel capacity in retail rates, the Mississippi PSC, at the time of such filing, issued an interim accounting order in December 2003 directing Mississippi Power to expense and record in 2003 a regulatory liability in the amount of approximately $60 million while the Mississippi PSC fully considered the entire request. On May 25, 2004, the Mississippi PSC issued an order related to this matter. The Mississippi PSC approved Mississippi Power’s request to reclassify the 266 megawatts of Plant Daniel Unit 3 and 4 capacity to jurisdictional cost of service effective January 1, 2004 and authorized Mississippi Power to include the related costs and revenue credits in jurisdictional rate base, cost of service and revenue requirement calculations for purposes of retail rate recovery. As directed by the Mississippi PSC, Mississippi Power will amortize the regulatory liability established pursuant to the Mississippi PSC’s interim order in December 2003 as an increase to earnings as follows: $16.5 million in 2004, $25.1 million in 2005, $13.0 million in 2006 and $5.7 million in 2007. This amortization increased after tax earnings for the third quarter and year-to-date 2004 by $2.5 million and $7.7 million, respectively.

     In addition, the Mississippi PSC also approved Mississippi Power’s requested changes to its PEP rate schedule, including the use of a forward-looking test year, with appropriate oversight; annual, rather than semi-annual, filings; and certain changes to the performance indicator mechanisms. Rate changes will be limited to 4% of retail revenues annually under the revised PEP. The Mississippi PSC will review all aspects of PEP in 2007. See Note 3 to the financial statements of Southern Company under “Mississippi Power Regulatory Filing” in Item 8 of the Form 10-K for additional information.

Retail Fuel Cost Recovery

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

Storm Damage Cost Recovery

On September 15 and 16, 2004, Hurricane Ivan hit the Gulf Coast of Florida and Alabama and continued north through the Southern Company’s service territory causing substantial damage. Nearly 40% of Southern Company’s 4 million customers were without electric service immediately after the hurricane. Almost 95% of those without power had service restored within one week, and two weeks after the storm, power had been restored to all who could receive service.

     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. At Alabama Power, operation and maintenance expenses associated with repairing the damage to its facilities and restoring service to customers are preliminarily estimated to be $52 million. The

20

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

balance in Alabama Power’s natural disaster reserve was not sufficient to cover these costs. On October 19, 2004, Alabama Power received approval from the Alabama PSC to record its hurricane related operation and maintenance expenses in its natural disaster reserve, thereby deferring the approximately $41 million negative balance for recovery in future periods in a manner which minimizes the impact on customers. At Gulf Power, the estimated total amount of damage related to Hurricane Ivan charged to the property damage reserve as of September 30, 2004 was $75.5 million. Prior to Hurricane Ivan, Gulf Power’s reserve balance was approximately $28 million. Gulf Power’s current annual accrual to the property damage reserve, as approved by the Florida PSC, is $3.5 million. The Florida PSC has also approved additional accrual amounts at Gulf Power’s discretion. Gulf Power is currently reviewing alternatives that would potentially allow for more rapid recovery of these costs. See Notes (K), (M) and (O) to the Condensed Financial Statements herein for additional information on these reserves.

Mirant Related Matters

See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — Other Matters” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “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 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

Leveraged Lease Transactions

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

Synthetic Fuel Tax Credits

See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — Income Tax Matters — Synthetic Fuel Tax Credits” of Southern Company in Item 7 and 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 for information related to Southern Company’s investments in two entities that produce synthetic fuel and receive tax credits under Section 29 of the Internal Revenue Code. In accordance with Section 29, these tax credits are subject to limitation as the annual average price of oil (as determined by the Department of Energy) increases over a specified, inflation-adjusted, dollar amount. Based on oil prices through October 31, 2004, Southern Company does not expect the recent oil price increases to result in any limitation to these credits in 2004. However, 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.

21

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

American Jobs Creation Act of 2004

On October 22, 2004, President Bush signed the American Jobs Creation Act of 2004 (Jobs Act) into law. The Jobs Act represents the most significant revision to the Internal Revenue Code since 1986. Congress must still develop the regulations that will implement the requirements of the Jobs Act. Southern Company is currently assessing the impact of the Jobs Act on its taxable income. However, Southern Company currently does not expect the Jobs Act to have a material impact on its financial statements.

Other Construction Projects

In October 2004, a partnership between Southern Company and the Orlando Utilities Commission (OUC) was selected by the U.S. Department of Energy (DOE) to build and operate a 285 MW coal-gasification facility. The facility will be located at OUC’s Stanton Energy Center near Orlando, Florida, site of Plant Stanton A, an existing gas-fired 630 megawatt unit co-owned by Southern Power, OUC and others. Southern Power will own and operate the Southern Company portion of the project. The project will demonstrate a coal gasification technology that has been under development, in partnership with the DOE, at Southern Company’s power systems development facility near Birmingham, Alabama. The project is scheduled to begin commercial operation in early 2010, with a projected total cost of $557 million. The DOE will contribute approximately $235 million of the cost.

     In August 2004 Southern Power completed limited construction activities on Plant Franklin Unit 3 to preserve the long-term viability of the project. Final completion is not anticipated until the 2008-2011 period. See Note 3 to the financial statements of Southern Company under “Uncontracted Generating Capacity” in Item 8 of the Form 10-K for additional information. The final outcome of these matters cannot now be determined.

Power Sales Agreements

On August 12, 2004, Georgia Power and Gulf Power entered into a PPA and Southern Power entered into two PPAs with Florida Power & Light (FP&L). Under the agreements, for the period from June 2010 through December 2015, Georgia Power and Gulf Power will provide FP&L with 165 megawatts of capacity annually from the jointly owned Plant Scherer Unit 3, and Southern Power will provide FP&L with a total of 790 megawatts of capacity annually from Plant Harris Unit 1 and Plant Franklin Unit 1. The contracts provide for fixed capacity payments and variable energy payments based on actual energy delivered. Additionally, FP&L will make payments for firm gas transportation. These contracts are contingent upon certain events, including approval of the Florida PSC. The final outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Revenues” of Southern Company in Item 7 of the Form 10-K for information on long-term power sales contracts.

Other Matters

See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — Other Matters” of Southern Company in Item 7 of the Form 10-K for information on nuclear security measures. Both Alabama Power and Georgia Power have implemented plans for the measures ordered by the NRC to be in effect on October 29, 2004 and are in compliance with the requirements. Alabama Power and Georgia Power — based on its ownership interest — currently estimate their respective expenditures related to these security measures to total $9.7 million and $9.8 million, of which $9.3 million and $1.4 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

22

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
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 Southern Company and its subsidiaries cannot be predicted at this time; however, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Southern Company’s financial statements.

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

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

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

New Accounting Standards

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

     In the third quarter 2004, Southern Company prospectively adopted FASB Staff Position (FSP) 106-2, Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Medicare Act). The Medicare Act provides a 28% prescription drug subsidy for Medicare eligible retirees. FSP 106-2 requires recognition of the impacts of the Medicare Act in the accumulated post-retirement benefit obligation (APBO) and future cost of service for post-retirement medical plans and may be applied retroactively to the enactment of the Medicare Act in December 2003 or prospectively effective for the third quarter 2004. Southern Company elected to apply this treatment prospectively. The effect of the subsidy reduced Southern Company’s expenses for the three months ended September 30, 2004 by approximately $5 million and is expected to have a similar impact on future expenses. The subsidy’s impact on the post-retirement medical plan APBO was a reduction of approximately $182

23

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

million. However, the ultimate impact on future periods is subject to federal regulations governing the subsidy created in the Medicare Act being finalized. See Note (G) to the Condensed Financial Statements herein for additional information.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Major changes in Southern Company’s financial condition during the first nine months of 2004 included $1.5 billion used for gross property additions to utility plant. The funds for these additions and other capital requirements were primarily obtained from net proceeds from short- and long-term security issuances of approximately $331 million and operating activities. See Southern Company’s Condensed Consolidated Statements of Cash Flows and “Financing Activities” herein for further details.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Capital Requirements and Contractual Obligations” of Southern Company in Item 7 of the Form 10-K for a description of Southern Company’s capital requirements for its construction program and other funding requirements associated with scheduled maturities of long-term debt, as well as the related interest, preferred stock dividends, leases, trust funding requirements and other purchase commitments. Approximately $455 million will be required by September 30, 2005 for redemptions and maturities of long-term debt.

Sources of Capital

Southern Company intends to meet its future capital needs through internal cash flow and external security issuances. The amounts and timing of additional equity capital to be raised will be contingent on Southern Company’s investment opportunities. The retail operating companies and Southern Power plan to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from operating cash flows, security issuances and term loan and short-term borrowings. However, the amount, type and timing of any financings, if needed, will depend upon market conditions and regulatory approval. See BUSINESS — “Financing Programs” in Item 1 and MANAGEMENT’S DISCUSSION AND 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 September 30, 2004 approximately $284 million of cash and cash equivalents and approximately $3.2 billion of unused credit arrangements with banks, of which $73 million expire in 2004, $1.7 billion expire in 2005 and $1.4 billion expire in 2006 and beyond. Of the facilities maturing in 2004 and 2005, $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 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 September 30, 2004, the Southern Company system had outstanding commercial paper of $350 million and extendible commercial notes of $8 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.

24

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

Off-Balance Sheet Financing Arrangements

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

Credit Rating Risk

Southern Company and its subsidiaries do not have any credit 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 below investment grade. These contracts are primarily for physical electricity purchases and sales and fixed-price physical gas purchases. At September 30, 2004, the maximum potential collateral requirements were approximately $433 million. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit or cash.

     Southern Company and its subsidiaries are also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade. These agreements are primarily for natural gas price and interest rate risk management activities. At September 30, 2004, Southern Company and its subsidiaries’ maximum potential exposure to these contracts was $9 million.

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 September 30, 2004 was as follows:

	Third Quarter
	2004			Year-to-Date
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	26,618		$	15,825
Contracts realized or settled		(19,929	)		(45,278	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		49,397			85,539
Contracts at September 30, 2004	$	56,086		$	56,086

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

25

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

	Source of September 30, 2004
	Valuation Prices
				Maturity
	Total
	Fair Value			Year 1			1-3 Years
				(in thousands)
Actively quoted	$	60,099		$	56,151		$	3,948
External sources		(4,013	)		(3,953	)		(60	)
Models and other methods		—			—			—
Contracts at September 30, 2004	$	56,086		$	52,198		$	3,888

     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 nine months of 2004, Southern Company and its subsidiaries issued $1.35 billion of senior notes, $276 million of other long-term debt, $175 million of preferred stock and $90 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 nine months of 2004.

     Subsequent to September 30, 2004, Gulf Power entered into loan agreements for $50 million maturing October 21, 2005 and $100 million maturing October 28, 2005. Proceeds from these borrowings were used for general corporate purposes and to finance repairs to its electric system for damage suffered as a result of Hurricane Ivan.

     Also subsequent to September 30, 2004, Savannah Electric has entered into interest rate hedging transactions related to the anticipated issuance of senior notes totaling approximately $30 million. The notes are expected to be issued in 2004. Further, Savannah Electric also entered into an interest rate hedging transaction related to $13.9 million of its outstanding tax-exempt auction rate securities. The interest rate swap will fix Savannah Electric’s interest rate cost related to these securities through 2007.

     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 debt and replace these obligations with lower-cost capital if market conditions permit.

     The market price of Southern Company’s common stock at September 30, 2004 was $29.98 per share and the book value was $13.93 per share, representing a market-to-book ratio of 215%, compared to $30.25, $13.13 and 230%, respectively, at the end of 2003. The dividend for the third quarter 2004 was $0.3575 per share compared to $0.35 per share in the third quarter 2003.

26

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.

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

     (b) Changes in internal controls.

There have been no changes in Southern Company’s, the retail operating companies’ or Southern Power’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the third quarter of 2004 that have materially affected or are reasonably likely to materially affect Southern Company’s, the retail operating companies’ or Southern Power’s internal control over financial reporting.

27

ALABAMA POWER COMPANY

28

ALABAMA POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
Operating Revenues:
Retail sales	$	979,768		$	951,612		$	2,571,549		$	2,371,347
Sales for resale —
Non-affiliates		134,068			134,897			366,504			370,390
Affiliates		95,739			96,840			215,472			213,568
Other revenues		36,798			32,785			111,359			101,096
Total operating revenues		1,246,373			1,216,134			3,264,884			3,056,401
Operating Expenses:
Fuel		331,853			330,189			880,942			810,724
Purchased power —
Non-affiliates		65,844			33,719			159,994			90,025
Affiliates		51,259			60,190			171,591			154,299
Other operations		156,179			152,434			463,454			446,619
Maintenance		60,307			68,143			231,412			224,364
Depreciation and amortization		106,860			103,526			318,359			308,242
Taxes other than income taxes		59,124			54,012			182,899			170,579
Total operating expenses		831,426			802,213			2,408,651			2,204,852
Operating Income		414,947			413,921			856,233			851,549
Other Income and (Expense):
Allowance for equity funds used during construction		4,237			2,159			12,261			9,958
Interest income		3,605			3,702			11,934			11,248
Interest expense, net of amounts capitalized		(46,385	)		(50,068	)		(148,831	)		(163,582	)
Interest expense to affiliate trusts		(4,059	)		—			(8,240	)		—
Distributions on mandatorily redeemable preferred securities		—			(3,937	)		(3,938	)		(11,317	)
Other income (expense), net		(7,682	)		(9,242	)		(18,435	)		(19,276	)
Total other income and (expense)		(50,284	)		(57,386	)		(155,249	)		(172,969	)
Earnings Before Income Taxes		364,663			356,535			700,984			678,580
Income taxes		138,834			135,271			268,669			250,102
Net Income		225,829			221,264			432,315			428,478
Dividends on Preferred Stock		6,072			4,748			17,524			13,520
Net Income After Dividends on Preferred Stock	$	219,757		$	216,516		$	414,791		$	414,958

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2004			2003		2004			2003
	(in thousands)					(in thousands)
Net Income After Dividends on Preferred Stock	$	219,757		$	216,516	$	414,791		$	414,958
Other comprehensive income (loss):
Change in fair value of marketable securities, net of tax of $(285)		(470	)		—		—			—
Changes in fair value of qualifying hedges, net of tax of $(11,016), $1,343, $(5,331) and $(80), respectively		(18,118	)		2,474		(8,768	)		480
Less: Reclassification adjustment for amounts included in net income, net of tax of $592, $1,514, $2,164 and $3,159, respectively		975			2,151		3,560			5,195
COMPREHENSIVE INCOME	$	202,144		$	221,141	$	409,583		$	420,633

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

29

ALABAMA POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Nine Months
	Ended September 30,
	2004			2003
	(in thousands)
Operating Activities:
Net income	$	432,315		$	428,478
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		373,792			354,519
Deferred income taxes and investment tax credits, net		120,554			58,913
Allowance for equity funds used during construction		(12,261	)		(9,958	)
Pension, postretirement, and other employee benefits		(14,744	)		(27,531	)
Tax benefit of stock options		7,004			8,029
Hedge settlements		3,594			(12,668	)
Natural disaster reserve payments		(19,992	)		(3	)
Other, net		(35,423	)		(10,974	)
Changes in certain current assets and liabilities —
Receivables, net		(203,743	)		(95,679	)
Fossil fuel stock		18,193			(5,844	)
Materials and supplies		(9,060	)		(7,708	)
Other current assets		(65	)		(12,028	)
Accounts payable		(82,429	)		(32,415	)
Accrued taxes		181,294			169,083
Accrued compensation		(16,185	)		(15,677	)
Other current liabilities		3,582			47,864
Net cash provided from operating activities		746,426			836,401
Investing Activities:
Gross property additions		(533,563	)		(473,484	)
Cost of removal net of salvage		(25,484	)		(23,707	)
Other		12,850			13,300
Net cash used for investing activities		(546,197	)		(483,891	)
Financing Activities:
Increase (decrease) in notes payable, net		130,791			(36,991	)
Proceeds —
Senior notes		600,000			1,065,000
Preferred stock		100,000			125,000
Common stock		40,000			25,000
Capital contributions from parent company		—			133
Redemptions —
Senior notes		(725,000	)		(1,000,800	)
Other long-term debt		(1,445	)		(707	)
Payment of preferred stock dividends		(16,197	)		(11,747	)
Payment of common stock dividends		(327,975	)		(322,650	)
Other		(14,759	)		(4,328	)
Net cash used for financing activities		(214,585	)		(162,090	)
Net Change in Cash and Cash Equivalents		(14,356	)		190,420
Cash and Cash Equivalents at Beginning of Period		42,752			22,685
Cash and Cash Equivalents at End of Period	$	28,396		$	213,105
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $5,118 and $5,037 capitalized for 2004 and 2003, respectively)	$	120,302		$	123,848
Income taxes (net of refunds)	$	18,490		$	84,569

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

30

ALABAMA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

	At September 30,				At December 31,
Assets	2004				2003
	(in thousands)
Current Assets:
Cash and cash equivalents	$	28,396			$	42,752
Receivables —
Customer accounts receivable		302,077				223,865
Unbilled revenues		97,880				95,953
Under recovered regulatory clause revenues		118,889				16,697
Other accounts and notes receivable		53,210				53,547
Affiliated companies		60,576				48,876
Accumulated provision for uncollectible accounts		(5,702	)			(4,756	)
Fossil fuel stock, at average cost		68,800				86,993
Vacation pay		35,530				35,530
Materials and supplies, at average cost		220,751				211,690
Prepaid expenses		52,942				44,608
Other		30,452				19,454
Total current assets		1,063,801				875,209
Property, Plant, and Equipment:
In service		14,486,018				14,224,117
Less accumulated provision for depreciation		5,038,305				4,905,920
		9,447,713				9,318,197
Nuclear fuel, at amortized cost		95,859				93,611
Construction work in progress		447,534				321,316
Total property, plant, and equipment		9,991,106				9,733,124
				��
Other Property and Investments:
Equity investments in unconsolidated subsidiaries		45,301				47,811
Nuclear decommissioning trusts, at fair value		408,053				384,574
Other		25,861				16,992
Total other property and investments		479,215				449,377
Deferred Charges and Other Assets:
Deferred charges related to income taxes		318,343				321,077
Prepaid pension costs		478,459				446,256
Unamortized debt issuance expense		27,919				23,457
Unamortized loss on reacquired debt		111,461				110,946
Other regulatory assets		54,805				13,092
Other		132,836				98,086
Total deferred charges and other assets		1,123,823				1,012,914
Total Assets	$	12,657,945			$	12,070,624

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

31

ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At September 30,			At December 31,
Liabilities and Stockholder's Equity	2004			2003
	(in thousands)
Current Liabilities:
Securities due within one year	$	15		$	526,019
Notes payable		130,791			—
Accounts payable —
Affiliated		132,705			141,940
Other		159,535			162,314
Customer deposits		48,987			47,507
Accrued taxes —
Income taxes		185,048			83,544
Other		89,185			22,273
Accrued interest		57,170			46,489
Accrued vacation pay		35,530			35,530
Accrued compensation		59,435			75,620
Other		42,201			34,514
Total current liabilities		940,602			1,175,750
Long-term Debt		3,780,060			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		1,709,444			1,571,076
Deferred credits related to income taxes		151,330			162,168
Accumulated deferred investment tax credits		208,091			216,309
Employee benefit obligations		198,721			174,036
Deferred capacity revenues		28,281			36,567
Asset retirement obligations		377,111			358,759
Asset retirement obligation regulatory liability		135,380			127,346
Other cost of removal obligations		594,923			574,445
Miscellaneous regulatory liabilities		95,012			86,323
Other		29,768			37,525
Total deferred credits and other liabilities		3,528,061			3,344,554
Total Liabilities		8,558,002			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 — September 30, 2004: 8,250,000 Shares
— December 31, 2003: 7,250,000 Shares		330,000			290,000
Paid-in capital		1,932,133			1,926,970
Premium on preferred stock		99			99
Retained earnings		1,378,374			1,291,558
Accumulated other comprehensive loss		(13,175	)		(7,967	)
Total common stockholder’s equity		3,627,431			3,500,660
Total Liabilities and Stockholder’s Equity	$	12,657,945		$	12,070,624

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

32

ALABAMA POWER COMPANY

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

THIRD QUARTER 2004 vs. THIRD QUARTER 2003
AND
YEAR-TO-DATE 2004 vs. YEAR-TO-DATE 2003

RESULTS OF OPERATIONS

Earnings

Alabama Power’s net income after dividends on preferred stock for the third quarter and year-to-date 2004 was $219.7 million and $414.8 million, respectively, compared to $216.5 million and $415.0 million, respectively, for the corresponding periods of 2003. Earnings in the third quarter of 2004 increased by $3.2 million, or 1.5%, primarily due to an increase in industrial base-rate revenues and other revenues, lower maintenance expenses and decreased interest expense, partially offset by an increase in income and other taxes. Earnings year-to-date 2004 remained relatively flat compared to year-to-date 2003 principally due to an increase in base rate revenues and a decrease in interest expense. These increases to income were partially offset by higher maintenance expense, depreciation expense and income and other taxes.

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Third Quarter					Year-To-Date
	(in thousands)			%		(in thousands)			%
Retail sales	$	28,156		3.0		$	200,202		8.4
Other revenues		4,013		12.2			10,263		10.2
Fuel expense		1,664		0.5			70,218		8.7
Purchased power — non-affiliates		32,125		95.3			69,969		77.7
Purchased power — affiliates		(8,931	)	(14.8	)		17,292		11.2
Maintenance expense		(7,836	)	(11.5	)		7,048		3.1
Depreciation and amortization expense		3,334		3.2			10,117		3.3
Taxes other than income taxes		5,112		9.5			12,320		7.2
Interest expense, net of amounts capitalized		(3,683	)	(7.4	)		(14,751	)	(9.0	)
Income taxes		3,563		2.6			18,567		7.4
Dividends on preferred stock		1,324		27.9			4,004		29.6

     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 $1.7 million, or 0.2%, for the third quarter 2004 and $48.7 million, or 2.8%, year-to-date 2004 when compared to the corresponding periods in 2003. See Note 3 to the financial statements of Alabama Power under “Retail Rate Adjustment Procedures” in Item 8 of the Form 10-K for additional information. Kilowatt-hour energy sales to commercial and industrial customers increased 0.3% and 5.8%, respectively, for the third quarter 2004 and increased 2.3% and 5.8%, respectively, year-to-date 2004 when compared to the corresponding periods of 2003 primarily due to improved industrial sales mainly in the primary metal, chemical and paper sectors. Kilowatt-hour energy sales to residential customers decreased 3.5% for the third quarter 2004 primarily due to Hurricane Ivan which struck Alabama in September 2004; however, retail sales revenues lost as a result of power outages from Hurricane Ivan did not have a material impact on Alabama Power’s net income for the third quarter 2004. For additional information, see “Future Earnings Potential — FERC and Alabama PSC Matters — Storm Damage Cost Recovery” herein. For the year, residential kilowatt-hour energy sales have increased 2.0% when compared to the same period in 2003 due to customer growth and a slight increase in average consumption.

33

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

     Other revenues.The increase in other revenues for the third quarter 2004 is primarily attributed to a $2.1 million increase in transmission revenues and a $1.0 million increase in revenues from cogeneration steam facilities due to increased fuel revenue resulting from higher gas prices when compared to the same period in 2003. The increase for the year-to-date 2004 is mainly due to a $5.7 million increase in transmission revenues, a $3.1 million increase in revenues from cogeneration steam facilities and a $1.3 million increase in rent from pole attachments when compared to the same period in 2003. Since cogeneration steam fuel revenues are generally offset by fuel expense, these revenues do not have a significant impact on earnings.

     Fuel expense.Fuel expense was higher in the third quarter 2004 when compared to the corresponding period in 2003 mainly due to a 45.3% increase in natural gas prices even though generation from natural gas-fired generating facilities decreased by 32.1%. The year-to-date 2004 increase in fuel expense when compared to the same period in 2003 is mainly due to a 27.6% increase in natural gas prices and a 3.1% increase in generation from gas-fired generating facilities. The increase in generation from gas-fired facilities for year-to-date 2004 when compared to the corresponding period in 2003 is mainly due to an increased energy demand coupled with a 43.5% 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. See “Future Earnings Potential — FERC and Alabama PSC Matters — Retail Fuel Cost Recovery” herein for additional information.

     Purchased power — non-affiliates.Purchased power from non-affiliates will vary depending on market cost of available energy being lower than Southern Company system generated energy, demand for energy within the service territory and availability of Southern Company system generation. In the third quarter 2004, purchased power from non-affiliates increased when compared to the same period in 2003 primarily due to a 101.1% increase in energy purchased even though purchased power prices decreased by 2.9% during the same time period. The increase in purchased power expense was also due to increased capacity payments of $11.3 million associated with a PPA between Alabama Power and a third party. See Note 7 to the financial statements in Item 8 of the Form 10-K for additional information. Year-to-date 2004 purchased power-non-affiliates increased $70 million when compared to the same period in 2003 mainly due to a 96.7% increase in energy purchased even though purchased power prices decreased by 9.7% during 2004. The increase in purchased power expense year-to-date 2004 is also due to a $16.9 million increase in capacity payments associated with a PPA between Alabama Power and a third party. Increased purchases were used to help meet the increased energy demand for retail sales since energy was available at prices lower than self-generation. These transactions did not have a significant impact on earnings since energy purchases are generally offset by energy revenues through Alabama Power’s energy cost recovery clause.

     Purchased power — affiliates.Purchased power from affiliates will vary depending on demand and the availability and cost of generating resources at each system company. Purchased power from affiliates decreased in the third quarter 2004 over the same period in 2003 due to a 12.2% reduction in energy purchased and a 4.4% decrease in purchased power prices. The year-to-date 2004 purchased power from affiliates increased when compared to year-to-date 2003, mainly due to a 40.0% increase in purchased power prices as energy purchased decreased by 20.3%. A component of the increase in purchased power expense in 2004 is due to a PPA between Alabama Power and Southern Power that began in June 2003, thus resulting in an increase in the year-to-date 2004 capacity component of $14.7 million. Due to the fact that the contract began in June 2003, year-to-date 2004 energy purchased associated with the PPA increased 51.1 % while the purchased power price associated with the contract decreased 5.0%. See Note 1 to the financial statements of Alabama Power under “Affiliate Transactions” in Item 8 of the Form 10-K for additional information on this PPA. These transactions did not have a significant impact on earnings since energy purchases are generally offset by energy revenues through Alabama Power’s energy cost recovery clause.

34

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

     Maintenance expense.The decrease in maintenance expense for the third quarter 2004 when compared to the same period in 2003 is primarily attributed to a $4.7 million decrease in distribution expense and a $3.1 million decrease in transmission expense. These decreases in distribution and transmission expenses for the third quarter 2004 are mainly related to a reduction in scheduled overhead line maintenance due to storm restoration efforts following Hurricane Ivan in September 2004. For additional information, see “Future Earnings Potential — FERC and Alabama PSC Matters — Storm Damage Cost Recovery” herein. The year-to-date 2004 increase in maintenance expense is primarily attributable to a $1.9 million increase in distribution expense for overhead line maintenance, a $1.9 million increase in steam expense for supervision and engineering expense and a $1.8 million increase in other power generation expense for caustic water damage repairs at the Washington County combined cycle facility.

     Depreciation and amortization expense.The increases in depreciation and amortization expense for the third quarter and year-to-date 2004 are attributed to an increase in utility plant in service when compared to the same periods in 2003. See Note 7 to the financial statements of Alabama Power under “Construction Program” in Item 8 of the Form 10-K for additional information.

     Taxes other than income taxes. The third quarter 2004 increase in taxes other than income taxes is mainly due to a $2.8 million increase in payroll taxes and a $1.3 million increase in property tax expense as a result of higher assessed property values when compared to the corresponding period in 2003. The year-to-date 2004 increase in taxes other than income taxes when compared to the same period in 2003 is primarily due to a $5.5 million increase in payroll taxes, a $4.0 million increase in property tax expense and a $2.6 million increase in the state public utility license tax because of increased retail revenues.

     Interest expense, net of amounts capitalized. The decreases in interest expense, net of amounts capitalized during the third quarter and year-to-date 2004 when compared to the same periods in 2003 are the result of refinancing higher cost debt. For additional information, see FINANCIAL CONDITION AND LIQUIDITY — “Financing Activities” herein.

     Income taxes. Income tax expense increased for the third quarter and year-to-date of 2004 compared to the same periods in 2003 due primarily to an increase in taxable income, resulting in an additional $3.6 million and $9.0 million tax expense, respectively. Income tax expense increased an additional $9.6 million year-to-date 2004 as a result of various income tax actualization adjustments.

     Dividends on preferred stock. Dividends on preferred stock increased for the third quarter and year-to-date 2004 due to the issuance of 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) in February 2004.

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 stricter 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 BUSINESS — The SOUTHERN System — “Risk Factors” in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential” of Alabama Power in Item 7 of the Form 10-K.

35

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

Environmental Matters

New Source Review Actions

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 information on certain environmental litigation, see MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — Environmental Matters” of Alabama Power in Item 7 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 enforcement action against the TVA. The case against Alabama Power had been effectively stayed pending this final resolution of the TVA case. On June 16, 2004, the U.S. District Court for the Northern District of Alabama lifted the stay of the New Source Review litigation against Alabama Power, placing the case back onto the District Court’s active docket. An adverse outcome in this case could require substantial capital expenditures and could possibly require payment of substantial penalties that cannot be determined at this time. This could affect future results of operations, cash flows and possibly financial condition if such costs are not recovered through regulated rates.

Global Warming Litigation

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

Other Environmental Matters

On March 12, 2004, the EPA redesignated the Birmingham, Alabama area from nonattainment to attainment under the one-hour ozone national ambient air quality standard. On April 30, 2004, the EPA published its eight-hour ozone nonattainment designations and a portion of the rules implementing the new eight-hour standard. 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

36

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

new standards will depend on the development and implementation of applicable state regulations and therefore cannot be determined at this time.

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

     In June 2004, the EPA issued its recommendations for areas to be designated “nonattainment” for the fine particle national ambient air quality standard. Areas within the Alabama Power’s service area that were included in the EPA’s proposed fine particulate matter designations include counties surrounding Birmingham, Alabama. Alabama Power owns several plants located within the counties proposed for the nonattainment designation. The EPA plans to make final nonattainment designations for fine particulate matter by the end of 2004.

     For additional information concerning recoverable environmental costs, see “Future Earnings Potential — FERC and Alabama PSC Matters — Environmental Rate Filing” herein.

FERC and Alabama PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — FERC Matters — Market-Based Rate Authority” of Alabama Power in Item 7 of the Form 10-K and Note 3 to the financial statements of Alabama 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 requires utilities to submit 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.

     On July 8, 2004, the FERC denied Southern Company’s request for rehearing, along with a number of others, and reaffirmed the interim tests that it adopted in April. Southern Company submitted the required analyses on August 9, 2004. In that filing, Southern Company passed the pivotal supplier analysis for all markets and the wholesale market share analysis for all markets except the Southern Company control area. Southern Company also submitted other analyses to demonstrate that it lacks generation market power. This filing remains pending at the FERC. Southern Company, along with other utilities, has also filed an appeal of the FERC’s April 14, 2004 order with the Circuit Court of Appeals in Washington, D.C. In the event that the FERC’s default mitigation measures are ultimately applied, Alabama Power may be required to charge cost-based rates for certain wholesale sales, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

Transmission

See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — FERC Matters — Transmission” of Alabama Power in Item 7 of the Form 10-K for information on

37

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

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.

Environmental Rate Filing

On August 2, 2004, Alabama Power made a filing with the Alabama PSC to establish a specific rate mechanism for the recovery of retail costs associated with environmental laws, regulations or other such mandates. On October 5, 2004, the Alabama PSC voted to approve the rate mechanism as filed. The rate mechanism will begin operation in January 2005 and provide for the recovery of these costs pursuant to a factor that will be calculated annually. Environmental costs to be recovered will include (1) applicable operation and maintenance expenses, (2) depreciation and a return on invested capital beginning with 2005 investments and (3) a true up of prior period over/under recovery amounts. It is anticipated that for the first two years of the increase, retail rates will increase by approximately 1% ($33 million) in 2005 and approximately an additional 1% ($30 million) in 2006. In conjunction with the Alabama PSC’s approval, Alabama Power agreed to a moratorium until March 2007 on any retail rate increase under the previously approved Rate Stabilization and Equalization Plan. Any increase in March 2007 would be based upon the earned return on retail common equity at December 31, 2006. See Note 3 to the financial statements of Alabama Power under “Retail Rate Adjustment Procedures” in Item 8 of Form 10-K for further information on the Rate Stabilization and Equalization Plan.

Retail Fuel Cost Recovery

In March 2002, the Alabama PSC issued a consent order establishing the current customer fuel rates, which Alabama Power began collecting in April 2002. In recent months, Alabama Power has experienced higher than expected fuel costs for coal and gas. Those higher fuel costs have increased the under recovered fuel costs included in the Condensed Balance Sheets herein. Alabama Power will continue to monitor the under recovered fuel cost balance in light of these higher fuel costs to determine if an adjustment to billing rates should be requested from the Alabama PSC. See MANAGEMENT’S DISCUSSION AND ANALYSIS - RESULTS OF OPERATIONS — “Revenues” of Alabama Power in Item 7 of and Note 3 to the financial statements of Alabama Power under “Retail Rate Adjustment Procedures” in Item 8 of the Form 10-K for additional information.

Storm Damage Cost Recovery

On September 15 and 16, 2004, Hurricane Ivan hit the Gulf Coast of Alabama and Florida and continued north through the state of Alabama, causing substantial damage in the service territory of Alabama Power. Approximately 826,000 of Alabama Power’s 1,370,000 customer accounts were without electrical service immediately after the hurricane. See Note 1 to the financial statements of Alabama Power under “Natural Disaster Reserve” in Item 8 of the Form 10-K for information on how Alabama Power maintains a reserve to cover uninsured expenses resulting from storms. At September 30, 2004, total operation and maintenance expenses associated with repairing the damage to its facilities and restoring service to its customers are preliminarily estimated to be $52 million. The balance in the natural disaster reserve was not sufficient to cover these costs. On October 19, 2004, Alabama Power received approval from the Alabama PSC to record its hurricane related operation and maintenance expenses in the natural disaster reserve, thereby deferring the approximately $41 million negative balance for recovery in future periods in a manner which will minimize the impact on customers. See MANAGEMENT’S DISCUSSION AND ANALYSIS — ACCOUNTING POLICIES — “Application of Critical Accounting Policies and Estimates” and Note (M) to the Condensed Financial Statements herein for further information concerning the Alabama PSC’s approval of deferring the costs of the storm. In the event another natural disaster occurs while Alabama Power’s Natural Disaster Reserve balance remains negative, management will seek approval from the Alabama PSC to defer and recover these costs over

38

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

time. Failure to receive such approval of such an accounting treatment could affect the results of operations of Alabama Power.

Other Matters

See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — Other Matters” of Alabama Power in Item 7 of the Form 10-K for information on nuclear security measures. Alabama Power has implemented plans for the measures ordered by the NRC to be in effect on October 29, 2004 and is in compliance with the requirements. Alabama Power currently estimates its expenditures related to these security measures to total $9.7 million, of which $9.3 million will be capitalized. These estimates are subject to change in the event additional NRC guidance is provided.

     On October 22, 2004, President Bush signed the American Jobs Creation Act of 2004 (the Jobs Act) into law. The Jobs Act represents the most significant revision to the Internal Revenue Code since 1986. Congress must still develop the regulations that will set implement the requirements of the Jobs Act. Alabama Power is currently assessing the impact of the Jobs Act on its taxable income. However, Alabama Power currently does not expect the Jobs Act to have a material impact on its financial statements.

     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 MANAGEMENT’S DISCUSSION AND ANALYSIS — ACCOUNTING POLICIES — “Application of Critical Accounting Policies and Estimates” of Alabama Power in Item 7 of the Form 10-K for a complete discussion of Alabama Power’s critical accounting policies and estimates related to Electric Utility Regulation and Contingent Obligations.

     In addition, see “Future Earnings Potential — FERC and Alabama PSC Matters — Storm Damage Cost Recovery” and Note (M) to the Condensed Financial Statements herein for information on the Alabama PSC’s approval of the deferral of approximately $41 million of costs in excess of Alabama Power’s existing natural disaster reserve associated with Hurricane Ivan storm restoration. Alabama Power currently has Alabama PSC approval to accrue for a Natural Disaster Reserve. Alabama Power will consider alternatives that minimize the impact on customers and will develop a plan to recover these costs, subject to Alabama PSC approval.

39

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 FASB 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 FASB Interpretation No. 46R. See Note (D) to the Condensed Financial Statements herein for additional information related to the adoption of FASB Interpretation No. 46R.

     In the third quarter 2004, Alabama Power prospectively adopted FASB Staff Position (FSP) 106-2, “Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Medicare Act).” The Medicare Act provides a 28% prescription drug subsidy for Medicare eligible retirees. FSP 106-2 requires recognition of the impacts of the Medicare Act in the accumulated post-retirement benefit obligation (APBO) and future cost of service for post-retirement medical plans and may be applied retroactively to the enactment of the Medicare Act in December 2003 or prospectively effective for the third quarter 2004. Alabama Power elected to apply this treatment prospectively. The effect of the subsidy reduced Alabama Power’s expenses for the three months ended September 30, 2004 by approximately $1.6 million and is expected to have a similar impact on future expenses. The subsidy’s impact on the post-retirement medical plan APBO was a reduction of approximately $60 million. However, the ultimate impact on future periods is subject to federal regulations governing the subsidy created in the Medicare Act being finalized. See Note (G) to the Condensed Financial Statements herein for additional information.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Major changes in Alabama Power’s financial condition during the first nine months of 2004 included the addition of approximately $534 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. See Alabama Power’s Condensed Statements of Cash Flows herein for further details.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Capital Requirements and Contractual Obligations” of Alabama Power in Item 7 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. The capital required by September 30, 2005 for maturities of long-term debt is not a material amount.

     In October 2004, Alabama Power approved a new capital budget for 2005 and 2006. The construction program of Alabama Power is $902 million for 2005 and $921 million for 2006. Over the next two years, Alabama Power estimates spending $563 million on environmental related additions, $170 million on Plant Farley, $511 million on distribution facilities and $249 million on transmission additions. See Note 7 to the financial statements of Alabama Power under “Construction Program” in Item 8 of the Form 10-K for additional details.

40

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

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 BUSINESS — “Financing Programs” in Item 1 of the Form 10-K for additional information.

     To meet short-term cash needs and contingencies, at September 30, 2004 Alabama Power had $28 million of cash and cash equivalents, unused committed lines of credit of approximately $868 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 ($50 million), 2005 ($593 million) and 2007 ($225 million). Of the facilities maturing in 2004 and 2005, $225 million contain provisions allowing two-year term loans executable at the expiration date and $245 million contain provisions allowing one-year term loans executable at the expiration date. 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 September 30, 2004, Alabama Power had $131 million of commercial paper outstanding. Management believes that the need for working capital can be adequately met by issuing commercial paper or utilizing lines of credit without maintaining large cash balances.

Credit Rating Risk

Alabama Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. 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 and fixed price physical gas purchases. At September 30, 2004, the maximum potential collateral requirements were approximately $27 million. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit or cash.

     Alabama Power 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 September 30, 2004, Alabama Power’s maximum potential exposure under these contracts was $9 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.

41

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

The fair value of derivative energy contracts at September 30, 2004 was as follows:

	Third Quarter
	2004			Year-to-Date
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	11,547		$	6,413
Contracts realized or settled		(8,578	)		(20,361	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		19,219			36,136
Contracts at September 30, 2004	$	22,188		$	22,188

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

	Source of September 30, 2004
	Valuation Prices
	Total			Maturity
	Fair Value			Year 1			1-3 Years
	(in thousands)
Actively quoted	$	22,562		$	21,659		$	903
External sources		(374	)		(374	)		—
Models and other methods		—			—			—
Contracts at September 30, 2004	$	22,188		$	21,285		$	903

     For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS - FINANCIAL CONDITION AND LIQUIDITY — “Market Price Risk” of Alabama Power in Item 7 of 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 (F) to the Condensed Financial Statements herein.

Financing Activities

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

     Also in the first quarter 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.

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

     In August 2004, Alabama Power issued $250 million of Series BB Floating Rate Senior Notes due August 25, 2009 and terminated a $250 million interest rate swap at a loss of $0.1 million. The loss from the terminated swap was deferred into Other Comprehensive Income and will be amortized to income over a five year period.

42

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

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.

     Additionally, in August 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.

     In August 2004, $250 million in aggregate principal amount of Series K 7.125% Senior Notes matured and also in September 2004, $275 million in aggregate principal amount of Series N 4.875% Senior Notes matured. Short-term borrowing, temporary cash investments and cash provided from operating activities were utilized to repay the maturing debt.

     In addition to any financings that may be necessary to meet Alabama Power’s capital requirements and contractual obligations, 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.

43

GEORGIA POWER COMPANY

44

GEORGIA POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
Operating Revenues:
Retail sales	$	1,450,148		$	1,353,851		$	3,687,163		$	3,361,162
Sales for resale —
Non-affiliates		58,789			59,783			185,842			193,221
Affiliates		25,778			31,805			128,870			125,656
Other revenues		46,773			41,443			132,164			123,374
Total operating revenues		1,581,488			1,486,882			4,134,039			3,803,413
Operating Expenses:
Fuel		362,347			335,058			971,781			848,989
Purchased power —
Non-affiliates		90,591			72,439			250,672			206,527
Affiliates		188,568			156,292			463,029			391,740
Other operations		216,782			195,010			635,974			580,487
Maintenance		106,761			88,774			339,904			307,346
Depreciation and amortization		69,588			89,033			205,867			260,778
Taxes other than income taxes		60,381			60,095			173,301			162,560
Total operating expenses		1,095,018			996,701			3,040,528			2,758,427
Operating Income		486,470			490,181			1,093,511			1,044,986
Other Income and (Expense):
Allowance for equity funds used during construction		8,845			2,509			16,892			6,311
Interest income		1,631			128			5,751			15,213
Interest expense, net of amounts capitalized		(43,724	)		(44,182	)		(137,667	)		(136,470	)
Interest expense to affiliate trusts		(14,878	)		—			(29,688	)		—
Distributions on mandatorily redeemable preferred securities		—			(14,918	)		(15,839	)		(44,756	)
Other income (expense), net		8,524			(21,995	)		(1,484	)		(9,730	)
Total other income and (expense)		(39,602	)		(78,458	)		(162,035	)		(169,432	)
Earnings Before Income Taxes		446,868			411,723			931,476			875,554
Income taxes		159,334			146,625			344,051			318,324
Net Income		287,534			265,098			587,425			557,230
Dividends on Preferred Stock		168			168			503			503
Net Income After Dividends on Preferred Stock	$	287,366		$	264,930		$	586,922		$	556,727

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
Net Income After Dividends on Preferred Stock	$	287,366		$	264,930		$	586,922		$	556,727
Other comprehensive loss:
Changes in fair value of qualifying hedges, net of tax of $(7,780), $(1,941), $(4,070) and $(3,287), respectively		(13,980	)		(3,078	)		(8,098	)		(5,625	)
Less: Reclassification adjustment for amounts included in net income, net of tax of $412, $444, $1,649 and $523, respectively		654			1,005			2,615			1,132
COMPREHENSIVE INCOME	$	274,040		$	262,857		$	581,439		$	552,234

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

45

GEORGIA POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Nine Months
	Ended September 30,
	2004			2003
	(in thousands)
Operating Activities:
Net income	$	587,425		$	557,230
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		269,916			315,495
Deferred income taxes and investment tax credits, net		199,113			151,737
Deferred capacity expenses — affiliates		(30,549	)		(17,711	)
Allowance for equity funds used during construction		(16,892	)		(6,311	)
Pension, postretirement, and other employee benefits		(675	)		(28,270	)
Tax benefit of stock options		7,203			9,590
Hedge settlements		(12,394	)		(11,250	)
Other, net		(23,788	)		25,685
Changes in certain current assets and liabilities —
Receivables, net		(231,421	)		(50,082	)
Fossil fuel stock		3,018			(15,799	)
Materials and supplies		(5,696	)		(10,559	)
Other current assets		19,064			25,555
Accounts payable		65,072			(43,546	)
Accrued taxes		48,855			100,903
Accrued compensation		(38,448	)		(36,850	)
Other current liabilities		15,467			8,886
Net cash provided from operating activities		855,270			974,703
Investing Activities:
Gross property additions		(856,037	)		(537,274	)
Cost of removal net of salvage		(11,182	)		(16,475	)
Change in construction payables, net of joint owner portion		(36,206	)		(52,841	)
Other		26,111			22,569
Net cash used for investing activities		(877,314	)		(584,021	)
Financing Activities:
Decrease in notes payable, net		(137,277	)		(287,222	)
Proceeds —
Senior notes		600,000			800,000
Mandatorily redeemable preferred securities		200,000			—
Capital contributions from parent company		226,400			158
Redemptions —
Senior notes		(200,000	)		(465,000	)
Mandatorily redeemable preferred securities		(200,000	)		—
Payment of common stock dividends		(424,125	)		(424,350	)
Other		(17,607	)		(16,602	)
Net cash provided from (used for) financing activities		47,391			(393,016	)
Net Change in Cash and Cash Equivalents		25,347			(2,334	)
Cash and Cash Equivalents at Beginning of Period		8,699			16,873
Cash and Cash Equivalents at End of Period	$	34,046		$	14,539
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $5,686 and $3,973 capitalized for 2004 and 2003, respectively)	$	177,167		$	160,344
Income taxes (net of refunds)	$	38,170		$	58,812

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

46

GEORGIA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

	At September 30,			At December 31,
Assets	2004			2003
	(in thousands)
Current Assets:
Cash and cash equivalents	$	34,046		$	8,699
Receivables —
Customer accounts receivable		376,213			261,771
Unbilled revenues		161,824			117,327
Under recovered regulatory clause revenues		268,553			151,447
Other accounts and notes receivable		81,405			101,783
Affiliated companies		32,051			52,413
Accumulated provision for uncollectible accounts		(7,825	)		(5,350	)
Fossil fuel stock, at average cost		134,519			137,537
Vacation pay		55,045			50,150
Materials and supplies, at average cost		276,737			271,040
Prepaid expenses		12,292			46,157
Other		25,705			83
Total current assets		1,450,565			1,193,057
Property, Plant, and Equipment:
In service		18,539,848			18,171,862
Less accumulated provision for depreciation		7,150,579			6,898,725
		11,389,269			11,273,137
Nuclear fuel, at amortized cost		106,723			129,056
Construction work in progress		720,314			341,783
Total property, plant, and equipment		12,216,306			11,743,976
Other Property and Investments:
Equity investments in unconsolidated subsidiaries		66,020			38,714
Nuclear decommissioning trusts, at fair value		430,994			423,319
Other		54,174			37,142
Total other property and investments		551,188			499,175
Deferred Charges and Other Assets:
Deferred charges related to income taxes		505,298			509,887
Prepaid pension costs		438,994			405,164
Unamortized debt issuance expense		78,935			75,245
Unamortized loss on reacquired debt		179,552			177,707
Other regulatory assets		79,973			84,901
Other		116,388			92,916
Total deferred charges and other assets		1,399,140			1,345,820
Total Assets	$	15,617,199		$	14,782,028

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

47

GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At September 30,			At December 31,
Liabilities and Stockholder's Equity	2004			2003
	(in thousands)
Current Liabilities:
Securities due within one year	$	302,449		$	2,304
Notes payable		—			137,277
Accounts payable —
Affiliated		185,878			134,884
Other		206,201			238,069
Customer deposits		112,188			103,756
Accrued taxes —
Income taxes		272,103			107,532
Other		152,003			166,892
Accrued interest		75,049			70,844
Accrued vacation pay		42,749			38,206
Accrued compensation		95,557			134,004
Other		89,175			105,234
Total current liabilities		1,533,352			1,239,002
Long-term Debt		3,860,472			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		2,401,145			2,303,085
Deferred credits related to income taxes		175,167			186,625
Accumulated deferred investment tax credits		303,140			312,506
Employee benefit obligations		316,420			282,833
Asset retirement obligations		496,777			475,585
Other cost of removal obligations		415,732			412,161
Miscellaneous regulatory liabilities		126,655			249,687
Other		73,644			63,431
Total deferred credits and other liabilities		4,308,680			4,285,913
Total Liabilities		10,671,577			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		2,442,101			2,208,498
Premium on preferred stock		40			40
Retained earnings		2,173,019			2,010,297
Accumulated other comprehensive loss		(28,357	)		(22,874	)
Total common stockholder’s equity		4,931,053			4,540,211
Total Liabilities and Stockholder’s Equity	$	15,617,199		$	14,782,028

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

48

GEORGIA POWER COMPANY

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

THIRD QUARTER 2004 vs. THIRD QUARTER 2003
AND
YEAR-TO-DATE 2004 vs. YEAR-TO-DATE 2003

RESULTS OF OPERATIONS

Earnings

Georgia Power’s net income after dividends on preferred stock for the third quarter and year-to-date 2004 was $287.4 million and $586.9 million, respectively, compared to $264.9 million and $556.7 million, respectively, for the corresponding periods in 2003. Earnings in the third quarter and year-to-date 2004 increased by $22.5 million, or 8.5%, and $30.2 million, or 5.4%, respectively, primarily due to higher retail base revenues partially offset by higher non-fuel operating expenses.

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Third Quarter						Year-To-Date
	(in thousands)			%			(in thousands)			%
Retail sales	$	96,297			7.1		$	326,001			9.7
Sales for resale — affiliates		(6,027	)		(18.9	)		3,214			2.6
Fuel expense		27,289			8.1			122,792			14.5
Purchased power — non-affiliates		18,152			25.1			44,145			21.4
Purchased power — affiliates		32,276			20.7			71,289			18.2
Other operations expense		21,772			11.2			55,487			9.6
Maintenance expense		17,987			20.3			32,558			10.6
Depreciation and amortization		(19,445	)		(21.8	)		(54,911	)		(21.1	)
Other income and (expense)		38,856			49.5			7,397			4.4

     Retail sales.Excluding fuel revenues, which generally do not affect net income, retail sales revenue increased by $34.8 million, or 3.6%, in the third quarter 2004 and $137.6 million, or 5.8%, for year-to-date 2004 compared to the corresponding periods in 2003. During the third quarter 2004, kilowatt-hour energy sales to residential, commercial and industrial customers were up by 0.9%, 1.3% and 1.5%, respectively, when compared to the same period in 2003. Year-to-date 2004 kilowatt-hour energy sales increased by 5.7%, 3.7% and 2.3%, respectively, in the residential, commercial and industrial sectors when compared to the corresponding period in 2003. These increases in kilowatt-hour energy sales in the third quarter and year-to-date 2004 are primarily attributed to a 1.9% growth in the number of customers, more favorable weather and continued improvement in the economy when compared to the same periods in 2003.

     Sales for resale – affiliates.Revenues from sales for resale to affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. During the third quarter and year-to-date 2004, energy sales to affiliates decreased 25.6% and 6.8%, respectively, when compared to the corresponding periods in 2003. The increase in year-to-date 2004 revenues for these sales resulted from higher fuel prices. These transactions did not have a significant impact on earnings since this energy is generally sold at marginal cost.

49

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

     Fuel expense. The increases in fuel expense during the third quarter and year-to-date 2004 result from an increase in the average cost of fuel per megawatt-hour of 13% in each period. Year-to-date 2004 fuel expense was also affected by a 0.9% increase in fossil generation to meet retail sales demand. These expenses do not have a significant impact on earnings since fuel expenses are generally offset by fuel revenues through Georgia Power’s fuel cost recovery clause. See “Future Earnings Potential – FERC and Georgia PSC Matters – Retail Fuel Cost Recovery” herein for additional information.

     Purchased power — non-affiliates.Increases in purchased power from non-affiliates in the third quarter and year-to-date 2004 are mainly due to fluctuations in off-system energy purchases and 27% and 13.5% increases in the average cost of fuel per megawatt-hour associated with these purchases, respectively. 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. During the third quarter and year-to-date 2004, purchased power from affiliates increased to meet the demand for energy. Third quarter and year-to-date 2004 average cost of fuel per megawatt-hour associated with these purchases increased 26% in each period. In addition, year-to-date 2004 purchased power from affiliates increased $71 million when compared to the corresponding period in 2003 primarily due to a PPA between Georgia Power and Southern Power that began in June 2003. The capacity component of these transactions increased $44.5 million year-to-date 2004 over the same period in 2003. 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 operations expense.The increases in other operations expense in the third quarter and year-to-date 2004 are primarily attributed to increases of $2.0 million and $7.1 million in transmission and distribution, respectively, increases of $4 million and $2.7 million in fossil power generation, respectively, and increases of $12.8 million and $26.2 million in administrative and general expenses related to increased employee benefit expenses, respectively, and $3.8 million in workers compensation expenses for year-to-date 2004.

     Maintenance expense. In the third quarter and year-to-date 2004, maintenance expense was higher primarily due to the timing of scheduled generating plant maintenance of $4.8 million and $9 million, respectively, and scheduled transmission and distribution maintenance of $7.5 million and $16.1 million, respectively, when compared to the corresponding periods in 2003.

     Depreciation and amortization.Depreciation and amortization expenses in the third quarter and year-to-date 2004 were lower compared to the corresponding periods in 2003. These decreases were caused primarily by lower regulatory charges needed to levelize purchased power capacity costs under the terms of the retail rate order effective January 1, 2002. These decreases were offset by increases in affiliated purchased power costs discussed above. See Note 1 to the financial statements of Georgia Power under “Depreciation and Amortization” in Item 8 of the Form 10-K for additional information.

     Other income and (expense). During the third quarter and year-to-date 2004, this net expense decreased primarily as a result of increased income from customer growth, weather and changes in customer consumption related to an electricity pricing program which contributed income of $10 million and $3.6 million, respectively. Also contributing to the decreases in other income and (expense) is increased AFUDC equity of $6 million and $11 million for the third quarter and year-to-date 2004, respectively, associated with Georgia Power’s acquisition of the McIntosh combined cycle units 10 and 11 construction project from Southern Power.

50

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

See “Future Earnings Potential — FERC and Georgia PSC Matters — Plant McIntosh Construction Project” herein and Note (J) to the Condensed Financial Statements herein for additional information. These decreases in the year-to-date 2004 net expense were partially offset by a reduction in interest income from the same period in the prior year primarily resulting from $14.5 million of interest on a favorable tax settlement received in the second quarter of 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 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 strict 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 Georgia Power’s service area. For additional information relating to these issues, see BUSINESS — The SOUTHERN System — “Risk Factors” in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS — “Future Earnings Potential” of Georgia Power in Item 7 of the Form 10-K.

Environmental Matters

New Source Review Actions and Plant Wansley Environmental Litigation

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

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

51

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

Global Warming Litigation

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

Other Environmental Matters

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 (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. In any event, however, based on the last three years of data, the State of Georgia believes that the Atlanta area has attained the one-hour standard and is in the process of applying for redesignation from the EPA. 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 May 5, 2004, the EPA published proposed amendments to its Regional Haze rules with respect to Best Available Retrofit Technology guidelines and requirements. The impact of these regulations will depend on the development and implementation of the final rules and implementation by the states and therefore cannot be determined at this time.

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

     On April 21, 2004, the EPA published the final regional nitrogen oxide reduction rules applicable to Georgia. These rules specified that the State of Georgia must submit a revised state implementation plan by

52

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

April 2005, and affected sources must comply with the reduction requirements by May 1, 2007. However, on October 22, 2004, the EPA announced it was granting a petition for reconsideration filed with the EPA by a coalition of Georgia industries. The EPA will stay implementation of the rule, as it relates to Georgia, while it initiates rulemakings to address the petition. The impact of the nitrogen oxide reduction rules will depend on the outcome of the petition for reconsideration and/or any subsequent development and approval of Georgia’s state implementation plan and cannot be determined at this time.

FERC and Georgia PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS — “Future Earnings Potential – FERC Matters – Market-Based Rate Authority” of Georgia Power 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. This new interim approach requires utilities to submit 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.

     On July 8, 2004, the FERC denied Southern Company’s request for rehearing, along with a number of others, and reaffirmed the interim tests that it adopted in April. Southern Company submitted the required analyses on August 9, 2004. In that filing, Southern Company passed the pivotal supplier analysis for all markets and the wholesale market share analysis for all markets except the Southern Company control area. Southern Company also submitted other analyses to demonstrate that it lacks generation market power. This filing remains pending at the FERC. Southern Company, along with other utilities, has also filed an appeal of the FERC’s April 14, 2004 order with the Circuit Court of Appeals in Washington, D.C. In the event that the FERC’s default mitigation measures are ultimately applied, Georgia Power may be required to charge cost-based rates for certain wholesale sales, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

Transmission

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

Plant McIntosh Construction Project

See MANAGEMENT’S DISCUSSION AND ANALYSIS – RESULTS OF OPERATION — “Future Earnings Potential — FERC Matters” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “FERC Matters” in Item 8 of the Form 10-K for information regarding PPAs between Southern Power and

53

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

Savannah Electric and Georgia Power for Plant McIntosh capacity. In April 2003, Southern Power applied for FERC approval of these PPAs. In July 2003, the FERC accepted the PPAs to become effective June 1, 2005, subject to refund, and ordered that hearings be held. To ensure the timely completion of construction on McIntosh units 10 and 11 and their availability in the summer of 2005 as supply side resources for the retail customers in the State of Georgia, on May 7, 2004, Savannah Electric and Georgia Power requested the Georgia PSC to direct them to acquire the McIntosh construction project. Savannah Electric and Georgia Power proposed to place the units in rate base at a cost approved by the Georgia PSC and to recover the unit operation and maintenance costs as retail service expenses as may be approved by the Georgia PSC. The Georgia PSC issued such an order on May 18, 2004 and the transfer occurred on May 24, 2004. On May 20, 2004, Southern Power filed a request to withdraw the PPAs and to terminate the ongoing FERC proceedings. On August 4, 2004, the FERC issued a notice that it allowed the request to withdraw the PPAs to be accepted and to become effective by operation of law on July 20, 2004. However, the FERC made no determination on what additional steps may need to be taken with respect to testimony provided in the proceedings. The ultimate outcome of this matter cannot now be determined.

     The May 18, 2004 Georgia PSC order also directed Georgia Power and Savannah Electric to file an application within 10 days of completing such purchase to amend the resource certificate granted by the Georgia PSC in 2002 to describe the capacity resource as being the McIntosh units 10 and 11 (as opposed to the McIntosh PPAs), the approximate construction schedule (which is not expected to change) and the proposed rate base treatment. The application was filed on June 3, 2004 and the Georgia PSC will have 180 days to respond. The Georgia PSC is expected to review the application in accordance with its affiliate transaction guidelines, which require a lower of cost or market approach unless otherwise determined by the Georgia PSC. Georgia Power and Savannah Electric have submitted information showing that the book cost of the McIntosh construction project is lower than its market value. In direct testimony filed on October 14, 2004, the Georgia PSC staff proposed a different valuation that shows the market value for the Plant McIntosh construction project is less than book value. Georgia Power and Savannah Electric disagree with the proposed valuation methodology. Georgia Power and Savannah Electric plan to file rebuttal testimony in November with hearings being held in that same month. The Georgia PSC is expected to issue a final order in this matter in December 2004. However, full recovery of the project costs depends on the outcome of the Georgia PSC’s review. In the event the Georgia PSC does not allow full recovery of the project costs, then part of such costs may have to be written off in accordance with FASB Statement No. 90, “Accounting for Abandonments and Disallowed Plant Costs.” At September 30, 2004, the investment in the McIntosh construction project totaled approximately $381.1 million for Georgia Power. The ultimate outcome of the Georgia PSC’s review cannot now be determined. See Note (J) to the Condensed Financial Statements herein for additional information.

Retail Rate Case

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

     The increase in retail revenues is being requested to cover the higher costs of purchased power; operating and maintenance expenses; environmental compliance; and continued investment in new generation, transmission

54

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

and distribution facilities to support growth and ensure reliability. Hearings on Georgia Power’s filed testimony were held in September 2004. Testimony from Georgia PSC staff was filed and hearings held in October 2004. Georgia Power plans to file rebuttal testimony in November 2004 with hearings on that testimony being held in the same month. Georgia Power expects the Georgia PSC to issue a final order in this matter during December 2004. The final outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS –“Future Earnings Potential – Other Matters” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Retail Rate Orders” in Item 8 of the Form 10-K and Note (I) to the Condensed Financial Statements herein for additional information.

Retail Fuel Cost Recovery

In August 2003, the Georgia PSC issued an order allowing Georgia Power to increase customer fuel rates to collect existing under recovered fuel costs over the period October 1, 2003 through March 31, 2005. Georgia Power has experienced higher than expected fuel costs since the order was issued. Those higher fuel costs have increased the under recovered fuel costs included in the Condensed Balance Sheets herein. Georgia Power will continue to monitor the under recovered fuel cost balance in light of these higher fuel costs. 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.

Storm Damage Cost Recovery

During the month of September 2004, Georgia Power’s service territory was impacted by Hurricanes Frances, Ivan and Jeanne. Georgia Power maintains an accumulated provision for property damage to cover the cost of damages from major storms to its transmission and distribution lines and the cost of uninsured damages to its generation facilities and other property as mandated by the Georgia PSC. The total amount of damage related to these hurricanes was estimated to be approximately $10 million and was charged to the storm damage reserve in September 2004. These costs are expected to be recovered through regular monthly accruals, which may be adjusted, if necessary, in connection with Georgia Power’s retail rate case. See “Retail Rate Case” herein for additional information.

Other Matters

On August 12, 2004, Georgia Power and Gulf Power entered into a PPA with Florida Power & Light (FP&L). Under the agreement, Georgia Power and Gulf Power will provide FP&L with 165 megawatts of capacity annually from the jointly owned Plant Scherer Unit 3 for the period from June 2010 through December 2015. The contract provides for fixed capacity payments and variable energy payments based on actual energy delivered. The contract is contingent upon certain events, including approval of the Florida PSC. The final outcome of this matter cannot now be determined.

     See MANAGEMENT’S DISCUSSION AND ANALYSIS – RESULTS OF OPERATION – “Future Earnings Potential – Other Matters” of Georgia Power in Item 7 of the Form 10-K for information on nuclear security measures. Georgia Power has implemented plans for the measures ordered by the NRC to be in effect on October 29, 2004 and is in compliance with the requirements. Georgia Power, based on its ownership interest, currently estimates its expenditures related to these security measures will total $9.8 million, of which $1.4 million will be capitalized. These estimates are subject to change in the event additional NRC guidance is provided.

55

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

     On October 22, 2004, President Bush signed the American Jobs Creation Act of 2004 (Jobs Act) into law. The Jobs Act represents the most significant revision to the Internal Revenue Code since 1986. Congress must still develop the regulations that will implement the requirements of the Jobs Act. Georgia Power is currently assessing the impact of the Jobs Act on its taxable income. However, Georgia Power currently does not expect the Jobs Act to have a material impact on its financial statements.

     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 MANAGEMENT’S DISCUSSION AND ANALYSIS — ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Georgia Power in Item 7 of the Form 10-K for a complete discussion of Georgia Power’s critical accounting policies and estimates related to Electric Utility Regulation 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 FASB 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 established to issue preferred securities since Georgia Power does not meet the definition of primary beneficiary established by FASB Interpretation No. 46R. See Note (D) to the Condensed Financial Statements herein for additional information related to the adoption of FASB Interpretation No. 46R.

     In the third quarter 2004, Georgia Power prospectively adopted FASB Staff Position (FSP) 106-2, Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Medicare Act). The Medicare Act provides a 28% prescription drug subsidy for Medicare eligible retirees. FSP 106-2 requires recognition of the impacts of the Medicare Act in the accumulated post-retirement benefit obligation (APBO) and future cost of service for post-retirement medical

56

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

plans and may be applied retroactively to the enactment of the Medicare Act in December 2003 or prospectively effective for the third quarter 2004. Georgia Power elected to apply this treatment prospectively. The effect of the subsidy reduced Georgia Power’s expenses for the three months ended September 30, 2004 by approximately $2.3 million and is expected to have a similar impact on future expenses. The subsidy’s impact on the post-retirement medical plan APBO was a reduction of approximately $72 million. However, the ultimate impact on future periods is subject to federal regulations governing the subsidy created in the Medicare Act being finalized. See Note (G) to the Condensed Financial Statements herein for additional information.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Major changes in Georgia Power’s financial condition during the first nine months of 2004 included the addition of approximately $856 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities and equity funds from Southern Company. See Georgia Power’s Condensed Statements of Cash Flows herein for further details.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Georgia Power in Item 7 of 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 $302 million will be required by September 30, 2005 for redemptions and maturities of long-term debt. The purchase of the McIntosh construction project temporarily increased short-term borrowings under the commercial paper program in the second quarter. The temporary increase was replaced by long-term debt in the third quarter. See “Financing Activities” herein for additional information. The projected construction program will increase by $437.8 million and $27.4 million in 2004 and 2005, respectively, for the McIntosh construction project and the projected purchased power commitments will decrease by $133.2 million in 2005-2006, $147.5 million in 2007-2008 and $885.2 million beyond 2008 as a result of the purchase of the construction project.

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 BUSINESS — “Financing Programs” in Item 1 of the Form 10-K for additional information.

     At September 30, 3004, Georgia Power’s current liabilities exceeded current assets as a result of $302 million principal amount of current maturities of long-term notes and lease obligations. Georgia Power plans to obtain the funds required for redemption from new security issuances. To meet short-term cash needs and contingencies, Georgia Power had at September 30, 2004 approximately $34 million of cash and cash equivalents and $773 million of unused credit arrangements with banks. Of these facilities, $423 million expire in 2005 and contain provisions allowing two-year term loans executable at expiration; and the remaining $350 million expire in 2007. Georgia Power expects to renew its credit facilities, as needed, prior to expiration. These unused credit arrangements provide liquidity support to Georgia Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Georgia Power may also meet short-term cash needs through

57

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

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 September 30, 2004, Georgia Power had no commercial paper outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.

Credit Rating Risk

Georgia Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to 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 September 30, 2004, the maximum potential collateral requirements were approximately $228 million. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit or cash.

     Georgia Power 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 September 30, 2004, Georgia Power had no material exposure related to these agreements.

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 September 30, 2004 was as follows:

	Third Quarter
	2004			Year-to-Date
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	7,955		$	3,155
Contracts realized or settled		(4,754	)		(9,532	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		12,193			21,771
Contracts at September 30, 2004	$	15,394		$	15,394

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

58

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

	Source of September 30, 2004
	Valuation Prices
				Maturity
	Total
	Fair Value			Year 1			1-3 Years
	(in thousands)
Actively quoted	$	15,848		$	14,564		$	1,284
External sources		(454	)		(454	)		—
Models and other methods		—			—			—
Contracts at September 30, 2004	$	15,394		$	14,110		$	1,284

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

Financing Activities

In January 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.

     In August 2004, Georgia Power issued $125 million of Series V 4.10% Senior Notes due August 15, 2009 and $125 million of Series W 6% Senior Notes due August 15, 2044. The proceeds from these sales were used to repay its short-term indebtedness incurred in part to purchase the Plant McIntosh units 10 and 11 construction project and for its continuous construction program. Upon the sale of the securities, interest rate swaps of $250 million were terminated at a loss of $12.1 million. The loss from the terminated swaps was deferred in Other Comprehensive Income and will be amortized to income over a 10-year period.

     In addition to any financings that may be necessary to meet Georgia Power’s capital requirements and contractual obligations, Georgia 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.

59

GULF POWER COMPANY

60

GULF POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
Operating Revenues:
Retail sales	$	215,087		$	205,327		$	571,360		$	540,789
Sales for resale —
Non-affiliates		18,980			19,608			56,938			56,241
Affiliates		24,488			17,313			67,147			39,944
Other revenues		10,831			10,641			30,030			28,962
Total operating revenues		269,386			252,889			725,475			665,936
Operating Expenses:
Fuel		100,649			96,531			269,843			237,596
Purchased power —
Non-affiliates		6,478			3,166			24,635			13,051
Affiliates		18,048			10,194			33,319			27,860
Other operations		31,191			30,737			100,639			94,174
Maintenance		13,612			11,447			46,591			45,284
Depreciation and amortization		20,674			20,373			61,948			60,949
Taxes other than income taxes		19,106			18,896			53,245			52,012
Total operating expenses		209,758			191,344			590,220			530,926
Operating Income		59,628			61,545			135,255			135,010
Other Income and (Expense):
Interest expense, net of amounts capitalized		(7,468	)		(7,191	)		(23,500	)		(23,498	)
Interest expense to affiliate trusts		(1,148	)		—			(2,295	)		—
Distributions on mandatorily redeemable preferred securities		—			(1,901	)		(1,113	)		(5,823	)
Other income (expense), net		(1,204	)		500			(1,277	)		(179	)
Total other income and (expense)		(9,820	)		(8,592	)		(28,185	)		(29,500	)
Earnings Before Income Taxes		49,808			52,953			107,070			105,510
Income taxes		17,854			20,101			39,167			39,793
Net Income		31,954			32,852			67,903			65,717
Dividends on Preferred Stock		54			54			162			162
Net Income After Dividends on Preferred Stock	$	31,900		$	32,798		$	67,741		$	65,555

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2004			2003		2004		2003
	(in thousands)					(in thousands)
Net Income After Dividends on Preferred Stock	$	31,900		$	32,798	$	67,741	$	65,555
Other comprehensive income (loss):
Change in fair value of marketable securities, net of tax of $(40)		(63	)		—		—		—
Changes in fair value of qualifying hedges, net of tax of $198 and $(1,228), respectively		—			314		—		(1,956	)
Less: Reclassification adjustment for amounts included in net income net of tax of $32 and $94, respectively		50			—		151		—
COMPREHENSIVE INCOME	$	31,887		$	33,112	$	67,892	$	63,599

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

61

GULF POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Nine Months
	Ended September 30,
	2004			2003
	(in thousands)
Operating Activities:
Net income	$	67,903		$	65,717
Adjustments to reconcile net income
to net cash provided from operating activities  —
Depreciation and amortization		66,439			65,161
Deferred income taxes		36,691			3,890
Pension, postretirement, and other employee benefits		(714	)		4,579
Tax benefit of stock options		2,401			1,596
Other, net		(901	)		(11,027	)
Changes in certain current assets and liabilities —
Receivables, net		(8,915	)		(4,767	)
Fossil fuel stock		4,629			4,946
Materials and supplies		(2,345	)		(3,430	)
Other current assets		(12,214	)		28,042
Accounts payable		7,847			(5,594	)
Accrued taxes		10,542			15,019
Accrued compensation		(721	)		(2,253	)
Other current liabilities		(1,040	)		8,707
Net cash provided from operating activities		169,602			170,586
Investing Activities:
Gross property additions		(106,660	)		(64,806	)
Cost of removal net of salvage		(5,069	)		(5,628	)
Investment in property damage fund		(6,700	)		(1,100	)
Other		75			(6,405	)
Net cash used for investing activities		(118,354	)		(77,939	)
Financing Activities:
Decrease in notes payable, net		(37,666	)		(28,479	)
Proceeds —
Pollution control bonds		—			61,625
Senior notes		110,000			225,000
Capital contributions from parent company		25,000			10,016
Redemptions —
Pollution control bonds		—			(61,625	)
Senior notes		(50,000	)		(151,757	)
Other long-term debt		—			(20,000	)
Mandatorily redeemable preferred securities		—			(40,000	)
Payment of preferred stock dividends		(162	)		(162	)
Payment of common stock dividends		(52,500	)		(52,650	)
Other		(2,066	)		(10,301	)
Net cash used for financing activities		(7,394	)		(68,333	)
Net Change in Cash and Cash Equivalents		43,854			24,314
Cash and Cash Equivalents at Beginning of Period		2,548			13,278
Cash and Cash Equivalents at End of Period	$	46,402		$	37,592
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $568 and $154 capitalized for 2004 and 2003, respectively)	$	25,170		$	30,647
Income taxes (net of refunds)	$	11,226		$	8,377

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

62

GULF POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

	At September 30,			At December 31,
Assets	2004			2003
	(in thousands)
Current Assets:
Cash and cash equivalents	$	46,402		$	2,548
Receivables —
Customer accounts receivable		54,590			44,001
Unbilled revenues		31,413			31,548
Under recovered regulatory clause revenues		22,641			21,812
Other accounts and notes receivable		5,215			6,179
Affiliated companies		8,807			9,826
Accumulated provision for uncollectible accounts		(1,332	)		(947	)
Fossil fuel stock, at average cost		30,725			35,354
Vacation pay		5,254			5,254
Materials and supplies, at average cost		38,275			35,930
Prepaid income taxes		11,153			4
Prepaid expenses		3,858			6,310
Other		11,612			4,981
Total current assets		268,613			202,800
Property, Plant, and Equipment:
In service		2,353,208			2,306,959
Less accumulated provision for depreciation		857,202			847,519
		1,496,006			1,459,440
Construction work in progress		66,088			49,438
Total property, plant, and equipment		1,562,094			1,508,878
Other Property and Investments		21,587			12,597
Deferred Charges and Other Assets:
Deferred charges related to income taxes		18,571			18,263
Prepaid pension costs		44,541			42,014
Unamortized debt issuance expense		6,621			6,877
Unamortized premium on reacquired debt		18,128			19,389
Other regulatory assets		109,193			19,058
Other		23,110			9,177
Total deferred charges and other assets		220,164			114,778
Total Assets	$	2,072,458		$	1,839,053

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

63

GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At September 30,			At December 31,
Liabilities and Stockholder's Equity	2004			2003
	(in thousands)
Current Liabilities:
Securities due within one year	$	75,000		$	50,000
Notes payable		—			37,666
Accounts payable —
Affiliated		33,761			26,945
Other		105,354			21,952
Customer deposits		19,634			18,271
Accrued taxes —
Income taxes		7,514			6,405
Other		19,164			8,621
Accrued interest		6,816			8,077
Accrued vacation pay		5,254			5,254
Accrued compensation		12,735			13,456
Other		11,231			9,694
Total current liabilities		296,463			206,341
Long-term Debt		549,559			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		213,855			175,685
Deferred credits related to income taxes		24,357			26,545
Accumulated deferred investment tax credits		18,979			20,451
Employee benefit obligations		54,175			52,395
Other cost of removal obligations		159,223			151,229
Miscellaneous regulatory liabilities		2,195			27,903
Other		73,100			27,083
Total deferred credits and other liabilities		545,884			481,291
Total Liabilities		1,464,072			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		392,253			364,852
Premium on preferred stock		12			12
Retained earnings		176,448			161,208
Accumulated other comprehensive loss		(2,623	)		(2,774	)
Total common stockholder’s equity		604,150			561,358
Total Liabilities and Stockholder’s Equity	$	2,072,458		$	1,839,053

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

64

GULF POWER COMPANY

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

THIRD QUARTER 2004 vs. THIRD QUARTER 2003
AND
YEAR-TO-DATE 2004 vs. YEAR-TO-DATE 2003

RESULTS OF OPERATIONS

Earnings

Gulf Power’s net income after dividends on preferred stock for the third quarter and year-to-date 2004 was $31.9 million and $67.7 million, respectively, compared to $32.8 million and $65.6 million, respectively, for the corresponding periods in 2003. Earnings in the third quarter 2004 decreased by $0.9 million, or 2.7%, due to higher operating expenses and reduced revenues as a result of outages from Hurricane Ivan. Earnings increased year-to-date 2004 by $2.2 million, or 3.3%, primarily due to a reduction in interest expense arising from refinancing of higher cost debt.

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Third Quarter						Year-To-Date
	(in thousands)			%			(in thousands)			%
Retail sales	$	9,760			4.8		$	30,571			5.7
Sale for resale – affiliates		7,175			41.4			27,203			68.1
Fuel expense		4,118			4.3			32,247			13.6
Purchased power – non-affiliates		3,312			104.6			11,584			88.8
Purchased power – affiliates		7,854			77.0			5,459			19.6
Other operations expense		454			1.5			6,465			6.9
Maintenance expense		2,165			18.9			1,307			2.9
Other income (expense), net		1,704			N/M			1,098			N/M
Income taxes		(2,247	)		(11.2	)		(626	)		(1.6	)

N/M Not meaningful

     Retail sales.Excluding the recovery of fuel expense and certain other expenses that do not affect net income, retail sales decreased by $0.4 million, or 0.3%, for the third quarter 2004 and increased by $4.5 million, or 1.5%, year-to-date 2004 when compared to the corresponding periods in 2003. Retail sales revenues for the third quarter 2004 were lower than the corresponding period in 2003 due primarily to the power outages resulting from Hurricane Ivan in September 2004. Approximately 90% of Gulf Power’s 405,000 customers were without electrical service immediately after the hurricane struck. Almost 72% of those without power had service restored within one week, and two weeks after the storm, power had been restored to all who could receive service. Based on current projections, retail sales revenues lost as a result of the power outages from Hurricane Ivan are not expected to have a material impact on net income of Gulf Power for the year ending December 31, 2004. For year-to-date 2004, retail sales revenues were higher than the corresponding period in 2003 primarily due to an increase in the number of customers and more favorable weather in the first two quarters of 2004. During the third quarter 2004, retail energy sales to residential, commercial and industrial customers decreased by 1.0%, 1.3% and 6.2%, respectively, as compared to the same period in 2003. For year-to-date 2004 as compared to 2003, retail energy sales to residential and commercial customers increased by

65

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

1.0% and 1.5%, respectively, while energy sales to industrial customers decreased by 3.2%. The decreases in industrial sales for the third quarter and year-to-date 2004 are primarily the result of permanent load reductions and customer operational issues, which vary from period to period.

     Sales for resale – affiliates and Purchased power – affiliates. Revenues from sales for resale to affiliates and 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 this energy is generally sold at marginal cost and energy purchases are generally offset by revenues through Gulf Power’s fuel cost recovery mechanism. The increases in the third quarter and year-to-date 2004 sales for resale to affiliates are due to increased sales of available generation to affiliate companies at a higher unit cost resulting from higher fuel prices. The increases in purchased power from affiliates in the third quarter and year-to-date 2004 are primarily due to higher fuel prices and an increase in capacity payments resulting from Gulf Power’s increased load growth.

     Fuel expense.During the third quarter 2004, fuel expense increased from the corresponding period in 2003 primarily due to higher coal and natural gas prices. The increase in fuel expense for year-to-date 2004 is primarily due to a greater percentage of generation needs coming from higher priced natural gas units and higher fuel prices. Since fuel expenses are generally offset by revenues through Gulf Power’s fuel cost recovery mechanism, these expenses do not have a material impact on net income.

     Purchased power – non-affiliates.The increases for the third quarter and year-to-date 2004, when compared to the corresponding periods in 2003, are primarily the result of power purchased from merchant generation resources in order to minimize total production cost. Since energy expenses are generally offset by revenues through Gulf Power’s fuel cost recovery mechanism, these expenses do not have a significant impact on net income.

     Other operations expense.The increase in other operations expense for year-to-date 2004 when compared to the corresponding period in 2003 is primarily due to a $3.5 million increase in employee benefit expenses, a $1.5 million increase in expenses related to marketing conservation programs and a $1.4 million increase in accrued expenses for uninsured litigation and workers compensation claims.

     Maintenance expense.The increases in maintenance expense during the third quarter and year-to-date 2004 are due primarily to unscheduled plant maintenance when compared to the corresponding periods in 2003.

     Other income (expense), net.The increases in this net expense for the third quarter and year-to-date 2004 are primarily due to an increase in charitable donations, when compared to the same periods in 2003.

     Income taxes.The decreases in income tax expense during the third quarter and year-to-date 2004 are primarily due to a decrease in 2004 taxable income resulting from a state tax credit for a charitable donation.

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

66

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

conservation practiced by customers, the price of electricity, the price elasticity of demand and the rate of economic growth in Gulf Power’s service area. For additional information relating to these issues, see BUSINESS — The SOUTHERN System — “Risk Factors” in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS — “Future Earnings Potential” of Gulf Power in Item 7 of the Form 10-K.

Environmental Matters

New Source Review Actions

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 – RESULTS OF OPERATIONS – “Future Earnings Potential - Environmental Matters” of Gulf Power in Item 7 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 enforcement 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 in the New Source Review litigation described in Item 8 of the Form 10-K could require substantial capital expenditures and could possibly require payment of substantial penalties that cannot be determined at this time. This could affect future results of operations, cash flows and possibly financial condition if such costs are not recovered through regulated rates.

Global Warming Litigation

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

67

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

Other Environmental Matters

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

     See MANAGEMENT’S DISCUSSION AND ANALYSIS – “Future Earnings Potential - Environmental Matters – Environmental Statutes and Regulations” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “Environmental Cost Recovery” in Item 8 of the Form 10-K and Note (O) to the Condensed Financial Statements herein for information on liabilities associated with environmental remediation projects. During the third quarter 2004, Gulf Power increased its estimated liability for these projects by approximately $47 million as a result of revised rules and changes in the extent of remediation expected to be required by the Florida Department of Environmental Protection (FDEP). The majority of the remediation areas are active substation sites. The schedule for completion of the remediation projects will be subject to FDEP approval. The projects have been approved by the Florida PSC for recovery, as expended, through Gulf Power’s environmental cost recovery clause; therefore, there was no impact on Gulf Power’s net income as a result of these revised estimates.

FERC and Florida PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS – “Future Earnings Potential – FERC Matters – Market Based Rate Authority” of Gulf Power 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. This new interim approach requires utilities to submit 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.

     On July 8, 2004, the FERC denied Southern Company’s request for rehearing, along with a number of others, and reaffirmed the interim tests that it adopted in April. Southern Company submitted the required analyses on August 9, 2004. In that filing, Southern Company passed the pivotal supplier analysis for all markets and the wholesale market share analysis for all markets except the Southern Company control area. Southern Company also submitted other analyses to demonstrate that it lacks generation market power. This filing remains pending at the FERC. Southern Company, along with other utilities, has also filed an appeal of the FERC’s April 14, 2004 order with the Circuit Court of Appeals in Washington, D.C. In the event that the FERC’s default mitigation measures are ultimately applied, Gulf Power may be required to charge cost-based rates for certain wholesale sales, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

68

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

Transmission

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

Storm Damage Cost Recovery

On September 15 and 16, 2004, Hurricane Ivan hit the Gulf Coast of Florida and Alabama causing substantial damage in Gulf Power’s service territory. Gulf Power maintains an accumulated provision 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. Prior to Hurricane Ivan, the balance in the accumulated provision for property damage was approximately $28 million. The estimated total amount of damage related to Hurricane Ivan charged to the accumulated provision for property damage as of September 2004 was $75.5 million. Gulf Power’s current annual accrual to the accumulated provision for property damage, as approved by the Florida PSC, is $3.5 million. The Florida PSC has also approved additional accrual amounts at Gulf Power’s discretion. Gulf Power is currently reviewing alternatives that would potentially allow for more rapid recovery of these costs. See Note 1 to Gulf Power’s financial statements under “Provision for Property Damage” in Item 8 of the Form 10-K for additional information.

Other Matters

On August 12, 2004, Georgia Power and Gulf Power entered into a PPA with Florida Power & Light (FP&L). Under the agreement, Georgia Power and Gulf Power will provide FP&L with 165 megawatts of capacity annually from the jointly owned Plant Scherer Unit 3 for the period from June 2010 through December 2015. The contract provides for fixed capacity payments and variable energy payments based on actual energy delivered. The contract is contingent upon certain events, including approval of the Florida PSC. The final outcome of this matter cannot now be determined.

     On October 22, 2004, President Bush signed the American Jobs Creation Act of 2004 (the Jobs Act) into law. The Jobs Act represents the most significant revision to the Internal Revenue Code since 1986. Congress must still develop the regulations that will implement the requirements of the Jobs Act. Gulf Power is currently assessing the impact of the Jobs Act on its taxable income. However, Gulf Power currently does not expect the Jobs Act to have a material impact on its financial statements.

     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.

69

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

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

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 FASB 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 FASB Interpretation No. 46R. See Note (D) to the Condensed Financial Statements herein for additional information related to the adoption of FASB Interpretation No. 46R.

     In the third quarter 2004, Gulf Power prospectively adopted FASB Staff Position (FSP) 106-2, Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Medicare Act). The Medicare Act provides a 28% prescription drug subsidy for Medicare eligible retirees. FSP 106-2 requires recognition of the impacts of the Medicare Act in the accumulated post-retirement benefit obligation (APBO) and future cost of service for post-retirement medical plans and may be applied retroactively to the enactment of the Medicare Act in December 2003 or prospectively effective for the third quarter 2004. Gulf Power elected to apply this treatment prospectively. The effect of the subsidy reduced Gulf Power’s expenses for the three months ended September 30, 2004 by approximately $0.2 million and is expected to have a similar impact on future expenses. The subsidy’s impact on the post-retirement medical plan APBO was a reduction of approximately $8 million. However, the ultimate impact on future periods is subject to federal regulations governing the subsidy created in the Medicare Act being finalized. See Note (G) to the Condensed Financial Statements herein for additional information.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Major changes in Gulf Power’s financial condition during the first nine months of 2004 included the addition of approximately $106.7 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.

70

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

Capital Requirements and Contractual Obligations

Reference is made to MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Gulf Power in Item 7 of the Form 10-K for a description of Gulf Power’s capital requirements for its construction program, lease obligations, purchase commitments and trust funding requirements. Approximately $75 million will be required by September 30, 2005 for redemptions and maturities of long-term debt.

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 and issuances of unsecured debt, trust preferred securities, preferred stock 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 BUSINESS – “Financing Programs” in Item 1 of the Form 10-K for additional information.

     At September 30, 2004, Gulf Power’s current liabilities exceeded current assets as a result of the scheduled redemption of $75 million principal amount of 6.10% senior notes, originally due in 2016. These notes were redeemed in October 2004 with proceeds from the Series K 4.90% Senior Notes due October 1, 2014 that were issued in September. See “Financing Activities” herein for additional information. To meet short-term cash needs and contingencies, Gulf Power has various internal and external sources of liquidity. In addition, Gulf Power has substantial cash flow from operating activities. At September 30, 2004, Gulf Power had approximately $46.4 million of cash and cash equivalents and $56.5 million of unused committed lines of credit with banks which expire in 2005. Gulf Power expects to renew its credit facilities, as needed, prior to expiration. 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 September 30, 2004, Gulf Power had no commercial paper outstanding. Subsequent to September 30, 2004, Gulf Power entered into loan agreements for $50 million maturing October 21, 2005 and $100 million maturing October 28, 2005. Proceeds from these borrowings were used for general corporate purposes and to finance repairs to Gulf Power’s electric system for damage suffered as a result of Hurricane Ivan. Management believes that the need for working capital can be adequately met by utilizing lines of credit, commercial paper and bank notes without maintaining large cash balances.

Credit Rating Risk

Gulf Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. Gulf Power is party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade. These agreements are primarily for natural gas price risk management activities. At September 30, 2004, Gulf Power had no material exposure related to these agreements.

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

71

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

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 the 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 September 30, 2004 was as follows:

	Third Quarter
	2004			Year-to-Date
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	3,393		$	2,504
Contracts realized or settled		(2,714	)		(6,513	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		5,523			10,211
Contracts at September 30, 2004	$	6,202		$	6,202

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

	Source of September 30, 2004
	Valuation Prices
	Total			Maturity
	Fair Value			Year 1			1-3 Years
	(in thousands)
Actively quoted	$	6,279		$	5,924		$	355
External sources		(77	)		(77	)		—
Models and other methods		—			—			—
Contracts at September 30, 2004	$	6,202		$	5,847		$	355

     See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Gulf Power in Item 7 of 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 (F) to the Condensed Financial Statements herein for further information.

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.

     In September 2004, Gulf Power issued $75 million of Series K 4.90% Senior Notes due October 1, 2014. The proceeds from this issue were used to redeem the $75 million outstanding principle amount of its Series D 6.10% Senior Notes on October 22, 2004.

72

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

     Subsequent to September 30, 2004, Gulf Power entered into loan agreements for $50 million maturing October 21, 2005 and $100 million maturing October 28, 2005. Proceeds from these borrowings were used for general corporate purposes and to finance repairs to Gulf Power’s electric system for damage suffered as a result of Hurricane Ivan.

     In addition to any financings that may be necessary to meet Gulf Power’s capital requirements and contractual obligations, Gulf 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.

73

MISSISSIPPI POWER COMPANY

74

MISSISSIPPI POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
Operating Revenues:
Retail sales	$	167,770		$	150,860		$	448,186		$	398,888
Sales for resale —
Non-affiliates		72,077			67,396			206,812			197,141
Affiliates		14,481			5,968			34,848			17,856
Contract termination		—			—			—			62,111
Other revenues		4,236			3,590			11,231			10,064
Total operating revenues		258,564			227,814			701,077			686,060
Operating Expenses:
Fuel		97,081			66,109			249,971			172,829
Purchased power —
Non-affiliates		6,783			3,121			26,831			14,449
Affiliates		13,966			21,194			54,119			59,281
Other operations		40,261			38,560			114,371			123,466
Maintenance		14,192			12,397			47,408			45,408
Depreciation and amortization		10,051			13,968			30,068			40,943
Taxes other than income taxes		14,486			14,148			41,675			41,231
Total operating expenses		196,820			169,497			564,443			497,607
Operating Income		61,744			58,317			136,634			188,453
Other Income and (Expense):
Interest expense		(3,064	)		(3,383	)		(8,915	)		(10,920	)
Interest expense to affiliate trusts		(650	)		—			(1,299	)		—
Distributions on mandatorily redeemable preferred securities		—			(630	)		(630	)		(1,890	)
Other income (expense), net		135			2,170			518			2,935
Total other income and (expense)		(3,579	)		(1,843	)		(10,326	)		(9,875	)
Earnings Before Income Taxes		58,165			56,474			126,308			178,578
Income taxes		22,151			21,584			48,118			68,226
Net Income		36,014			34,890			78,190			110,352
Dividends on Preferred Stock		433			503			3,399			1,510
Net Income After Dividends on Preferred Stock	$	35,581		$	34,387		$	74,791		$	108,842

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2004			2003		2004			2003
	(in thousands)					(in thousands)
Net Income After Dividends on Preferred Stock	$	35,581		$	34,387	$	74,791		$	108,842
Other comprehensive income (loss):
Change in fair value of marketable securities, net of tax of $(49)		(80	)		—		—			—
Changes in fair value of qualifying hedges, net of tax net of tax of $580 and $(820), respectively		936			—		(1,324	)		—
COMPREHENSIVE INCOME	$	36,437		$	34,387	$	73,467		$	108,842

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

75

MISSISSIPPI POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Nine Months
	Ended September 30,
	2004			2003
	(in thousands)
Operating Activities:
Net income	$	78,190		$	110,352
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		33,351			46,180
Deferred income taxes and investment tax credits, net		30,187			3,682
Pension, postretirement, and other employee benefits		(273	)		471
Tax benefit of stock options		834			1,876
Other, net		(4,564	)		(532	)
Changes in certain current assets and liabilities —
Receivables, net		(24,233	)		8,846
Fossil fuel stock		3,985			(3,914	)
Materials and supplies		(372	)		64
Other current assets		(9,996	)		8,643
Accounts payable		(8,928	)		(29,609	)
Accrued taxes		9,071			7,138
Accrued compensation		(3,506	)		(5,352	)
Other current liabilities		(23,365	)		(6,922	)
Net cash provided from operating activities		80,381			140,923
Investing Activities:
Gross property additions		(44,837	)		(41,636	)
Cost of removal net of salvage		(3,747	)		(4,282	)
Other		(2,504	)		(1,884	)
Net cash used for investing activities		(51,088	)		(47,802	)
Financing Activities:
Increase in notes payable, net		14,976			—
Proceeds —
Senior notes		40,000			90,000
Preferred stock		30,000			—
Capital contributions from parent company		—			79
Redemptions —
First mortgage bonds		—			(33,350	)
Pollution control bonds		—			(850	)
Senior notes		(80,000	)		(86,628	)
Preferred stock		(28,388	)		—
Payment of preferred stock dividends		(1,395	)		(1,510	)
Payment of common stock dividends		(49,650	)		(49,500	)
Other		(630	)		(1,185	)
Net cash used for financing activities		(75,087	)		(82,944	)
Net Change in Cash and Cash Equivalents		(45,794	)		10,177
Cash and Cash Equivalents at Beginning of Period		69,120			62,695
Cash and Cash Equivalents at End of Period	$	23,326		$	72,872
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest	$	8,241		$	12,918
Income taxes (net of refunds)	$	1,798		$	47,589

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

76

MISSISSIPPI POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

	At September 30,			At December 31,
Assets	2004			2003
	(in thousands)
Current Assets:
Cash and cash equivalents	$	23,326		$	69,120
Receivables —
Customer accounts receivable		39,533			30,514
Unbilled revenues		19,536			19,278
Under recovered regulatory clause revenues		24,872			14,607
Other accounts and notes receivable		8,466			8,088
Affiliated companies		16,391			12,160
Accumulated provision for uncollectible accounts		(815	)		(897	)
Fossil fuel stock, at average cost		21,248			25,233
Vacation pay		5,766			5,766
Materials and supplies, at average cost		24,042			23,670
Assets from risk management activities		12,251			2,672
Prepaid income taxes		15,535			27,415
Prepaid expenses		3,327			4,518
Total current assets		213,478			242,144
Property, Plant, and Equipment:
In service		1,867,204			1,841,667
Less accumulated provision for depreciation		691,893			679,939
		1,175,311			1,161,728
Construction work in progress		28,479			25,844
Total property, plant, and equipment		1,203,790			1,187,572
Other Property and Investments		5,041			2,934
Deferred Charges and Other Assets:
Deferred charges related to income taxes		11,573			12,125
Prepaid pension costs		18,911			18,167
Unamortized debt issuance expense		7,029			6,993
Unamortized loss on reacquired debt		9,625			10,201
Prepaid rent		13,345			14,758
Other		8,798			16,280
Total deferred charges and other assets		69,281			78,524
Total Assets	$	1,491,590		$	1,511,174

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

77

MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At September 30,			At December 31,
Liabilities and Stockholder's Equity	2004			2003
	(in thousands)
Current Liabilities:
Securities due within one year	$	—		$	80,000
Notes payable		14,976			—
Accounts payable —
Affiliated		19,415			21,259
Other		44,720			55,309
Customer deposits		7,735			11,863
Accrued taxes —
Income taxes		18,591			1,696
Other		35,010			42,834
Accrued interest		3,838			3,223
Accrued vacation pay		5,766			5,766
Accrued compensation		20,325			23,832
Regulatory clauses over recovery		7,586			31,118
Other		8,545			4,867
Total current liabilities		186,507			281,767
Long-term Debt		242,495			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		158,567			142,088
Deferred credits related to income taxes		22,125			23,279
Accumulated deferred investment tax credits		18,951			19,841
Employee benefit obligations		54,083			54,830
Plant Daniel lease guarantee obligation, at fair value		13,345			14,758
Plant Daniel capacity		47,919			60,300
Other cost of removal obligations		76,172			73,378
Miscellaneous regulatory liabilities		12,751			11,899
Other		31,125			27,248
Total deferred credits and other liabilities		435,038			427,621
Total Liabilities		900,122			946,876
Cumulative Preferred Stock		33,421			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		293,350			292,515
Premium on preferred stock		23			326
Retained earnings		229,769			203,419
Accumulated other comprehensive loss		(2,786	)		(1,462	)
Total common stockholder’s equity		558,047			532,489
Total Liabilities and Stockholder’s Equity	$	1,491,590		$	1,511,174

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

78

MISSISSIPPI POWER COMPANY

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

THIRD QUARTER 2004 vs. THIRD QUARTER 2003
AND
YEAR-TO-DATE 2004 vs. YEAR-TO-DATE 2003

RESULTS OF OPERATIONS

Earnings

Mississippi Power’s net income after dividends on preferred stock for the third quarter and year-to-date 2004 was $35.6 million and $74.8 million, respectively, compared to $34.4 million and $108.8 million, respectively, for the corresponding periods of 2003. Earnings for year-to-date 2004 decreased $34 million, or 31.3%, primarily as a result of the 2003 gain of $38 million after tax related to the termination of a PPA with Dynegy and related 2003 contract revenue of $10 million after-tax. This decrease was partially offset by the net impact of a $6 million after tax decrease in other operations expense related to costs incurred in the third quarter of 2003 to restructure the lease agreement for the combined cycle generating units at Plant Daniel and a decrease of $8 million after tax in depreciation and amortization resulting from the impact of the Mississippi PSC’s order approving the inclusion of the additional Plant Daniel capacity in jurisdictional cost of service. See Note 3 to the financial statements of Mississippi Power under “Contract Termination” and “Retail Regulatory Filing” in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements herein for additional information.

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Third Quarter						Year-To-Date
	(in thousands)			%			(in thousands)			%
Retail sales	$	16,910			11.2		$	49,298			12.4
Sales for resale — non-affiliates		4,681			6.9			9,671			4.9
Sale for resale — affiliates		8,513			142.6			16,992			95.2
Fuel expense		30,972			46.8			77,142			44.6
Purchased power — non-affiliates		3,662			117.3			12,382			85.7
Purchased power — affiliates		(7,228	)		(34.1	)		(5,162	)		(8.7	)
Other operations expense		1,701			4.4			(9,095	)		(7.4	)
Maintenance expense		1,795			14.5			2,000			4.4
Depreciation and amortization		(3,917	)		(28.0	)		(10,875	)		(26.6	)
Interest expense		(319	)		(9.4	)		(2,005	)		(18.4	)
Other income (expense), net		(2,035	)		(93.8	)		(2,417	)		(82.4	)
Income taxes		567			2.6			(20,108	)		(29.5	)
Dividends on preferred stock		(70	)		(13.9	)		1,889			125.1

     Retail sales.Retail sales revenue increased $16.9 million, or 11.2%, in the third quarter 2004 and $49.3 million or 12.4% year-to-date 2004 when compared to the same periods in 2003. The increases in retail sales revenues are primarily the result of increases of $15.3 million in the third quarter 2004 and $47.6 million year-to-date 2004 in fuel cost recovery revenues, which generally do not have an effect on income. Retail sales revenues, excluding fuel revenues, for the third quarter 2004 to residential and commercial customers remained mostly constant while retail sales to industrial customers, excluding fuel revenues, decreased 2.2% primarily as a result of the effects Hurricane Ivan when compared to the same period in 2003. Retail sales revenues, excluding fuel revenues, for year-to-date 2004 from residential, commercial and industrial customers

79

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

remained mostly constant as compared to the same period in 2003.

     Sales for resale — non-affiliates.The increases in sales for resale to non-affiliates in the third quarter and year-to-date 2004 as compared to the same periods in 2003 are primarily due to the increases of $6.6 million and $13.3 million, respectively, in revenue from wholesale territorial customers that were offset by decreases of $1.9 million and $3.7 million, respectively, in revenue from non-territorial customers. The increases in the third quarter and year-to-date 2004 revenue from wholesale territorial customers as compared to the same periods in 2003 are the result of increases in the price per kilowatt-hour due to fuel cost. The decreases in the third quarter and year to date 2004 revenue from wholesale non-territorial customers as compared to the same period in 2003 are the result of the loss of capacity revenues as a result of the termination of the Dynegy contract in 2003.

     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 is primarily a result of more generation available for sale. The increase in purchased power from affiliates is primarily due to the increase in the cost of fuel.

     Fuel expense.In the third quarter and year-to-date 2004, fuel expense increased when compared to the same periods in 2003 as a result of 10.5% and 10.3% increases in generation, respectively, and 20.4% and 29.0% increases in the cost of gas, respectively. Since energy expenses are generally offset by energy revenues through Mississippi Power’s retail and wholesale fuel cost recovery clauses, these expenses do not have a significant impact on earnings.

     Purchased power — non-affiliates. The third quarter and year-to-date 2004 purchased power from non-affiliates increased due to higher fuel prices in 2004.

     Other operations expense.The third quarter and year-to-date 2004 decreases in other operations expense when compared to the same periods in 2003 are a result of approximately $11 million incurred during the third quarter 2003 to restructure the lease agreement for the combined cycle generating units at Plant Daniel. See Note 7 to the financial statements of Mississippi Power under “Operating Leases — Plant Daniel Combined Cycle Generating Units” in Item 8 of the Form 10-K for additional information.

     Maintenance expense.The third quarter and year-to-date 2004 increases in maintenance expense when compared to the same periods in 2003 are primarily a result of higher operating hours at the combined cycle units in 2004 and resulting higher expense. See Note 7 to the financial statements of Mississippi Power under “Long-Term Service Agreements” in Item 8 of the Form 10-K for additional information.

     Depreciation and amortization.The third quarter and year-to-date 2004 decreases in depreciation and amortization expense when compared to the same periods in 2003 are primarily the result of the amortization of a regulatory liability as approved by the Mississippi PSC. The Mississippi PSC issued an interim accounting order in December 2003 directing Mississippi Power to expense and record in 2003 a regulatory liability in the amount of approximately $60 million. Mississippi Power recorded a credit to expense in the amount of $4.1 million and $12.4 million for the quarter and year-to-date 2004, respectively, to amortize this regulatory liability retroactive to January 1, 2004. See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Filing” in Item 8 of the Form 10-K and “Future Earnings Potential — FERC and Mississippi

80

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

PSC Matters — Retail Rate Filing” and Note (K) to the Condensed Financial Statements herein for additional information.

     Interest expense.The decreases in interest expense for the third quarter and year-to-date 2004 as compared to the same periods in 2003 are a result of lower interest rates. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Financing Activities” of Mississippi Power in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY — “Financing Activities” herein for further information on efforts to reduce interest rates.

     Other income (expense), net.The third quarter and year-to-date 2004 decreases in other income (expense), net of $2 million, or 93.8%, and $2.4 million, or 82.4%, respectively, are the result of lower revenue from miscellaneous contract work and a FERC settlement in July 2003 that resulted in the recognition, in the third quarter 2003, of $1.2 million of revenue previously reserved for refund. See Note 3 to the financial statements of Mississippi Power under “Transmission Facilities Agreement” in Item 8 of the Form 10-K.

     Income taxes.The third quarter and year-to-date 2004 income taxes increased $0.6 million, or 2.6%, and decreased $20.1 million, or 29.5%, respectively, as a direct result of the changes in earnings before income taxes when compared to the same periods in 2003.

     Dividends on preferred stock.The year-to-date 2004 increase in dividends on preferred stock is the result of a $2.0 million loss on the redemption of preferred stock recognized in the second quarter of 2004. The third quarter 2004 dividends on preferred stock remained fairly constant in comparison 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 Mississippi Power’s service area. For additional information relating to these issues, see BUSINESS — The SOUTHERN System — “Risk Factors” in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential” of Mississippi Power in Item 7 in the Form 10-K.

Environmental Matters

New Source Review Actions

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 MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — Environmental Matters” of Mississippi Power in Item 7 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

81

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

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 in the New Source Review litigation described in Item 8 of the Form 10-K could require substantial capital expenditures and could possibly require payment of substantial penalties that cannot be determined at this time. This could affect future results of operations, cash flows and possibly financial condition if such costs are not recovered through regulated rates.

Global Warming Litigation

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

Other Environmental Matters

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

FERC and Mississippi PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — FERC Matters — Market-Based Rate Authority” of Mississippi Power in Item 7 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. This new interim approach requires utilities to submit 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

82

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

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.

     On July 8, 2004, the FERC denied Southern Company’s request for rehearing, along with a number of others, and reaffirmed the interim tests that it adopted in April. Southern Company submitted the required analyses on August 9, 2004. In that filing, Southern Company passed the pivotal supplier analysis for all markets and the wholesale market share analysis for all markets except the Southern Company control area. Southern Company also submitted other analyses to demonstrate that it lacks generation market power. This filing remains pending at the FERC. Southern Company, along with other utilities, has also filed an appeal of the FERC’s April 14, 2004 order with the Circuit Court of Appeals in Washington, D.C. In the event that the FERC’s default mitigation measures are ultimately applied, Mississippi Power may be required to charge cost-based rates for certain wholesale sales, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time. See Note (B) to the Condensed Financial Statements under “FERC Matters” herein for additional information.

Transmission

See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — FERC Matters — Transmission” of Mississippi Power in Item 7 of 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 and standard electricity market design.

Retail Rate Filing

On December 5, 2003, Mississippi Power filed a request with the Mississippi PSC to reclassify 266 megawatts of Plant Daniel Units 3 and 4 generating capacity not currently included in jurisdictional cost of service. As part of Mississippi Power’s proposal to include the additional Plant Daniel capacity in retail rates, the Mississippi PSC issued an interim accounting order in December 2003 directing Mississippi Power to expense and record in 2003 a regulatory liability in the amount of approximately $60 million while the Mississippi PSC fully considered the entire request. On May 25, 2004, the Mississippi PSC issued an order related to this matter. The Mississippi PSC approved Mississippi Power’s request to reclassify the 266 megawatts of Plant Daniel unit 3 and 4 capacity to jurisdictional cost of service effective January 1, 2004 and authorized Mississippi Power to include the related costs and revenue credits in jurisdictional rate base, cost of service and revenue requirement calculations for purposes of retail rate recovery. As directed by the Mississippi PSC, Mississippi Power will amortize the regulatory liability established pursuant to the Mississippi PSC’s interim order in December 2003 as an increase to earnings as follows: $16.5 million in 2004, $25.1 million in 2005, $13.0 million in 2006 and $5.7 million in 2007. This amortization increased after tax earnings for the third quarter and year-to-date 2004 by $2.5 million and $7.7 million, respectively.

     In addition, the Mississippi PSC also approved Mississippi Power’s requested changes to its PEP rate schedule including the use of a forward-looking test year, with appropriate oversight; annual, rather than semi- annual, filings; and certain changes to the performance indicator mechanisms. Rate changes will be limited to 4% of retail revenues annually under the revised PEP. The Mississippi PSC will review all aspects of PEP in 2007. See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Filing” in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements herein.

83

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

Storm Damage Cost Recovery

During the month of September 2004, Mississippi Power’s service territory was impacted by Hurricane Ivan. As mandated by the Mississippi PSC, Mississippi Power maintains an accumulated provision 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 it generation facilities and other property. The total amount of damage related to this hurricane was estimated to be $7.6 million and was charged to the storm damage reserve in September 2004, leaving a balance in the reserve of $0.3 million. See Note 1 to the financial statements of Mississippi Power under “Provision for Property Damage” in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements herein for more information.

Other Matters

On October 22, 2004, President Bush signed the American Jobs Creation Act of 2004 (the Jobs Act) into law. The Jobs Act represents the most significant revision to the Internal Revenue Code since 1986. Congress must still develop the regulations that will implement the requirements of the Jobs Act. Mississippi Power is currently assessing the impact of the Jobs Act on its taxable income. However, Mississippi Power currently does not expect the Jobs Act to have a material impact on its financial statements.

     Mississippi Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Mississippi Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury and citizen enforcement of environmental requirements, 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 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 MANAGEMENT’S DISCUSSION AND ANALYSIS — ACCOUNTING POLICIES — “Application of Critical Accounting Policies and Estimates” of Mississippi Power in Item 7 of the Form 10-K for a complete discussion of Mississippi Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, Plant Daniel Capacity and Plant Daniel Operating Lease. Also see Note (K) to the Condensed Financial Statements herein for additional information related to Plant Daniel capacity.

84

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

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 FASB 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 FASB Interpretation No. 46R. See Note (D) to the Condensed Financial Statements herein for additional information related to the adoption of FASB Interpretation No. 46R.

     In the third quarter 2004, Mississippi Power prospectively adopted FASB Staff Position (FSP) 106-2, Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Medicare Act). The Medicare Act provides a 28% prescription drug subsidy for Medicare eligible retirees. FSP 106-2 requires recognition of the impacts of the Medicare Act in the accumulated post-retirement benefit obligation (APBO) and future cost of service for post-retirement medical plans and may be applied retroactively to the enactment of the Medicare Act in December 2003 or prospectively effective for the third quarter 2004. Mississippi Power elected to apply this treatment prospectively. The effect of the subsidy reduced Mississippi Power’s expenses for the three months ended September 30, 2004 by approximately $0.2 million and is expected to have a similar impact on future expenses. The subsidy’s impact on the post-retirement medical plan APBO was a reduction of approximately $8 million. However, the ultimate impact on future periods is subject to federal regulations governing the subsidy created in the Medicare Act which are being finalized. See Note (G) to the Condensed Financial Statements herein for additional information.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Major changes in Mississippi Power’s financial condition during the first nine months of 2004 included the addition of approximately $45 million to utility plant, a reduction in current liabilities of $95 million, an increase of $40 million in long-term debt, a decrease of $46 million in cash and an increase in accounts receivable of $24.2 million. See Mississippi Power’s Condensed Statements of Cash Flows and “Financing Activities” herein for further details.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Capital Requirements and Contractual Obligations” of Mississippi Power in Item 7 of the Form 10-K for a description of Mississippi Power’s capital requirements for its construction program, lease obligations, purchase commitments 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. These sources include cash flows from operating activities and issuances of unsecured debt, trust preferred securities, preferred stock and pollution control bonds issued for Mississippi Power’s benefit by public authorities. The amount, type and timing of any financings, if needed, will depend upon maintenance of adequate earnings, regulatory approval,

85

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

prevailing market conditions and other factors. See BUSINESS — “Financing Programs” in Item 1 of the Form 10-K for additional information.

     To meet short-term cash needs and contingencies, Mississippi Power had at September 30, 2004, approximately $23 million of cash and cash equivalents and $100 million of unused committed credit arrangements with banks. Of these facilities, $13 million expire in 2004 and the remaining $87 million expire in 2005. 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 September 30, 2004, Mississippi Power had $15 million in 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.

Off-Balance Sheet Financing Arrangements

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

Credit Rating Risk

Mississippi Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. Mississippi Power is party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade. These agreements are primarily for natural gas price risk management activities. At September 30, 2004, Mississippi Power had no material exposure related to these agreements.

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.

     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 the Mississippi PSC and wholesale fuel hedging programs under agreements with wholesale customers.

86

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

     The fair values of derivative, fuel and energy contracts at September 30, 2004, were as follows:

	Third Quarter
	2004			Year-to-Date
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	1,166		$	2,470
Contracts realized or settled		(2,316	)		(5,772	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		10,973			13,125
Contracts at September 30, 2004	$	9,823		$	9,823

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

	Source of September 30, 2004,
	Valuation Prices
	Total			Maturity
	Fair Value			Year 1			1-3 Years
	(in thousands)
Actively quoted	$	12,820		$	11,718		$	1,102
External sources		(2,997	)		(2,937	)		(60	)
Models and other methods		—			—			—
Contracts at September 30, 2004	$	9,823		$	8,781		$	1,042

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

Financing Activities

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.

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

     In addition to any financings that may be necessary to meet Mississippi Power’s capital requirements and contractual obligations, Mississippi 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.

87

SAVANNAH ELECTRIC
AND
POWER COMPANY

88

SAVANNAH ELECTRIC AND POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
Operating Revenues:
Retail sales	$	102,312		$	95,364		$	258,772		$	234,378
Sales for resale —
Non-affiliates		966			1,068			3,670			4,100
Affiliates		960			1,627			5,050			4,863
Other revenues		1,141			1,056			2,792			2,891
Total operating revenues		105,379			99,115			270,284			246,232
Operating Expenses:
Fuel		15,106			18,060			39,713			42,079
Purchased power —
Non-affiliates		2,373			1,136			9,102			3,763
Affiliates		35,966			26,017			85,241			67,110
Other operations		15,054			13,905			44,732			40,886
Maintenance		4,932			5,266			18,268			17,865
Depreciation and amortization		5,452			5,121			15,902			15,270
Taxes other than income taxes		4,190			4,026			11,582			11,125
Total operating expenses		83,073			73,531			224,540			198,098
Operating Income		22,306			25,584			45,744			48,134
Other Income and (Expense):
Interest expense, net of amounts capitalized		(3,023	)		(2,378	)		(9,155	)		(7,472	)
Distributions on mandatorily redeemable preferred securities		—			(685	)		(109	)		(2,055	)
Other income (expense), net		530			784			109			214
Total other income and (expense)		(2,493	)		(2,279	)		(9,155	)		(9,313	)
Earnings Before Income Taxes		19,813			23,305			36,589			38,821
Income taxes		7,262			8,927			13,391			14,638
Net Income		12,551			14,378			23,198			24,183
Dividends on Preferred Stock		675			—			825			—
Net Income After Dividends on Preferred Stock	$	11,876		$	14,378		$	22,373		$	24,183

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2004		2003			2004			2003
	(in thousands)					(in thousands)
Net Income After Dividends on Preferred Stock	$	11,876	$	14,378		$	22,373		$	24,183
Other comprehensive income (loss):
Changes in fair value of qualifying hedges, net of tax of $8, $(457), $(2) and $(457), respectively		12		(724	)		(3	)		(724	)
Less: Reclassification adjustment for amounts included in net income, net of tax of $9, $3, $39 and $3, respectively		14		4			61			4
COMPREHENSIVE INCOME	$	11,902	$	13,658		$	22,431		$	23,463

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

89

SAVANNAH ELECTRIC AND POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Nine Months
	Ended September 30,
	2004			2003
	(in thousands)
Operating Activities:
Net income	$	23,198		$	24,183
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		17,671			16,836
Deferred income taxes and investment tax credits, net		10,465			1,375
Pension, postretirement, and other employee benefits		4,978			4,417
Tax benefit of stock options		682			860
Other, net		143			(3,095	)
Changes in certain current assets and liabilities —
Receivables, net		(21,783	)		(4,607	)
Fossil fuel stock		1,246			(375	)
Materials and supplies		(575	)		(384	)
Other current assets		(1,750	)		4,593
Accounts payable		(1,856	)		(1,647	)
Accrued taxes		6,424			10,374
Accrued compensation		(1,543	)		(1,482	)
Other current liabilities		(494	)		(2,518	)
Net cash provided from operating activities		36,806			48,530
Investing Activities:
Gross property additions		(109,327	)		(27,469	)
Other		(10,744	)		3,751
Net cash used for investing activities		(120,071	)		(23,718	)
Financing Activities:
Increase in notes payable, net		20,784			6,148
Proceeds —
Pollution control bonds		—			13,870
Other long-term debt		10,000			—
Preferred stock		45,000			—
Capital contributions from parent company		31,000			5,000
Redemptions —
Pollution control bonds		—			(13,870	)
Senior notes		—			(20,000	)
Other long-term debt		(7	)		(420	)
Mandatorily redeemable preferred securities		(40,000	)		—
Payment of preferred stock dividends		(150	)		—
Payment of common stock dividends		(17,400	)		(17,250	)
Other		43			(153	)
Net cash provided from (used for) financing activities		49,270			(26,675	)
Net Change in Cash and Cash Equivalents		(33,995	)		(1,863	)
Cash and Cash Equivalents at Beginning of Period		37,943			3,978
Cash and Cash Equivalents at End of Period	$	3,948		$	2,115
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $918 and $162 capitalized for 2004 and 2003, respectively)	$	6,276		$	7,609
Income taxes (net of refunds)	$	1,158		$	1,900

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

90

SAVANNAH ELECTRIC AND POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

	At September 30,			At December 31,
Assets	2004			2003
	(in thousands)
Current Assets:
Cash and cash equivalents	$	3,948		$	37,943
Receivables —
Customer accounts receivable		29,896			19,674
Unbilled revenues		10,639			11,288
Under recovered regulatory clause revenues		14,477			—
Other accounts and notes receivable		825			1,138
Affiliated companies		3,288			4,872
Accumulated provision for uncollectible accounts		(1,011	)		(641	)
Fossil fuel stock, at average cost		7,405			8,652
Materials and supplies, at average cost		9,646			9,070
Prepaid income taxes		19,684			24,419
Prepaid expenses		1,421			1,377
Other		2,329			623
Total current assets		102,547			118,415
Property, Plant, and Equipment:
In service		937,246			912,504
Less accumulated provision for depreciation		407,551			402,394
		529,695			510,110
Construction work in progress		89,385			14,121
Total property, plant, and equipment		619,080			524,231
Other Property and Investments		2,391			2,248
Deferred Charges and Other Assets:
Deferred charges related to income taxes		9,165			9,611
Cash surrender value of life insurance for deferred compensation plans		24,173			23,866
Unamortized debt issuance expense		4,097			5,652
Unamortized loss on reacquired debt		8,116			7,488
Other regulatory assets		3,914			3,427
Other		14,588			14,983
Total deferred charges and other assets		64,053			65,027
Total Assets	$	788,071		$	709,921

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

91

SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At September 30,			At December 31,
Liabilities and Stockholder's Equity	2004			2003
	(in thousands)
Current Liabilities:
Securities due within one year	$	30,961		$	40,910
Notes payable		20,784			—
Accounts payable —
Affiliated		15,281			13,797
Other		9,087			13,147
Customer deposits		6,993			6,922
Accrued taxes —
Income taxes		2,257			1,172
Other		6,812			1,473
Accrued interest		4,332			2,802
Accrued vacation pay		2,581			2,530
Accrued compensation		4,109			5,652
Other		3,579			5,107
Total current liabilities		106,776			93,512
Long-term Debt		202,435			222,493
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		89,037			83,852
Deferred credits related to income taxes		9,040			9,804
Accumulated deferred investment tax credits		8,127			8,625
Employee benefit obligations		44,812			39,833
Other cost of removal obligations		40,531			36,843
Miscellaneous regulatory liabilities		13,434			12,932
Other		6,936			15,735
Total deferred credits and other liabilities		211,917			207,624
Total Liabilities		521,128			523,629
Non-Cumulative Preferred Stock		45,000			—
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		55,037			24,417
Retained earnings		114,829			109,856
Accumulated other comprehensive loss		(2,146	)		(2,204	)
Total common stockholder’s equity		221,943			186,292
Total Liabilities and Stockholder’s Equity	$	788,071		$	709,921

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

92

SAVANNAH ELECTRIC AND POWER COMPANY

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

THIRD QUARTER 2004 vs. THIRD QUARTER 2003
AND
YEAR-TO-DATE 2004 vs. YEAR-TO-DATE 2003

RESULTS OF OPERATIONS

Earnings

Savannah Electric’s net income after dividends on preferred stock for the third quarter and year-to-date 2004 was $11.9 million and $22.4 million, respectively, compared to $14.4 million and $24.2 million, respectively, for the corresponding periods of 2003. Earnings decreased by $2.5 million, or 17.4%, in the third quarter 2004 primarily due to higher operating expenses. Year-to-date 2004 earnings were down by $1.8 million, or 7.5%, as a result of higher operating expenses, partially offset by higher operating revenues.

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Third Quarter						Year-To-Date
	(in thousands)			%			(in thousands)			%
Retail sales	$	6,948			7.3		$	24,394			10.4
Fuel expense		(2,954	)		(16.4	)		(2,366	)		(5.6	)
Purchased power — non-affiliates		1,237			108.9			5,339			141.9
Purchased power — affiliates		9,949			38.2			18,131			27.0
Other operations expense		1,149			8.3			3,846			9.4
Interest expense, net of amounts capitalized		645			27.1			1,683			22.5
Dividends on preferred stock		675			N/M			825			N/M

N/M Not meaningful

     Retail sales. Excluding fuel revenues, which do not affect net income, retail sales revenue remained stable in the third quarter 2004 and increased by $6.5 million, or 4.7%, year-to-date 2004 when compared to the corresponding periods in 2003. The year-to-date 2004 increase in retail revenues is primarily a result of favorable weather conditions in the first two quarters of 2004 and a 2.2% increase in the number of customers. Year-to-date 2004 energy sales to residential and commercial customers were higher by 8.7% and 6.2%, respectively. Industrial sales revenues, excluding fuel revenues, for year-to-date 2004 remained essentially constant as compared to the same period in 2003.

     Fuel expense.Fuel expense decreased in the third quarter and year-to-date 2004 primarily as a result of a decrease in generation, partially offset by higher cost of fuel. Generation decreased 14.3% for third quarter and 4.0% for year-to-date 2004 when compared to the prior year because Savannah Electric had opportunities to purchase power at prices less than its cost to generate. 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. See “Future Earnings Potential — FERC and Georgia PSC Matters — Fuel Cost Recovery Rate Filings” and Note (L) to the Condensed Financial Statements herein for additional information.

     Purchased power — non-affiliates.In the third quarter and year-to-date 2004, the increases in purchased power from non-affiliates are primarily due to higher demand and the opportunity to purchase this energy at a cost lower than self-generation or than available from affiliates. These transactions do not have a significant impact on earnings, as energy costs are generally recovered through the fuel cost recovery clause.

93

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

     Purchased power — affiliates. Purchased power from affiliates increased in the third quarter and year-to-date 2004 as compared to the same periods in the prior year primarily due to the availability of Southern Company system generation at prices below self-generation to meet increased sales demand. The capacity component of purchased power expense from affiliates is higher in year-to-date 2004 reflecting a greater write-down of deferred Wansley PPA costs, consistent with the accounting order approved by the Georgia PSC in December 2002, and higher capacity costs from affiliates. 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 $0.4 million decrease to expense for the third quarter and a $0.5 million increase year-to-date. Purchased power from affiliates also includes energy purchases which will vary depending on demand and cost of generation resources at each company. These energy costs are recovered through the fuel cost recovery clause and have no significant impact on earnings.

     Other operations expense. The increases for the third quarter and year-to-date 2004 as compared to the same periods in the prior year in other operations expense are attributed to increases in distribution expenses and administrative and general expenses. Distribution expenses increased $0.4 million, or 19.5%, and $0.6 million, or 10.7%, for the third quarter and year-to-date 2004, respectively, primarily as a result of storm-related expenses. Administrative and general expenses increased $0.5 million, or 7.6%, and $2.6 million, or 14.4%, for the third quarter and year-to-date 2004, respectively, primarily relating to accounting and auditing services, legal expenses, workers’ compensation claims and employee benefit expenses.

     Interest expense, net of amounts capitalized.The third quarter and year-to-date 2004 increases in this expense as compared to the same periods in the prior year are mainly due to an increase in long-term debt outstanding of $65 million. These increases were more than offset by decreases in distributions on mandatorily redeemable preferred securities. These preferred securities were redeemed in January 2004 with proceeds from senior notes issued in late 2003.

     Dividends on preferred stock.Dividends on preferred stock increased for the third quarter and year-to-date 2004 due to the issuance of 1,800,000 shares ($45 million aggregate par value) of 6.00% Series Preferred Stock, Non-Cumulative, Par Value $25 Per Share in June 2004. See FINANCIAL CONDITION AND LIQUIDITY — “Financing Activities” herein for additional information.

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 Savannah Electric’s service area. For additional information relating to these issues, see BUSINESS – The SOUTHERN System — “Risk Factors” in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential” of Savannah Electric in Item 7 of the Form 10-K.

Environmental Matters

New Source Review Actions

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 — RESULTS OF MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS

94

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

OF OPERATIONS — “Future Earnings Potential — Environmental Matters” of Savannah Electric in Item 7 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 enforcement action against the TVA. The case against Savannah Electric had been effectively stayed pending this final resolution of the TVA case. At this time, no party to the case against Savannah Electric has sought to reopen that case, which remains administratively closed in the District Court for the Northern District of Georgia. An adverse outcome in this case could require substantial capital expenditures and could possibly require payment of substantial penalties that cannot be determined at this time. This could affect future results of operations, cash flows and possibly financial condition if such costs are not recovered through regulated rates.

Global Warming Litigation

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

Other Environmental Matters

On April 21, 2004, the EPA published the final regional nitrogen oxide reduction rules applicable to the State of Georgia. These rules specified that the State of Georgia must submit a revised state implementation plan by April 2005, and affected sources must comply with the reduction requirements by May 1, 2007. However, on October 22, 2004, the EPA announced it was granting a petition for reconsideration filed with the EPA by a coalition of Georgia industries. The EPA will stay implementation of the rule, as it relates to the State of Georgia, while it initiates rulemakings to address the petition. The impact of the nitrogen oxide reduction rules will depend on the outcome of the petition for reconsideration and/or any subsequent development and approval of the State of Georgia’s state implementation plan and cannot be determined at this time.

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

95

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

FERC and Georgia PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — FERC Matters — Market-Based Rate Authority” of Savannah Electric 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. This new interim approach requires utilities to submit 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.

     On July 8, 2004, the FERC denied Southern Company’s request for rehearing, along with a number of others, and reaffirmed the interim tests that it adopted in April. Southern Company submitted the required analyses on August 9, 2004. In that filing, Southern Company passed the pivotal supplier analysis for all markets and the wholesale market share analysis for all markets except the Southern Company control area. Southern Company also submitted other analyses to demonstrate that it lacks generation market power. This filing remains pending at the FERC. Southern Company, along with other utilities, has also filed an appeal of the FERC’s April 14, 2004 order with the Circuit Court of Appeals in Washington, D.C. In the event that the FERC’s default mitigation measures are ultimately applied, Savannah Electric may be required to charge cost-based rates for certain wholesale sales, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

Transmission

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

Plant McIntosh Construction Project

See MANAGEMENT’S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS — “Future Earnings Potential — FERC Matters — Southern Power PPAs” of Savannah Electric in Item 7 and Note 3 to the financial statements of Savannah Electric under “FERC Matters” in Item 8 of the Form 10-K for information regarding PPAs between Southern Power and Savannah Electric and Georgia Power for Plant McIntosh capacity. In April 2003, Southern Power applied for FERC approval of these PPAs. In July 2003, the FERC accepted the PPAs to become effective June 1, 2005, subject to refund, and ordered that hearings be held. To ensure the timely completion of construction on McIntosh units 10 and 11 and their availability in the summer of 2005 as supply side resources for the retail customers in the State of Georgia, on May 7, 2004, Savannah Electric and Georgia Power requested the Georgia PSC to direct them to acquire the McIntosh construction project. Savannah Electric and Georgia Power proposed to place the units in rate base at a cost approved by the Georgia PSC and to recover the unit operation and maintenance costs as retail service expenses as may be approved by the Georgia PSC. The Georgia PSC issued such an order on May 18, 2004 and the transfer occurred on May 24, 2004. On May 20, 2004, Southern Power filed a request to withdraw the PPAs and to terminate the ongoing

96

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

FERC proceedings. On August 4, 2004, the FERC issued a notice that it allowed the request to withdraw the PPAs to be accepted and to become effective by operation of law on July 20, 2004. However, the FERC made no determination on what additional steps may need to be taken with respect to testimony provided in the proceedings. The ultimate outcome of this matter cannot now be determined.

     The May 18, 2004 Georgia PSC order also directed Georgia Power and Savannah Electric to file an application within 10 days of completing such purchase to amend the resource certificate granted by the Georgia PSC in 2002 to describe the capacity resource as being the McIntosh units 10 and 11 (as opposed to the McIntosh PPAs), the approximate construction schedule (which is not expected to change) and the proposed rate base treatment. The application was filed on June 3, 2004 and the Georgia PSC will have 180 days to respond. The Georgia PSC is expected to review the application in accordance with its affiliate transaction guidelines, which require a lower of cost or market approach unless otherwise determined by the Georgia PSC. Georgia Power and Savannah Electric have submitted information showing that the book cost of the McIntosh construction project is lower than its market value. In direct testimony filed on October 14, 2004, the Georgia PSC staff proposed a different valuation that shows the market value for the Plant McIntosh construction project is less than book value. Georgia Power and Savannah Electric disagree with the proposed valuation methodology. Georgia Power and Savannah Electric plan to file rebuttal testimony in November with hearings being held in that same month. The Georgia PSC is expected to issue a final order in this matter in December 2004. However, full recovery of the project costs depends on the outcome of the Georgia PSC’s review. In the event the Georgia PSC does not allow full recovery of the project costs, then part of such costs may have to be written off in accordance with FASB Statement No. 90, “Accounting for Abandonments and Disallowed Plant Costs.” At September 30, 2004, the investment in the McIntosh construction project totaled approximately $74.2 million for Savannah Electric. The ultimate outcome of the Georgia PSC’s review cannot now be determined. See Note (J) to the Condensed Financial Statements herein for additional information.

Fuel Cost Recovery Rate Filings

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 have allowed for the cost of a coal transloader then under construction to be amortized over 24 months through fuel expense and recovered through Savannah Electric’s fuel cost recovery clause. The transloader allows foreign coal to be off-loaded from ships at Savannah Electric’s Plant Kraft dock and then transferred by rail to Plant McIntosh. On June 24, 2004, the Georgia PSC denied Savannah Electric’s request for this accounting order. Consequently, accumulated project costs were recorded as construction work in progress in June 2004 and were to be depreciated over the project’s estimated useful life of 35 years once placed in service.

     On July 30, 2004, Savannah Electric filed for a fuel cost recovery rate increase with the Georgia PSC. The increase will allow for the recovery of fuel costs based on an estimate of future costs, as well as the collection of the existing under recovery of fuel expenses, over a two-year period. The amount under recovered at September 30, 2004 is approximately $14.5 million and is included in Savannah Electric’s Condensed Balance Sheets herein. On October 25, 2004, the Georgia PSC approved Savannah Electric’s request, with no significant modifications. The approved increase will allow for the recovery of approximately $161 million in fuel costs, which includes an estimate of future fuel costs over the next twelve months and recovery of the existing under recovered fuel balance, over the next 24 months. The approved fuel rate increase also includes the recovery of approximately $3.5 million in costs associated with the coal transloader to be amortized over a 21-month period, which the Georgia PSC had denied in June 2004. The new rates will become effective in November 2004. See Note (L) to the Condensed Financial Statements herein for additional information.

97

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

Retail Rate Case

Savannah Electric is currently preparing testimony and exhibits for a base retail rate case, which is expected to be filed with the Georgia PSC in late November or early December 2004. It is expected that an increase in retail revenues will be requested to recover the investment in the McIntosh combined cycle plant, continued investment in new transmission and distribution facilities to support growth and improve reliability and increasing operating expenses, in part, to meet new laws and regulations. A decision by the Georgia PSC is expected in mid-year 2005.

Other Matters

On October 22, 2004, President Bush signed the American Jobs Creation Act of 2004 (the Jobs Act) into law. The Jobs Act represents the most significant revision to the Internal Revenue Code since 1986. Congress must still develop the regulations that will implement the requirements of the Jobs Act. Savannah Electric is currently assessing the impact of the Jobs Act on its taxable income. However, Savannah Electric currently does not expect the Jobs Act to have a material impact on its financial statements.

     At the end of September, Kerr-McGee Corporation, one of Savannah Electric’s largest industrial customers, shut down one of its three production lines at its Savannah, Georgia facility. The annual reduction in base revenues is not expected to have a material impact on Savannah Electric’s financial statements.

     Effective September 30, 2004, Savannah Electric retired Units 4 and 5 at Plant Riverside. The remaining units at the plant will be retired on May 31, 2005. These retirements will have no material impact on Savannah Electric’s financial statements.

     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.

     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 MANAGEMENT’S DISCUSSION AND ANALYSIS — ACCOUNTING POLICIES — “Application of Critical Accounting Policies and Estimates” of Savannah Electric in Item 7 of the

98

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

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.

     In the third quarter 2004, Savannah Electric prospectively adopted FASB Staff Position (FSP) 106-2, “Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Medicare Act).” The Medicare Act provides a 28% prescription drug subsidy for Medicare eligible retirees. FSP 106-2 requires recognition of the impacts of the Medicare Act in the accumulated post-retirement benefit obligation (APBO) and future cost of service for post-retirement medical plans and may be applied retroactively to the enactment of the Medicare Act in December 2003 or prospectively effective for the third quarter 2004. Savannah Electric elected to apply this treatment prospectively. The effect of the subsidy reduced Savannah Electric’s expenses for the three months ended September 30, 2004 by approximately $0.1 million and is expected to have a similar impact on future expenses. The subsidy’s impact on the post-retirement medical plan APBO was a reduction of approximately $3.5 million. However, the ultimate impact on future periods is subject to federal regulations governing the subsidy created in the Medicare Act being finalized. See Note (G) to the Condensed Financial Statements herein for additional information.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Major changes in Savannah Electric’s financial condition during the first nine months of 2004 included the addition of approximately $109.3 million to utility plant, which includes the Plant McIntosh combined cycle construction project. See Note (J) to the Condensed Financial Statements herein for additional information. The funds for these additions and other capital requirements were derived primarily from operating activities, issuance of securities, capital contributions from Southern Company 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 MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY — “Capital Requirements and Contractual Obligations” of Savannah Electric in Item 7 of 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. Approximately $31 million will be required by September 30, 2005 for maturities of long term debt. The projected construction program will increase by $83.1 million and $7.6 million in 2004 and 2005, respectively, for the Plant McIntosh combined cycle construction project and the projected purchased power commitments will decrease by $25.3 million in 2005-2006, $28.2 million in 2007-2008 and $158.0 million beyond 2008 as a result of the purchase of the construction project.

99

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. These sources include cash flows from operating activities and issuances of unsecured debt, preferred stock and pollution control bonds issued for Savannah Electric’s benefit by public authorities and capital contributions from Southern Company. The amount, type and timing of any future financings, if needed, will depend upon market conditions and regulatory approval. See BUSINESS — “Financing Programs” in Item 1 of the Form 10-K for additional information.

     Savannah Electric’s current liabilities 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, Savannah Electric had at September 30, 2004 approximately $3.9 million of cash and cash equivalents and $50 million of unused committed credit arrangements with banks, of which $10 million expires in 2004, $30 million expires in 2005 and $10 million expires in 2007. Of the unused credit arrangements expiring in 2004 and 2005, $40 million include two year term loan options executable at the expiration date. Savannah Electric expects to renew its credit facilities, as needed, prior to expiration. 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 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 September 30, 2004, Savannah Electric had $12.8 million of commercial paper and $8.0 million of extendible commercial notes outstanding. Management believes that the need for working capital can be adequately met by utilizing lines of credit and access to the financial markets.

Credit Rating Risk

Savannah Electric does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. Savannah Electric is party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade. These agreements are primarily for natural gas price risk management activities. At September 30, 2004, Savannah Electric had no material exposure related to these agreements.

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.

100

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 September 30, 2004 was as follows:

	Third Quarter
	2004			Year-to-Date
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	1,583		$	463
Contracts realized or settled		(1,034	)		(1,816	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		1,676			3,578
Contracts at September 30, 2004	$	2,225		$	2,225

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

	Source of September 30, 2004
	Valuation Prices
	Total			Maturity
	Fair Value			Year 1			1-3 Years
				(in thousands)
Actively quoted	$	2,251		$	1,947		$	304
External sources		(26	)		(26	)		—
Models and other methods		—			—			—
Contracts at September 30, 2004	$	2,225		$	1,921		$	304

     For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS - FINANCIAL CONDITION AND LIQUIDITY — “Market Price Risk” of Savannah Electric in Item 7 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 (F) to the Condensed Financial Statements herein.

Financing Activities

Savannah Electric received contributions to capital from Southern Company in May 2004 in the amount of $31 million to help finance the purchase of the Plant McIntosh construction project. See Note (J) to the Condensed Financial Statements herein for additional information.

     In June 2004, Savannah Electric issued 1,800,000 shares ($45 million aggregate par value) of 6.00% Series Preferred Stock, Non-Cumulative, Par Value $25 Per Share. The proceeds from this sale were used to repay a portion of its outstanding short-term indebtedness that had been incurred primarily to finance the purchase of the Plant McIntosh construction project.

     Subsequent to September 30, 2004, Savannah Electric has entered into interest rate hedging transactions related to the anticipated issuance of senior notes totaling approximately $30 million. The notes are expected to be issued in 2004. Further, Savannah Electric also entered into an interest rate hedging transaction related to $13.9 million of its outstanding tax-exempt auction rate securities. The interest rate swap will fix Savannah Electric’s interest cost related to these securities beginning in 2005 and continuing through 2007.

     In addition to any financings that may be necessary to meet Savannah Electric’s capital requirements and contractual obligations, Savannah Electric 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.

101

SOUTHERN POWER COMPANY

102

SOUTHERN POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
Operating Revenues:
Sales for resale —
Non-affiliates	$	58,417		$	93,251		$	218,148		$	212,517
Affiliates		128,111			112,258			322,124			253,627
Contract termination		—			—			—			80,000
Other revenues		2,413			3,115			7,023			8,200
Total Operating Revenues		188,941			208,624			547,295			554,344
Operating Expenses:
Fuel		35,460			49,440			109,793			104,676
Purchased power —
Non-affiliates		16,697			18,399			56,115			49,959
Affiliates		24,699			43,399			95,681			93,001
Other operations		13,919			12,362			42,173			30,597
Maintenance		3,431			2,253			10,850			4,733
Depreciation and amortization		12,789			11,634			38,363			26,240
Taxes other than income taxes		2,686			3,132			8,083			6,495
Total operating expenses		109,681			140,619			361,058			315,701
Operating Income		79,260			68,005			186,237			238,643
Other Income and (Expense):
Interest expense, net of amounts capitalized		(18,582	)		(13,587	)		(45,491	)		(17,930	)
Other income (expense), net		(161	)		(1,288	)		1,603			(1,159	)
Total other income and (expense)		(18,743	)		(14,875	)		(43,888	)		(19,089	)
Earnings Before Income Taxes		60,517			53,130			142,349			219,554
Income taxes		23,195			12,991			55,425			77,367
Earnings Before Cumulative Effect of Accounting Change		37,322			40,139			86,924			142,187
Cumulative effect of accounting change — less income taxes of $231 thousand		—			—			—			367
Net Income	$	37,322		$	40,139		$	86,924		$	142,554

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2004			2003		2004			2003
	(in thousands)					(in thousands)
Net Income	$	37,322		$	40,139	$	86,924		$	142,554
Other comprehensive income (loss):
Changes in fair value of qualifying hedges, net of tax of $(128), $1,072, $(546) and $(7,492), respectively		(205	)		1,711		(967	)		(12,276	)
Less: Reclassification adjustment for amounts included in net income, net of tax of $1,100, $794, $2,973 and $910, respectively		1,758			1,265		4,741			1,969
COMPREHENSIVE INCOME	$	38,875		$	43,115	$	90,698		$	132,247

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

103

SOUTHERN POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Nine Months
	Ended September 30,
	2004			2003
	(in thousands)
Operating Activities:
Net income	$	86,924		$	142,554
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		45,912			28,590
Deferred income taxes and investment tax credits, net		4,227			11,271
Deferred capacity revenues		36,270			26,097
Tax benefit of stock options		225			—
Hedge settlements		—			(93,298	)
Other, net		(3,258	)		1,373
Changes in certain current assets and liabilities —
Receivables, net		(44,477	)		(28,757	)
Fossil fuel stock		2,889			5,082
Materials and supplies		(1,634	)		(469	)
Other current assets		13,208			(17,133	)
Accounts payable		(16,936	)		(1,792	)
Accrued taxes		31,979			17,272
Accrued interest		(16,400	)		(6,696	)
Other current liabilities		—			151
Net cash provided from operating activities		138,929			84,245
Investing Activities:
Gross property additions		(113,522	)		(277,509	)
Sale of property to affiliates		414,582			—
Change in construction payables, net		(14,499	)		(18,641	)
Other		2,359			1,146
Net cash provided from (used for) investing activities		288,920			(295,004	)
Financing Activities:
Decrease in notes payable, net — affiliated		—			(19,988	)
Increase (decrease) in notes payable, net		(114,349	)		102,681
Proceeds —
Senior notes		—			575,000
Capital contributions from parent company		—			385
Redemptions —
Other long-term debt		—			(380,404	)
Capital distributions to parent company		(113,000	)		—
Payment of common stock dividends		(187,000	)		—
Other		2,989			(9,133	)
Net cash provided from (used for) financing activities		(411,360	)		268,541
Net Change in Cash and Cash Equivalents		16,489			57,782
Cash and Cash Equivalents at Beginning of Period		2,798			19,474
Cash and Cash Equivalents at End of Period	$	19,287		$	77,256
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $17,368 and $30,015 capitalized for 2004 and 2003, respectively)	$	50,857		$	111,668
Income taxes (net of refunds)	$	16,822		$	60,266

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

104

SOUTHERN POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

	At September 30,			At December 31,
Assets	2004			2003
	(in thousands)
Current Assets:
Cash and cash equivalents	$	19,287		$	2,798
Receivables —
Customer accounts receivable		13,226			10,772
Other accounts receivable		—			270
Accumulated provision for uncollectible accounts		(350	)		(350	)
Affiliated companies		56,422			14,130
Fossil fuel stock, at average cost		2,909			5,798
Materials and supplies, at average cost		9,758			8,123
Prepaid income taxes		—			11,222
Prepaid expenses		2,578			2,528
Other		152			1,174
Total current assets		103,982			56,465
Property, Plant, and Equipment:
In service		1,823,625			1,831,139
Less accumulated provision for depreciation		98,408			60,005
		1,725,217			1,771,134
Construction work in progress		204,437			504,097
Total property, plant, and equipment		1,929,654			2,275,231
Deferred Charges and Other Assets:
Unamortized debt issuance expense		15,481			18,315
Accumulated deferred income taxes		10,281			21,911
Prepaid long-term service agreements		35,193			21,728
Other—
Affiliated		6,455			12,790
Other		3,615			2,845
Total deferred charges and other assets		71,025			77,589
Total Assets	$	2,104,661		$	2,409,285

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

105

SOUTHERN POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At September 30,			At December 31,
Liabilities and Stockholder's Equity	2004			2003
	(in thousands)
Current Liabilities:
Securities due within one year	$	200		$	200
Notes payable		—			114,347
Accounts payable —
Affiliated		23,669			51,442
Other		2,929			6,591
Accrued taxes —
Income taxes		23,528			—
Other		9,740			1,289
Accrued interest		13,612			30,012
Other		186			489
Total current liabilities		73,864			204,370
Long-term Debt		1,149,266			1,149,112
Deferred Credits and Other Liabilities:
Deferred capacity revenues—
Affiliated		65,332			28,799
Other		—			256
Other—
Affiliated		13,666			15,061
Other		134			211
Total deferred credits and other liabilities		79,132			44,327
Total Liabilities		1,302,262			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		737,537			850,312
Retained earnings		117,550			217,626
Accumulated other comprehensive loss		(52,688	)		(56,462	)
Total common stockholder’s equity		802,399			1,011,476
Total Liabilities and Stockholder’s Equity	$	2,104,661		$	2,409,285

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

106

SOUTHERN POWER COMPANY

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

THIRD QUARTER 2004 vs. THIRD QUARTER 2003
AND
YEAR-TO-DATE 2004 vs. YEAR-TO-DATE 2003

RESULTS OF OPERATIONS

Earnings

Southern Power’s net income for the third quarter and year-to-date 2004 was $37.3 million and $86.9 million, respectively, compared to $40.1 million and $142.5 million for the corresponding periods of 2003. The decrease in third quarter 2004 earnings of $2.8 million, or 7.0%, is due to a reduction in the earnings from sales of uncontracted capacity as new PPAs have become effective. The decrease in year-to-date 2004 earnings of $55.6 million, or 39.0%, is primarily attributed to a one-time gain of $50 million recognized in May 2003 upon termination of PPAs with Dynegy, as well as the reduction in earnings from sales of uncontracted capacity. 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 Unit A that began in October 2003 increased both affiliated and non-affiliated revenues, while significantly reducing uncontracted capacity. A new PPA with Georgia Power for Plant Harris Unit 2 began in June 2004 and further reduced uncontracted capacity. The previously uncontracted capacity that was available to the market from June 2003 through May 2004 consisted of approximately 800 MW: 600 MW from Plant Harris Unit 2 and 200 MW from Plant Franklin Unit 2.

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Third Quarter						Year-To-Date
	(in thousands)			%			(in thousands)			%
Sales for resale — non-affiliates	$	(34,834	)		(37.4	)	$	5,631			2.6
Sale for resale — affiliates		15,853			14.1			68,497			27.0
Fuel expense		(13,980	)		(28.3	)		5,117			4.9
Purchased power — non-affiliates		(1,702	)		(9.3	)		6,156			12.3
Purchased power — affiliates		(18,700	)		(43.1	)		2,680			2.9
Other operations expense		1,557			12.6			11,576			37.8
Maintenance expense		1,178			52.3			6,117			129.2
Depreciation and amortization		1,155			9.9			12,123			46.2
Taxes other than income taxes		(446	)		(14.2	)		1,588			24.4
Interest expense, net of amounts capitalized		4,995			36.8			27,561			153.7
Other income (expense), net		1,127			87.5			2,762			238.3
Income taxes		10,204			78.5			(21,942	)		(28.4	)

     Sales for resale — non-affiliates. The decrease in non-affiliate sales for the third quarter 2004 relative to the same period in 2003 resulted from the inception of Georgia Power’s PPA for all the capacity of Plant Harris Unit 2 in June 2004; this capacity was therefore no longer available for non-affiliate sales. Year-to-date 2004 revenues from sales for resale to non-affiliates were higher when compared to the corresponding period in 2003. This increase was primarily due to additional wholesale capacity and energy sales to non-affiliates as a result of commercial operation of Plant Stanton A in October 2003.

107

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

     Sales for resale — affiliates.During the third quarter 2004, sales for resale to affiliates increased as compared to the same period in 2003 primarily due to energy and capacity sales to Georgia Power that commenced in June 2004 for Plant Harris Unit 2. For year-to-date 2004, revenues under this PPA, as well as a full nine months of revenues in 2004 for PPAs at Plant Harris Unit 1 and Plant Franklin Units 1 and 2 that began in June 2003 with both Alabama Power and Georgia Power, contributed to the increase. 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.

     Fuel expense. Fuel expense for the third quarter 2004 decreased when compared to third quarter 2003 primarily as a result of the Plant Harris Unit 2 PPA with Georgia Power, under which Georgia Power assumes fuel responsibility. Year-to-date 2004 fuel expense increased when compared to the same period in 2003 largely due to increased gas transportation expenses associated with Plant Harris Unit 2 prior to its commitment under the Georgia Power PPA. Significantly lower offsetting hedge gains in 2004 also contributed to the year-to-date increase. Southern Power’s existing PPAs generally provide that the purchasers are responsible for substantially all of the cost of fuel relating to the energy delivered under such PPAs; therefore, these cost increases do not have a significant impact on net income.

     Purchased power — non-affiliates. For third quarter 2004, the decrease in purchased power — non-affiliates when compared to the same period in 2003 is the result of lower demand due to milder weather and the availability of lower priced energy from affiliates or self generation. The year-to-date 2004 increase over the same period in 2003 is attributable to the increase in lower priced energy available from contracts with Georgia electric membership corporations and North Carolina municipalities.

     Purchased power — affiliates. The decrease in purchased power from affiliates during the third quarter 2004 compared to the same period in the prior year is the result of lower demand due to the milder weather and lower relative cost of Southern Power’s self generation. Expenses from purchased power transactions will vary depending on demand, availability and the cost of generating.

     Other operations and maintenance expenses.For the third quarter and year-to-date 2004, other operations and maintenance expenses increased when compared to the same periods in the prior year due mainly to 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 reasons for the increases in depreciation and amortization in the third quarter and year-to-date 2004 as compared to the corresponding periods in the prior year.

     Taxes other than income taxes.During the third quarter 2004, taxes other than income taxes decreased from the same period in 2003 due to lower property tax rates resulting from a favorable settlement in the fourth quarter of 2003. Year-to-date 2004 taxes other than income taxes increased over 2003 as a result of the increased property tax base in October 2003 when Plant Stanton A entered service.

     Interest expense, net of amounts capitalized.In the third quarter and year-to-date 2004, interest expense, net of amounts capitalized increased when compared to the same periods 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. In addition, see Note (J) to the Condensed Financial Statements herein for information

108

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

regarding the transfer of the Plant McIntosh Units 10 and 11 construction project to Georgia Power and Savannah Electric on May 24, 2004. In August 2004, Southern Power completed limited construction activities at the Plant Franklin Unit 3 to preserve the long-term viability of the project and indefinitely suspended further construction. Capitalized interest was stopped effective with the suspension date.

     Other income (expense), net.During the third quarter and year-to-date 2004, other income (expense), net increased due to gains on gas and electric hedge positions, both realized and unrealized, and as a result of a state taxable gain on the sale of Plant McIntosh Units 10 and 11 construction project to Georgia Power and Savannah Electric.

     Income taxes.The increase in income taxes for the third quarter 2004 are a direct result of the change in income items discussed above. The decrease in income taxes year-to-date 2004 corresponds to the decrease in pre-tax earnings due to the Dynegy settlement recorded in the second quarter of 2003.

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 Business — The SOUTHERN System — “Risk Factors” in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential” of Southern Power in Item 7 of the Form 10-K.

FERC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — FERC Matters — Market-Based Rate Authority” of Southern Power 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. This new interim approach requires utilities to submit 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.

     On July 8, 2004, the FERC denied Southern Company’s request for rehearing, along with a number of others, and reaffirmed the interim tests that it adopted in April. Southern Company submitted the required analyses on August 9, 2004. In that filing, Southern Company passed the pivotal supplier analysis for all markets and the wholesale market share analysis for all markets except the Southern Company control area. Southern Company also submitted other analyses to demonstrate that it lacks generation market power. This filing remains pending at the FERC. Southern Company, along with other utilities, has also filed an appeal of the FERC’s April 14, 2004 order with the Circuit Court of Appeals in Washington, D.C. In the event that the FERC’s default mitigation measures are ultimately applied, Southern Power may be required to charge cost-based rates for certain wholesale sales, which may be lower than negotiated market-based rates. The final

109

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

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.

Plant McIntosh Construction Project

See Note 3 to the financial statements of Southern Power under “FERC Matters” in Item 8 of the Form 10-K for information regarding PPAs between Southern Power and Georgia Power and Savannah Electric for Plant McIntosh Units 10 and 11 capacity. In April 2003, Southern Power applied for FERC approval of these PPAs. In July 2003, the FERC accepted the PPAs to become effective June 1, 2005, subject to refund, and ordered that hearings be held. To ensure the timely completion of construction on McIntosh Units 10 and 11 and their availability in the summer of 2005 as supply side resources for the retail customers in the State of Georgia, on May 7, 2004, Savannah Electric and Georgia Power requested the Georgia PSC to direct them to acquire the McIntosh construction project. Savannah Electric and Georgia Power proposed to place the units in rate base at a cost approved by the Georgia PSC and to recover the unit operation and maintenance costs as retail service expenses as may be approved by the Georgia PSC. The Georgia PSC issued such an order on May 18, 2004 and the transfer occurred on May 24, 2004. On May 20, 2004, Southern Power filed a request to withdraw the PPAs and to terminate the ongoing FERC proceedings. On August 4, 2004, the FERC issued a notice that it allowed the request to withdraw the PPAs to be accepted and to become effective by operation of law on July 20, 2004. However, the FERC made no determination on what additional steps may need to be taken with respect to testimony provided in the proceedings. The ultimate outcome of this matter cannot now be determined.

Transmission

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

Power Sales Agreements

On August 12, 2004, Southern Power entered into two PPAs with Florida Power & Light (FP&L). Under the agreements, Southern Power will provide FP&L with a total of 790 megawatts of capacity annually from Plant Harris Unit 1 and Plant Franklin Unit 1 for the period from June 2010 through December 2015. The PPAs provide for fixed capacity payments and variable energy payments based on actual energy delivered. Additionally, FP&L will make payments for firm gas transportation. These contracts are contingent upon certain events, including approval of the Florida PSC. The final outcome of this matter cannot now be determined.

     Southern Power executed on August 26, 2004 multiple agreements with a new full-requirements customer. For the years 2005-2009, Southern Power will sell approximately 130 megawatts of additional wholesale capacity from existing resources to Flint Energies, a cooperative located in Reynolds, Georgia.

     See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — General” and “- Power Sales Agreements” of Southern Power in Item 7 of 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.

110

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, sales under PPAs with Georgia Power for the remaining 200 MW of uncontracted capacity at Plant Franklin Unit 2 and for Plant Harris Unit 2 began. Sales under PPAs for the other units became effective upon commercial operation. The opportunity for non-affiliate sales from uncontracted capacity has declined significantly since these PPAs became effective.

Other Construction Projects

In October 2004, a partnership between Southern Company and the Orlando Utilities Commission (OUC) was selected by the U.S. Department of Energy (DOE) to build and operate a 285 MW coal-gasification facility. The facility will be located at OUC’s Stanton Energy Center near Orlando, Florida, site of the existing gas-fired 630 MW Stanton A unit co-owned by Southern Power, OUC and others. Southern Power will own and operate the Southern Company portion of the project. The project will demonstrate a coal gasification technology that has been under development, in partnership with the DOE, at Southern Company’s power systems development facility near Birmingham, Alabama. The project is scheduled to begin commercial operation in early 2010, with a projected total cost of $557 million. The DOE will contribute approximately $235 million of the cost.

     In August 2004, Southern Power completed limited construction activities on Plant Franklin Unit 3 to preserve the long-term viability of the project and indefinitely suspended further construction. Final completion is not anticipated until the 2008-2011 period. See Note 3 to the financial statements of Southern Power 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.

Other Matters

On October 22, 2004, President Bush signed the American Jobs Creation Act of 2004 (Jobs Act) into law. The Jobs Act represents the most significant revision to the Internal Revenue Code since 1986. Congress must still develop the regulations that will implement the requirements of the Jobs Act. Southern Power is currently assessing the impact of the Jobs Act on its taxable income. However, Southern Power currently does not expect the Jobs Act to have a material impact on its financial statements.

     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. The ultimate outcome of such litigation against Southern 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 Southern Power’s financial statements.

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

Environmental Matters

See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — Environmental Matters” of Southern Power in Item 7 of the Form 10-K for information on the

111

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

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.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

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

FINANCIAL CONDITION AND LIQUIDITY

Overview

The major change in Southern Power’s financial condition during the first nine months of 2004 was the sale of the Plant McIntosh Units 10 and 11 combined cycle construction project to Georgia Power and Savannah Electric at a final book cost of $415 million. See Note (J) to the Condensed Financial Statements herein for additional information. As a result of the sale, Southern Power repaid its note payable to Southern Company of $89 million, returned $225 million to Southern Company ($113 million from capital surplus and $112 million from retained earnings) and repaid $114 million in commercial paper borrowings. In September 2003, the SEC had approved, under the PUHCA, Southern Power’s payment of dividends in an amount up to $190 million to Southern Company from capital surplus. In September 2004, Southern Power declared and paid $75 million in additional dividends to Southern Company, bringing the dividends paid out of retained earnings to $187 million.

Capital Requirements and Contractual Obligations

Reference is made to MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Capital Requirements and Contractual Obligations” of Southern Power in Item 7 of the Form 10-K for a description of Southern Power’s capital requirements for its construction program, maturing debt, purchase commitments and long-term service agreements. The sale of the Plant McIntosh Units 10 and 11 construction project and the suspension of construction activities at Plant Franklin Unit 3 have eliminated the current need for short-term borrowings under the commercial paper program. The projected construction program will decrease by $202 million and $41 million in 2004 and 2005, respectively, for the Plant McIntosh combined cycle construction project as a result of the sale of the project.

Sources of Capital

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 proceeds from the sale of the Plant McIntosh Units 10 and 11 construction project were used to repay $24 million of outstanding commercial paper early in the third quarter of 2004. Southern Power’s strategy

112

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

has been to refinance most of such short-term borrowings with long-term securities following commercial operation of the generating facilities. At September 30, 2004, there was no commercial paper outstanding. See Note 6 to the financial statements of Southern Power under “Commercial Paper” in Item 8 of the Form 10-K for additional information.

     To meet liquidity and capital resource requirements, Southern Power had at September 30, 2004 $19.3 million in cash and equivalents and $325 million of an unused committed credit arrangement with banks expiring in 2006. Reflecting the change in Southern Power’s future construction needs following the sale of the McIntosh construction project, the committed credit arrangement was reduced from $650 million to $325 million. This arrangement also provides liquidity support for Southern Power’s commercial paper program. 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.

Credit Rating Risk

Southern Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are 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 September 30, 2004, the maximum potential collateral requirements were approximately $179 million.

     Southern Power 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 risk management activities. At September 30, 2004, Southern Power had no material exposure related to these agreements.

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.

113

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

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. The fair values of derivative energy contracts at September 30, 2004 were as follows:

	Third Quarter
	2004			Year-to-Date
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	(39	)	$	665
Contracts realized or settled		(23	)		(522	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		9			(196	)
Contracts at September 30, 2004	$	(53	)	$	(53	)

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

	Source of September 30, 2004
	Valuation Prices
	Total			Maturity
	Fair Value			Year 1			1-3 Years
	(in thousands)
Actively quoted	$	32		$	32		$	—
External sources		(85	)		(85	)		—
Models and other methods		—			—			—
Contracts at September 30, 2004	$	(53	)	$	(53	)	$	—

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

114

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, K, M, N, O, P
Alabama Power	A, B, C, D, F, G, M
Georgia Power	A, B, C, D, F, G, I, J
Gulf Power	A, B, C, D, F, G, O
Mississippi Power	A, B, C, D, F, G, K
Savannah Electric	A, B, C, D, F, G, J, L
Southern Power	A, B, F, J

115

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 September 30, 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 AND PLANT WANSLEY ENVIRONMENTAL LITIGATION
	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 enforcement action against the TVA. The cases against Alabama Power, Georgia Power and Savannah Electric had been effectively stayed pending this final resolution of the TVA case. On June 16, 2004, the U.S. District Court for the Northern District of Alabama lifted the stay of the New Source Review litigation against Alabama Power, placing the case back onto the District Court’s active docket. At this time, no party to the case against Georgia Power and Savannah Electric has sought to reopen that case, which remains administratively closed in the District Court for the Northern District of Georgia. On June 10, 2004, the U.S. District Court for the Northern District of Georgia granted Georgia Power’s motion in the Plant Wansley environmental litigation for partial summary judgment regarding emission offsets. The case has been removed from the court’s trial calendar due to pending motions for summary judgment, and a new trial date has not been scheduled. An adverse outcome in any one of these cases could require substantial capital expenditures and could possibly require payment of substantial penalties that cannot be determined at this time.

116

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

	This could affect future results of operations, cash flows and possibly financial condition if such costs are not recovered through regulated rates.
	MIRANT RELATED MATTERS
	Southern Company Employee Savings Plan Litigation
	On June 30, 2004, an employee of a subsidiary of Southern Company filed a complaint in the United States District Court for the Northern District of Georgia alleging violations of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and naming as defendants Southern Company, Southern Company Services, Inc., the Employee Savings Plan Committee, the Pension Fund Investment Review Committee, certain current and former members of those committees, Merrill Lynch Trust Company, FSB and “Unknown Defendants 1-100.” The plaintiff seeks to represent a purported class of individuals who were participants in or beneficiaries of The Southern Company Employee Savings Plan (the Plan) at any time since April 2, 2001 whose Plan accounts included investments in Mirant common stock.
	The complaint alleges that the defendants breached their fiduciary duties under ERISA by, among other things, failing to investigate whether Mirant stock was an appropriate investment option for the Plan and by failing to inform Plan participants that Mirant stock was not an appropriate investment for their retirement assets based on Mirant’s alleged improper energy trading and accounting practices, mismanagement and dire circumstances. The plaintiff seeks class-wide equitable and monetary relief. Southern Company denies any wrongdoing and intends to defend this action vigorously. The final outcome of this matter cannot now be determined.
	Under certain circumstances, Southern Company will be obligated under its Bylaws to indemnify the current and former officers who served as members of the Employee Savings Plan Committee and/or the Pension Fund Investment Review Committee at or since the date of the spin-off and are named as defendants in the lawsuit.
	Mirant Bankruptcy
��
	See Note 3 to the financial statements of Southern Company under “Mirant Related Matters — Mirant Bankruptcy” in Item 8 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. On June 14, 2004, Mirant’s bankruptcy counsel notified Southern Company that it is investigating potential claims against Southern Company. Southern Company has produced documents in response to requests by Mirant’s bankruptcy counsel and is fully cooperating in the investigation. The final outcome of these matters cannot now be determined.
	See Note 3 to the financial statements of Southern Company under “Mirant Bankruptcy” and Note 5 to the financial statements of Southern Company in Item 8 of the Form 10-K and Note (N) herein 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,

117

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

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.

Mobile Energy Services’ Petition for Bankruptcy

See Note 3 to the financial statements of Southern Company under Mirant Related Matters — “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 requires utilities to submit 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.

On July 8, 2004, the FERC denied Southern Company’s request for rehearing, along with a number of others, and reaffirmed the interim tests that it adopted in April. Southern Company submitted the required analyses on August 9, 2004. In that filing, Southern Company passed the pivotal supplier analysis for all markets and the wholesale market share analysis for all markets except the Southern Company control area. Southern Company also submitted other analyses to demonstrate that it lacks generation market power. This filing remains pending at the FERC. Southern Company, along with other utilities, has also filed an appeal of the FERC’s April 14, 2004 order with the Circuit Court of Appeals in Washington, D.C. In the event that the FERC’s default mitigation measures are ultimately applied, Southern Power and the retail operating companies may be required to charge cost-based rates for certain wholesale sales, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

INCOME TAX MATTERS

See Note 3 to the financial statements of Southern Company 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, a lease-in lease-out (LILO) transaction. The original adjustment of $30 million included approximately $6.5 million of interest. Recently several taxpayers have reached settlements with the IRS

118

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

	related to LILO transactions. Southern Company has recently submitted the issue to the IRS appeals division with a request for an accelerated review, which could result in a settlement. If Southern Company is unable to resolve the issue in the IRS appeals division, Southern Company will continue to pursue litigation. 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). If the IRS is ultimately successful in disallowing the tax deductions related to all four international leveraged lease transactions beginning with the 2000 tax year, Southern Company could be subject to additional interest charges of up to $24 million. Additionally, although the payment of the tax liability, exclusive of this interest, would not affect Southern Company’s results of operations, it could have a material impact on cash flow. See Note 1 to the financial statements of Southern Company 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.
	GULF POWER PERSONAL INJURY LITIGATION
	See Note 3 to the financial statements of Gulf Power under “Personal Injury Litigation” in Item 8 of the Form 10-K for additional information. This matter was the subject of an appeal to Florida’s First District Court of Appeal. In May 2004, the court affirmed the result of the jury’s verdict without submitting a written opinion, thereby preempting Gulf Power’s right to appeal the case to the Florida Supreme Court. Therefore, in June 2004 Gulf Power paid the judgment amount and accrued interest. As a result of insurance coverage, there was no material impact on Gulf Power’s financial statements.
(C)	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		09/30/04
	(in millions)
Alabama Power	$	359	$	—	$	—		$	18	$	—	$	377
Georgia Power		476		—		(2	)		23		—		497
Gulf Power		4		—		—			1		1		6
Mississippi Power		2		—		—			2		1		5
Savannah Electric		4		—		—			—		—		4
Southern Company	$	845	$	—	$	(2	)	$	44	$	2	$	889

(D) On March 31, 2004, Southern Company and the retail operating companies prospectively adopted FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities,” which requires the primary beneficiary of a variable interest entity to consolidate the related assets and liabilities. The adoption of FASB Interpretation No. 46R had no impact on the net income of Southern Company or the retail operating companies. However, as a result of the adoption, Southern Company and the retail operating companies deconsolidated certain wholly-owned trusts established to issue preferred securities since Southern Company and the retail operating companies do not meet the definition of primary beneficiary established by FASB Interpretation No. 46R. 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

119

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

trusts to Southern Company and the retail operating companies are reflected as Long-term Debt Payable to Affiliated Trusts on the accompanying Condensed 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 September 30, 2004, Southern Company’s investment totaled $26.3 million. During the third quarter of 2004, Southern Company terminated new investments in this fund; however, additional contributions to existing investments will still occur. Southern Company has committed to a maximum investment of $50 million. The assets of the venture capital fund are included in Cash and Other Investments on the accompanying Condensed Balance Sheets.

(E)

See Note 1 to the financial statements of Southern Company under “Stock Options” and Note 8 to the financial statements of Southern Company under “Stock Option Plan” in Item 8 of the Form 10-K for information regarding non-qualified employee stock options provided by Southern Company. Southern Company 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 and nine-month periods ending September 30, 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			Three			Nine			Nine
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2004			2003			2004			2003
Interest rate		3.8	%		3.1	%		3.1	%		2.7	%
Average expected life of stock options (in years)		5.0			4.3			5.0			4.3
Expected volatility of common stock		19.0	%		21.7	%		19.6	%		23.6	%
Expected annual dividends on common stock	$	1.43		$	1.40		$	1.40		$	1.37
Weighted average fair value of stock options granted	$	3.34		$	3.38		$	3.29		$	3.59

120

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

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

	As Reported		Pro Forma
Three Months Ended September 30, 2004
Net income (in millions)	$	644	$	641
Earnings per share (dollars):
Basic	$	0.87	$	0.87
Diluted	$	0.87	$	0.87
Three Months Ended September 30, 2003
Net income (in millions)	$	619	$	614
Earnings per share (dollars):
Basic	$	0.85	$	0.84
Diluted	$	0.84	$	0.83
Nine Months Ended September 30, 2004
Net income (in millions)	$	1,328	$	1,315
Earnings per share (dollars):
Basic	$	1.80	$	1.78
Diluted	$	1.79	$	1.77
Nine Months Ended September 30, 2003
Net income (in millions)	$	1,349	$	1,336
Earnings per share (dollars):
Basic	$	1.86	$	1.84
Diluted	$	1.85	$	1.83

Diluted Earnings Per Share

	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
(in thousands)	September 30,		September 30,		September 30,		September 30,
	2004		2003		2004		2003
As reported shares		739,345		729,816		738,056		724,462
Effect of options		4,350		5,039		4,215		5,208
Diluted shares		743,695		734,855		742,271		729,670

(F) 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 September 30, 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	$	58,261		$	22,488		$	15,367	$	6,198	$	11,962		$	2,246		$	—
Other comprehensive income (loss)		(201	)		(322	)		—		—		(2,144	)		—			(73	)
Net income		(1,974	)		22			27		4		5			(21	)		20
Total fair value	$	56,086		$	22,188		$	15,394	$	6,202	$	9,823		$	2,225		$	(53	)

121

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

For the three months and nine months ended September 30, 2004 and 2003, the amounts recognized in income for derivative energy contracts that are not hedges, for Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric and Southern Power were immaterial.

In addition, the pre-tax gains that will be reclassified from Other Comprehensive Income to Fuel Expense by Southern Company for the twelve month period ended September 30, 2005 are immaterial.

At September 30, 2004, Southern Company had $3.2 billion notional amount of interest rate swaps outstanding with net fair value gains of $13.9 million as follows:

Fair Value Hedges

							Fair Value Gain (Loss)
	Notional	Fixed Rate			Variable	Maturity	September 30, 2004
	Amount	Received			Rate Paid	Date	(in millions)
Southern Company	$400 million		5.3	%	6-month LIBOR (in arrears) less 0.103%	February 2007	$	19.3
Southern Company	$40 million		7.625	%	6-month LIBOR (in arrears) plus 2.9225%	December 2009	$	1.5

Cash Flow Hedges

			Weighted				Fair Value
		Variable	Average				Gain (Loss)
	Notional	Rate	Fixed Rate			Maturity	September 30, 2004
	Amount	Received	Paid			Date	(in millions)
Alabama Power	$536 million	BMA Index		2.007	%	January 2007	$	2.9
Alabama Power	$195 million	3-month LIBOR		1.89	%	April 2006	$	2.3
Alabama Power	$250 million	3-month LIBOR		5.676	%	March 2035	$	(13.6	)
Alabama Power	$220 million	3-month LIBOR		3.4145	%	November 2007	$	(0.4	)
Georgia Power	$250 million	3-month LIBOR plus 0.125%		1.96	%	February 2005	$	0.2
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	$	0.7
Georgia Power	$250 million	3-month LIBOR		4.6629	%	February 2015	$	1.2
Georgia Power	$100 million	3-month LIBOR		5.029	%	December 2015	$	(0.3	)
Savannah Electric	$20 million	3-month LIBOR plus 0.375%		2.055	%	December 2004	$	0.0

122

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

For the twelve month period ended September 30, 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	$	(4.7	)
Georgia Power		(2.7	)
Gulf Power		(0.3	)
Savannah Electric		(0.1	)
Southern Power		(11.0	)
Southern Company	$	(18.8	)

(G) 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 and nine-month periods ending September 30, 2004 and 2003 are as follows:

	Southern			Alabama			Georgia			Gulf			Mississippi			Savannah
PENSION PLANS (in millions)	Company			Power			Power			Power			Power			Electric
Three Months Ended September 30, 2004
Service cost	$	32		$	8		$	10		$	1		$	2		$	1
Interest cost		67			18			25			3			3			1
Expected return on plan assets		(114	)		(34	)		(45	)		(5	)		(5	)		(1	)
Recognized net gain		(3	)		(1	)		(2	)		—			—			—
Net amortization		5			(1	)		2			—			—			—
Net cost (income)	$	(13	)	$	(10	)	$	(10	)	$	(1	)	$	—		$	1
Nine Months Ended September 30, 2004
Service cost	$	96		$	24		$	30		$	3		$	6		$	3
Interest cost		203			54			77			9			9			3
Expected return on plan assets		(340	)		(104	)		(135	)		(15	)		(15	)		(3	)
Recognized net gain		(5	)		(3	)		(4	)		—			—			—
Net amortization		13			1			6			—			—			—
Net cost (income)	$	(33	)	$	(28	)	$	(26	)	$	(3	)	$	—		$	3
Three Months Ended September 30, 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
Nine Months Ended September 30, 2003
Service cost	$	87		$	21		$	30		$	3		$	3		$	3
Interest cost		195			51			75			9			9			3
Expected return on plan assets		(336	)		(105	)		(135	)		(15	)		(12	)		(3	)
Recognized net gain		(33	)		(9	)		(15	)		—			—			—
Net amortization		12			3			6			—			—			—
Net cost (income)	$	(75	)	$	(39	)	$	(39	)	$	(3	)	$	—		$	3

123

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

POSTRETIREMENT PLANS	Southern			Alabama			Georgia			Gulf		Mississippi		Savannah
(in millions)	Company			Power			Power			Power		Power		Electric
Three Months Ended September 30, 2004
Service cost	$	7		$	2		$	3		$	—	$	—	$	—
Interest cost		21			5			9			1		1		1
Expected return on plan assets		(13	)		(5	)		(6	)		—		—		—
Net amortization		8			3			3			—		—		—
Net cost (income)	$	23		$	5		$	9		$	1	$	1	$	1
Nine Months Ended September 30, 2004
Service cost	$	21		$	6		$	7		$	—	$	—	$	—
Interest cost		69			17			31			3		3		3
Expected return on plan assets		(37	)		(13	)		(18	)		—		—		—
Net amortization		26			7			13			—		—		—
Net cost (income)	$	79		$	17		$	33		$	3	$	3	$	3
Three Months Ended September 30, 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
Nine Months Ended September 30, 2003
Service cost	$	18		$	6		$	6		$	—	$	—	$	—
Interest cost		69			18			30			3		3		3
Expected return on plan assets		(36	)		(12	)		(18	)		—		—		—
Net amortization		24			6			12			—		—		—
Net cost (income)	$	75		$	18		$	30		$	3	$	3	$	3

In the third quarter 2004, Southern Company prospectively adopted FASB Staff Position (FSP) 106-2, “Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Medicare Act).” The Medicare Act provides a 28% prescription drug subsidy for Medicare eligible retirees. FSP 106-2 requires recognition of the impacts of the Medicare Act in the accumulated post-retirement benefit obligation (APBO) and future cost of service for post-retirement medical plans and may be applied retroactively to the enactment of the Medicare Act in December 2003 or prospectively effective for the third quarter 2004. Southern Company elected to apply this treatment prospectively. As shown in the following table (amounts in millions), the effect of the subsidy reduced Southern Company’s expenses for the three months ended September 30, 2004 by approximately $5 million and is expected to have a similar impact on future expenses. The subsidy’s impact on the post-retirement medical plan APBO was a reduction of approximately $182 million. However, the ultimate impact on future periods is subject to federal regulations governing the subsidy created in the Medicare Act which are being finalized.

	Expense			APBO
Alabama Power	$	(1.6	)	$	(60.0	)
Georgia Power		(2.3	)		(72.0	)
Gulf Power		(0.2	)		(8.0	)
Mississippi Power		(0.2	)		(8.0	)
Savannah Electric		(0.1	)		(3.5	)
Southern Company	$	(5.0	)	$	(182.0	)

124

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(H)	See Note 1 to Southern Company’s financial statements under “Leveraged Leases” in Item 8 of the Form 10-K. In June 2004, Southern Company completed the purchase from Keyspan Corporation 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 was approximately $385 million. Southern Company’s net initial investment in the leveraged lease was approximately $68 million.
(I)	On July 1, 2004, Georgia Power filed a request with the Georgia PSC for an approximate 7 percent increase in retail revenues, effective January 1, 2005. The requested increase is based on a future test year ending July 31, 2005 and a proposed retail return on common equity of 12.5 percent.
	The increase in retail revenues is being requested to cover the higher costs of purchased power; operating and maintenance expenses; environmental compliance; and continued investment in new generation, transmission and distribution facilities to support growth and ensure reliability. Hearings on Georgia Power’s filed testimony were held in September 2004. In direct testimony filed on October 14, 2004, the Georgia PSC staff proposed certain adjustments to Georgia Power’s general rate case filing that indicate a $57 million revenue surplus. Georgia Power disagrees with a majority of the staff’s proposed adjustments. The hearings on the staff testimony were held in October 2004. Georgia Power plans to file rebuttal testimony in November 2004 with hearings on that testimony being held in the same month. Georgia Power expects the Georgia PSC to issue a final order in this matter during December 2004. The final outcome of this matter cannot now be determined. See Note 3 to the financial statements of Southern Company under “Georgia Power Retail Rate Orders” and of Georgia Power under “Retail Rate Orders” in Item 8 of the Form 10-K for additional information.
(J)	See Note 3 to the financial statements of Georgia Power, Savannah Electric and Southern Power under “FERC Matters” in Item 8 of the Form 10-K for information regarding PPAs between Southern Power and Georgia Power and Savannah Electric for Plant McIntosh capacity.
	In April 2003, Southern Power applied for FERC approval of these PPAs. In July 2003, the FERC accepted the PPAs to become effective June 1, 2005, subject to refund, and ordered that hearings be held. To ensure the timely completion of construction on McIntosh units 10 and 11 and their availability in the summer of 2005 as supply side resources for the retail customers in the State of Georgia, on May 7, 2004, Savannah Electric and Georgia Power requested the Georgia PSC to direct them to acquire the McIntosh construction project. Savannah Electric and Georgia Power proposed to place the units in rate base at a cost approved by the Georgia PSC and to recover the unit operation and maintenance costs as retail service expenses as may be approved by the Georgia PSC. The Georgia PSC issued such an order on May 18, 2004 and the transfer occurred on May 24, 2004. On May 20, 2004, Southern Power filed a request to withdraw the PPAs and to terminate the ongoing FERC proceedings. On August 4, 2004, the FERC issued a notice that it allowed the request to withdraw the PPAs to be accepted and to become effective by operation of law on July 20, 2004. However, the FERC made no determination on what additional steps may need to be taken with respect to testimony provided in the proceedings. The ultimate outcome of this matter cannot now be determined.
	The May 18, 2004 Georgia PSC order also directed Georgia Power and Savannah Electric to file an application within 10 days of completing such purchase to amend the resource certificate granted by the Georgia PSC in 2002 to describe the capacity resource as being the McIntosh units 10 and 11 (as opposed to the McIntosh PPAs), the approximate construction schedule (which is not expected to change) and the proposed rate base treatment. The application was filed on June 3, 2004 and the Georgia PSC will have 180 days to respond. The Georgia PSC is expected to review the application in accordance with its affiliate transaction guidelines, which require a lower of cost or market approach unless otherwise determined by the Georgia PSC. Georgia Power and Savannah Electric have submitted

125

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

	information showing that the book cost of the McIntosh construction project is lower than its market value. In direct testimony filed on October 14, 2004 the Georgia PSC staff proposed a different valuation that shows the market value for the Plant McIntosh construction project is less than book value. Georgia Power and Savannah Electric disagree with the proposed valuation methodology. However, full recovery of the project costs depends on the outcome of the Georgia PSC’s review. The Georgia PSC is expected to issue a final order in this matter in December 2004. In the event the Georgia PSC does not allow full recovery of the project costs, then part of such costs may have to be written off in accordance with FASB Statement No. 90, “Accounting for Abandonments and Disallowed Plant Costs.” At September 30, 2004, the investment in the McIntosh construction project totaled approximately $381.1 million and $74.2 million for Georgia Power and Savannah Electric, respectively. The ultimate outcome of the Georgia PSC’s review cannot now be determined.
(K)	See Note 3 to the financial statements of 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 reclassify 266 megawatts of Plant Daniel Units 3 and 4 generating capacity not currently included in jurisdictional cost of service and to modify certain provisions of the PEP used to set Mississippi Power’s retail base rates and the Mississippi PSC’s interim order creating a $60.3 million regulatory liability issued in December 2003. The Mississippi PSC held hearings on these matters in April 2004 and a final decision was issued on May 25, 2004. The Mississippi PSC approved Mississippi Power’s request to reclassify the 266 megawatts of Plant Daniel unit 3 and 4 capacity to jurisdictional cost of service effective January 1, 2004, and authorized Mississippi Power to include the related costs and revenue credits in jurisdictional rate base, cost of service and revenue requirement calculations for purposes of retail rate recovery. Mississippi Power will amortize the regulatory liability established pursuant to the Mississippi PSC’s interim order in December to earnings as follows: $16.5 million in 2004, $25.1 million in 2005, $13.0 million in 2006 and $5.7 million in 2007, resulting in increases to earnings in each of those years.
	In addition, the Mississippi PSC also approved Mississippi Power’s requested changes to PEP, including the use of a forward-looking test year, with appropriate oversight; annual, rather than semi-annual, filings; and certain changes to the performance indicator mechanisms. Rate changes will be limited to 4% of retail revenues annually under the revised PEP. The Mississippi PSC will review all aspects of PEP in 2007.
	See Note 1 to the financial statements of Mississippi Power under “Provision for Property Damage” in Item 8 of the Form 10-K. As a result of the restoration costs associated with Hurricane Ivan, an estimated amount of $7.6 million has been charged to the provision for property damage in September 2004, leaving a balance in the reserve of $0.3 million.
(L)	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 have allowed for the cost of a coal transloader then under construction to be amortized over 24 months through fuel expense and recovered through Savannah Electric’s fuel cost recovery clause. The transloader allows foreign coal to be off-loaded from ships at Savannah Electric’s Plant Kraft dock, and then transferred by rail to Plant McIntosh. On June 24, 2004, the Georgia PSC denied Savannah Electric’s request for this accounting order. Consequently, accumulated project costs were recorded as construction work in progress in June 2004 and were to be depreciated over the projects estimated useful life of 35 years once placed in service.
	In a separate action, on July 30, 2004, Savannah Electric filed for a fuel cost recovery rate increase with the Georgia PSC. The increase will allow for the recovery of fuel costs based on an estimate of future costs, as well as the collection of the existing under recovery of fuel expenses, over a two-year period. The amount under recovered at September 30, 2004 is approximately $14.5 million. On October 25,

126

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

	2004, the Georgia PSC approved Savannah Electric’s request, with no significant modifications. The approved increase will allow for the recovery of approximately $161 million in fuel costs, which includes an estimate of future fuel costs over the next 12 months and recovery of the existing under recovered fuel balance over the next 24 months. The approved fuel rate increase also includes the recovery of approximately $3.5 million in costs associated with the coal transloader to be amortized over a 21-month period, which the Georgia PSC had denied in June 2004. The new rates will become effective in November 2004.
(M)	On August 2, 2004, Alabama Power made a filing with the Alabama PSC to establish a specific rate mechanism for the recovery of retail costs associated with environmental laws, regulations or other such mandates. On October 5, 2004, the Alabama PSC voted to approve the rate mechanism as filed. The rate mechanism will begin operation in January 2005 and provide for the recovery of these costs pursuant to a factor that will be calculated annually. Environmental costs to be recovered would include (1) applicable operation and maintenance expenses, (2) depreciation and a return on invested capital beginning with 2005 investments and (3) a true up of prior period over/under recovery amounts. It is anticipated that for the first two years of the increase, retail rates will increase by approximately 1% ($33 million) in 2005 and approximately an additional 1% ($30 million) in 2006. In conjunction with the Alabama PSC’s approval, Alabama Power agreed to a moratorium until March 2007 on any retail rate increase under the previously approved Rate Stabilization and Equalization Plan. Any increase in March 2007 would be based upon the earned return on retail common equity at December 31, 2006. See Note 3 to the financial statements of Southern Company under “Retail Rate Adjustment Procedures” and of Alabama Power under “Alabama Power Retail Rate Adjustment Procedures” in Item 8 of the Form 10-K for further information on the Rate Stabilization and Equalization Plan.
	In a separate action, on October 19, 2004, Alabama Power received approval from the Alabama PSC to record its hurricane related operation and maintenance expenses in the natural disaster reserve, thereby deferring the approximately $41 million negative balance at September 30, 2004, for recovery in future periods in a manner which minimizes the impact on customers. This asset is included in Other Regulatory Assets in the accompanying Condensed Balance Sheet. See Note 1 to the financial statements of Alabama Power under “Natural Disaster Reserve” in Item 8 of the Form 10-K for additional information.
(N)	See Note 7 to the financial statements of Southern Company under “Guarantees” in Item 8 of the Form 10-K for information regarding guarantees made to certain counterparties regarding performance of contractual commitments by Mirant’s trading and marketing subsidiaries. During the third quarter of 2004, Mirant rejected in bankruptcy, and the bankruptcy court approved the rejection, of two contracts covered by Southern Company guarantees. As a result, in September 2004, Southern Company recorded reserves for its estimated exposure under these guarantees, which are included in other income and (expense) on the accompanying Consolidated Statements of Income and are not material. In October 2004, Southern Company paid approximately $1.1 million to extinguish all further liabilities under one of these guarantees, which had a notional amount of $5 million. Therefore, the total notional amount of guarantees remaining outstanding at October 31, 2004 was less than $25 million, of which $8 million will expire on December 31, 2004 and the remaining guarantees will expire by 2009.
(O)	See Note 3 to the financial statements of Gulf Power under “Environmental Cost Recovery” in Item 8 of the Form 10-K. In September 2004, Gulf Power increased its liability and related regulatory asset for the estimated costs of environmental remediation projects to by $47 million to $59.8 million. This increase relates to new regulations and stricter site closure criteria by the Florida Department of Environmental Protection (FDEP) for soil and groundwater contamination from herbicide applications. The schedule for completion of these remediation projects will be subject to FDEP approval.

127

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

See Note 1 to the financial statements of Gulf Power under “Provision for Property Damage” in Item 8 of the Form 10-K. As a result of the restoration costs associated with Hurricane Ivan, an estimated amount of $75.5 million has been charged to the provision for property damage in September 2004, which exceeded the existing balance. The $47.5 million balance is included in Other Regulatory Assets in the accompanying Condensed Balance Sheet as of September 30, 2004.

(P)

Southern Company’s reportable business segment is the sale of electricity in the Southeast by the 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 September 30, 2004:
Operating revenues	$	3,322	$	189	$	(153	)	$	3,358	$	110	$	(27	)	$	3,441
Segment net income (loss)		591		37		—			628		16		—			644
Nine Months Ended September 30, 2004:
Operating revenues		8,733		547		(418	)		8,862		402		(82	)		9,182
Segment net income (loss)		1,171		87		—			1,258		70		(1	)		1,327
Total assets at September 30, 2004	$	33,093	$	2,105	$	(165	)	$	35,033	$	1,951	$	(486	)	$	36,498
Three Months Ended September 30, 2003:
Operating revenues	$	3,172	$	208	$	(156	)	$	3,224	$	100	$	(23	)	$	3,301
Segment net income (loss)		562		41		—			603		16		—			619
Nine Months Ended September 30, 2003:
Operating revenues		8,144		554		(347	)		8,351		376		(61	)		8,666
Segment net income (loss)		1,170		143		—			1,313		36		—			1,349
Total assets at December 31, 2003	$	31,405	$	2,409	$	(122	)	$	33,692	$	1,671	$	(325	)	$	35,038

Products and Services

	Electric Utilities Revenues
Period	Retail		Wholesale		Other		Total
	(in millions)
Three Months Ended September 30, 2004	$	2,915	$	343	$	100	$	3,358
Three Months Ended September 30, 2003		2,757		376		91		3,224
Nine Months Ended September 30, 2004		7,537		1,038		287		8,862
Nine Months Ended September 30, 2003		6,907		1,034		410		8,351

128

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 6.       Exhibits.

(10) Material Contracts

Southern Company
(a)1	-	Form Award Agreement setting forth terms of nonqualified stock option grants, made under the Southern Company Omnibus Incentive Compensation Plan as Amended and Restated effective May 23, 2001, to employees of The Southern Company and its subsidiaries.
Alabama Power
(b)1	-	Form Award Agreement setting forth terms of nonqualified stock option grants, made under the Southern Company Omnibus Incentive Compensation Plan as Amended and Restated effective May 23, 2001, to employees of The Southern Company and its subsidiaries. (See Exhibit 10(a)1 herein)
Georgia Power
(c)1	-	Form Award Agreement setting forth terms of nonqualified stock option grants, made under the Southern Company Omnibus Incentive Compensation Plan as Amended and Restated effective May 23, 2001, to employees of The Southern Company and its subsidiaries. (See Exhibit 10(a)1 herein)
Gulf Power
(d)1	-	Form Award Agreement setting forth terms of nonqualified stock option grants, made under the Southern Company Omnibus Incentive Compensation Plan as Amended and Restated effective May 23, 2001, to employees of The Southern Company and its subsidiaries. (See Exhibit 10(a)1 herein)
Mississippi Power
(e)1	-	Form Award Agreement setting forth terms of nonqualified stock option grants, made under the Southern Company Omnibus Incentive Compensation Plan as Amended and Restated effective May 23, 2001, to employees of The Southern Company and its subsidiaries. (See Exhibit 10(a)1 herein)
(e)2	-	Separation Agreement between Mississippi Power and Don E. Mason dated July 26, 2004.

129

Item 6.       Exhibits.

(10)      Material Contracts (continued)

	Savannah Electric
	(f)1	-	Form Award Agreement setting forth terms of nonqualified stock option grants, made under the Southern Company Omnibus Incentive Compensation Plan as Amended and Restated effective May 23, 2001, to employees of The Southern Company and its subsidiaries. (See Exhibit 10(a)1 herein)
(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.)
	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.)

130

Item 6.       Exhibits.

(24)	Power of Attorney and Resolutions (continued)
	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.
	(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.

131

Item 6.       Exhibits.

(31)	Section 302 Certifications (continued)
	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.
	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.

132

Item 6.       Exhibits.

(32)	Section 906 Certifications (continued)
	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.

133

THE SOUTHERN COMPANY

SIGNATURES

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

	THE SOUTHERN COMPANY
By	David M. Ratcliffe
	Chairman 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: November 5, 2004

134

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: November 5, 2004

135

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, Treasurer and Assistant Secretary
	(Principal Financial Officer)
By	/s/ Wayne Boston
	(Wayne Boston, Attorney-in-fact)
		Date: November 5, 2004

136

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: November 5, 2004

137

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: November 5, 2004

138

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: November 5, 2004

139

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: November 5, 2004

140