The Southern Company (SO) 10-Q 2004 Q2 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 Quarter Ended June 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 ___

     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 June 30, 2004
The Southern Company	Par Value $5 Per Share		738,180,277
Alabama Power Company	Par Value $40 Per Share		7,750,000
Georgia Power Company	Without Par Value		7,761,500
Gulf Power Company	Without Par Value		992,717
Mississippi Power Company	Without Par Value		1,121,000
Savannah Electric and Power Company	Par Value $5 Per Share		10,844,635
Southern Power Company	Par Value $0.01 Per Share		1,000

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

2

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

	Page
	Number
DEFINITIONS		5
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
The Southern Company and Subsidiary Companies
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		28
Condensed Statements of Comprehensive Income		28
Condensed Statements of Cash Flows		29
Condensed Balance Sheets		30
Management’s Discussion and Analysis of Results of Operations and Financial Condition		32
Georgia Power Company
Condensed Statements of Income		42
Condensed Statements of Comprehensive Income		42
Condensed Statements of Cash Flows		43
Condensed Balance Sheets		44
Management’s Discussion and Analysis of Results of Operations and Financial Condition		46
Gulf Power Company
Condensed Statements of Income		57
Condensed Statements of Comprehensive Income		57
Condensed Statements of Cash Flows		58
Condensed Balance Sheets		59
Management’s Discussion and Analysis of Results of Operations and Financial Condition		61
Mississippi Power Company
Condensed Statements of Income		69
Condensed Statements of Comprehensive Income		69
Condensed Statements of Cash Flows		70
Condensed Balance Sheets		71
Management’s Discussion and Analysis of Results of Operations and Financial Condition		73
Savannah Electric and Power Company
Condensed Statements of Income		82
Condensed Statements of Comprehensive Income		82
Condensed Statements of Cash Flows		83
Condensed Balance Sheets		84
Management’s Discussion and Analysis of Results of Operations and Financial Condition		86
Southern Power Company
Condensed Statements of Income		95
Condensed Statements of Comprehensive Income		95
Condensed Statements of Cash Flows		96
Condensed Balance Sheets		97
Management’s Discussion and Analysis of Results of Operations and Financial Condition		99
Notes to the Condensed Financial Statements		105
Item 3. Quantitative and Qualitative Disclosures about Market Risk		26
Item 4. Controls and Procedures		26

3

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

	Page
	Number
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	118
Item 2. Changes in Securities, 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	118
Item 5. Other Information	Inapplicable
Item 6. Exhibits and Reports on Form 8-K	120
Signatures	127

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
IRS	Internal Revenue Service
LIBOR	London Interbank Offered Rate
Mirant	Mirant Corporation
Mississippi Power	Mississippi Power Company
Moody’s	Moody’s Investors Service, Inc.
NRC	Nuclear Regulatory Commission
PEP	Performance Evaluation Plan
PPA	Purchase Power Agreement
PSC	Public Service Commission
PUHCA	Public Utility Holding Company Act of 1935, as amended
retail operating companies	Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric
RTO	Regional Transmission Organization
S&P	Standard and Poor’s, a division of The McGraw-Hill Companies, Inc.
Savannah Electric	Savannah Electric and Power Company
SCS	Southern Company Services, Inc.
SEC	Securities and Exchange Commission
SMA	Supply Margin Assessment
Southern Company	The Southern Company
Southern Company GAS	Southern Company Gas LLC
Southern Company system	Southern Company, the retail operating companies, Southern Power and other subsidiaries
Southern LINC	Southern Communications Services, Inc.
Southern Power	Southern Power Company
Super Southeast	Southern Company’s traditional service territory, Alabama, Florida, Georgia and Mississippi, plus the surrounding states of Kentucky, Louisiana, North Carolina, South Carolina, Tennessee and Virginia
TVA	Tennessee Valley Authority

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, 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 Six Months
	Ended June 30,						Ended June 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
Operating Revenues:
Retail sales	$	2,477,856		$	2,175,706		$	4,621,945		$	4,149,550
Sales for resale		343,819			322,994			694,617			657,607
Other electric revenues		94,068			227,921			187,489			319,798
Other revenues		93,152			97,343			237,159			238,046
Total operating revenues		3,008,895			2,823,964			5,741,210			5,365,001
Operating Expenses:
Fuel		870,000			738,048			1,708,750			1,448,375
Purchased power		218,066			114,694			337,824			247,248
Other operations		569,421			550,012			1,083,458			1,036,561
Maintenance		268,459			238,954			505,956			468,664
Depreciation and amortization		233,449			258,297			474,103			503,285
Taxes other than income taxes		154,583			142,737			313,067			291,563
Total operating expenses		2,313,978			2,042,742			4,423,158			3,995,696
Operating Income		694,917			781,222			1,318,052			1,369,305
Other Income and (Expense):
Allowance for equity funds used during construction		9,467			4,173			17,651			12,024
Interest income		6,455			20,589			14,109			25,087
Equity in losses of unconsolidated subsidiaries		(21,253	)		(26,275	)		(46,569	)		(53,442	)
Leveraged lease income		17,005			15,698			32,932			33,413
Interest expense, net of amounts capitalized		(138,613	)		(134,188	)		(269,198	)		(257,949	)
Interest expense to affiliate trusts		(31,985	)		—			(31,985	)		—
Distributions on mandatorily redeemable preferred securities		—			(39,951	)		(31,168	)		(79,537	)
Preferred dividends of subsidiaries		(9,539	)		(5,472	)		(15,011	)		(10,222	)
Other income (expense), net		(15,302	)		1,854			(23,464	)		(2,429	)
Total other income and (expense)		(183,765	)		(163,572	)		(352,703	)		(333,055	)
Earnings Before Income Taxes		511,152			617,650			965,349			1,036,250
Income taxes		159,020			185,763			282,075			306,931
Earnings Before Cumulative Effect of Accounting Change		352,132			431,887			683,274			729,319
Cumulative effect of accounting change — less income taxes of $231		—			—			—			367
Consolidated Net Income	$	352,132		$	431,887		$	683,274		$	729,686
Common Stock Data:
Consolidated basic earnings per share	$	0.48		$	0.60		$	0.93		$	1.01
Consolidated diluted earnings per share	$	0.47		$	0.59		$	0.92		$	1.00
Average number of basic shares of common stock outstanding (in thousands)		738,185			724,627			737,412			721,785
Average number of diluted shares of common stock outstanding (in thousands)		742,453			730,286			741,920			727,140
Cash dividends paid per share of common stock	$	0.350		$	0.343		$	0.700		$	0.685

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 Six Months
	Ended June 30,
	2004			2003
	(in thousands)
Operating Activities:
Consolidated net income	$	683,274		$	729,686
Adjustments to reconcile consolidated net income to net cash provided from operating activities —
Depreciation and amortization		567,805			597,245
Deferred income taxes and investment tax credits		314,210			180,354
Equity in losses of unconsolidated subsidiaries		46,569			53,373
Leveraged lease income		(32,932	)		(33,413	)
Pension, postretirement, and other employee benefits		(2,164	)		(11,239	)
Tax benefit of stock options		15,110			15,159
Other, net		(30,850	)		(26,520	)
Changes in certain current assets and liabilities—
Receivables, net		(284,491	)		(16,074	)
Fossil fuel stock		(7,501	)		(28,952	)
Materials and supplies		(9,699	)		(14,235	)
Other current assets		(47,016	)		(99,780	)
Accounts payable		(24,771	)		(168,832	)
Accrued taxes		(104,674	)		160,343
Accrued compensation		(199,683	)		(226,314	)
Other current liabilities		21,953			49,282
Net cash provided from operating activities		905,140			1,160,083
Investing Activities:
Gross property additions		(1,039,230	)		(1,062,621	)
Cost of removal net of salvage		(42,078	)		(36,162	)
Other		(87,687	)		(101,300	)
Net cash used for investing activities		(1,168,995	)		(1,200,083	)
Financing Activities:
Increase in notes payable, net		170,439			477,254
Proceeds—
Long-term debt		840,301			2,045,495
Mandatorily redeemable preferred securities		200,000			—
Preferred stock		175,000			125,000
Common stock		62,059			275,917
Redemptions—
Long-term debt		(494,453	)		(2,177,420	)
Mandatorily redeemable preferred securities		(240,000	)		(240,000	)
Preferred stock		(28,388	)		—
Payment of common stock dividends		(515,824	)		(493,069	)
Other		(25,388	)		(35,570	)
Net cash provided from (used for) financing activities		143,746			(22,393	)
Net Change in Cash and Cash Equivalents		(120,109	)		(62,393	)
Cash and Cash Equivalents at Beginning of Period		311,274			273,032
Cash and Cash Equivalents at End of Period	$	191,165		$	210,639
Supplemental Cash Flow Information:
Cash paid during the period for—
Interest (net of $22,613 and $31,176 capitalized for 2004 and 2003, respectively)	$	277,681		$	247,929
Income taxes (net of refunds)	$	30,810		$	(3,159	)

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 June 30,			At December 31,
Assets	2004			2003
	(in thousands)
Current Assets:
Cash and cash equivalents	$	191,165		$	311,274
Receivables—
Customer accounts receivable		722,557			678,345
Unbilled revenues		362,276			275,395
Under recovered regulatory clause revenues		405,561			204,563
Other accounts and notes receivable		289,300			338,557
Accumulated provision for uncollectible accounts		(27,878	)		(30,155	)
Fossil fuel stock, at average cost		323,627			316,126
Vacation pay		101,478			96,700
Materials and supplies, at average cost		580,486			570,787
Prepaid expenses		154,996			125,477
Other		64,919			30,380
Total current assets		3,168,487			2,917,449
Property, Plant, and Equipment:
In service		40,886,764			40,339,785
Less accumulated depreciation		14,626,931			14,303,516
		26,259,833			26,036,269
Nuclear fuel, at amortized cost		210,268			222,667
Construction work in progress		1,435,403			1,274,888
Total property, plant, and equipment		27,905,504			27,533,824
Other Property and Investments:
Nuclear decommissioning trusts, at fair value		841,664			807,893
Leveraged leases		939,152			837,843
Other		342,623			238,193
Total other property and investments		2,123,439			1,883,929
Deferred Charges and Other Assets:
Deferred charges related to income taxes		866,777			874,443
Prepaid pension costs		946,015			911,442
Unamortized debt issuance expense		151,125			151,558
Unamortized loss on reacquired debt		333,079			326,389
Other		440,778			446,149
Total deferred charges and other assets		2,737,774			2,709,981
Total Assets	$	35,935,204		$	35,045,183

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 June 30,			At December 31,
Liabilities and Stockholders’ Equity	2004			2003
	(in thousands)
Current Liabilities:
Securities due within one year	$	923,979		$	741,073
Notes payable		737,890			567,771
Accounts payable		628,438			698,758
Customer deposits		194,368			189,000
Accrued taxes —
Income taxes		149,372			153,757
Other		227,899			248,937
Accrued interest		190,152			186,935
Accrued vacation pay		132,392			128,505
Accrued compensation		232,583			436,854
Other		281,001			264,688
Total current liabilities		3,698,074			3,616,278
Long-term Debt		10,274,868			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		4,854,278			4,586,377
Deferred credits related to income taxes		391,663			409,339
Accumulated deferred investment tax credits		565,785			579,490
Employee benefit obligations		812,852			765,390
Asset retirement obligations		873,679			845,392
Other cost of removal obligations		1,272,603			1,268,729
Miscellaneous regulatory liabilities		475,928			576,393
Other		269,517			262,579
Total deferred credits and other liabilities		9,516,305			9,293,689
Total Liabilities		25,449,891			24,974,471
Cumulative Preferred Stock of Subsidiaries		569,738			423,126
Common Stockholders’ Equity:
Common stock, par value $5 per share — Authorized — 1 billion shares Issued — June 30, 2004: 738,396,059 Shares;           — December 31, 2003: 735,021,270 Shares Treasury — June 30, 2004: 215,782 Shares;           — December 31, 2003: 192,691 Shares Par value		3,691,980			3,675,106
Paid-in capital		806,275			746,080
Treasury, at cost		(4,720	)		(4,066	)
Retained earnings		5,509,513			5,343,471
Accumulated other comprehensive loss		(87,473	)		(113,005	)
Total Common Stockholders’ Equity		9,915,575			9,647,586
Total Liabilities and Stockholders’ Equity	$	35,935,204		$	35,045,183

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 Six Months
	Ended June 30,						Ended June 30,
	2004			2003			2004		2003
	(in thousands)						(in thousands)
Consolidated Net Income	$	352,132		$	431,887		$	683,274	$	729,686
Other comprehensive income (loss):
Change in fair value of marketable securities, net of tax of $(754), $-, $3,307 and $-, respectively		(1,721	)		(16	)		5,902		96
Changes in fair value of qualifying hedges, net of tax of $15,514, $(9,465), $7,803 and $(10,106), respectively		25,274			(12,787	)		12,570		(13,504	)
Less: Reclassification adjustment for amounts included in net income, net of tax of $2,214, $38, $4,385 and $(4,660), respectively		3,570			1,010			7,060		(6,357	)
COMPREHENSIVE INCOME	$	379,255		$	420,094		$	708,806	$	709,921

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

OVERVIEW

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

RESULTS OF OPERATIONS

Earnings

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

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Second Quarter						Year-To-Date
	(in thousands)			%			(in thousands)			%
Retail sales	$	302,150			13.9		$	472,395			11.4
Sales for resale		20,825			6.4			37,010			5.6
Other electric revenues		(133,853	)		(58.7	)		(132,309	)		(41.4	)
Fuel expense		131,952			17.9			260,375			18.0
Purchased power expense		103,372			90.1			90,576			36.6
Other operations and maintenance expenses		48,914			6.2			84,189			5.6
Depreciation and amortization expense		(24,848	)		(9.6	)		(29,182	)		(5.8	)
Taxes other than income taxes		11,846			8.3			21,504			7.4
Interest income		(14,134	)		(68.6	)		(10,978	)		(43.8	)
Other income (expense), net		(17,156	)		N/M			(21,035	)		N/M

N/M Not meaningful

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 $109 million, or 7.1%, in the second quarter 2004, and increased by $181 million, or 6.2%, year-to-date 2004 when compared to the same periods in 2003. In the second quarter and year-to-date 2004, retail kilowatt-hour energy sales increased by 5.3% and 4.9%, respectively, over the same periods a year ago, primarily due to customer and demand growth and the still improving economy evidenced by increases in residential, commercial and industrial second quarter kilowatt-hour energy sales of 8.5%, 5.1% and 3.0%, respectively. Year-to-date residential, commercial and industrial kilowatt-hour energy sales increased by 6.9%, 4.3% and 3.9%, respectively, when compared to the same period in 2003. In the second quarter and year-to-date 2004, temperatures were slightly above normal, while mild weather in the same periods last year resulted in reduced demand by retail customers. The number of retail customers increased by 1.8%, and average consumption by residential customers increased by 5.2% for the year-to-date 2004 when compared to year-to-date 2003.

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

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

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

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

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

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

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

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

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

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

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

Future Earnings Potential

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

Environmental Matters

New Source Review Actions and Plant Wansley Environmental Litigation

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

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

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

Global Warming Litigation

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

Other Environmental Matters

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

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

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

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

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

FERC and State PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — FERC Matters — Market-Based Rate Authority” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “FERC Matters” in Item 8 of the Form 10-K. On April 14, 2004, the FERC issued an order that abandoned the SMA test and adopted a new interim analysis for measuring generation market power. This new interim approach includes a pivotal supplier analysis and a wholesale market share analysis, the results of which provide a rebuttable presumption regarding generation market power. The FERC’s order also sets forth procedures for rebutting these presumptions and addresses mitigation measures for those entities that are found to have market power. In the absence of specific mitigation measures, the order includes several cost-based mitigation measures that would apply by default. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. Southern Company, the retail operating companies and Southern Power believe that it may be difficult for a traditional utility company, or an affiliate thereof, with a significant load service obligation and generation to satisfy that obligation, and that is not a member of a large, FERC-approved RTO, to pass all aspects of the market power screens as currently designed. However, each of the companies believes that it has an appropriate basis to rebut the generation market power presumption.

     On July 8, 2004, the FERC denied Southern Company’s request for rehearing, along with a number of others, and reaffirmed the interim tests that it adopted in April. Southern Company will submit the required analyses by August 9, 2004. In the event that the FERC’s default mitigation measures are ultimately applied, Southern Power and the retail operating companies may be required to charge cost-based rates, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

Transmission

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

Plant McIntosh Construction Project

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

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

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

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

Georgia Power Retail Rate Case

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

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

Alabama Power Environmental Rate Filing

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

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

Mississippi Power Retail Rate Filing

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

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

Retail Fuel Cost Recovery

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

Mirant Related Matters

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

Income Tax Matters

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

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

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

Other Matters

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

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

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

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

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

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

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

New Accounting Standards

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

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

FINANCIAL CONDITION AND LIQUIDITY

Overview

Major changes in Southern Company’s financial condition during the first six months of 2004 included $1.0 billion used for gross property additions to utility plant. The funds for these additions and other capital requirements were primarily obtained from net proceeds from short- and long-term security issuances of approximately $685 million and operating activities. See Southern Company’s Condensed Consolidated Statements of Cash Flows and “Financing Activities” herein for further details.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Capital Requirements and Contractual Obligations” of Southern Company in Item 7 of the Form 10-K for a description of Southern Company’s capital requirements for its construction program and other funding requirements associated with scheduled maturities of long-term debt, as well as the related interest, preferred stock dividends, leases, trust funding requirements and other purchase commitments. Approximately $924 million will be required by June 30, 2005 for redemptions and maturities of long-term debt.

Sources of Capital

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

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

ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Sources of Capital” of Southern Company in Item 7 of the Form 10-K for additional information.

     Southern Company’s current liabilities exceed current assets because of the continued use of short-term debt as a funding source to meet cash needs, as well as scheduled maturities of long-term debt. To meet short term cash needs and contingencies, the Southern Company system had at June 30, 2004 approximately $191 million of cash and cash equivalents and approximately $3.5 billion of unused credit arrangements with banks, of which $251 million expire in 2004, $1.5 billion expire in 2005 and $1.7 billion expire in 2006 and beyond. Of the facilities maturing in 2004 and 2005, $1.22 billion contain provisions allowing two-year term loans executable at the expiration date and $215 million contain provisions allowing one-year term loans executable at the expiration date. These unused credit arrangements also provide liquidity support to variable rate pollution control bonds and commercial paper programs. Southern Company expects to renew its credit facilities, as needed, prior to expiration. The retail operating companies may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of each of the retail operating companies. At June 30, 2004, the Southern Company system had outstanding commercial paper of $727 million and extendible commercial notes of $10.9 million.

     Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.

Off-Balance Sheet Financing Arrangements

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

Credit Rating Risk

Southern Company and its subsidiaries do not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral — but not accelerated payment — in the event of a credit rating change to below investment grade. These contracts are primarily for physical electricity purchases and sales, fixed-price physical gas purchases and agreements covering interest rate swaps. At June 30, 2004, the maximum potential collateral requirements were approximately $429.8 million. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit or cash.

Market Price Risk

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

     Due to cost-based rate regulations, the retail operating companies have limited exposure to market volatility in interest rates, commodity fuel prices and prices of electricity. To mitigate residual risks relative to movements in electricity prices, the retail operating companies and Southern Power enter into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas purchases. Also, the retail operating companies have each implemented fuel-hedging

23

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

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

	Second Quarter
	2004			Year-to-Date
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	43,512		$	15,825
Contracts realized or settled		(19,702	)		(25,349	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes		2,808			36,142
Contracts at June 30, 2004	$	26,618		$	26,618

	Source of June 30, 2004
	Valuation Prices
	Total		Maturity
	Fair Value		Year 1		1-3 Years
	(in thousands)
Actively quoted	$	26,618	$	23,155	$	3,463
External sources		—		—		—
Models and other methods		—		—		—
Contracts at June 30, 2004	$	26,618	$	23,155	$	3,463

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

Financing Activities

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

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

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

24

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

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

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

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

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

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

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

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

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

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

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

25

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 second quarter of 2004 that have materially affected or are reasonably likely to materially affect, Southern Company’s, the retail operating companies’ or Southern Power’s internal control over financial reporting.

26

ALABAMA POWER COMPANY

27

ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
Operating Revenues:
Retail sales	$	847,148		$	748,906		$	1,591,781		$	1,419,735
Sales for resale —
Non-affiliates		120,491			116,212			232,436			235,493
Affiliates		53,945			54,741			119,733			116,728
Other revenues		37,233			30,287			74,561			68,311
Total operating revenues		1,058,817			950,146			2,018,511			1,840,267
Operating Expenses:
Fuel		277,110			240,791			549,089			480,535
Purchased power —
Non-affiliates		65,508			27,476			94,150			56,306
Affiliates		60,400			52,613			120,332			94,109
Other operations		160,889			159,642			307,275			294,185
Maintenance		90,718			81,646			171,105			156,221
Depreciation and amortization		106,146			104,505			211,499			204,716
Taxes other than income taxes		59,328			56,482			123,775			116,567
Total operating expenses		820,099			723,155			1,577,225			1,402,639
Operating Income		238,718			226,991			441,286			437,628
Other Income and (Expense):
Allowance for equity funds used during construction		3,914			3,062			8,024			7,799
Interest income		3,890			4,270			8,329			7,546
Interest expense, net of amounts capitalized		(52,367	)		(58,941	)		(102,446	)		(113,514	)
Interest expense to affiliate trusts		(4,181	)		—			(4,181	)		—
Distributions on mandatorily redeemable preferred securities		—			(3,939	)		(3,938	)		(7,380	)
Other income (expense), net		(6,415	)		(4,315	)		(10,753	)		(10,034	)
Total other income and (expense)		(55,159	)		(59,863	)		(104,965	)		(115,583	)
Earnings Before Income Taxes		183,559			167,128			336,321			322,045
Income taxes		72,567			55,758			129,835			114,831
Net Income		110,992			111,370			206,486			207,214
Dividends on Preferred Stock		6,705			4,747			11,452			8,772
Net Income After Dividends on Preferred Stock	$	104,287		$	106,623		$	195,034		$	198,442

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months					For the Six Months
	Ended June 30,					Ended June 30,
	2004		2003			2004		2003
	(in thousands)					(in thousands)
Net Income After Dividends on Preferred Stock	$	104,287	$	106,623		$	195,034	$	198,442
Other comprehensive income:
Change in fair value of marketable securities, net of tax of $285 and $285, respectively		470		—			470		—
Changes in fair value of qualifying hedges, net of tax of $11,847, $(627), $5,685 and $(1,423), respectively		19,486		(686	)		9,350		(1,994	)
Less: Reclassification adjustment for amounts included in net income, net of tax of $718, $893, $1,572 and $1,645, respectively		1,180		1,808			2,585		3,044
COMPREHENSIVE INCOME	$	125,423	$	107,745		$	207,439	$	199,492

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

28

ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months
	Ended June 30,
	2004			2003
	(in thousands)
Operating Activities:
Net income	$	206,486		$	207,214
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		239,039			232,181
Deferred income taxes and investment tax credits, net		85,355			32,712
Pension, postretirement, and other employee benefits		(19,862	)		(15,160	)
Tax benefit of stock options		5,419			8,029
Other, net		(28,142	)		(41,268	)
Changes in certain current assets and liabilities —
Receivables, net		(107,575	)		(10,236	)
Fossil fuel stock		(1,631	)		(7,857	)
Materials and supplies		(3,800	)		(3,732	)
Other current assets		(30,012	)		(32,999	)
Accounts payable		(105,485	)		(63,625	)
Accrued taxes		66,254			60,963
Accrued compensation		(32,216	)		(41,073	)
Other current liabilities		18,023			35,113
Net cash provided from operating activities		291,853			360,262
Investing Activities:
Gross property additions		(376,470	)		(351,330	)
Cost of removal net of salvage		(18,743	)		(17,752	)
Other		14,832			3,031
Net cash used for investing activities		(380,381	)		(366,051	)
Financing Activities:
Increase in notes payable, net		45,978			33,940
Proceeds —
Senior notes		350,000			1,065,000
Preferred stock		100,000			125,000
Common stock		20,000			25,000
Capital contributions from parent company		—			133
Redemptions —
Senior notes		(200,000	)		(1,000,800	)
Other long-term debt		(1,443	)		(472	)
Payment of preferred stock dividends		(9,274	)		(8,659	)
Payment of common stock dividends		(218,650	)		(215,100	)
Other		(13,035	)		(11,881	)
Net cash provided from financing activities		73,576			12,161
Net Change in Cash and Cash Equivalents		(14,952	)		6,372
Cash and Cash Equivalents at Beginning of Period		42,752			22,685
Cash and Cash Equivalents at End of Period	$	27,800		$	29,057
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $3,343 and $3,953 capitalized for 2004 and 2003, respectively)	$	81,471		$	85,222
Income taxes (net of refunds)	$	9,554		$	48,385

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

29

ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Assets	2004			2003
	(in thousands)
Current Assets:
Cash and cash equivalents	$	27,800		$	42,752
Receivables —
Customer accounts receivable		244,269			223,865
Unbilled revenues		117,483			95,953
Under recovered regulatory clause revenues		98,155			16,697
Other accounts and notes receivable		44,064			53,547
Affiliated companies		41,346			48,876
Accumulated provision for uncollectible accounts		(5,688	)		(4,756	)
Fossil fuel stock, at average cost		88,624			86,993
Vacation pay		35,530			35,530
Materials and supplies, at average cost		215,490			211,690
Prepaid expenses		63,342			44,608
Other		36,308			19,454
Total current assets		1,006,723			875,209
Property, Plant, and Equipment:
In service		14,389,837			14,224,117
Less accumulated provision for depreciation		4,984,801			4,905,920
		9,405,036			9,318,197
Nuclear fuel, at amortized cost		94,076			93,611
Construction work in progress		402,384			321,316
Total property, plant, and equipment		9,901,496			9,733,124
Other Property and Investments:
Equity investments in unconsolidated subsidiaries		47,995			47,811
Nuclear decommissioning trusts, at fair value		404,223			384,574
Other		26,211			16,992
Total other property and investments		478,429			449,377
Deferred Charges and Other Assets:
Deferred charges related to income taxes		319,255			321,077
Prepaid pension costs		467,081			446,256
Unamortized loss on reacquired debt		113,520			110,946
Other		140,394			134,635
Total deferred charges and other assets		1,040,250			1,012,914
Total Assets	$	12,426,898		$	12,070,624

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 June 30,		At December 31,
Liabilities and Stockholder’s Equity	2004		2003
	(in thousands)
Current Liabilities:
Securities due within one year	$	525,015	$	526,019
Notes payable		45,978		—
Accounts payable —
Affiliated		113,263		135,017
Other		87,781		162,314
Customer deposits		49,828		47,507
Accrued taxes —
Income taxes		86,242		83,544
Other		67,639		22,273
Accrued interest		51,089		46,489
Accrued vacation pay		35,530		35,530
Accrued compensation		43,404		75,620
Other		33,218		34,513
Total current liabilities		1,138,987		1,168,826
Long-term Debt		3,529,766		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		1,687,565		1,571,076
Deferred credits related to income taxes		154,943		162,168
Accumulated deferred investment tax credits		210,830		216,309
Employee benefit obligations		181,923		180,960
Deferred capacity revenues		31,015		36,567
Asset retirement obligations		370,892		358,759
Asset retirement obligation regulatory liability		133,777		127,346
Other cost of removal obligations		585,849		574,445
Miscellaneous regulatory liabilities		74,952		86,323
Other		31,582		37,525
Total deferred credits and other liabilities		3,463,328		3,351,478
Total Liabilities		8,441,360		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 — June 30, 2004: 7,750,000 Shares
— December 31, 2003: 7,250,000 Shares		310,000		290,000
Paid-in capital		1,932,387		1,926,970
Premium on preferred stock		99		99
Retained earnings		1,266,102		1,291,558
Accumulated other comprehensive income (loss)		4,438		(7,967	)
Total common stockholder’s equity		3,513,026		3,500,660
Total Liabilities and Stockholder’s Equity	$	12,426,898	$	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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

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

RESULTS OF OPERATIONS

Earnings

Alabama Power’s net income after dividends on preferred stock for the second quarter and year-to-date 2004 was $104.3 million and $195.0 million, respectively, compared to $106.6 million and $198.4 million, respectively, for the corresponding periods of 2003. Earnings in the second quarter of 2004 decreased by $2.3 million, or 2.2%, primarily due to higher maintenance expenses and income and other taxes, partially offset by an increase in retail base-rate revenues and a decrease in interest expense. Earnings year-to-date 2004 decreased by $3.4 million, or 1.7%, principally due to higher maintenance expense, depreciation expense, and income and other taxes. These increases were partially offset by an increase in base rate revenues and a decrease in interest expense.

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Second Quarter						Year-To-Date
	(in thousands)			%			(in thousands)			%
Retail sales	$	98,242			13.1		$	172,046			12.1
Other revenues		6,946			22.9			6,250			9.1
Fuel expense		36,319			15.1			68,554			14.3
Purchased power — non-affiliates		38,032			138.4			37,844			67.2
Purchased power — affiliates		7,787			14.8			26,223			27.9
Maintenance expense		9,072			11.1			14,884			9.5
Depreciation and amortization		1,641			1.6			6,783			3.3
Taxes other than income taxes		2,846			5.0			7,208			6.2
Interest expense, net of amounts capitalized		(6,574	)		(11.2	)		(11,068	)		(9.8	)
Income taxes		16,809			30.1			15,004			13.1
Dividends on preferred stock		1,958			41.2			2,680			30.6

     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 $25.5 million, or 4.6%, for the second quarter 2004 and $47.1 million, or 4.5%, 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 residential, commercial, and industrial customers increased 7.1%, 4.2%, and 3.0%, respectively, for the second quarter 2004 and increased 5.7%, 3.4% and 5.8%, respectively, year-to-date 2004 when compared to the corresponding periods of 2003 primarily due to more favorable weather conditions and improved industrial sales mainly in the coal mining, primary metal and automotive sectors.

32

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

     Other revenues.The increases in other revenues for the second quarter and year-to-date 2004 are attributed to a $3.4 million increase in revenues from cogeneration steam facilities due to increased fuel revenue resulting from higher gas prices, a $1.6 million increase in rent from pole attachments and a $1.0 million increase in transmission revenues when compared to the same periods 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 second quarter 2004 when compared to the corresponding period in 2003 mainly due to a 35.7% increase in natural gas prices and a 10.8% increase in generation from natural gas-fired generating facilities. The year-to-date 2004 increase in fuel expense when compared to the same period in 2003 is mainly due to a 30.6% increase in natural gas prices and a 24.0% increase in generation from gas-fired generating facilities. These increases in generation from gas-fired facilities in the second quarter and year-to-date 2004 when compared to the corresponding periods in 2003 are mainly due to an increased energy demand coupled with a 68.4% decrease and a 48.4% decrease, respectively, 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. In the second quarter and year-to-date 2004, purchased power from non-affiliates increased when compared to the same periods in 2003 primarily due to a 99.5% increase in energy purchased during the second quarter 2004 even though purchased power prices decreased by 31.0% during the second quarter 2004. Increased purchases were used to help meet the increased energy demand for retail sales. 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 increased in the second quarter and year-to-date 2004 over the same periods in 2003 due to a PPA between Alabama Power and Southern Power that began in June 2003. The capacity component of these transactions was $13.0 million in the second quarter 2004 and $22.4 million year-to-date 2004. Purchases of energy will vary depending on demand and the availability and cost of generating resources at each company. 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. 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 on base rate adjustments for certificated PPA expenses.

     Maintenance expense.The increase in maintenance expense for the second quarter 2004 when compared to the same period in 2003 is attributed to a $3.3 million increase in distribution expense, a $2.1 million increase in Washington County combined cycle turbine expense primarily due to caustic water damage and a $1.9 million increase in transmission expense. The year-to-date 2004 increase in maintenance expense is mainly due to a $6.6 million increase in distribution expense and a $3.7 million increase in transmission expense. These increases in transmission and distribution are mainly related to scheduled work performed on overhead lines.

     Depreciation and amortization expense.The increases in depreciation and amortization expense for the second 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 second quarter 2004 increase in taxes other than income taxes is mainly due to a $1.3 million increase in property tax expense as a result of a higher assessed property values when compared to the corresponding period in 2003. The year-to-date 2004 increase in taxes other than income

33

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

taxes when compared to the same period in 2003 is primarily due to a $2.7 million increase in payroll taxes, a $2.7 million increase in property tax expense and a $1.7 million increase in the state public utility license tax because of increased retail revenues.

     Interest expense, net of amounts capitalized. The decrease in interest expense, net of amounts capitalized, during the second quarter and year-to-date 2004 when compared to the same periods in 2003 is 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 second quarter and year-to-date of 2004 due primarily to greater taxable income in the second quarter of 2004 compared to 2003, resulting in an additional $6.5 million tax expense. Income tax expense increased an additional $4.2 million in the second quarter of 2004 due to a state income tax actualization adjustment. Also, an income tax settlement which was recorded in 2003 resulted in a $4.7 million increase to net income in the second quarter of 2003.

     Dividends on preferred stock. Dividends on preferred stock increased for the second 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.

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 the EPA 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 final resolution of the TVA case. With the denial of the EPA’s petition for review, the Court of Appeals’ decision became final. Alabama Power and the EPA

34

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

jointly notified the District Court for the Northern District of Alabama, where the case against Alabama Power is pending and requested that the stay be lifted. On June 16, 2004, the District Court lifted the stay, placing the case back onto the District Court’s active docket. An adverse outcome in this case could require substantial capital expenditures that cannot be determined at this time and could possibly require payment of substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates.

Global Warming Litigation

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

Other Environmental Matters

On March 12, 2004, the EPA redesignated the Birmingham, Alabama area from nonattainment to attainment under the one-hour ozone national ambient air quality standard. On April 30, 2004, the EPA published its eight-hour ozone nonattainment designations and a portion of the rules implementing the new eight-hour standard. Within Alabama Power’s service area, Birmingham has been designated as nonattainment under the eight-hour ozone standard. Under the implementation provisions of the new rule, the EPA announced that the one-hour ozone standard will be revoked on June 15, 2005. The impact of the eight-hour designations and the new standards will depend on the development and implementation of applicable state regulations and therefore cannot be determined at this time.

     Additionally, on 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.

35

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

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 includes a pivotal supplier analysis and a wholesale market share analysis, the results of which provide a rebuttable presumption regarding generation market power. The FERC’s order also sets forth procedures for rebutting these presumptions and addresses mitigation measures for those entities that are found to have market power. In the absence of specific mitigation measures, the order includes several cost-based mitigation measures that would apply by default. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. Southern Company, the retail operating companies, including Alabama Power, and Southern Power believe that it may be difficult for a traditional utility company, or an affiliate thereof, with a significant load service obligation and generation to satisfy that obligation, and that is not a member of a large, FERC-approved RTO, to pass all aspects of the market power screens as currently designed. However, each of the companies believes that it has an appropriate basis to rebut the generation market power presumption.

     On July 8, 2004, the FERC denied Southern Company’s request for rehearing, along with a number of others, and reaffirmed the interim tests that it adopted in April. Southern Company will submit the required analyses by August 9, 2004. In the event that the FERC’s default mitigation measures are ultimately applied, Southern Power and the retail operating companies may be required to charge cost-based rates, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

Transmission

See MANAGEMENT’S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS – “Future Earnings Potential – FERC Matters — Transmission” of Alabama 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.

Environmental Rate Filing

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

36

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

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. 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.

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. Implementation plans for the measures ordered by the NRC to be in effect by October 29, 2004 have been finalized based on current interpretations of the requirements. Alabama Power currently estimates its expenditures related to these security measures to total $9.6 million, of which $9.3 million will be capitalized. These estimates are subject to change in the event additional NRC guidance is provided.

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

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

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Alabama Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Alabama Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Alabama Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See 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.

37

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

FINANCIAL CONDITION AND LIQUIDITY

Overview

Major changes in Alabama Power’s financial condition during the first six months of 2004 included the addition of approximately $376 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities and net proceeds from security issuances of $269 million. 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. Approximately $525 million will be required by June 30, 2005 for maturities of long-term debt.

Sources of Capital

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

     Alabama Power’s current liabilities exceed current assets primarily because of scheduled maturities of long-term debt. To meet short-term cash needs and contingencies, at June 30, 2004 Alabama Power had $28 million of cash and cash equivalents, unused committed lines of credit of approximately $808 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 ($165 million), 2005 ($418 million) and 2007 ($225 million). Alabama Power

38

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

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 June 30, 2004, Alabama Power had $46 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 agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are contracts that could require collateral – but not accelerated payment – in the event of a credit rating change to below investment grade. These contracts are primarily for physical electricity purchases and sales, fixed price physical gas purchases and agreements covering interest rate swaps. At June 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.

Market Price Risk

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

     Due to cost-based rate regulations, Alabama Power has limited exposure to market volatility in interest rates, commodity fuel prices and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Alabama Power enters into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas purchases. Alabama Power has also implemented a retail fuel hedging program at the instruction of the Alabama PSC. The fair value of derivative energy contracts at June 30, 2004 was as follows:

	Second Quarter
	2004			Year-to-Date
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	17,858		$	6,413
Contracts realized or settled		(8,593	)		(11,782	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes		2,282			16,916
Contracts at June 30, 2004	$	11,547		$	11,547

39

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

	Source of June 30, 2004
	Valuation Prices
	Total		Maturity
	Fair Value		Year 1		1-3 Years
	(in thousands)
Actively quoted	$	11,547	$	10,715	$	832
External sources		—		—		—
Models and other methods		—		—		—
Contracts at June 30, 2004	$	11,547	$	10,715	$	832

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

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

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

     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.

40

GEORGIA POWER COMPANY

41

GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
Operating Revenues:
Retail sales	$	1,199,220		$	1,041,604		$	2,237,015		$	2,007,311
Sales for resale —
Non-affiliates		61,597			59,452			127,053			133,438
Affiliates		48,950			46,365			103,092			93,851
Other revenues		43,395			42,672			85,391			81,931
Total operating revenues		1,353,162			1,190,093			2,552,551			2,316,531
Operating Expenses:
Fuel		324,220			271,428			609,434			513,931
Purchased power —
Non-affiliates		97,392			62,052			160,081			134,088
Affiliates		139,319			121,605			274,461			235,448
Other operations		220,799			199,487			419,192			385,477
Maintenance		124,675			107,628			233,143			218,572
Depreciation and amortization		68,542			86,003			136,279			171,745
Taxes other than income taxes		56,488			49,290			112,920			102,465
Total operating expenses		1,031,435			897,493			1,945,510			1,761,726
Operating Income		321,727			292,600			607,041			554,805
Other Income and (Expense):
Allowance for equity funds used during construction		4,700			846			8,047			3,802
Interest income		1,768			14,970			4,120			15,085
Interest expense, net of amounts capitalized		(48,293	)		(47,925	)		(93,943	)		(92,288	)
Interest expense to affiliate trusts		(14,810	)		—			(14,810	)		—
Distributions on mandatorily redeemable preferred securities		—			(14,919	)		(15,839	)		(29,838	)
Other income (expense), net		(5,613	)		9,353			(10,008	)		12,265
Total other income and (expense)		(62,248	)		(37,675	)		(122,433	)		(90,974	)
Earnings Before Income Taxes		259,479			254,925			484,608			463,831
Income taxes		103,597			96,231			184,717			171,699
Net Income		155,882			158,694			299,891			292,132
Dividends on Preferred Stock		167			167			335			335
Net Income After Dividends on Preferred Stock	$	155,715		$	158,527		$	299,556		$	291,797

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months					For the Six Months
	Ended June 30,					Ended June 30,
	2004		2003			2004		2003
	(in thousands)					(in thousands)
Net Income After Dividends on Preferred Stock	$	155,715	$	158,527		$	299,556	$	291,797
Other comprehensive income (loss):
Changes in fair value of qualifying hedges, net of tax of $4,590, $(380), $3,710 and $(1,346), respectively		7,277		(1,015	)		5,882		(2,547	)
Less: Reclassification adjustment for amounts included in net income, net of tax of $558, $79, $1,237 and $79, respectively		884		134			1,961		127
COMPREHENSIVE INCOME	$	163,876	$	157,646		$	307,399	$	289,377

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

42

GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months
	Ended June 30,
	2004			2003
	(in thousands)
Operating Activities:
Net income	$	299,891		$	292,132
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		177,927			220,465
Deferred income taxes and investment tax credits, net		127,958			93,581
Pension, postretirement, and other employee benefits		(11,339	)		(17,271	)
Tax benefit of stock options		5,570			9,590
Other, net		(18,859	)		7,115
Changes in certain current assets and liabilities —
Receivables, net		(146,027	)		33,395
Fossil fuel stock		(6,309	)		(22,658	)
Materials and supplies		(2,680	)		(8,000	)
Other current assets		29,779			31,641
Accounts payable		63,354			(72,695	)
Accrued taxes		(78,952	)		16,600
Accrued compensation		(67,828	)		(68,314	)
Other current liabilities		25,648			2,201
Net cash provided from operating activities		398,133			517,782
Investing Activities:
Gross property additions		(672,424	)		(370,727	)
Cost of removal net of salvage		(14,236	)		(10,786	)
Change in construction payables, net of joint owner portion		(23,743	)		(59,455	)
Other		10,899			(2,334	)
Net cash used for investing activities		(699,504	)		(443,302	)
Financing Activities:
Increase (decrease) in notes payable, net		234,749			(17,633	)
Proceeds —
Senior notes		350,000			700,000
Mandatorily redeemable preferred securities		200,000			—
Capital contributions from parent company		223,000			158
Redemptions —
Senior notes		(200,000	)		(465,000	)
Mandatorily redeemable preferred securities		(200,000	)		—
Payment of common stock dividends		(282,750	)		(282,900	)
Other		(12,069	)		(15,179	)
Net cash provided from (used for) financing activities		312,930			(80,554	)
Net Change in Cash and Cash Equivalents		11,559			(6,074	)
Cash and Cash Equivalents at Beginning of Period		8,699			16,873
Cash and Cash Equivalents at End of Period	$	20,258		$	10,799
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $2,804 and $2,852 capitalized for 2004 and 2003, respectively)	$	120,449		$	107,940
Income taxes (net of refunds)	$	35,078		$	(21,958	)

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

43

GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Assets	2004			2003
	(in thousands)
Current Assets:
Cash and cash equivalents	$	20,258		$	8,699
Receivables —
Customer accounts receivable		300,311			261,771
Unbilled revenues		167,852			117,327
Under recovered regulatory clause revenues		254,428			151,447
Other accounts and notes receivable		77,475			101,783
Affiliated companies		30,935			52,413
Accumulated provision for uncollectible accounts		(6,025	)		(5,350	)
Fossil fuel stock, at average cost		143,846			137,537
Vacation pay		54,928			50,150
Materials and supplies, at average cost		273,720			271,040
Prepaid expenses		10,850			46,157
Other		11,010			83
Total current assets		1,339,588			1,193,057
Property, Plant, and Equipment:
In service		18,472,477			18,171,862
Less accumulated provision for depreciation		7,068,465			6,898,725
		11,404,012			11,273,137
Nuclear fuel, at amortized cost		116,191			129,056
Construction work in progress		639,952			341,783
Total property, plant, and equipment		12,160,155			11,743,976
Other Property and Investments:
Equity investments in unconsolidated subsidiaries		68,703			38,714
Nuclear decommissioning trusts, at fair value		437,441			423,319
Other		64,891			37,142
Total other property and investments		571,035			499,175
Deferred Charges and Other Assets:
Deferred charges related to income taxes		504,470			509,887
Prepaid pension costs		426,899			405,164
Unamortized debt issuance expense		74,852			75,245
Unamortized loss on reacquired debt		182,286			177,707
Other		160,596			177,817
Total deferred charges and other assets		1,349,103			1,345,820
Total Assets	$	15,419,881		$	14,782,028

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

44

GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Liabilities and Stockholder’s Equity	2004			2003
	(in thousands)
Current Liabilities:
Securities due within one year	$	302,401		$	2,304
Notes payable		372,027			137,277
Accounts payable —
Affiliated		154,541			121,928
Other		236,621			238,069
Customer deposits		109,204			103,756
Accrued taxes —
Income taxes		172,250			107,532
Other		104,271			166,892
Accrued interest		71,861			70,844
Accrued vacation pay		42,749			38,206
Accrued compensation		66,176			134,004
Other		129,009			105,234
Total current liabilities		1,761,110			1,226,046
Long-term Debt		3,611,092			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		2,358,072			2,303,085
Deferred credits related to income taxes		178,986			186,625
Accumulated deferred investment tax credits		306,262			312,506
Employee benefit obligations		306,543			295,788
Asset retirement obligations		490,164			475,585
Other cost of removal obligations		405,433			412,161
Miscellaneous regulatory liabilities		158,333			249,687
Other		66,813			63,432
Total deferred credits and other liabilities		4,270,606			4,298,869
Total Liabilities		10,611,881			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		2,437,069			2,208,498
Premium on preferred stock		40			40
Retained earnings		2,027,103			2,010,297
Accumulated other comprehensive loss		(15,031	)		(22,874	)
Total common stockholder’s equity		4,793,431			4,540,211
Total Liabilities and Stockholder’s Equity	$	15,419,881		$	14,782,028

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

45

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

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

RESULTS OF OPERATIONS

Earnings

Georgia Power’s net income after dividends on preferred stock for the second quarter and year-to-date 2004 was $155.7 million and $299.6 million, respectively, compared to $158.5 million and $291.8 million, respectively, for the corresponding periods in 2003. Earnings in the second quarter decreased by $2.8 million, or 1.8%, primarily due to higher non-fuel operating expenses partially offset by higher retail base revenues when compared to the same period in 2003. Earnings for year-to-date 2004 increased $7.8 million, or 2.7%, 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)
	Second Quarter						Year-To-Date
	(in thousands)			%			(in thousands)			%
Retail sales	$	157,616			15.1		$	229,704			11.4
Fuel expense		52,792			19.4			95,503			18.6
Purchased power — non-affiliates		35,340			57.0			25,993			19.4
Purchased power — affiliates		17,714			14.6			39,013			16.6
Other operations		21,312			10.7			33,715			8.7
Maintenance		17,047			15.8			14,571			6.7
Depreciation and amortization		(17,461	)		(20.3	)		(35,466	)		(20.7	)
Allowance for funds used during construction		3,854			N/M			4,245			N/M
Interest income		(13,202	)		(88.2	)		(10,965	)		(72.7	)
Other income (expense), net		(14,966	)		N/M			(22,273	)		N/M

N/M Not meaningful

     Retail sales.Excluding fuel revenues, which generally do not affect net income, retail sales revenue increased by $70.9 million, or 9.7%, in the second quarter 2004 compared to the corresponding period in 2003. In the second quarter 2004, kilowatt-hour energy sales to residential, commercial and industrial customers increased by 13.2%, 6.2% and 3.4%, respectively, when compared to the same period in 2003. Year-to-date 2004 base retail sales revenue increased by $102.8 million, or 7.3%, compared to the corresponding period in 2003. Year-to-date kilowatt-hour energy sales to residential, commercial and industrial customers increased by 9.1%, 5.1% and 2.8%, respectively, when compared to the same period in 2003. These increases in the retail sectors during the second quarter and year-to-date 2004 are mainly due to customer growth of 2%, more favorable weather, and an improving economy when compared to the same periods in 2003.

46

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

     Fuel expense. During the second quarter and year-to-date 2004, fuel expense was higher due to increases of 14.0% and 14.1%, respectively, in the average cost of fuel and increases of 1.7% and 1.8%, respectively, in generation due to increased retail sales. These expenses do not have a significant impact on earnings since fuel expenses are generally offset by fuel revenues through Georgia Power’s fuel cost recovery clause. See “Future Earnings Potential – FERC and Georgia PSC Matters – Retail Fuel Cost Recovery” herein for additional information.

     Purchased power — non-affiliates.The second quarter and year-to-date 2004 increases in purchased power from non-affiliates are primarily due to fluctuations in off-system energy purchases used to meet off-system sales commitments. These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Georgia Power’s fuel cost recovery clause.

     Purchased power — affiliates. Purchased power from affiliates increased in the second quarter and year-to-date 2004 when compared to the corresponding periods in 2003 due to a PPA between Georgia Power and Southern Power that began in June 2003. The capacity component of these transactions increased $15.6 million and $25.8 million in the second quarter and year-to-date 2004, respectively, over the same periods 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.Other operations expense in the second quarter and year-to-date 2004 was higher when compared to the same periods in 2003 due to increased administrative and general expenses of $8.0 million and $13.8 million, respectively, related to increased employee benefit expenses and $3.2 million in workers compensation expenses for year-to-date 2004.

     Maintenance expense. Maintenance expense was higher in the second quarter and year-to-date 2004 when compared to the same periods in 2003 due to the timing of scheduled generating plant maintenance of $8.7 million and $4.2 million, respectively, and scheduled transmission and distribution maintenance of $10.2 million and $13.2 million, respectively.

     Depreciation and amortization.In the second quarter and year-to-date 2004, depreciation and amortization expense was 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.

     Allowance for equity funds used during construction. The second quarter and year-to-date 2004 increases result primarily from the acquisition of the McIntosh combined cycle units 10 and 11 construction project from Southern Power. See “FERC Matters” herein and Note (J) to the Condensed Financial Statements herein for additional information.

     Interest income. The second quarter and year-to-date 2004 decreases result from $14.5 million of interest on a favorable tax settlement received in the second quarter of 2003.

47

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

     Other income (expense), net.The second quarter and year-to-date 2004 decreases in other income (expense), net reflect decreased rental income of $4.0 million and $2.5 million, respectively, as well as the impact of the ESOP contribution in June 2004 of $3.4 million when compared to the same periods in 2003. The year-to-date 2004 decrease in other income (expense), net also reflects a $5.0 million decrease related to the 2003 favorable resolution of a loss contingency.

Future Earnings Potential

The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors including Georgia Power’s ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stricter environmental standards. Growth in energy sales is subject to a number of factors, which include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in the service area. For additional information relating to these issues, see 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 final resolution of the TVA case. With the denial of the EPA’s petition for review, the Court of Appeals’ decision became final. 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 that cannot be determined at this time and could possibly require payment of substantial penalties. This could affect future results of operations, cash flows and possibly financial condition if such costs are not recovered through regulated rates.

48

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

Other Environmental Matters

On 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. The impact of the eight-hour designations and the new standards will depend on the development and implementation of applicable state regulations and therefore cannot be determined at this time.

     In June 2004, the EPA issued its recommendations for areas to be designated “nonattainment” for the fine particle national ambient air quality standard. Areas within 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 specify that the State of Georgia must submit a revised state implementation plan by April 2005, and affected sources must comply with the reduction requirements by May 1, 2007. The impact of these regulations will depend on the development and approval of Georgia’s state implementation plan and cannot be determined at this time.

49

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

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

FERC and 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 includes a pivotal supplier analysis and a wholesale market share analysis, the results of which provide a rebuttable presumption regarding generation market power. The FERC’s order also sets forth procedures for rebutting these presumptions and addresses mitigation measures for those entities that are found to have market power. In the absence of specific mitigation measures, the order includes several cost-based mitigation measures that would apply by default. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. Southern Company, the retail operating companies, including Georgia Power, and Southern Power believe that it may be difficult for a traditional utility company, or an affiliate thereof, with a significant load service obligation and generation to satisfy that obligation, and that is not a member of a large, FERC-approved RTO, to pass all aspects of the market power screens as currently designed. However, each of the companies believes that it has an appropriate basis to rebut the generation market power presumption.

     On July 8, 2004, the FERC denied Southern Company’s request for rehearing, along with a number of others, and reaffirmed the interim tests that it adopted in April. Southern Company will submit the required analyses by August 9, 2004. In the event that the FERC’s default mitigation measures are ultimately applied, Southern Power and the retail operating companies may be required to charge cost-based rates, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

Transmission

See MANAGEMENT’S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS — “Future Earnings Potential — FERC Matters — Transmission” of 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 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

50

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

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. However, full recovery of the project costs depends on the outcome of the Georgia PSC’s review. In the event the Georgia PSC does not allow full recovery of the project costs, then part of such costs may have to be written off in accordance with FASB Statement No. 90, “Accounting for Abandonments and Disallowed Plant Costs.” At June 30, 2004, the investment in the McIntosh construction project totaled approximately $353.2 million for Georgia Power. The ultimate outcome of the Georgia PSC’s review cannot now be determined.

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. 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.

51

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

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.

Other Matters

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. Implementation plans for the measures ordered by the NRC to be in effect by October 29, 2004 have been finalized based on current interpretations of the requirements. Georgia Power, based on its ownership interest, currently estimates its expenditures related to these security measures will total $9.3 million, of which 1.3 million will be capitalized. These estimates are subject to change in the event additional NRC guidance is provided.

     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.

52

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

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

FINANCIAL CONDITION AND LIQUIDITY

Overview

Major changes in Georgia Power’s financial condition during the first six months of 2004 included the addition of approximately $672.4 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities, short-term borrowings 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 June 30, 2005 for redemptions and maturities of long-term debt. The purchase of the McIntosh construction project is expected to temporarily increase short-term borrowings under the commercial paper program. The temporary increase will be replaced with additional long-term debt. The projected construction program will increase by $437.8 million and $27.4 million in 2004 and 2005, respectively, for the Plant McIntosh combined cycle 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.

53

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

     Georgia Power’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, Georgia Power had at June 30, 2004 approximately $20.3 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; with the remaining $350 million expiring in 2007. The credit arrangements provide liquidity support to Georgia Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Georgia Power expects to renew its credit facilities, as needed, prior to expiration. Georgia Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Georgia Power and other Southern Company subsidiaries. At June 30, 2004, Georgia Power had $372 million of 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 agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are contracts that could require collateral — but not accelerated payment — in the event of a credit rating change to below investment grade. These contracts are primarily for physical electricity purchases and sales, fixed-price physical gas purchases and agreements covering interest rate swaps. At June 30, 2004, the maximum potential collateral requirements were approximately $226 million. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit or cash.

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 June 30, 2004 was as follows:

	Second Quarter
	2004			Year-to-Date
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	10,533		$	3,155
Contracts realized or settled		(4,680	)		(4,778	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes		2,102			9,578
Contracts at June 30, 2004	$	7,955		$	7,955

54

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

	Source of June 30, 2004
	Valuation Prices
	Total		Maturity
	Fair Value		Year 1		1-3 Years
	(in thousands)
Actively quoted	$	7,955	$	6,136	$	1,819
External sources		—		—		—
Models and other methods		—		—		—
Contracts at June 30, 2004	$	7,955	$	6,136	$	1,819

     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. 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.

     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.

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

55

GULF POWER COMPANY

56

GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
Operating Revenues:
Retail sales	$	191,189		$	175,669		$	356,273		$	335,462
Sales for resale —
Non-affiliates		18,470			17,908			37,958			36,633
Affiliates		21,964			12,414			42,659			22,631
Other revenues		9,547			9,218			19,199			18,321
Total operating revenues		241,170			215,209			456,089			413,047
Operating Expenses:
Fuel		90,778			77,798			169,194			141,065
Purchased power —
Non-affiliates		11,724			3,929			18,157			9,885
Affiliates		7,843			5,079			15,271			17,666
Other operations		36,430			33,426			69,448			63,437
Maintenance		16,773			17,257			32,979			33,837
Depreciation and amortization		20,722			20,324			41,274			40,576
Taxes other than income taxes		17,076			16,728			34,139			33,116
Total operating expenses		201,346			174,541			380,462			339,582
Operating Income		39,824			40,668			75,627			73,465
Other Income and (Expense):
Interest expense, net of amounts capitalized		(8,138	)		(8,252	)		(16,032	)		(16,307	)
Interest expense to affiliate trusts		(1,147	)		—			(1,147	)		—
Distributions on mandatorily redeemable preferred securities		—			(1,894	)		(1,113	)		(3,922	)
Other income (expense), net		(91	)		(256	)		(73	)		(679	)
Total other income and (expense)		(9,376	)		(10,402	)		(18,365	)		(20,908	)
Earnings Before Income Taxes		30,448			30,266			57,262			52,557
Income taxes		11,392			11,427			21,313			19,692
Net Income		19,056			18,839			35,949			32,865
Dividends on Preferred Stock		54			54			108			108
Net Income After Dividends on Preferred Stock	$	19,002		$	18,785		$	35,841		$	32,757

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months					For the Six Months
	Ended June 30,					Ended June 30,
	2004		2003			2004		2003
	(in thousands)					(in thousands)
Net Income After Dividends on Preferred Stock	$	19,002	$	18,785		$	35,841	$	32,757
Other comprehensive income (loss):
Change in fair value of marketable securities, net of tax of $40 and $40, respectively		63		—			63		—
Changes in fair value of qualifying hedges, net of tax of $(1,426) and $(1,426), respectively		—		(2,270	)		—		(2,270	)
Less: Reclassification adjustment for amounts included in net income, net of tax of $31 and $62, respectively		51		—			101		—
COMPREHENSIVE INCOME	$	19,116	$	16,515		$	36,005	$	30,487

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

57

GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months
	Ended June 30,
	2004			2003
	(in thousands)
Operating Activities:
Net income	$	35,949		$	32,865
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		44,278			43,382
Deferred income taxes		4,097			(112	)
Pension, postretirement, and other employee benefits		425			3,808
Tax benefit of stock options		988			1,596
Other, net		(1,880	)		(3,025	)
Changes in certain current assets and liabilities —
Receivables, net		(7,591	)		(7,598	)
Fossil fuel stock		(6,235	)		(2,822	)
Materials and supplies		781			(2,797	)
Other current assets		338			24,945
Accounts payable		6,155			(13,390	)
Accrued taxes		17,684			4,297
Accrued compensation		(3,457	)		(6,323	)
Other current liabilities		6,602			14,065
Net cash provided from operating activities		98,134			88,891
Investing Activities:
Gross property additions		(66,828	)		(40,654	)
Cost of removal net of salvage		(3,935	)		(4,842	)
Investment in property damage fund		(6,700	)		(1,100	)
Other		(1,103	)		(5,552	)
Net cash used for investing activities		(78,566	)		(52,148	)
Financing Activities:
Increase (decrease) in notes payable, net		(32,671	)		23,227
Proceeds —
Pollution control bonds		—			61,625
Senior notes		35,000			65,000
Capital contributions from parent company		25,000			10,016
Redemptions —
Pollution control bonds		—			(61,625	)
Senior notes		—			(45,037	)
Other long-term debt		—			(20,000	)
Mandatorily redeemable preferred securities		—			(40,000	)
Payment of preferred stock dividends		(108	)		(108	)
Payment of common stock dividends		(35,000	)		(35,100	)
Other		(1,509	)		(4,504	)
Net cash used for financing activities		(9,288	)		(46,506	)
Net Change in Cash and Cash Equivalents		10,280			(9,763	)
Cash and Cash Equivalents at Beginning of Period		2,548			13,278
Cash and Cash Equivalents at End of Period	$	12,828		$	3,515
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $385 and $66 capitalized for 2004 and 2003, respectively)	$	15,652		$	18,525
Income taxes (net of refunds)	$	5,008			$(5,393	)

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

58

GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

		At June 30,			At December 31,
Assets		2004			2003
	(in thousands)
Current Assets:
Cash and cash equivalents		$	12,828		$	2,548
Receivables —
Customer accounts receivable			50,852			44,001
Unbilled revenues			39,013			31,548
Under recovered regulatory clause revenues			22,177			21,812
Other accounts and notes receivable			4,166			6,179
Affiliated companies			4,832			9,826
Accumulated provision for uncollectible accounts			(1,030	)		(947	)
Fossil fuel stock, at average cost			41,589			35,354
Vacation pay			5,254			5,254
Materials and supplies, at average cost			35,149			35,930
Prepaid expenses			4,211			6,310
Other			6,248			4,985
Total current assets			225,289			202,800
Property, Plant, and Equipment:
In service			2,338,654			2,306,959
Less accumulated provision for depreciation			843,611			847,519
			1,495,043			1,459,440
Construction work in progress			44,664			49,438
Total property, plant, and equipment			1,539,707			1,508,878
Other Property and Investments			21,708			12,597
Deferred Charges and Other Assets:
Deferred charges related to income taxes			18,468			18,263
Prepaid pension costs			43,604			42,014
Unamortized debt issuance expense			6,830			6,877
Unamortized premium on reacquired debt			18,535			19,389
Other			31,646			28,235
Total deferred charges and other assets			119,083			114,778
Total Assets		$	1,905,787		$	1,839,053

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

59

GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Liabilities and Stockholder’s Equity	2004			2003
	(in thousands)
Current Liabilities:
Securities due within one year	$	50,000		$	50,000
Notes payable		4,995			37,666
Accounts payable —
Affiliated		33,452			26,945
Other		19,959			21,952
Customer deposits		19,150			18,271
Accrued taxes —
Income taxes		16,003			6,405
Other		15,089			8,621
Accrued interest		8,435			8,077
Accrued vacation pay		5,254			5,254
Accrued compensation		9,999			13,456
Other		15,664			9,694
Total current liabilities		198,000			206,341
Long-term Debt		549,969			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		183,166			175,685
Deferred credits related to income taxes		25,086			26,545
Accumulated deferred investment tax credits		19,470			20,451
Employee benefit obligations		54,410			52,395
Other cost of removal obligations		156,111			151,229
Miscellaneous regulatory liabilities		29,070			27,903
Other		25,752			27,083
Total deferred credits and other liabilities		493,065			481,291
Total Liabilities		1,313,200			1,273,459
Cumulative Preferred Stock		4,236			4,236
Common Stockholder’s Equity:
Common stock, without par value—
Authorized - 992,717 shares
Outstanding - 992,717 shares		38,060			38,060
Paid-in capital		390,840			364,852
Premium on preferred stock		12			12
Retained earnings		162,049			161,208
Accumulated other comprehensive loss		(2,610	)		(2,774	)
Total common stockholder’s equity		588,351			561,358
Total Liabilities and Stockholder’s Equity	$	1,905,787		$	1,839,053

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

60

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

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

RESULTS OF OPERATIONS

Earnings

Gulf Power’s net income after dividends on preferred stock for the second quarter and year-to-date 2004 was $19.0 million and $35.8 million, respectively, compared to $18.8 million and $32.8 million, respectively, for the corresponding periods in 2003. Earnings in the second quarter and year-to-date 2004 increased by $0.2 million, or 1.2%, and $3.1 million, or 9.4%, respectively, as a result of higher operating revenues that were only partially offset with higher operating expenses.

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Second Quarter				Year-To-Date
	(in thousands)		%		(in thousands)			%
Retail sales	$	15,520		8.8	$	20,811			6.2
Sale for resale – affiliates		9,550		76.9		20,028			88.5
Fuel expense		12,980		16.7		28,129			19.9
Purchased power – non-affiliates		7,795		198.4		8,272			83.7
Purchased power – affiliates		2,764		54.4		(2,395	)		(13.6	)
Other operations expense		3,004		9.0		6,011			9.5
Taxes other than income taxes		348		2.1		1,023			3.1
Other income (expense), net		165		64.5		606			89.2

     Retail sales.Excluding the recovery of fuel expense and certain other expenses that do not affect net income, retail sales increased by $0.8 million, or 0.8%, for the second quarter 2004 and by $4.9 million, or 2.5%, year-to-date 2004 when compared to the corresponding periods in 2003. For both of the reporting periods, retail sales revenues were higher than the corresponding periods in 2003 primarily due to an increase in the number of customers and more favorable weather. During the second quarter 2004, retail energy sales to residential and industrial customers decreased by 0.3% and 5.2%, respectively, while energy sales to commercial customers increased by 2.9% 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 2.3% and 3.2%, respectively, while energy sales to industrial customers decreased by 1.5%. The decreases in industrial sales for the second 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 energy revenues through Gulf Power’s fuel cost recovery mechanism. The increases in the second quarter and year-to-date 2004 sales for resale to affiliates are due to increased sales of available

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

generation to affiliate companies at a higher unit cost resulting from higher fuel prices. The increase in purchased power from affiliates in the second quarter 2004 is primarily due to higher priced peak hour energy purchases that resulted from increased fuel prices. The decrease in purchased power from affiliates for year-to-date 2004 is primarily due to an increase in Gulf Power generation to meet its load requirements.

     Fuel expense.During the second quarter and year-to-date 2004, fuel expense increased from the corresponding periods in 2003 primarily due to a significant increase in the use of gas generation to meet additional demand for energy. Since energy expenses are generally offset by energy revenues through Gulf Power’s fuel cost recovery mechanism, these expenses do not have a material impact on net income.

     Purchased power – non-affiliates.The increases for the second quarter and year-to-date 2004, when compared to the corresponding periods in 2003, are primarily attributed to Gulf Power’s increased purchase of off-system power from merchant generation resources in order to reduce total system energy production costs. Since energy expenses are generally offset by energy revenues, these expenses do not have a significant impact on net income.

     Other operations expense.The increase in other operations expense during the second quarter 2004 is primarily due to a $2.0 million increase in employee benefit expenses and a $1.2 million increase in accrued expenses for uninsured litigation and workers compensation claims. The increase in other operations expense for year-to-date 2004 when compared to the corresponding period in 2003 is primarily due to a $3.4 million increase in employee benefit expenses, a $1.3 million increase in expenses related to marketing conservation programs and a $1.2 million increase in accrued expenses for uninsured litigation and workers compensation claims.

     Taxes other than income taxes.The increases in taxes other than income taxes for the second quarter and year-to-date 2004 are primarily due to increased franchise fees and gross receipts taxes resulting from increased revenues.

     Other income (expense), net.The increases in other income (expense), net for the second quarter and year-to-date 2004 when compared to the same periods in 2003 are primarily due to higher AFUDC related to the environmental controls project at Plant Crist.

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 stringent environmental standards. Growth in energy sales is subject to a number of factors, which include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in the service area. For additional information relating to these issues, see 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.

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

Environmental Matters

Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs are not fully recovered through Gulf Power’s Environmental Cost Recovery Clause. See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — Environmental Matters” in Item 7 of Gulf Power 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 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 substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates.

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

     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 Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS — “Future Earnings Potential — FERC Matters — Market Based Rate Authority” in Item 7 and Note 3 to the financial statements of Gulf Power under “FERC Matters” in Item 8 of the Form 10-K. On April 14, 2004, the FERC issued an order that abandoned the SMA test and adopted a new interim analysis for measuring generation

63

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

market power. This new interim approach includes a pivotal supplier analysis and a wholesale market share analysis, the results of which provide a rebuttable presumption regarding generation market power. The FERC’s order also sets forth procedures for rebutting these presumptions and addresses mitigation measures for those entities that are found to have market power. In the absence of specific mitigation measures, the order includes several cost-based mitigation measures that would apply by default. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. Southern Company, the retail operating companies, including Gulf Power, and Southern Power believe that it may be difficult for a traditional utility company, or an affiliate thereof, with a significant load service obligation and generation to satisfy that obligation, and that is not a member of a large, FERC-approved RTO, to pass all aspects of the market power screens as currently designed. However, each of the companies believes that it has an appropriate basis to rebut the generation market power presumption.

     On July 8, 2004, the FERC denied Southern Company’s request for rehearing, along with a number of others, and reaffirmed the interim tests that it adopted in April. Southern Company will submit the required analyses by August 9, 2004. In the event that the FERC’s default mitigation measures are ultimately applied, Southern Power and the retail operating companies may be required to charge cost-based rates, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

Transmission

See MANAGEMENT’S DISCUSSION AND ANALYSIS — RESULTS OF OPERATIONS — “Future Earnings Potential — FERC Matters — Transmission” of 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.

Other Matters

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

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

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

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

FINANCIAL CONDITION AND LIQUIDITY

Overview

Major changes in Gulf Power’s financial condition during the first six months of 2004 included the addition of approximately $70.2 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.

65

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.

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.

     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 June 30, 2004, Gulf Power had approximately $12.8 million of cash and cash equivalents and $56.3 million of unused committed lines of credit with banks. Of these facilities, $10 million expire in 2004 and the remaining $46.3 million 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 June 30, 2004, Gulf Power had $5.0 million of commercial paper outstanding. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances.

Credit Rating Risk

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

Market Price Risk

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

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

     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 June 30, 2004 was as follows:

	Second Quarter
	2004			Year-to-Date
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	5,674		$	2,504
Contracts realized or settled		(2,720	)		(3,799	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes		439			4,688
Contracts at June 30, 2004	$	3,393		$	3,393

	Source of June 30, 2004
	Valuation Prices
	Total		Maturity
	Fair Value		Year 1		1-3 Years
	(in thousands)
Actively quoted	$	3,393	$	3,202	$	191
External sources		—		—		—
Models and other methods		—		—		—
Contracts at June 30, 2004	$	3,393	$	3,202	$	191

     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 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.

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MISSISSIPPI POWER COMPANY

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MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
Operating Revenues:
Retail sales	$	151,861		$	134,058		$	280,416		$	248,028
Sales for resale —
Non-affiliates		68,935			59,320			134,735			129,745
Affiliates		8,558			5,665			20,367			11,888
Contract termination		—			62,111			—			62,111
Other revenues		3,431			3,206			6,995			6,474
Total operating revenues		232,785			264,360			442,513			458,246
Operating Expenses:
Fuel		76,365			55,596			152,890			106,720
Purchased power —
Non-affiliates		13,093			4,511			20,048			11,328
Affiliates		22,837			17,755			40,153			38,087
Other operations		39,132			49,743			74,110			84,906
Maintenance		18,144			18,751			33,216			33,011
Depreciation and amortization		5,874			13,902			20,017			26,975
Taxes other than income taxes		14,050			13,716			27,189			27,083
Total operating expenses		189,495			173,974			367,623			328,110
Operating Income		43,290			90,386			74,890			130,136
Other Income and (Expense):
Interest expense		(3,048	)		(3,767	)		(5,851	)		(7,537	)
Interest expense to affiliate trusts		(649	)		—			(649	)		—
Distributions on mandatorily redeemable preferred securities		—			(630	)		(630	)		(1,260	)
Other income (expense), net		(188	)		753			383			765
Total other income and (expense)		(3,885	)		(3,644	)		(6,747	)		(8,032	)
Earnings Before Income Taxes		39,405			86,742			68,143			122,104
Income taxes		15,051			33,179			25,967			46,642
Net Income		24,354			53,563			42,176			75,462
Dividends on Preferred Stock		2,463			504			2,966			1,007
Net Income After Dividends on Preferred Stock	$	21,891		$	53,059		$	39,210		$	74,455

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months					For the Six Months
	Ended June 30,					Ended June 30,
	2004			2003		2004			2003
	(in thousands)					(in thousands)
Net Income After Dividends on Preferred Stock	$	21,891		$	53,059	$	39,210		$	74,455
Other comprehensive income (loss):
Change in fair value of marketable securities, net of tax of $49 and $49, respectively		80			—		80			—
Changes in fair value of qualifying hedges, net of tax of $(926) and $(1,400), respectively		(1,495	)		—		(2,260	)		—
COMPREHENSIVE INCOME	$	20,476		$	53,059	$	37,030		$	74,455

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

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MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months
	Ended June 30,
	2004			2003
	(in thousands)
Operating Activities:
Net income	$	42,176		$	75,462
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		22,227			31,046
Deferred income taxes and investment tax credits, net		19,142			1,623
Pension, postretirement, and other employee benefits		447			779
Tax benefit of stock options		474			1,876
Other, net		(1,324	)		11,897
Changes in certain current assets and liabilities —
Receivables, net		(18,606	)		12,950
Fossil fuel stock		(1,567	)		(6,723	)
Materials and supplies		(864	)		143
Other current assets		(3,157	)		(484	)
Accounts payable		(18,507	)		(40,330	)
Accrued taxes		(14,649	)		14,463
Accrued compensation		(9,546	)		(13,701	)
Other current liabilities		(15,697	)		(2,324	)
Net cash provided from operating activities		549			86,677
Investing Activities:
Gross property additions		(32,023	)		(26,566	)
Cost of removal net of salvage		(3,606	)		(2,268	)
Other		(1,547	)		951
Net cash used for investing activities		(37,176	)		(27,883	)
Financing Activities:
Increase in notes payable, net		44,830			—
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		(962	)		(1,007	)
Payment of common stock dividends		(33,100	)		(33,000	)
Other		(931	)		(1,184	)
Net cash used for financing activities		(28,551	)		(65,940	)
Net Change in Cash and Cash Equivalents		(65,178	)		(7,146	)
Cash and Cash Equivalents at Beginning of Period		69,120			62,695
Cash and Cash Equivalents at End of Period	$	3,942		$	55,549
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest	$	5,836		$	10,413
Income taxes (net of refunds)	$	1,615		$	6,073

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

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MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Assets	2004			2003
	(in thousands)
Current Assets:
Cash and cash equivalents	$	3,942		$	69,120
Receivables —
Customer accounts receivable		34,652			30,514
Unbilled revenues		22,776			19,278
Under recovered regulatory clause revenues		21,905			14,607
Other accounts and notes receivable		6,772			8,088
Affiliated companies		16,783			12,160
Accumulated provision for uncollectible accounts		(531	)		(897	)
Fossil fuel stock, at average cost		26,800			25,233
Vacation pay		5,766			5,766
Materials and supplies, at average cost		24,534			23,670
Prepaid income taxes		17,490			27,415
Prepaid expenses		4,437			4,517
Other		6,092			2,857
Total current assets		191,418			242,328
Property, Plant, and Equipment:
In service		1,853,607			1,841,668
Less accumulated provision for depreciation		672,291			672,730
		1,181,316			1,168,938
Construction work in progress		33,029			25,844
Total property, plant, and equipment		1,214,345			1,194,782
Other Property and Investments		3,990			2,750
Deferred Charges and Other Assets:
Deferred charges related to income taxes		11,757			12,125
Prepaid pension costs		18,582			18,167
Unamortized debt issuance expense		6,852			6,993
Unamortized loss on reacquired debt		9,812			10,201
Prepaid rent		13,816			14,758
Other		8,489			16,280
Total deferred charges and other assets		69,308			78,524
Total Assets	$	1,479,061		$	1,518,384

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

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MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Liabilities and Stockholder’s Equity	2004			2003
	(in thousands)
Current Liabilities:
Securities due within one year	$	—		$	80,000
Notes payable		44,830			—
Accounts payable —
Affiliated		22,456			21,259
Other		36,446			55,309
Customer deposits		8,282			11,863
Accrued taxes —
Income taxes		5,822			1,696
Other		24,059			42,834
Accrued interest		3,149			3,223
Accrued vacation pay		5,766			5,766
Accrued compensation		14,286			23,832
Regulatory clauses over recovery		14,204			31,118
Other		9,712			4,867
Total current liabilities		189,012			281,767
Long-term Debt		242,493			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		151,106			142,088
Deferred credits related to income taxes		22,510			23,279
Accumulated deferred investment tax credits		19,234			19,841
Employee benefit obligations		53,431			54,830
Plant Daniel lease guarantee obligation, at fair value		13,816			14,758
Plant Daniel capacity		52,046			60,300
Other cost of removal obligations		86,003			80,588
Miscellaneous regulatory liabilities		14,519			11,899
Other		27,564			27,248
Total deferred credits and other liabilities		440,229			434,831
Total Liabilities		907,816			954,086
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		292,990			292,515
Premium on preferred stock		23			326
Retained earnings		210,762			203,419
Accumulated other comprehensive loss		(3,642	)		(1,462	)
Total common stockholder’s equity		537,824			532,489
Total Liabilities and Stockholder’s Equity	$	1,479,061		$	1,518,384

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

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

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

RESULTS OF OPERATIONS

Earnings

Mississippi Power’s net income after dividends on preferred stock for the second quarter and year-to-date 2004 was $21. 9 million and $39.2 million, respectively, compared to $53.1 million and $74.5 million, respectively, for the corresponding periods of 2003. Earnings in the second quarter and year-to-date 2004 decreased by $31.2 million or 58.8%, and $35.3 million, or 47.4%, respectively, primarily as a result of the 2003 gain of $38 million after tax related to the termination of a PPA with Dynegy. This decrease was partially offset by the net impact of an $11 million decrease in other operations expense related to costs incurred in the second quarter of 2003 to restructure the lease agreement for the combined cycle generating units at Plant Daniel, and an increase of $11.8 million in pretax earnings in the second quarter of 2004 resulting from the impact of the Mississippi PSC’s order approving the inclusion of the 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)
	Second Quarter						Year-To-Date
	(in thousands)			%			(in thousands)			%
Retail sales	$	17,803			13.3		$	32,388			13.1
Sales for resale — non-affiliates		9,615			16.2			4,990			3.8
Sale for resale — affiliates		2,893			51.1			8,479			71.3
Fuel expense		20,769			37.4			46,170			43.3
Purchased power — non-affiliates		8,582			190.2			8,720			77.0
Purchased power — affiliates		5,082			28.6			2,066			5.4
Other operations expense		(10,611	)		(21.3	)		(10,796	)		(12.7	)
Depreciation and amortization		(8,028	)		(57.7	)		(6,958	)		(25.8	)
Interest expense		(719	)		(19.1	)		(1,686	)		(22.4	)
Income taxes		(18,128	)		(54.6	)		(20,675	)		(44.3	)
Dividends on preferred stock		1,959			388.7			1,959			194.5

     Retail sales.Retail sales revenue increased $17.8 million, or 13.3%, in the second quarter 2004 and $32.4 million or 13.1% year-to-date 2004 when compared to the same periods in 2003. The increases in retail sales revenues are primarily as a result of an increase of $18.6 million in the second quarter 2004 and $32.2 million year-to-date 2004 in fuel revenues, which generally do not have an effect on income. Retail sales revenues, excluding fuel revenues, for the second quarter 2004 to residential, commercial and industrial customers decreased 2.4%, 1.3% and 0.4%, respectively, primarily as a result of mild weather 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 remained mostly constant as compared to the same period in 2003.

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

     Sales for resale — non-affiliates.The increase in sales for resale to non-affiliates in the second quarter 2004 as compared to the same period in 2003 is primarily due to the increased fuel revenue from wholesale territorial customers and increased energy sales to non-territorial customers.

     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 Mississippi Power’s more economical generating costs when compared to others. The increase in purchased power from affiliates is primarily due to the increase in the cost of fuel.

     Fuel expense.In the second quarter and year-to-date 2004, fuel expense increased when compared to the same periods in 2003 as a result of 4.2% and 10.1% increases in generation, respectively, and a 42.5% and 50.6% increase in cost of oil and 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 second quarter and year-to-date 2004 increases in purchased power from non-affiliates when compared to the same periods in 2003 are a result of increased purchased power demand as a result of planned outages at generating units for maintenance purposes in 2004.

     Other operations expense.The second quarter and year-to-date 2004 decreases in other operation expense when compared to the same periods in 2003 are a result of approximately $11 million incurred during the second 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.

     Depreciation and amortization.The second 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. Based on the final Mississippi PSC order issued May 25, 2004 that approved this treatment, Mississippi Power recorded during the second quarter a credit to expense in the amount of $8.3 million to amortize the 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 Note (K) to the Condensed Financial Statements and “Future Earnings Potential — FERC and Mississippi PSC Matters – Retail Rate Filing” herein for additional information.

     Interest expense.The decreases in interest expense for the second 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.

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

     Income taxes.The second quarter and year-to-date decreases in income taxes of $18.1 million, or 54.6%, and $20.7 million, or 44.3%, respectively, are a result of the $47.3 million and $53.9 million, respectively, reduction in earnings before income taxes when compared to the same periods in 2003.

     Dividends on preferred stock.The second quarter and year-to-date 2004 increases in dividends on preferred stock are the result of a $2.0 million loss on the redemption of preferred stock recognized in the second quarter of 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 Mississippi Power’s ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs and to recover costs related to growing demand and increasingly stricter environmental standards. Growth in energy sales is subject to a number of factors, which include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand and the rate of economic growth in the service area. For additional information relating to these issues, see BUSINESS — The SOUTHERN System — “Risk Factors” in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS — “Future Earnings Potential” in Item 7 of Mississippi Power in the Form 10-K.

Environmental Matters

Mississippi Power’s 2004 ECO Plan filing was approved, as filed, by the Mississippi PSC on March 15, 2004, and resulted in a slight decrease in rates effective April 2004. Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot continue to be recovered. See MANAGEMENT’S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS — “Future Earnings Potential – Environmental Matters” 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 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 substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates.

     On July 21, 2004, attorneys general from eight states, each outside of Southern Company’s service territory, and the corporation counsel for New York City filed a complaint in U.S. District Court for the Southern District of New York against Southern Company and four other electric power companies. A nearly identical complaint was filed by three environmental groups in the same court. The complaints allege that the companies’ emissions of carbon dioxide, a greenhouse gas, contribute to global warming, which the plaintiffs assert is a public nuisance. Plaintiffs seek relief under the federal common law or, in the alternative, under state law, of public nuisance. The environmental groups also seek relief under common law private nuisance theories. The plaintiffs seek a judicial order (1) holding each defendant jointly and severally liable for creating, contributing to, and/or maintaining an ongoing public nuisance, global warming and (2) permanently enjoining each of the

75

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

defendants to abate its contribution to the nuisance by capping its emissions of carbon dioxide and then reducing those emissions by a specified percentage each year for at least a decade. Plaintiffs have not, however, requested that damages be awarded in connection with their claims. Southern Company believes these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. Southern Company has not yet responded to the suits; however, it intends to vigorously defend against these claims. While the outcome cannot be determined at this time, an adverse judgment could result in substantial capital expenditures.

     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. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. Southern Company, the retail operating companies, including Mississippi Power, and Southern Power believe that it may be difficult for a traditional utility company, or an affiliate thereof, with a significant load service obligation and generation to satisfy that obligation, and that is not a member of a large, FERC-approved RTO, to pass all aspects of the market power screens as currently designed. However, each of the companies believes that it has an appropriate basis to rebut the generation market power presumption.

     On July 8, 2004, the FERC denied Southern Company’s request for rehearing, along with a number of others, and reaffirmed the interim tests that it adopted in April. Southern Company will submit the required analyses by August 9, 2004. In the event that the FERC’s default mitigation measures are ultimately applied, Southern Power and the retail operating companies may be required to charge cost-based rates, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time. 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” 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

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

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. The impact of the order on earnings for the period January 1, 2004 through June 30, 2004 is an increase of $7.3 million after tax and is reflected in the second quarter 2004 financial statements of Mississippi Power. 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.

     In addition, the Mississippi PSC also approved Mississippi Power’s requested changes to its 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.

Other Matters

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 any such current proceedings would have a material adverse effect on Mississippi Power’s financial statements.

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

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

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

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

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.

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

FINANCIAL CONDITION AND LIQUIDITY

Overview

Major changes in Mississippi Power’s financial condition during the first six months of 2004 included the addition of approximately $32 million to utility plant, a reduction in current liabilities of $93 million, an increase of $40 million in long-term debt and a decrease of $65 million in cash. 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 in the Form 10-K for a description of Mississippi Power’s capital requirements for its construction program, lease obligations, purchase commitments and trust funding requirements.

Sources of Capital

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

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

     To meet short-term cash needs and contingencies, Mississippi Power had at June 30, 2004, approximately $3.9 million of cash and cash equivalents and $100 million of unused committed credit arrangements with banks. Of these facilities, $35 million expire in 2004 and the remaining $65 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 June 30, 2004, Mississippi Power had $44.8 million in outstanding notes payable. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances.

Off-Balance Sheet Financing Arrangements

See 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 agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.

Market Price Risk

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

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

	Second Quarter
	2004			Year-to-Date
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	5,621		$	2,470
Contracts realized or settled		(2,723	)		(3,456	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes		(1,732	)		2,152
Contracts at June 30, 2004	$	1,166		$	1,166

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

	Source of June 30, 2004
	Valuation Prices
	Total		Maturity
	Fair Value		Year 1		1-3 Years
	(in thousands)
Actively quoted	$	1,166	$	788	$	378
External sources		—		—		—
Models and other methods		—		—		—
Contracts at June 30, 2004	$	1,166	$	788	$	378

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

     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.

80

SAVANNAH ELECTRIC
AND
POWER COMPANY

81

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

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
Operating Revenues:
Retail sales	$	88,437		$	75,468		$	156,460		$	139,014
Sales for resale —
Non-affiliates		1,294			1,106			2,704			3,032
Affiliates		1,653			912			4,090			3,236
Other revenues		686			757			1,651			1,835
Total operating revenues		92,070			78,243			164,905			147,117
Operating Expenses:
Fuel		14,123			12,594			24,607			24,019
Purchased power —
Non-affiliates		4,387			723			6,729			2,627
Affiliates		27,145			22,080			49,275			41,093
Other operations		15,577			13,882			29,678			26,981
Maintenance		6,905			6,689			13,336			12,599
Depreciation and amortization		5,246			5,088			10,450			10,149
Taxes other than income taxes		3,795			3,652			7,392			7,099
Total operating expenses		77,178			64,708			141,467			124,567
Operating Income		14,892			13,535			23,438			22,550
Other Income and (Expense):
Interest expense, net of amounts capitalized		(2,988	)		(2,473	)		(6,132	)		(5,094	)
Distributions on mandatorily redeemable preferred securities		—			(685	)		(109	)		(1,370	)
Other income (expense), net		(74	)		(361	)		(421	)		(570	)
Total other income and (expense)		(3,062	)		(3,519	)		(6,662	)		(7,034	)
Earnings Before Income Taxes		11,830			10,016			16,776			15,516
Income taxes		4,331			3,720			6,129			5,711
Net Income		7,499			6,296			10,647			9,805
Dividends on Preferred Stock		150			—			150			—
Net Income After Dividends on Preferred Stock	$	7,349		$	6,296		$	10,497		$	9,805

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2004		2003		2004			2003
	(in thousands)				(in thousands)
Net Income After Dividends on Preferred Stock	$	7,349	$	6,296	$	10,497		$	9,805
Other comprehensive income (loss):
Changes in fair value of qualifying hedges, net of tax of $10 and $(10), respectively		18		—		(15	)		—
Less: Reclassification adjustment for amounts included in net income, net of tax of $15 and $30, respectively		23		—		47			—
COMPREHENSIVE INCOME	$	7,390	$	6,296	$	10,529		$	9,805

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

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SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months
	Ended June 30,
	2004			2003
	(in thousands)
Operating Activities:
Net income	$	10,647		$	9,805
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		11,550			11,197
Deferred income taxes and investment tax credits, net		5,716			521
Pension, postretirement, and other employee benefits		3,538			3,203
Tax benefit of stock options		611			860
Other, net		(6,904	)		4,085
Changes in certain current assets and liabilities —
Receivables, net		(13,678	)		(3,986	)
Fossil fuel stock		(486	)		(1,951	)
Materials and supplies		(750	)		(278	)
Other current assets		(1,442	)		2,469
Accounts payable		2,604			(4,261	)
Accrued taxes		2,766			2,044
Accrued compensation		(2,588	)		(3,404	)
Other current liabilities		(1,631	)		(2,285	)
Net cash provided from operating activities		9,953			18,019
Investing Activities:
Gross property additions		(95,854	)		(19,557	)
Other		(1,889	)		272
Net cash used for investing activities		(97,743	)		(19,285	)
Financing Activities:
Increase in notes payable, net		17,586			29,054
Proceeds —
Pollution control bonds		—			13,870
Other long-term debt		10,179			—
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		—			(463	)
Mandatorily redeemable preferred securities		(40,000	)		—
Payment of common stock dividends		(11,600	)		(11,500	)
Other		109			(149	)
Net cash provided from financing activities		52,274			1,942
Net Change in Cash and Cash Equivalents		(35,516	)		676
Cash and Cash Equivalents at Beginning of Period		37,943			3,978
Cash and Cash Equivalents at End of Period	$	2,427		$	4,654
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $409 and $113 capitalized for 2004 and 2003, respectively)	$	5,295		$	5,946
Income taxes (net of refunds)	$	774		$	403

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

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SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Assets	2004			2003
	(in thousands)
Current Assets:
Cash and cash equivalents	$	2,427		$	37,943
Receivables —
Customer accounts receivable		24,514			19,674
Unbilled revenues		15,152			11,288
Under recovered regulatory clause revenues		8,897			—
Other accounts and notes receivable		686			1,138
Affiliated companies		1,553			4,872
Accumulated provision for uncollectible accounts		(793	)		(641	)
Fossil fuel stock, at average cost		9,137			8,652
Materials and supplies, at average cost		9,821			9,070
Prepaid income taxes		23,152			24,419
Prepaid expenses		1,526			1,377
Other		1,914			623
Total current assets		97,986			118,415
Property, Plant, and Equipment:
In service		926,205			912,504
Less accumulated provision for depreciation		411,317			402,394
		514,888			510,110
Construction work in progress		95,854			14,121
Total property, plant, and equipment		610,742			524,231
Other Property and Investments		2,312			2,248
Deferred Charges and Other Assets:
Deferred charges related to income taxes		9,313			9,611
Cash surrender value of life insurance for deferred compensation plans		24,071			23,866
Unamortized debt issuance expense		4,414			5,652
Unamortized loss on reacquired debt		8,298			7,488
Other		16,295			18,410
Total deferred charges and other assets		62,391			65,027
Total Assets	$	773,431		$	709,921

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

84

SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Liabilities and Stockholder’s Equity	2004			2003
	(in thousands)
Current Liabilities:
Securities due within one year	$	954		$	40,910
Notes payable		17,586			—
Accounts payable —
Affiliated		18,044			13,797
Other		10,605			13,147
Customer deposits		7,101			6,922
Accrued taxes —
Income taxes		766			1,172
Other		4,645			1,473
Accrued interest		2,886			2,802
Accrued vacation pay		2,564			2,530
Accrued compensation		3,063			5,652
Other		3,272			5,107
Total current liabilities		71,486			93,512
Long-term Debt		232,628			222,493
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		88,142			83,852
Deferred credits related to income taxes		9,295			9,804
Accumulated deferred investment tax credits		8,293			8,625
Employee benefit obligations		43,371			39,833
Other cost of removal obligations		39,207			36,843
Miscellaneous regulatory liabilities		13,230			12,932
Other		6,944			15,735
Total deferred credits and other liabilities		208,482			207,624
Total Liabilities		512,596			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		56,027			24,417
Retained earnings		107,757			109,856
Accumulated other comprehensive loss		(2,172	)		(2,204	)
Total common stockholder’s equity		215,835			186,292
Total Liabilities and Stockholder’s Equity	$	773,431		$	709,921

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

85

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

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

RESULTS OF OPERATIONS

Earnings

Savannah Electric’s net income for the second quarter and year-to-date 2004 was $7.3 million and $10.5 million, respectively, compared to $6.3 million and $9.8 million, respectively, for the corresponding periods of 2003. Earnings increased by $1.1 million, or 16.7%, in the second quarter 2004 primarily due to higher operating revenues and other income, net, partially offset by higher operating expenses. Year-to-date 2004 earnings were up by $0.7 million, or 7.1%, as a result of higher operating revenues, also partially offset by higher operating expenses.

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Second Quarter				Year-To-Date
	(in thousands)		%		(in thousands)		%
Retail sales	$	12,969		17.2	$	17,446		12.5
Sale for resale — affiliates		741		81.3		854		26.4
Fuel expense		1,529		12.1		588		2.4
Purchased power — non-affiliates		3,664		506.8		4,102		156.1
Purchased power — affiliates		5,065		22.9		8,182		19.9
Other operations expense		1,695		12.2		2,697		10.0
Maintenance expense		216		3.2		737		5.8
Interest expense, net of amounts capitalized		515		20.8		1,038		20.4

     Retail sales. Excluding fuel revenues, which do not affect net income, retail sales revenue increased by $4.5 million, or 10.2%, in the second quarter 2004 and increased by $6.5 million, or 7.9%, year-to-date 2004 when compared to the corresponding periods in 2003. The second quarter 2004 increase in retail sales revenue is mainly attributed to an 11.7% increase in retail kilowatt-hour energy sales. Energy sales to residential and commercial customers were higher by 12.0% and 12.5%, respectively, mainly due to more favorable weather conditions and growth in the number of customers when compared to the same period in 2003. Energy sales to industrial customers increased by 9.3% in the second quarter 2004 compared to the second quarter 2003 primarily due to increased usage by several industrial customers as a result of the improving economy. The year-to-date 2004 increase in retail revenues is primarily a result of more favorable weather conditions and growth in the number of customers. Year-to-date 2004, energy sales to residential and commercial customers were higher by 14.1% and 7.4%, respectively. Energy sales to industrial customers year-to-date 2004 were down 4.4% when compared to the prior year mainly due to the installation of a cogeneration facility by one customer in late 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. Sales for resale to affiliates increased in the second quarter and year-to-date 2004 primarily due to an increase in demand. These transactions do not have a significant impact on net income.

86

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

     Fuel expense.Fuel expense increased in the second quarter and year-to-date 2004 primarily as a result of increased generation to meet demand for energy and increases in the price of fuel. Generation increased 4.8% for second quarter and 3.2% for year-to-date 2004 when compared to the prior year. Fuel costs increased 7.1% for second quarter 2004. 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 second 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 available from affiliates. These transactions do not have a significant impact on earnings, as energy costs are generally recovered through Savannah Electric’s fuel cost recovery clause.

     Purchased power — affiliates. Purchased power from affiliates increased in the second quarter and year-to-date 2004 as compared to the same periods in the prior year primarily due to the availability of system generation at prices below self generation to meet increased sales demand and also as the result of an accounting order approved by the Georgia PSC in December 2002 which allows Savannah Electric to write-down a portion of the approximately $3.8 million annual deferral in Plant Wansley purchased power costs. 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 $0.6 million increase to expense for the second quarter and a $0.9 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 and higher energy costs. 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 second quarter and year-to-date 2004 as compared to the same periods in the prior year in other operations expense are attributed to an increase in administrative and general expenses primarily relating to accounting and auditing services, legal and employee benefit expenses.

     Maintenance expense.The increases in the second quarter and year-to-date 2004 as compared to the same periods in the prior year are mainly due to an unscheduled coal mill repair at Plant Kraft.

     Interest expense, net of amounts capitalized.The second quarter and year-to-date 2004 increases in this expense as compared to the same period in the prior year are mainly due to an increase in long term debt outstanding. 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 the issuance of senior notes in late 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 Savannah Electric’s ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs and to recover costs related to growing demand and increasingly stricter environmental standards. Growth in energy sales is subject to a number of factors, which include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand and the rate of economic growth in the service area. For additional information relating to these issues, see BUSINESS — The

87

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

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

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 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 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 Savannah Electric has been effectively stayed pending final resolution of the TVA case. With the denial of the EPA’s petition for review, the Court of Appeals’ decision became final. 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 that cannot be determined at this time and could possibly require payment of substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates.

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

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

     Additionally, on 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.

88

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” 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 includes a pivotal supplier analysis and a wholesale market share analysis, the results of which provide a rebuttable presumption regarding generation market power. The FERC’s order also sets forth procedures for rebutting these presumptions and addresses mitigation measures for those entities that are found to have market power. In the absence of specific mitigation measures, the order includes several cost-based mitigation measures that would apply by default. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. Southern Company, the retail operating companies, including Savannah Electric, and Southern Power believe that it may be difficult for a traditional utility company, or an affiliate thereof, with a significant load service obligation and generation to satisfy that obligation, and that is not a member of a large, FERC-approved RTO, to pass all aspects of the market power screens as currently designed. However, each of the companies believes that it has an appropriate basis to rebut the generation market power presumption.

     On July 8, 2004, the FERC denied Southern Company’s request for rehearing, along with a number of others, and reaffirmed the interim tests that it adopted in April. Southern Company will submit the required analyses by August 9, 2004. In the event that the FERC’s default mitigation measures are ultimately applied, Southern Power and the retail operating companies may be required to charge cost-based rates, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

Transmission

See MANAGEMENT’S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS — “Future Earnings Potential — FERC Matters — Transmission” of 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

89

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

occurred on May 24, 2004. On May 20, 2004, Southern Power filed a request to withdraw the PPAs and to terminate the ongoing FERC proceedings. On August 4, 2004, the FERC issued a notice that it allowed the request to withdraw the PPAs to be accepted and to become effective by operation of law on July 20, 2004. However, the FERC made no determination on what additional steps may need to be taken with respect to testimony provided in the proceedings. The ultimate outcome of this matter cannot now be determined.

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

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 twenty-four 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 of $2.7 million were recorded as construction work in progress in June 2004 and will 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 June 30, 2004 is approximately $8.9 million and is included in Savannah Electric’s Condensed Balance Sheets herein. The Georgia PSC is expected to rule on this matter by late October 2004. The outcome of the filing cannot be determined at this time.

Retail Rate Case

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

Other Matters

Savannah Electric is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Savannah Electric’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged

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

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

FINANCIAL CONDITION AND LIQUIDITY

Overview

Major changes in Savannah Electric’s financial condition during the first six months of 2004 included the addition of approximately $95.9 million to utility plant, which include 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.

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SAVANNAH ELECTRIC AND 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 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. 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.

Sources of Capital

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

     To meet short-term cash needs and contingencies, Savannah Electric had at June 30, 2004 approximately $2.4 million of cash and cash equivalents and $50 million of unused committed credit arrangements with banks, of which $31 million expires in 2004, $9 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. The credit arrangements provide liquidity support to some of Savannah Electric’s obligations with respect to its variable rate debt and its commercial paper. Savannah Electric expects to renew its credit facilities, as needed, prior to expiration. Savannah Electric may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Savannah Electric and other Southern Company subsidiaries. At June 30, 2004, Savannah Electric had $10.7 million of commercial paper and $6.9 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 agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.

Market Price Risk

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

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

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

	Second Quarter
	2004			Year-to-Date
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	1,959		$	463
Contracts realized or settled		(781	)		(782	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes		405			1,902
Contracts at June 30, 2004	$	1,583		$	1,583

	Source of June 30, 2004
	Valuation Prices
	Total		Maturity
	Fair Value		Year 1		1-3 Years
	(in thousands)
Actively quoted	$	1,583	$	1,341	$	242
External sources		—		—		—
Models and other methods		—		—		—
Contracts at June 30, 2004	$	1,583	$	1,341	$	242

     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 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.

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

93

SOUTHERN POWER COMPANY

94

SOUTHERN POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2004			2003			2004			2003
	(in thousands)						(in thousands)
Operating Revenues:
Sales for resale —
Non-affiliates	$	73,032		$	68,997		$	159,731		$	119,266
Affiliates		107,218			86,079			194,013			141,369
Contract termination		—			80,000			—			80,000
Other revenues		2,499			3,205			4,610			5,085
Total Operating Revenues		182,749			238,281			358,354			345,720
Operating Expenses:
Fuel		43,998			35,198			74,333			55,236
Purchased power —
Non-affiliates		25,813			16,237			39,418			31,560
Affiliates		28,926			31,670			70,982			49,602
Other operations		13,529			12,327			28,254			18,235
Maintenance		4,407			303			7,419			2,480
Depreciation and amortization		12,796			8,062			25,574			14,606
Taxes other than income taxes		2,718			2,063			5,397			3,363
Total operating expenses		132,187			105,860			251,377			175,082
Operating Income		50,562			132,421			106,977			170,638
Other Income and (Expense):
Interest expense, net of amounts capitalized		(14,323	)		(2,944	)		(26,909	)		(4,343	)
Other income (expense), net		1,271			(174	)		1,764			129
Total other income and (expense)		(13,052	)		(3,118	)		(25,145	)		(4,214	)
Earnings Before Income Taxes		37,510			129,303			81,832			166,424
Income taxes		15,093			50,013			32,230			64,376
Earnings Before Cumulative Effect of Accounting Change		22,417			79,290			49,602			102,048
Cumulative effect of accounting change — less income taxes of $231 thousand		—			—			—			367
Net Income	$	22,417		$	79,290		$	49,602		$	102,415

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months					For the Six Months
	Ended June 30,					Ended June 30,
	2004		2003			2004			2003
	(in thousands)					(in thousands)
Net Income	$	22,417	$	79,290		$	49,602		$	102,415
Other comprehensive income (loss):
Changes in fair value of qualifying hedges, net of tax of $104, $(6,164), $(418) and $(8,564), respectively		166		(10,154	)		(762	)		(13,987	)
Less: Reclassification adjustment for amounts included in net income, net of tax of $886, $(50), $1,873 and $116, respectively		1,414		440			2,983			704
COMPREHENSIVE INCOME	$	23,997	$	69,576		$	51,823		$	89,132

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

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SOUTHERN POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months
	Ended June 30,
	2004			2003
	(in thousands)
Operating Activities:
Net income	$	49,602		$	102,415
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		30,561			13,924
Deferred income taxes and investment tax credits, net		20,281			10,514
Deferred capacity revenues		(14,972	)		(10,159	)
Tax benefit of stock options		100			131
Other, net		483			878
Changes in certain current assets and liabilities —
Receivables, net		(32,912	)		(34,680	)
Fossil fuel stock		2,880			4,678
Materials and supplies		(1,493	)		(324	)
Other current assets		10,480			(7,287	)
Accounts payable		(21,417	)		23,023
Accrued taxes		5,577			46,627
Accrued interest		(291	)		(3,781	)
Net cash provided from operating activities		48,879			145,959
Investing Activities:
Gross property additions		(94,991	)		(231,396	)
Sale of property to affiliates		400,346			—
Change in construction payables, net		(9,463	)		(19,587	)
Other		778			1,079
Net cash provided from (used for) investing activities		296,670			(249,904	)
Financing Activities:
Decrease in notes payable, net — affiliated		—			(4,025	)
Increase (decrease) in notes payable, net		(90,218	)		492,351
Proceeds —
Capital contributions from parent company		—			254
Redemptions —
Other long-term debt		—			(380,163	)
Capital distributions to parent company		(225,000	)		—
Other		1,960			(2,540	)
Net cash provided from (used for) financing activities		(313,258	)		105,877
Net Change in Cash and Cash Equivalents		32,291			1,932
Cash and Cash Equivalents at Beginning of Period		2,798			19,474
Cash and Cash Equivalents at End of Period	$	35,089		$	21,406
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $15,544 and $23,890 capitalized for 2004 and 2003, respectively)	$	19,839		$	—
Income taxes (net of refunds)	$	2,201		$	10,831

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

96

SOUTHERN POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Assets	2004			2003
	(in thousands)
Current Assets:
Cash and cash equivalents	$	35,089		$	2,798
Receivables —
Customer accounts receivable		12,617			10,772
Other accounts receivable		7			270
Accumulated provision for uncollectible accounts		(350	)		(350	)
Affiliated companies		45,460			14,130
Fossil fuel stock, at average cost		2,918			5,798
Materials and supplies, at average cost		9,616			8,123
Prepaid income taxes		2,539			11,222
Prepaid expenses		4,428			2,528
Other		330			1,174
Total current assets		112,654			56,465
Property, Plant, and Equipment:
In service		1,823,448			1,831,139
Less accumulated provision for depreciation		85,617			60,005
		1,737,831			1,771,134
Construction work in progress		200,319			504,097
Total property, plant, and equipment		1,938,150			2,275,231
Deferred Charges and Other Assets:
Unamortized debt issuance expense		16,457			18,315
Accumulated deferred income taxes		1,259			21,911
Prepaid long-term service agreements		31,660			21,728
Prepaid transmission expenses — affiliated		—			12,790
Other		4,077			2,845
Total deferred charges and other assets		53,453			77,589
Total Assets	$	2,104,257		$	2,409,285

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

97

SOUTHERN POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Liabilities and Stockholder’s Equity	2004			2003
	(in thousands)
Current Liabilities:
Securities due within one year	$	200		$	200
Notes payable		24,131			114,347
Accounts payable —
Affiliated		22,556			51,442
Other		4,597			6,591
Accrued taxes other than income taxes		6,866			1,289
Accrued interest		29,722			30,012
Other		349			489
Total current liabilities		88,421			204,370
Long-term Debt		1,149,214			1,149,112
Deferred Credits and Other Liabilities:
Deferred capacity revenues —
Affiliated		14,098			28,799
Other		(15	)		256
Other —
Affiliated		13,999			15,061
Other		140			211
Total deferred credits and other liabilities		28,222			44,327
Total Liabilities		1,265,857			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		737,413			850,312
Retained earnings		155,228			217,626
Accumulated other comprehensive loss		(54,241	)		(56,462	)
Total common stockholder’s equity		838,400			1,011,476
Total Liabilities and Stockholder’s Equity	$	2,104,257		$	2,409,285

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

98

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

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

RESULTS OF OPERATIONS

Earnings

Southern Power’s net income for the second quarter and year-to-date 2004 was $22.4 million and $49.6 million, respectively, compared to $79.3 million and $102.4 million for the corresponding periods of 2003. The decreases in second quarter 2004 earnings of $56.9 million, or 71.7%, and $52.8 million, or 51.6%, year-to-date 2004 are primarily attributed to a one-time gain of $50 million recognized in May 2003 upon termination of PPAs with Dynegy, as well as a reduction in the earnings from sales of uncontracted capacity as new PPAs have become effective. 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 MWs; 600 MWs 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)
	Second Quarter						Year-To-Date
	(in thousands)			%			(in thousands)			%
Sales for resale — non-affiliates	$	4,035			5.8		$	40,465			33.9
Sale for resale — affiliates		21,139			24.6			52,644			37.2
Fuel expense		8,800			25.0			19,097			34.6
Purchased power — non-affiliates.		9,576			59.0			7,858			24.9
Purchased power — affiliates		(2,744	)		(8.7	)		21,380			43.1
Other operations expense		1,202			9.8			10,019			54.9
Depreciation and amortization		4,734			58.7			10,968			75.1
Interest expense, net of amounts capitalized		11,379			N/M			22,566			N/M
Income taxes		(34,920	)		N/M			(32,146	)		N/M

N/M Not meaningful

     Sales for resale — non-affiliates. In the second quarter and year-to-date 2004, revenues from sales for resale to non-affiliates were higher when compared to the corresponding periods in 2003. These increases were primarily due to additional wholesale capacity and energy sales to non-affiliates as a result of commercial operation of Plant Harris Unit 2 in June 2003 and Plant Stanton A in October 2003.

     Sales for resale — affiliates.During the second quarter and year-to-date 2004, sales for resale to affiliates increased primarily due to energy and capacity sales through PPAs with Alabama Power and Georgia Power that commenced in June 2003. A new PPA with Georgia Power for Plant Harris Unit 2 that began in June 2004 also contributed to the increases. 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.

99

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

     Fuel expense. Fuel expense for the second quarter and year-to-date 2004 increased significantly when compared to the same periods in 2003. The second quarter 2004 increase resulted primarily from commercial operation of Plant Harris Unit 2, and natural gas prices that averaged 14% higher than in the same period of 2003. For year-to-date 2004, the increase over the same period in 2003 was 6%. 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. The increases in purchased power from non-affiliates during the second quarter and year-to-date 2004 when compared to the same periods in 2003 are primarily due to higher purchase volumes and pricing related to day-ahead peak-hour purchases in 2004. These purchases minimize daily cycling of Southern Power’s generating units or the need to operate those units during off-peak hours when cheaper energy is available from affiliates. These purchases reduce overall costs when long-term maintenance of the units is considered.

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

     Other operations expense.During the second quarter and year-to-date 2004, other operations expense 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 drivers for the increases in depreciation and amortization in the second quarter and year-to-date 2004 as compared to the corresponding periods in the prior year.

     Interest expense, net of amounts capitalized.In the second 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 regarding the transfer of the Plant McIntosh Unit 10 and 11 construction project to Georgia Power and Savannah Electric on May 24, 2004.

     Income taxes.The decreases in income taxes for the second quarter and year-to-date 2004 correspond to the decrease in pre-tax earnings due to the Dynegy settlement recorded in the second quarter of 2003. There were no audit adjustments or settlements related to income taxes through June 30, 2004.

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

100

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

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 includes a pivotal supplier analysis and a wholesale market share analysis, the results of which provide a rebuttable presumption regarding generation market power. The FERC’s order also sets forth procedures for rebutting these presumptions and addresses mitigation measures for those entities that are found to have market power. In the absence of specific mitigation measures, the order includes several cost-based mitigation measures that would apply by default. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. Southern Company, the retail operating companies and Southern Power believe that it may be difficult for a traditional utility company, or an affiliate thereof, with a significant load service obligation and generation to satisfy that obligation, and that is not a member of a large, FERC-approved RTO, to pass all aspects of the market power screens as currently designed. However, each of the companies believes that it has an appropriate basis to rebut the generation market power presumption.

     On July 8, 2004, the FERC denied Southern Company’s request for rehearing, along with a number of others, and reaffirmed the interim tests that it adopted in April. Southern Company will submit the required analyses by August 9, 2004. In the event that the FERC’s default mitigation measures are ultimately applied, Southern Power and the retail operating companies may be required to charge cost-based rates, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

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.

101

SOUTHERN 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” of Southern Company in Item 7 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.

Other Matters

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.

     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 the PPA with Georgia Power for the remaining 200 MW of uncontracted capacity at Plant Franklin Unit 2 began. Also, in June 2004, sales under the PPA with Georgia Power 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.

     Southern Power is also completing limited construction activities on Plant Franklin Unit 3 to preserve the long-term viability of the project but has deferred final completion until the 2008-2011 period. See Note 3 to 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.

     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 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.

102

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

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Southern Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Southern Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See 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 six months of 2004 was the sale of the Plant McIntosh Units 10 and 11 combined cycle construction project to Georgia Power and Savannah Electric on May 24, 2004 at book cost of $429 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, declared dividends of $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.

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 will significantly reduce short-term borrowings under the commercial paper program.

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 has been to refinance most of such short-term borrowings with long-term securities following commercial operation of the generating facilities. 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 June 30, 2004 approximately $650 million of an unused committed credit arrangement with banks expiring in 2006. This arrangement also provides liquidity support for Southern Power’s commercial paper program. Amounts drawn under the arrangements may be used to finance acquisition and construction costs related to gas-fired electric generating

103

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

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 agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are contracts that could require collateral — but not accelerated payment — in the event of a credit rating change to below investment grade. These contracts are primarily for physical electricity purchases and sales, fixed-price physical gas purchases and agreements covering interest rate swaps. Generally, collateral may be provided by a Southern Company guaranty, letter of credit or cash. At June 30, 2004, the maximum potential collateral requirements were approximately $177 million.

Market Price Risk

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

     Because energy from Southern Power’s generating facilities is primarily sold under long-term PPAs with tolling agreements and provisions shifting substantially all of the responsibility for fuel cost to the purchasers, Southern Power’s exposure to market volatility in commodity fuel prices and prices of electricity is limited. To mitigate residual risks in those areas, Southern Power enters into fixed-price contracts for the sale of electricity. Unrealized gains and losses on electric and gas contracts qualifying as cash flow hedges of anticipated purchases and sales are deferred in Other Comprehensive Income. The fair values of derivative energy contracts at June 30, 2004 were as follows:

	Second Quarter
	2004			Year-to-Date
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	(203	)	$	665
Contracts realized or settled		166			(499	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes		(2	)		(205	)
Contracts at June 30, 2004	$	(39	)	$	(39	)

     At June 30, 2004, all of these contracts mature within one year and are based on actively quoted market prices. 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.

104

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
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
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

105

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 June 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 have been effectively stayed pending final resolution of the TVA case. With the denial of the EPA’s petition for review, the Court of Appeals’ decision became final. Alabama Power and the EPA jointly notified the District Court for the Northern District of Alabama, where the case against Alabama Power is pending and requested that the stay be lifted. On June 16, 2004, the District Court lifted the stay, placing the case back onto the District Court’s active docket. At this time, no party to the case against Georgia Power and Savannah Electric has sought to reopen that case, which remains administratively closed in the District Court for the Northern District of Georgia. On June 10, 2004, the U.S. District Court for the Northern District of Georgia granted Georgia Power’s motion in the Plant Wansley environmental litigation for partial summary judgment regarding 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

106

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

adverse outcome in any one of these cases could require substantial capital expenditures that cannot be determined at this time and could possibly require payment of substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates.

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. The final outcome of these matters cannot now be determined.

See Note 3 to the financial statements of Southern Company under “Mirant Bankruptcy” in Item 8 of the Form 10-K and Note 5 to the financial statements of Southern Company in Item 8 of the Form 10-K for

107

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

information related to potential contingent liabilities as a result of Mirant’s inclusion in the consolidated federal income tax return prior to the spin-off. In connection with the audit of tax years 2000 and 2001, the IRS has preliminarily indicated that they may challenge certain tax deductions arising from Mirant’s operations prior to the spin-off. The ultimate outcome of this matter cannot now be determined.

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 includes a pivotal supplier analysis and a wholesale market share analysis, the results of which provide a rebuttable presumption regarding generation market power. The FERC’s order also sets forth procedures for rebutting these presumptions and addresses mitigation measures for those entities that are found to have market power. In the absence of specific mitigation measures, the order includes several cost-based mitigation measures that would apply by default. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. Southern Company, the retail operating companies and Southern Power believe that it may be difficult for a traditional utility company, or an affiliate thereof, with a significant load service obligation and generation to satisfy that obligation, and that is not a member of a large, FERC-approved RTO, to pass all aspects of the market power screens as currently designed. However, each of the companies believes that it has an appropriate basis to rebut the generation market power presumption.

On July 8, 2004, the FERC denied Southern Company’s request for rehearing and reaffirmed the interim tests that it adopted in April. Southern Company will submit the required analyses by August 9, 2004. In the event that the FERC’s default mitigation measures are ultimately applied, Southern Power and the retail operating companies may be required to charge cost-based rates, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

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. The IRS has also preliminarily indicated that they may challenge Southern Company’s other three international leveraged lease transactions (so-called SILO or sale-in-lease-out transactions). See

108

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

	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. 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 significant additional interest charges. Additionally, although the payment of the actual tax liability would not affect Southern Company’s results of operations, it could have a material impact on cash flow. 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		06/30/04
					(in millions)
Alabama Power	$	359	$	—	$	—		$	12	$	—	$	371
Georgia Power		476		—		(1	)		15		—		490
Gulf Power		4		—		—			—		1		5
Mississippi Power		2		—		—			—		1		3
Savannah Electric		4		—		—			—		—		4
Southern Company	$	845	$	—	$	(1	)	$	27	$	2	$	873

(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 trusts to Southern Company and the retail operating companies are reflected as Long-term Debt Payable to Affiliated Trusts on the accompanying Balance Sheets.

109

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

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 June 30, 2004, Southern Company’s investment totaled $27.9 million; Southern Company has committed to a maximum investment of $75 million. The assets of the venture capital fund are included in Cash and Other Investments on the accompanying Condensed Balance Sheets.
	In May 2004, the FASB approved Staff Position (FSP) No. 106-2, “Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “Medicare Act”).” FSP No. 106-2 requires recognition of the impacts of the Medicare Act in the accumulated post-retirement benefit obligation and future cost of service for post-retirement medical plans and may be applied retroactively to the enactment of the Medicare Act in December 2003 or prospectively effective for the third quarter 2004. Southern Company and the retail operating companies have elected to apply this treatment prospectively. Pending the finalization of federal regulations governing the subsidy effected in the Medicare Act, Southern Company and its subsidiaries do not anticipate a material impact on their respective financial statements from the adoption of FSP No. 106-2.
(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 six-month periods ending June 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			Six			Six
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	June 30,			June 30,			June 30,			June 30,
	2004			2003			2004			2003
Interest rate		3.7	%		2.6	%		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		19.6	%		22.7	%		19.7	%		23.6	%
Expected annual dividends on common stock	$	1.40		$	1.37		$	1.40		$	1.37
Weighted average fair value of stock options granted	$	3.41		$	3.51		$	3.29		$	3.59

110

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 June 30, 2004
Net income (in millions)	$	352	$	348
Earnings per share (dollars):
Basic	$	0.48	$	0.47
Diluted	$	0.47	$	0.46
Three Months Ended June 30, 2003
Net income (in millions)	$	432	$	427
Earnings per share (dollars):
Basic	$	0.60	$	0.60
Diluted	$	0.59	$	0.59
Six Months Ended June 30, 2004
Net income (in millions)	$	683	$	674
Earnings per share (dollars):
Basic	$	0.93	$	0.91
Diluted	$	0.92	$	0.90
Six Months Ended June 30, 2003
Net income (in millions)	$	730	$	721
Earnings per share (dollars):
Basic	$	1.01	$	1.00
Diluted	$	1.00	$	0.99

Diluted Earnings Per Share

	Three Months		Three Months		Six Months		Six Months
	Ended		Ended		Ended		Ended
(in thousands)	June 30, 2004		June 30, 2003		June 30, 2004		June 30, 2003
As Reported Shares		738,185		724,627		737,411		721,785
Effect of options		4,268		5,659		4,509		5,354
Diluted Shares		742,452		730,286		741,920		727,139

(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 June 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	$	29,788		$	12,005		$	7,951	$	3,392	$	4,825		$	1,615		$	—
Other comprehensive income (loss)		(3,129	)		(462	)		—		—		(3,660	)		(32	)		(40	)
Net income		(41	)		4			4		1		1			—			1
Total fair value	$	26,618		$	11,547		$	7,955	$	3,393	$	1,166		$	1,583		$	(39	)

111

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

For the three months and six months ended June 30, 2004 and 2003, the amounts recognized in income for Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric and Southern Power were immaterial.

In addition, approximately $2 million in pre-tax gains will be reclassified from Other Comprehensive Income to Fuel Expense by Southern Company for the twelve month period ended June 30, 2005.

At June 30, 2004, Southern Company had $3.3 billion notional amount of interest rate swaps outstanding with net fair value gains of $48.4 million as follows:

Fair Value Hedges

							Fair Value Gain (Loss)
	Notional	Fixed Rate			Variable Rate	Maturity	June 30, 2004
	Amount	Received			Paid	Date	(in millions)
Southern Company	$400 million		5.3	%	6-month LIBOR (in arrears) less 0.103%	February 2007	$	19.5
Southern Company	$40 million		7.625	%	6-month LIBOR (in arrears) plus 2.9225%	December 2009	$	(0.4	)

Cash Flow Hedges

							Fair Value
			Weighted Average				Gain (Loss)
	Notional	Variable Rate	Fixed Rate			Maturity	June 30, 2004
	Amount	Received	Paid			Date	(in millions)
Variable Rate Securities
Alabama Power	$536 million	BMA Index		2.007	%	January 2007	$	6.7
Alabama Power	$195 million	3-month LIBOR		1.89	%	April 2006	$	3.3
Alabama Power	$250 million	3-month LIBOR		3.9198	%	September 2009	$	5.4
Alabama Power	$220 million	3-month LIBOR		3.4145	%	November 2007	$	3.3
Georgia Power	$250 million	3-month LIBOR plus 0.125%		1.96	%	February 2005	$	0.1
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	$	0.5
Georgia Power	$250 million	3-month LIBOR		4.6629	%	February 2015	$	14.0
Georgia Power	$250 million	3-month LIBOR		5.3621	%	September 2014	$	(4.1	)
Savannah Electric	$20 million	3-month LIBOR plus 0.375%		2.055	%	December 2004	$	0.0

112

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

For the twelve month period ended June 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	$	(2.9	)
Georgia Power		(0.3	)
Gulf Power		(0.3	)
Mississippi Power		—
Savannah Electric		(0.1	)
Southern Power		(10.8	)
Southern Company	$	(14.4	)

(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 six-month periods ending June 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 June 30, 2004
Service cost	$	32		$	8		$	10		$	1		$	2		$	1
Interest cost		68			18			26			3			3			1
Expected return on plan assets		(113	)		(35	)		(45	)		(5	)		(5	)		(1	)
Recognized net gain		(1	)		(1	)		(1	)		–			–			–
Net amortization		4			1			2			–			–			–
Net cost (income)	$	(10	)	$	(9	)	$	(8	)	$	(1	)	$	–		$	1
Six Months Ended June 30, 2004
Service cost	$	64		$	16		$	20		$	2		$	4		$	2
Interest cost		136			36			52			6			6			2
Expected return on plan assets		(226	)		(70	)		(90	)		(10	)		(10	)		(2	)
Recognized net gain		(2	)		(2	)		(2	)		–			–			–
Net amortization		8			2			4			–			–			–
Net cost (income)	$	(20	)	$	(18	)	$	(16	)	$	(2	)	$	–		$	2
Three Months Ended June 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
Six Months Ended June 30, 2003
Service cost	$	58		$	14		$	20		$	2		$	2		$	2
Interest cost		130			34			50			6			6			2
Expected return on plan assets		(224	)		(70	)		(90	)		(10	)		(8	)		(2	)
Recognized net gain		(22	)		(6	)		(10	)		–			–			–
Net amortization		8			2			4			–			–			–
Net cost (income)	$	(50	)	$	(26	)	$	(26	)	$	(2	)	$	–		$	2

113

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

	Southern			Alabama			Georgia			Gulf		Mississippi		Savannah
PENSION PLANS (in millions)	Company			Power			Power			Power		Power		Electric
Three Months Ended June 30, 2004
Service cost	$	7		$	2		$	2		$	–	$	–	$	–
Interest cost		24			6			11			1		1		1
Expected return on plan assets		(12	)		(4	)		(6	)		–		–		–
Net amortization		9			2			5			–		–		–
Net cost (income)	$	28		$	6		$	12		$	1	$	1	$	1
Six Months Ended June 30, 2004
Service cost	$	14		$	4		$	4		$	–	$	–	$	–
Interest cost		48			12			22			2		2		2
Expected return on plan assets		(24	)		(8	)		(12	)		–		–		–
Net amortization		18			4			10			–		–		–
Net cost (income)	$	56		$	12		$	24		$	2	$	2	$	2
Three Months Ended June 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
Six Months Ended June 30, 2003
Service cost	$	12		$	4		$	4		$	–	$	–	$	–
Interest cost		46			12			20			2		2		2
Expected return on plan assets		(24	)		(8	)		(12	)		–		–		–
Net amortization		16			4			8			–		–		–
Net cost (income)	$	50		$	12		$	20		$	2	$	2	$	2

(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 investment in the leveraged lease is 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.
	Georgia Power is currently operating under a three-year retail rate order that expires December 31, 2004. Under the terms of the existing order, earnings are evaluated annually against a retail return on common equity range of 10 percent to 12.95 percent. Two-thirds of any earnings above the 12.95 percent return are applied to rate refunds, with the remaining one-third retained by Georgia Power. The order required Georgia Power to file a general rate case on July 1, 2004. 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. 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.

114

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(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 information showing that the book cost of the McIntosh construction project is lower than its market value. However, full recovery of the project costs depends on the outcome of the Georgia PSC’s review. In the event the Georgia PSC does not allow full recovery of the project costs, then part of such costs may have to be written off in accordance with FASB Statement No. 90, “Accounting for Abandonments and Disallowed Plant Costs.” At June 30, 2004, the investment in the McIntosh construction project totaled approximately $353.2 million and $69.7 million for Georgia Power and Savannah Electric, respectively. The ultimate outcome of the Georgia PSC’s review cannot now be determined.
(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 include 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,

115

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

	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.
(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 twenty-four 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 of $2.7 million were recorded as construction work in progress in June 2004 and will 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 June 30, 2004 is approximately $8.9 million. The Georgia PSC is expected to rule on this matter by late October 2004. The outcome of the filing cannot be determined at this time.
(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. If approved, the rate mechanism would begin operation in January 2005 and provide for the recovery of these costs pursuant to a factor that will be calculated annually. It is anticipated that for the first two years of the increase, retail rates would increase under the proposed mechanism by approximately 1% ($33 million) in 2005 and approximately an additional 1% ($30 million) in 2006. Such environmental cost recovery would include operation and maintenance expense, depreciation and a return on invested capital. The outcome of this matter cannot now be determined.

116

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(N) 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									All		Reconciling
	Companies		Southern Power		Eliminations			Total		Other		Eliminations			Consolidated
	(in millions)
Three Months Ended June 30, 2004:
Operating revenues	$	2,868	$	182	$	(134	)	$	2,916	$	119	$	(26	)	$	3,009
Segment net income (loss)		308		23		–			331		21		–			352
Six Months Ended June 30, 2004:
Operating revenues		5,410		358		(264	)		5,504		292		(55	)		5,741
Segment net income (loss)		580		50		–			630		54		(1	)		683
Total assets at June 30, 2004	$	32,497	$	2,104	$	(97	)	$	34,504	$	1,833	$	(402	)	$	35,935
Three Months Ended June 30, 2003:
Operating revenues	$	2,606	$	239	$	(118	)	$	2,727	$	123	$	(26	)	$	2,824
Segment net income (loss)		344		79		–			423		9		–			432
Six Months Ended June 30, 2003:
Operating revenues		4,972		346		(191	)		5,127		276		(38	)		5,365
Segment net income (loss)		608		102		–			710		20		–			730
Total assets at December 31, 2003	$	31,412	$	2,409	$	(122	)	$	33,699	$	1,671	$	(325	)	$	35,045

Products and Services

			Electric Utilities Revenues
Period	Retail		Wholesale		Other		Total
	(in millions)
Three Months Ended June 30, 2004	$	2,478	$	344	$	94	$	2,916
Three Months Ended June 30, 2003		2,176		324		227		2,727
Six Months Ended June 30, 2004		4,622		695		187		5,504
Six Months Ended June 30, 2003		4,150		658		319		5,127

117

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 4.	Submission of Matters to a Vote of Security Holders.
	Southern Company
	Southern Company held its annual meeting of shareholders on May 26, 2004. Each nominee for director of Southern Company received the requisite plurality of votes for election. The vote tabulation was as follows:

Nominees	Shares For		Shares Withhold Vote
Daniel P. Amos		561,096,823		9,213,597
Dorrit J. Bern		559,474,911		10,835,509
Francis S. Blake		559,207,630		11,102,790
Thomas F. Chapman		561,058,059		9,252,361
H. Allen Franklin		557,021,653		13,288,767
Bruce S. Gordon		560,732,936		9,577,484
Donald M. James		529,323,267		40,987,153
Zack T. Pate		559,607,842		10,702,578
J. Neal Purcell		559,547,359		10,763,061
David M. Ratcliffe		559,718,258		10,592,162
Gerald J. St. Pé		560,734,357		9,576,063

In addition, at the annual meeting, shareholders were asked to vote for the ratification of the appointment of auditors. The vote tabulation was 556,104,768 shares for, 8,549,577 shares against and 5,656,066 shares abstaining. As a result of this vote the audit appointment was ratified. Shareholders were also entitled to vote on the Outside Directors Stock Plan. The vote tabulation was 375,820,740 shares for, 37,899,402 shares against and 11,935,860 shares abstaining. As a result of this vote, the Outside Directors Stock Plan was approved.

Alabama Power

Alabama Power held its annual meeting of common shareholders and preferred shareholders on April 23, 2004, and the following persons were elected to serve as directors of Alabama Power:

Whit Armstrong	Wallace D. Malone, Jr.
David J. Cooper, Sr.	Charles D. McCrary
H. Allen Franklin	Malcolm Portera
R. Kent Henslee	Robert D. Powers
John D. Johns	C. Dowd Ritter
Carl E. Jones, Jr.	James H. Sanford
Patricia M. King	John C. Webb, IV
James K. Lowder	James W. Wright

118

Item 4.	Submission of Matters to a Vote of Security Holders. (Continued)
	All 7,750,000 of the outstanding shares of Alabama Power’s common stock are owned by Southern Company and were voted in favor of the nominees for directors. None of the shares of preferred stock or Class A preferred stock were voted.
	Georgia Power
	Georgia Power held its annual meeting of common shareholders and preferred shareholders on May 19, 2004 and the following persons were elected to serve as directors of Georgia Power:

Juanita P. Baranco	D. Gary Thompson
Robert L. Brown, Jr.	Richard W. Ussery
Anna R. Cablik	William Jerry Vereen
Michael D. Garrett	Carl Ware
David M. Ratcliffe	E. Jenner Wood, III

All of the 7,761,500 outstanding shares of Georgia Power’s common stock are owned by Southern Company and were voted in favor of the nominees for directors. None of the shares of preferred stock were voted.

Gulf Power

Gulf Power held its annual meeting of common shareholders and preferred shareholders on May 19, 2004 and the following persons were elected to serve as directors of Gulf Power:

C. LeDon Anchors	William A. Pullum
William C. Cramer, Jr.	Winston E. Scott
Fred C. Donovan, Sr.	Susan N. Story

All of the 992,717 outstanding shares of Gulf Power’s common stock are owned by Southern Company and were voted in favor of the nominees for directors. None of the shares of preferred stock were voted.

Mississippi Power

Mississippi Power held its annual meeting of common shareholders and preferred shareholders on May 19, 2004 and the following persons were elected to serve as directors of Mississippi Power:

Tommy E. Dulaney	George A. Schloegel
Linda T. Howard	Philip J. Terrell
Robert C. Khayat	Anthony J. Topazi
Aubrey K. Lucas	N. Eugene Warr

All of the 1,121,000 outstanding shares of Mississippi Power’s common stock are owned by Southern Company and were voted in favor of the nominees for directors. None of the shares of preferred stock were voted.

119

Item 4.	Submission of Matters to a Vote of Security Holders. (Continued)
	Savannah Electric
	By written consent, in lieu of the annual meeting of stockholders of Savannah Electric, effective May 5, 2004, the following persons were elected to serve as directors of Savannah Electric:

Gus H. Bell, III	Anthony R. James
Archie H. Davis	Robert B. Miller, III
Walter D. Gnann	Arnold M. Tenenbaum

All of the 10,844,635 outstanding shares of Savannah Electric’s common stock are owned by Southern Company and were voted in favor of the nominees for directors.

Southern Power

By written consent, in lieu of the annual meeting of stockholders of Southern Power, effective April 1, 2004, the number of directors constituting the board of directors was set at six and the following persons were elected to serve as directors of Southern Power:

W. Paul Bowers	Michael D. Garrett
H. Allen Franklin	Charles D. McCrary
Thomas A. Fanning	David M. Ratcliffe

All of the 1,000 outstanding shares of Southern Power’s common stock are owned by Southern Company and were voted in favor of the nominees for directors.

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

(a) Exhibits.

(10)	Material Contracts
	Southern Company
	(a)1	-	Southern Company Deferred Compensation Plan as amended and restated effective January 1, 2004.
	(a)2	-	Outside Directors Stock Plan for The Southern Company and its Subsidiaries, effective May 26, 2004.
	(a)3	-	Amended and Restated Change in Control Agreement between The Southern Company, Southern Company Services, Inc. and David M. Ratcliffe, effective June 1, 2004.
	(a)4	-	Amended and Restated Change in Control Agreement between The Southern Company, Southern Company Services, Inc. and Thomas A. Fanning, effective June 1, 2004.
	(a)5	-	Amended and Restated Change in Control Agreement between The Southern Company, Alabama Power Company and Charles D. McCrary, effective June 1, 2004.
	(a)6	-	Amended and Restated Change in Control Agreement between The Southern Company, Georgia Power Company and Michael D. Garrett, effective June 1, 2004.

120

Item 6.	Exhibits and Reports on Form 8-K.
(10)	Material Contracts (continued)
	(a)7	-	Amended and Restated Change in Control Agreement between The Southern Company, Southern Nuclear and William G. Hairston, III, effective June 1, 2004.
	Alabama Power
	(b)1	-	Southern Company Deferred Compensation Plan as amended and restated effective January 1, 2004. (See Exhibit 10(a)1 herein)
	(b)2	-	Outside Directors Stock Plan for The Southern Company and its Subsidiaries, effective May 26, 2004. (See Exhibit 10(a)2 herein)
	(b)3	-	Amended and Restated Change in Control Agreement between The Southern Company, Alabama Power Company and Charles D. McCrary, effective June 1, 2004. (See Exhibit 10(a)5 herein)
	(b)4	-	Amended and Restated Change in Control Agreement between The Southern Company, Alabama Power Company and C. Alan Martin, effective June 1, 2004.
	Georgia Power
	(c)1	-	Southern Company Deferred Compensation Plan as amended and restated effective January 1, 2004. (See Exhibit 10(a)1 herein)
	(c)2	-	Outside Directors Stock Plan for The Southern Company and its Subsidiaries, effective May 26, 2004. (See Exhibit 10(a)2 herein)
	(c)3	-	Amended and Restated Change in Control Agreement between The Southern Company, Georgia Power Company and Michael D. Garrett, effective June 1, 2004. (See Exhibit 10(a)6 herein)
	Gulf Power
	(d)1	-	Southern Company Deferred Compensation Plan as amended and restated effective January 1, 2004. (See Exhibit 10(a)1 herein)
	(d)2	-	Outside Directors Stock Plan for The Southern Company and its Subsidiaries, effective May 26, 2004. (See Exhibit 10(a)2 herein)
	Mississippi Power
	(e)1	-	Southern Company Deferred Compensation Plan as amended and restated effective January 1, 2004. (See Exhibit 10(a)1 herein)
	(e)2	-	Outside Directors Stock Plan for The Southern Company and its Subsidiaries, effective May 26, 2004. (See Exhibit 10(a)2 herein)

121

Item 6.	Exhibits and Reports on Form 8-K.
(10)	Material Contracts (continued)
	Savannah Electric
	(f)1	-	Southern Company Deferred Compensation Plan as amended and restated effective January 1, 2004. (See Exhibit 10(a)1 herein)
	(f)2	-	Outside Directors Stock Plan for The Southern Company and its Subsidiaries, effective May 26, 2004. (See Exhibit 10(a)2 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.)

122

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

123

Item 6.		Exhibits and Reports on Form 8-K.
(a)	Exhibits. (Continued)
		(d)2	-	Certificate of Gulf Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
		Mississippi Power
		(e)1	-	Certificate of Mississippi Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
		(e)2	-	Certificate of Mississippi Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
		Savannah Electric
		(f)1	-	Certificate of Savannah Electric’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
		(f)2	-	Certificate of Savannah Electric’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
		Southern Power
		(g)1	-	Certificate of Southern Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
		(g)2	-	Certificate of Southern Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
(32)		Section 906 Certifications
		Southern Company
		(a)	-	Certificate of Southern Company’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
		Alabama Power
		(b)	-	Certificate of Alabama Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
		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.

124

Item 6.		Exhibits and Reports on Form 8-K.
(a)	Exhibits. (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.

(b) Reports on Form 8-K.

The registrants collectively and separately furnished Current Reports on Form 8-K dated April 28, 2004:

Item reported:	Item 12
Financial statements filed:	None

Southern Company filed Current Reports on Form 8-K dated May 7, 2004, May 18, 2004, May 25, 2004 and June 30, 2004:

Items reported:	Items 5
Financial statements filed:	None

Southern Company filed an Amendment to a Current Report dated May 25, 2004 on Form 8-K/A filed July 14, 2004:

Items reported:	Items 5
Financial statements filed:	None

Alabama Power filed Current Reports on Form 8-K dated April 7, 2004 (two reports):

Items reported:	Items 5 and 7
Financial statements filed:	None

Georgia Power filed Current Reports on Form 8-K dated May 7, 2004 and May 18, 2004:

Items reported:	Items 5
Financial statements filed:	None

Gulf Power filed a Current Report on Form 8-K dated April 6, 2004:

Items reported:	Items 5 and 7
Financial statements filed:	None

125

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

     (b) Reports on Form 8-K. (continued)

Mississippi Power filed Current Reports on Form 8-K dated March 3, 2004 (two reports), and May 25, 2004:

Item reported:	Items 5 and 7
Financial statements filed:	None

Mississippi Power filed an Amendment to a Current Report dated May 25, 2004 on Form 8-K/A filed July 14, 2004:

Items reported:	Items 5
Financial statements filed:	None

Savannah Electric filed Current Reports on Form 8-K dated May 7, 2004, May 18, 2004, and May 27, 2004:

Items reported:	Items 5 and 7
Financial statements filed:	None

Southern Power filed Current Reports on Form 8-K dated May 7, 2004 and May 18, 2004:

Items reported:	Items 5
Financial statements filed:	None

126

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 and Accounting Officer)
By	/s/ Wayne Boston
	(Wayne Boston, Attorney-in-fact)

Date: August 5, 2004

127

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 and Accounting Officer)
By	/s/ Wayne Boston
	(Wayne Boston, Attorney-in-fact)

Date: August 5, 2004

128

GEORGIA POWER COMPANY

SIGNATURES

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

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

Date: August 5, 2004

129

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: August 5, 2004

130

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: August 5, 2004

131

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: August 5, 2004

132

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: August 5, 2004

133