The Southern Company (SO) 10-Q 2006 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 quarterly period ended June 30, 2006

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)
	30 Ivan Allen Jr. Boulevard, N.W.
	Atlanta, Georgia 30308
	(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 Florida 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
333-98553	Southern Power Company	58-2598670
	(A Delaware Corporation)
	30 Ivan Allen Jr. Boulevard, N.W.
	Atlanta, Georgia 30308
	(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. Yesþ Noo

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

	Large
	Accelerated		Accelerated	Non-accelerated
Registrant	Filer		Filer	Filer
The Southern Company		X
Alabama Power Company					X
Georgia Power Company					X
Gulf Power Company					X
Mississippi Power Company					X
Southern Power Company					X

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yeso Noþ (Response applicable to all registrants.)

	Description of	Shares Outstanding
Registrant	Common Stock	at June 30, 2006
The Southern Company	Par Value $5 Per Share		742,286,154
Alabama Power Company	Par Value $40 Per Share		10,250,000
Georgia Power Company	Without Par Value		7,761,500	*
Gulf Power Company	Without Par Value		992,717
Mississippi Power Company	Without Par Value		1,121,000
Southern Power Company	Par Value $0.01 Per Share		1,000

* On July 1, 2006, Georgia Power Company issued an additional 1,500,000 common shares, without par value, in conjunction with the merger of Savannah Electric and Power Company into Georgia Power Company.

     This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, and Southern Power Company. Savannah Electric and Power Company was merged into Georgia Power Company on July 1, 2006. Savannah Electric and Power Company’s separate SEC reporting obligations were terminated following the merger. Savannah Electric and Power Company’s business and operations for the second quarter and year-to-date are now reflected only in The Southern Company portion of this report. This information will be incorporated into the Georgia Power Company Quarterly Report on Form 10-Q for the third quarter 2006 and for subsequent reporting periods. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.

2

INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2006

	Page
	Number
DEFINITIONS		5
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION		6
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Southern Company and Subsidiary Companies		7
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 Financial Condition and Results of Operations		13
Alabama Power Company		30
Condensed Statements of Income		31
Condensed Statements of Comprehensive Income		31
Condensed Statements of Cash Flows		32
Condensed Balance Sheets		33
Management’s Discussion and Analysis of Financial Condition and Results of Operations		35
Georgia Power Company		47
Condensed Statements of Income		48
Condensed Statements of Comprehensive Income		48
Condensed Statements of Cash Flows		49
Condensed Balance Sheets		50
Management’s Discussion and Analysis of Financial Condition and Results of Operations		52
Gulf Power Company		63
Condensed Statements of Income		64
Condensed Statements of Comprehensive Income		64
Condensed Statements of Cash Flows		65
Condensed Balance Sheets		66
Management’s Discussion and Analysis of Financial Condition and Results of Operations		68
Mississippi Power Company		79
Condensed Statements of Income		80
Condensed Statements of Comprehensive Income		80
Condensed Statements of Cash Flows		81
Condensed Balance Sheets		82
Management’s Discussion and Analysis of Financial Condition and Results of Operations		84
Southern Power Company and Subsidiary Companies		95
Condensed Consolidated Statements of Income		96
Condensed Consolidated Statements of Comprehensive Income		96
Condensed Consolidated Statements of Cash Flows		97
Condensed Consolidated Balance Sheets		98
Management’s Discussion and Analysis of Financial Condition and Results of Operations		100
Notes to the Condensed Financial Statements		108
Item 3. Quantitative and Qualitative Disclosures about Market Risk		29
Item 4. Controls and Procedures		29

3

INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2006

	Page
	Number
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		125
Item 1A. Risk Factors		125
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	Inapplicable
Item 3. Defaults Upon Senior Securities	Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders		125
Item 5. Other Information		127
Item 6. Exhibits		128
Signatures		133

4

DEFINITIONS

TERM	MEANING
AFUDC	Allowance for funds used during construction
Alabama Power	Alabama Power Company
ALJ	Administrative law judge
BMA	Bond Market Association
Clean Air Act	Clean Air Act Amendments of 1990
DOE	U.S. Department of Energy
ECO Plan	Environmental Compliance Overview Plan
EPA	U.S. Environmental Protection Agency
ERISA	Employee Retirement Income Security Act of 1974, as amended
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, 2005 and, with respect to Southern Company, Amendment No. 1 and Amendment No. 2 thereto
Georgia Power	Georgia Power Company
Gulf Power	Gulf Power Company
IIC	Intercompany Interchange Contract
IRC	Internal Revenue Code of 1986, as amended
IRS	Internal Revenue Service
KWH	Kilowatt-hour
LIBOR	London Interbank Offered Rate
Mirant	Mirant Corporation
Mississippi Power	Mississippi Power Company
Moody’s	Moody’s Investors Service, Inc
MW	Megawatt
NRC	Nuclear Regulatory Commission
NSR	New Source Review
PEP	Performance Evaluation Plan
PPA	Power Purchase Agreement
PSC	Public Service Commission
retail operating companies	Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric (merged into Georgia Power on July 1, 2006)
S&P	Standard and Poor’s, a division of The McGraw-Hill Companies, Inc.
Savannah Electric	Savannah Electric and Power Company (merged into Georgia Power on July 1, 2006)
SCS	Southern Company Services, Inc.
SEC	Securities and Exchange Commission
Southern Company	The Southern Company
Southern Company system	Southern Company, the retail operating companies, Southern Power, and other subsidiaries
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

5

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, statements concerning the strategic goals for the wholesale business, storm damage cost recovery and repairs, fuel cost recovery, environmental regulations and expenditures, synthetic fuel investments, financing activities, completion of construction projects, impacts of adoption of new accounting rules, access to sources of capital, and estimated construction and other expenditures. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar terminology. There are various factors that could cause actual results to differ materially from those suggested by 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, implementation of the Energy Policy Act of 2005, and also changes in environmental, tax, and other laws and regulations to which Southern Company and its subsidiaries are subject, including proposed legislation relating to tax credits associated with synthetic fuel investments (and the timing of adoption of any such legislation), 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, FERC matters, IRS audits, and Mirant matters;

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

• variations in demand for electricity, including those relating to weather, the general economy and population, and business growth (and declines);

• 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 the impact of pending and future rate cases and negotiations, including rate actions relating to fuel and storm restoration cost recovery;

• the performance of projects undertaken by the non-utility businesses and the success of efforts to invest in and develop new opportunities;

• fluctuations in the level of oil prices;

• the level of production, if any, by the synthetic fuel operations at Carbontronics Synfuels Investors LP and Alabama Fuel Products, LLC for the remainder of fiscal year 2006;

• 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 terrorist incidents and the threat of terrorist incidents;

• interest rate fluctuations and 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;

• catastrophic events such as fires, earthquakes, explosions, floods, hurricanes, or other similar occurrences;

• 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.

Each registrant expressly disclaims any obligation to update any forward-looking statements.

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,
	2006			2005			2006			2005
	(in thousands)						(in thousands)
Operating Revenues:
Retail revenues	$	2,970,387		$	2,555,091		$	5,441,800		$	4,823,900
Sales for resale		439,902			384,997			854,771			732,122
Other electric revenues		116,095			109,348			227,085			210,443
Other revenues		65,119			70,210			131,107			140,211
Total operating revenues		3,591,503			3,119,646			6,654,763			5,906,676
Operating Expenses:
Fuel		1,307,650			993,241			2,356,195			1,857,862
Purchased power		138,843			123,677			243,254			221,893
Other operations		587,921			572,191			1,150,373			1,088,619
Maintenance		273,292			259,975			556,922			554,067
Depreciation and amortization		297,532			286,374			596,458			577,484
Taxes other than income taxes		179,200			162,798			354,203			325,682
Total operating expenses		2,784,438			2,398,256			5,257,405			4,625,607
Operating Income		807,065			721,390			1,397,358			1,281,069
Other Income and (Expense):
Allowance for equity funds used during construction		10,398			14,011			21,925			30,870
Interest income		6,237			6,223			12,909			11,495
Equity in losses of unconsolidated subsidiaries		(12,277	)		(29,574	)		(44,852	)		(52,678	)
Leveraged lease income		17,599			18,677			35,702			36,925
Impairment loss on equity method investments		(15,274	)		—			(15,274	)		—
Interest expense, net of amounts capitalized		(180,695	)		(154,215	)		(357,070	)		(293,202	)
Interest expense to affiliate trusts		(30,640	)		(31,931	)		(61,269	)		(63,861	)
Preferred and preference dividends of subsidiaries		(8,006	)		(7,402	)		(17,021	)		(14,804	)
Other income (expense), net		15,372			(1,916	)		4,507			(7,123	)
Total other income and (expense)		(197,286	)		(186,127	)		(420,443	)		(352,378	)
Earnings From Continuing Operations Before Income Taxes		609,779			535,263			976,915			928,691
Income taxes		222,249			146,447			329,271			222,334
Earnings From Continuing Operations		387,530			388,816			647,644			706,357
Earnings from discontinued operations, net of income taxes of $(1,467), $(1,259), $(525), and $2,176, respectively		(2,307	)		(1,995	)		(814	)		3,424
Consolidated Net Income	$	385,223		$	386,821		$	646,830		$	709,781
Common Stock Data:
Earnings per share from continuing operations-
Basic	$	0.52		$	0.52		$	0.87		$	0.95
Diluted	$	0.52		$	0.52		$	0.87		$	0.94
Earnings per share including discontinued operations-
Basic	$	0.52		$	0.52		$	0.87		$	0.95
Diluted	$	0.52		$	0.52		$	0.87		$	0.95
Average number of basic shares of common stock outstanding (in thousands)		742,515			746,823			742,355			745,424
Average number of diluted shares of common stock outstanding (in thousands)		746,387			751,016			746,725			749,360
Cash dividends paid per share of common stock	$	0.3875		$	0.3725		$	0.7600		$	0.7300

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,
	2006			2005
	(in thousands)
Operating Activities:
Consolidated net income	$	646,830		$	709,781
Adjustments to reconcile consolidated net income to net cash provided from operating activities —
Depreciation and amortization		696,048			687,205
Deferred income taxes and investment tax credits		262,870			175,751
Allowance for equity funds used during construction		(21,925	)		(30,870	)
Equity in losses of unconsolidated subsidiaries		44,852			52,678
Leveraged lease income		(35,702	)		(36,925	)
Pension, postretirement, and other employee benefits		23,672			21,656
Stock option expense		22,186			—
Tax benefit of stock options		1,103			36,963
Hedge settlements		18,502			(19,860	)
Storm damage accounting order		—			45,000
Other, net		(20,547	)		(38,741	)
Changes in certain current assets and liabilities —
Receivables		(140,438	)		(360,973	)
Fossil fuel stock		(120,420	)		(115,221	)
Materials and supplies		(42,493	)		(19,362	)
Other current assets		(21,734	)		42,244
Accounts payable		(285,434	)		(109,448	)
Accrued taxes		(27,938	)		(80,978	)
Accrued compensation		(263,409	)		(210,061	)
Other current liabilities		7,605			47,384
Net cash provided from operating activities		743,628			796,223
Investing Activities:
Property additions		(1,167,696	)		(1,141,771	)
Nuclear decommissioning trust fund purchases		(384,850	)		(324,849	)
Nuclear decommissioning trust fund sales		377,970			316,150
Proceeds from property sales		151,760			9,468
Investment in unconsolidated subsidiaries		(52,273	)		(51,870	)
Cost of removal net of salvage		(40,328	)		(41,485	)
Other		(45,417	)		(57,162	)
Net cash used for investing activities		(1,160,834	)		(1,291,519	)
Financing Activities:
Increase in notes payable, net		594,563			510,947
Proceeds —
Long-term debt		960,125			870,695
Common stock		19,652			148,609
Gross excess tax benefit of stock options		2,506			—
Redemptions —
Long-term debt		(423,408	)		(436,470	)
Long-term debt to affiliate trusts		(67,457	)		—
Preferred and preference stock		(14,569	)		—
Common stock repurchased		(117	)		(62,321	)
Special deposits — redemption funds		—			(102,481	)
Payment of common stock dividends		(564,146	)		(543,637	)
Other		(29,154	)		(21,737	)
Net cash provided from financing activities		477,995			363,605
Net Change in Cash and Cash Equivalents		60,789			(131,691	)
Cash and Cash Equivalents at Beginning of Period		202,111			368,449
Cash and Cash Equivalents at End of Period	$	262,900		$	236,758
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $9,151 and $12,589 capitalized for 2006 and 2005, respectively)	$	423,312		$	312,975
Income taxes (net of refunds)	$	52,153		$	45,896

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	2006			2005
	(in thousands)
Current Assets:
Cash and cash equivalents	$	262,900		$	202,111
Receivables —
Customer accounts receivable		941,661			868,665
Unbilled revenues		377,313			303,782
Under recovered regulatory clause revenues		614,882			754,522
Other accounts and notes receivable		330,323			409,685
Accumulated provision for uncollectible accounts		(34,243	)		(37,510	)
Fossil fuel stock, at average cost		538,208			402,579
Vacation pay		117,356			116,699
Materials and supplies, at average cost		694,925			665,754
Assets from risk management activities		70,699			124,607
Prepaid expenses		188,499			131,324
Other		217,859			262,659
Total current assets		4,320,382			4,204,877
Property, Plant, and Equipment:
In service		44,599,652			43,578,501
Less accumulated depreciation		16,184,593			15,727,300
		28,415,059			27,851,201
Nuclear fuel, at amortized cost		265,370			261,997
Construction work in progress		1,281,027			1,367,255
Total property, plant, and equipment		29,961,456			29,480,453
Other Property and Investments:
Nuclear decommissioning trusts, at fair value		972,965			953,554
Leveraged leases		1,106,644			1,082,100
Other		319,805			337,236
Total other property and investments		2,399,414			2,372,890
Deferred Charges and Other Assets:
Deferred charges related to income taxes		925,670			936,729
Prepaid pension costs		1,025,064			1,021,797
Unamortized debt issuance expense		173,242			161,583
Unamortized loss on reacquired debt		299,194			309,409
Deferred under recovered regulatory clause revenues		731,913			530,668
Other regulatory assets		537,198			519,005
Other		427,682			339,294
Total deferred charges and other assets		4,119,963			3,818,485
Total Assets	$	40,801,215		$	39,876,705

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		2006			2005
	(in thousands)
Current Liabilities:
Securities due within one year	$	993,325		$	900,699
Notes payable		1,851,991			1,257,428
Accounts payable		867,352			1,229,253
Customer deposits		237,282			219,781
Accrued taxes —
Income taxes		203,504			103,925
Other		294,888			318,978
Accrued interest		225,390			204,292
Accrued vacation pay		143,454			143,816
Accrued compensation		196,204			458,573
Other		386,805			403,606
Total current liabilities		5,400,195			5,240,351
Long-term Debt		11,296,969			10,957,903
Long-term Debt Payable to Affiliated Trusts		1,893,187			1,888,469
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		6,000,558			5,735,502
Deferred credits related to income taxes		301,448			311,083
Accumulated deferred investment tax credits		515,124			527,172
Employee benefit obligations		971,435			929,908
Asset retirement obligations		1,144,672			1,117,280
Other cost of removal obligations		1,292,836			1,295,215
Other regulatory liabilities		262,717			323,180
Other		280,148			265,838
Total deferred credits and other liabilities		10,768,938			10,505,178
Total Liabilities		29,359,289			28,591,901
Preferred and Preference Stock of Subsidiaries		595,612			595,626
Common Stockholders’ Equity:
Common stock, par value $5 per share —
Authorized — 1 billion shares
Issued — June 30, 2006: 751,861,212 Shares;
— December 31, 2005: 751,810,927 Shares
Treasury — June 30, 2006: 9,575,058 Shares;
— December 31, 2005: 10,362,970 Shares
Par value		3,759,306			3,759,055
Paid-in capital		1,101,602			1,084,799
Treasury, at cost		(331,771	)		(358,892	)
Retained earnings		6,414,930			6,332,023
Accumulated other comprehensive loss		(97,753	)		(127,807	)
Total Common Stockholders’ Equity		10,846,314			10,689,178
Total Liabilities and Stockholders’ Equity	$	40,801,215		$	39,876,705

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 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006		2005
	(in thousands)						(in thousands)
Consolidated Net Income	$	385,223		$	386,821		$	646,830	$	709,781
Other comprehensive income (loss) — continuing operations:
Change in fair value of marketable securities, net of tax of $2,798, $(346), $4,407, and $(2,075), respectively		4,334			(598	)		6,855		(3,924	)
Changes in fair value of qualifying hedges, net of tax of $7,255, $(12,321), $14,385, and $(11,386), respectively		11,519			(19,805	)		22,911		(18,370	)
Reclassification adjustment for amounts included in net income, net of tax of $65, $1,083, $306, and $2,400, respectively		(2	)		1,351			288		3,405
Total other comprehensive income — continuing operations		15,851			(19,052	)		30,054		(18,889	)
Other comprehensive income — discontinued operations:
Changes in fair value of qualifying hedges, net of tax of $(448) and $642, respectively		—			(710	)		—		1,018
Reclassification adjustment for amounts included in net income, net of tax of $(95) and $598, respectively		—			(149	)		—		948
Total other comprehensive income — discontinued operations		—			(859	)		—		1,966
COMPREHENSIVE INCOME	$	401,074		$	366,910		$	676,884	$	692,858

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
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SECOND QUARTER 2006 vs. SECOND QUARTER 2005
AND
YEAR-TO-DATE 2006 vs. YEAR-TO-DATE 2005

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, and energy-related services. 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. For information regarding the synthetic fuel investments, see Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein.

     Hurricanes Dennis and Katrina hit Southern Company’s service territory in July and August 2005, respectively. As a result of these storms, as well as Hurricane Ivan in September 2004, Southern Company has incurred significant restoration costs. In addition, fuel costs at each of the retail operating companies rose significantly during 2005 and the first six months of 2006. Southern Company continues to make significant progress in working with its regulators to develop methods to enable the timely recovery of these costs. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Storm Damage Cost Recovery” of Southern Company in Item 7 of the Form 10-K and FUTURE EARNINGS POTENTIAL – “FERC and State PSC Matters – Storm Damage Cost Recovery” and Notes (H), (I), and (K) to the Condensed Financial Statements herein for additional information.

     Effective July 1, 2006, Savannah Electric was merged into Georgia Power. Prior to the merger, Southern Company was the sole common shareholder of both Georgia Power and Savannah Electric. At the time of the merger, each outstanding share of Savannah Electric common stock was cancelled, and Southern Company was issued an additional 1,500,000 shares of Georgia Power common stock, no par value per share. Also in July 2006, Savannah Electric’s separate SEC reporting obligations were terminated following the merger. Savannah Electric’s results of operations and cash flows for the three and six months ended June 30, 2006 and 2005 and assets and liabilities as of June 30, 2006 and December 31, 2005 are included in the Southern Company condensed consolidated financial statements herein. Georgia Power will account for the merger in a manner similar to a pooling of interests, and Georgia Power’s financial statements will reflect the merger effective July 1, 2006.

     Southern Company continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and earnings per share. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Southern Company in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Southern Company’s second quarter and year-to-date 2006 earnings were $385.2 million ($0.52 per share) and $646.8 million ($0.87 per share) compared with $386.8 million ($0.52 per share) and $709.8 million ($0.95 per share), respectively, for the corresponding periods in 2005. Earnings were flat in the second quarter of 2006 when compared to the same period in 2005. The decrease in earnings year-to-date 2006 resulted primarily from higher other operations and maintenance expenses, a reduction in tax credits and impairments associated with synthetic fuel investments, and higher interest expense, compared to year-to-date 2005. These decreases to earnings were partially offset by an increase in revenues resulting from sustained economic strength and

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customer growth in the Southern Company service area and warmer weather in the second quarter of 2006 compared to the same period in 2005.

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Second Quarter					Year-to-Date
	(in thousands)			%		(in thousands)			%
Retail revenues	$	415,296		16.3		$	617,900		12.8
Sales for resale		54,905		14.3			122,649		16.8
Other electric revenues		6,747		6.2			16,642		7.9
Fuel expense		314,409		31.7			498,333		26.8
Purchased power expense		15,166		12.3			21,361		9.6
Other operations expense		15,730		2.7			61,754		5.7
Maintenance expense		13,317		5.1			2,855		0.5
Depreciation and amortization expense		11,158		3.9			18,974		3.3
Taxes other than income taxes		16,402		10.1			28,521		8.8
Allowance for equity funds used during construction		(3,613	)	(25.8	)		(8,945	)	(29.0	)
Equity in losses of unconsolidated subsidiaries		(17,297	)	(58.5	)		(7,826	)	(14.9	)
Impairment loss on equity method investments		15,274		N/M			15,274		N/M
Interest expense, net of amounts capitalized		26,480		17.2			63,868		21.8
Other income (expense), net		17,288		N/M			11,630		N/M
Income taxes		75,802		51.8			106,937		48.1

N/M – Not meaningful

     Retail revenues.The chart below reflects the primary drivers of the 16.3% and 12.8% increases in retail revenues in the second quarter and year-to-date 2006 when compared to the same periods in 2005. Changes in revenue related to certain cost recovery mechanisms such as fuel and storm damage have no effect on net income. In the second quarter and year-to-date 2006, retail KWH sales increased by 4.6% and 2.5%, respectively, from the same periods a year ago, primarily due to warmer weather in the second quarter of 2006 and continued customer and demand growth from sustained economic strength in the Southeast. The number of retail customers increased by 1.3% as of June 2006 compared to June 2005, and weather-adjusted average consumption by retail customers increased by 0.9% and 0.8%, respectively, for the second quarter and year-to-date 2006 when compared with the same periods in 2005.

     Details of retail revenues are as follows:

	Second Quarter					Year-to-Date
	2006					2006
	(in millions)		% change			(in millions)		% change
Retail – prior year	$	2,555				$	4,824
Change in —
Base rates		17		0.7			28		0.6
Sales growth		25		1.0			60		1.3
Weather		61		2.4			55		1.1
Fuel cost recovery		293		11.5			435		9.0
Other cost recovery		19		0.7			40		0.8
Retail – current year	$	2,970		16.3	%	$	5,442		12.8	%

     Sales for resale. In the second quarter and year-to-date 2006, sales for resale increased $54.9 million and $122.6 million, respectively, over the same periods in 2005. The second quarter and year-to-date 2006 increases reflect a rise in fuel revenues due to increases of 22.4% and 21.2%, respectively, in the average unit cost of fuel

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per net KWH generated when compared to the same periods in the prior year. New wholesale contracts also contributed to the increase.

     Other electric revenues.In the second quarter and year-to-date 2006, other electric revenues increased $6.7 million and $16.6 million, respectively, primarily due to higher transmission revenues of $7.0 million and $11.1 million, respectively, and higher outdoor lighting revenues of $1.6 million and $3.0 million, respectively, compared to the same periods in 2005.

     Fuel expense and purchased power expense. Fuel expense and purchased power expense increased $329.6 million in the second quarter 2006 over the second quarter 2005 due to an increase of $243.0 million in the cost of fuel and $86.6 million related to an increase in total KWHs generated and purchased. Year-to-date 2006 fuel expense and purchased power expense increased $519.7 million over the same period in 2005 due to an increase of $454.2 million in the cost of fuel and $65.5 million related to an increase in total KWHs generated and purchased. 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. Fuel expenses incurred under Southern Power’s PPAs are generally the responsibility of the counterparties and do not significantly affect net income.

     Other operations expense.Other operations expense increased $15.7 million and $61.8 million in the second quarter and year-to-date 2006, respectively, compared with the same periods in the prior year due to increases in administrative and general expense of $2.4 million and $23.9 million, respectively, primarily additional compensation related to expensing of stock options in the first quarter of 2006; increases of $7.3 million and $15.6 million, respectively, in customer service and sales expense, primarily technology costs, promotional expenses for energy efficiency programs; and an increase in bad debt expense. The second quarter and year-to-date 2006 increases were also attributable to increases of $8.8 million and $15.6 million, respectively, in transmission and distribution expense, and a $6.7 million year-to-date 2006 increase in other production expense when compared to the same periods in 2005. The second quarter 2006 increase was partially offset by a $2.8 million decrease in other production expense. Other production, transmission, and distribution expenses fluctuate from year to year due to timing of plant outages and system maintenance projects as well as normal increases in costs.

     Maintenance expense.In the first quarter of 2005, Alabama Power recorded $45 million of expenses in accordance with an accounting order approved by the Alabama PSC to offset the costs of Hurricane Ivan and restore the natural disaster reserve. In accordance with the accounting order, Alabama Power also returned certain regulatory liabilities related to deferred taxes to its retail customers; therefore, the combined effects of this accounting order had no impact on net income. See Note 3 to the financial statements of Southern Company under “Storm Damage Cost Recovery” in Item 8 of the Form 10-K for additional information. In the second quarter and year-to-date 2006, when compared to the same periods in 2005, maintenance expense increased $13.3 million and $2.9 million, respectively. Excluding the impact of the $45 million Alabama Power accounting order, year-to-date 2006 maintenance expense increased $47.9 million over the same period in 2005. These increases are primarily due to higher administrative and general expense of $1.7 million and $2.6 million, respectively, increases of $17.4 million and $32.7 million, respectively, in transmission and distribution expense, and a $12.6 million year-to-date 2006 increase in other production expense when compared to the same periods in 2005. The second quarter 2006 increase was partially offset by a $5.8 million decrease in other production expense. Other production, transmission, and distribution expenses fluctuate from year to year due to timing of plant outages and system maintenance projects as well as normal increases in costs.

     Depreciation and amortization expense.The $11.2 million and $19.0 million increases in depreciation and amortization expense in the second quarter and year-to-date 2006, respectively, when compared with the same periods in 2005 are primarily a result of an increase in depreciable property, plant, and equipment, including Southern Power’s Plant Oleander and Plant Desoto, acquired in June 2005 and June 2006, respectively, as well as increases in depreciation rates and changes in the estimated lives of depreciable assets. These increases are partially offset by a decrease in amortization expense at Georgia Power related to the inclusion of new certified

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PPAs in retail rates on a levelized basis over a three-year period as ordered by the Georgia PSC under the terms of the retail order effective January 1, 2005.

     Taxes other than income taxes.The $16.4 million and $28.5 million increases in taxes other than income taxes in the second quarter and year-to-date 2006, respectively, compared with the same periods in 2005 are primarily a result of increases in municipal franchise and gross receipts taxes associated with increases in revenues from energy sales and an increase in property taxes associated with changes in property tax rates, changes in the assessed value of properties, and increases in total property value.

     Allowance for equity funds used during construction. In the second quarter and year-to-date 2006, when compared to the same periods in 2005, AFUDC equity decreased $3.6 million and $8.9 million, respectively, due to the completion of the Plant McIntosh combined cycle units 10 and 11 by Georgia Power in June 2005. AFUDC equity is non-taxable.

     Equity in losses of unconsolidated subsidiaries.Southern Company has made investments in two synfuel production facilities that generate operating losses. These investments also allow Southern Company to claim federal income tax credits that offset these operating losses and make the projects profitable. The $17.3 million and $7.8 million decreases in equity in losses of unconsolidated subsidiaries in the second quarter and year-to-date 2006, respectively, compared with the same periods in 2005 are primarily a result of terminating Southern Company’s membership interest in one of the synthetic fuel entities which reduced the amount of funding obligation for the second quarter 2006. These decreases were partially offset by higher operating losses at the other synthetic fuel entity due to higher production levels before it was idled on May 11, 2006. See “Impairment loss on equity method investments” below and FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Synthetic Fuel Tax Credits” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein for further information.

     Impairment loss on equity method investments.In June 2006, Southern Company recorded a $15.3 million impairment associated with its investments in synthetic fuels. On May 11, 2006, production at one of the synthetic fuel investments was idled due to a projected phase out of tax credits because of high oil prices. Effective July 1, 2006, Southern Company terminated its membership interest in the other synthetic fuel investment. Southern Company will not be entitled to any further tax credits from this investment. As a result of these actions and the projected continued phase out of tax credits due to high oil prices, the investments in these two synthetic fuel entities were considered fully impaired. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Synthetic Fuel Tax Credits” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein for further information.

     Interest expense, net of amounts capitalized.Interest charges and other financing costs increased by $26.5 million and $63.9 million in the second quarter and year-to-date 2006, respectively, associated with increases in notes payable and long-term debt outstanding for the second quarter and year-to-date 2006, respectively, compared to the same periods in 2005 as well as an increase in average interest rates on variable rate debt. Variable rates on pollution control bonds are highly correlated with the BMA Municipal Swap Index, which averaged 3.6%, and 3.3% in the second quarter and year-to-date 2006, respectively, compared to 2.6% and 2.3% in the second quarter and year-to-date 2005, respectively. Variable rates on commercial paper and senior notes are highly correlated with the one-month LIBOR, which averaged 5.1% and 4.8% in the second quarter and year-to-date 2006, respectively, compared to 3.1% and 2.9% in the second quarter and year-to-date 2005, respectively. The year-to-date increase in interest expense was also the result of $5.0 million related to early redemption of trust preferred securities. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Financing Activities” of Southern Company in Item 7 of the Form 10-K and herein for additional information.

     Other income (expense), net.The $17.3 million and $11.6 million increases in other income (expense), net, in the second quarter and year-to-date 2006, respectively, compared to the same periods in 2005 are primarily due to a $1.5 million gain on the sale of an investment, a $5.1 million increase due to changes in the value of economic hedges associated with synthetic fuel investments, and the release of $6.3 million in certain

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obligations associated with Southern Company’s synthetic fuel investments in 2006. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Synthetic Fuel Tax Credits” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein for further information. The year-to-date 2006 increase is partially offset by Alabama Power’s recognition of $5.0 million associated with the consent decree entered in the NSR litigation. See Note 3 to the financial statements of Southern Company under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under “NEW SOURCE REVIEW ACTIONS – New Source Review Litigation” herein for further information.

     Income taxes.Income taxes increased $75.8 million and $106.9 million, respectively, in the second quarter and year-to-date 2006 when compared to the same periods in 2005 due to higher taxable earnings and $21.2 million and $39.7 million of synthetic fuel tax credit reserves recorded in the second quarter and year-to-date 2006, respectively. The second quarter and year-to-date 2006 increases in income taxes are also the result of decreases in synthetic fuel tax credits of $17.7 million and $8.3 million, respectively, as a result of terminating the membership interest in one of the synthetic fuel entities which reduced the allocated credits available to Southern Company for the second quarter 2006. These increases were partially offset by higher synthetic fuel tax credit production at the other synthetic fuel entity before it was idled on May 11, 2006. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Synthetic Fuel Tax Credits” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein for further information. Also contributing to the year-to-date 2006 increase is the $45 million Alabama PSC accounting order recorded in the first quarter 2005, discussed under “Maintenance expense” above.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Southern Company’s future earnings potential. The level of future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Company’s primary business of selling electricity. These factors include the retail operating companies’ ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs. Another major factor is the profitability of the competitive market-based wholesale generating business and associated federal regulatory policy, which may impact Southern Company’s level of participation in this market. Future earnings for the electricity business in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in the service area. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form 10-K.

Environmental Matters

Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be fully recovered in rates on a timely basis. As discussed in the Form 10-K, environmental compliance spending over the next several years may exceed amounts estimated. Some of the factors driving the anticipated increase are higher commodity costs, market demand for labor, and scope additions and clarifications. The timing, specific requirements, and estimated costs could also change as environmental regulations are modified. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters” in Item 8 of the Form 10-K for additional information.

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New Source Review Litigation

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters – New Source Review Actions” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding a civil action brought by the EPA alleging that Alabama Power had violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of its coal-fired generating facilities. On June 19, 2006, the U.S. District Court for the Northern District of Alabama entered a consent decree between Alabama Power and the EPA, resolving alleged NSR violations at Plant Miller. The consent decree requires Alabama Power to pay $100,000 to resolve the government’s claim for a civil penalty and donate $4.9 million of sulfur dioxide emission allowances to a nonprofit charitable organization. As a result, Alabama Power has recognized $5 million in other income (expense), net related to the consent decree. The consent decree also formalizes specific emissions reductions to be accomplished by Alabama Power, consistent with other Clean Air Act programs that require emissions reductions. On May 31, 2006, Alabama Power filed a motion for summary judgment and entry of a final order on claims related to Plants Barry, Gaston, Gorgas, and Greene County, based on the district court’s previous ruling regarding the correct legal tests and stipulations entered between the parties. The final resolution of these claims is dependent on further court action and subject to possible appeals and, therefore, cannot be determined at this time.

New Source Review Reform Rules

On October 20, 2005, the EPA published a proposed rule clarifying the test for determining when an emissions increase is subject to the NSR requirements. On March 17, 2006, the U.S. Court of Appeals for the District of Columbia Circuit vacated the EPA’s proposed rule which sought to clarify the scope of the existing Routine Maintenance, Repair, and Replacement Exclusion. Because this rule was not yet in effect, the court’s ruling is not anticipated to have any impact on Southern Company or its subsidiaries. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters – New Source Review Actions” of Southern Company in Item 7 of the Form 10-K for additional information.

Plant Wansley Environmental Litigation

On March 30, 2006, the U.S. Court of Appeals for the Eleventh Circuit ruled in favor of Georgia Power on its appeal and reversed the district court’s order regarding certain alleged opacity violations at Plant Wansley. The court of appeals remanded the case to the U.S. District Court for the Northern District of Georgia for further proceedings consistent with its decision. The ultimate outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS - - FUTURE EARNINGS POTENTIAL — “Environmental Matters — Plant Wansley Environmental Litigation” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters — Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K for additional information.

Birmingham Area Eight-Hour Ozone Attainment Redesignation

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters - Environmental Statutes and Regulations — Air Quality” of Southern Company in Item 7 of the Form 10-K for additional information regarding non-attainment designations for the eight-hour ozone air quality standard. On May 12, 2006, the EPA published a final rule approving the State of Alabama’s request to redesignate the Birmingham eight-hour ozone non-attainment area to attainment under the standard. The EPA also approved a revision to the Alabama state implementation plan, containing a maintenance plan to ensure the area’s continued compliance with the standard and to address any future exceedances of the standard. The EPA’s redesignation determination became effective on June 12, 2006.

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FERC and State PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS— 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 — Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Each of the retail operating companies and Southern Power has authorization from the FERC to sell power to non-affiliates at market-based prices. The retail operating companies and Southern Power also have FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. On February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. A hearing before an ALJ originally scheduled for March 2006 has been held in abeyance to allow the parties to explore settlement. Any new market-based rate transactions in its retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. Such sales through May 27, 2006, the end of the 15-month refund period, were approximately $20 million for the Southern Company system. In the event that the FERC’s default mitigation measures for entities that are found to have market power are ultimately applied, the retail operating companies and Southern Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The 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.

     In addition, in May 2005, the FERC initiated an investigation to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing. The FERC established a new 15-month refund period related to this expanded investigation. Any new market-based rate transactions involving any Southern Company subsidiary will be subject to refund to the extent the FERC orders lower rates as a result of this new investigation, with the refund period beginning July 19, 2005. The impact of all such sales through June 30, 2006 is not expected to exceed $43 million, of which $17 million relates to sales inside the retail service territory discussed above. The FERC also directed that this expanded proceeding be held in abeyance pending the outcome of the proceeding on the IIC discussed below.

     Southern Company and its subsidiaries believe that there is no meritorious basis for this proceeding and are vigorously defending themselves in this matter. However, the final outcome of this matter, including any remedies to be applied in the event of an adverse ruling in this proceeding, cannot now be determined.

Intercompany Interchange Contract

Also in May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the power pool of Southern Company is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (2) whether any parties to the IIC have violated the FERC’s standards of conduct applicable to utility companies that are transmission providers, and (3) whether Southern Company’s code of conduct defining Southern Power as a “system company” rather than a “marketing affiliate” is just and reasonable. In connection with the formation of Southern Power, the FERC authorized Southern Power’s inclusion in the IIC in 2000. The FERC also previously approved Southern Company’s code of conduct. The FERC order directs that the ALJ who

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presided over a proceeding involving approval of PPAs between Southern Power and Georgia Power and Savannah Electric be assigned to preside over the hearing in this proceeding and that the testimony and exhibits presented in that proceeding be preserved to the extent appropriate. Effective July 19, 2005, revenues from transactions under the IIC involving any Southern Company subsidiaries will be subject to refund to the extent the FERC orders any changes to the IIC. On April 11, 2006, Southern Company, Calpine Corporation, Coral Energy, and Dalton Utilities filed a settlement offer that would resolve the proceeding, and does not require any refunds. The ALJ has certified the settlement to the FERC, where it is pending. Since the offer is pending, the final outcome of this matter cannot now be determined.See MANAGEMENT’S DISCUSSION AND ANALYSIS– FUTURE EARNINGS POTENTIAL – “FERC Matters – Intercompany Interchange Contract” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “FERC Matters – Intercompany Interchange Contract” 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 2005 and the first six months of 2006, the retail operating companies have experienced higher than expected fuel costs for coal and gas. These higher fuel costs have increased the under recovered fuel costs included in the balance sheets to approximately $1.3 billion at June 30, 2006. Operating revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes to the billing factors will have no significant effect on Southern Company’s revenues or net income, but will affect cash flow. The retail operating companies will continue to monitor the under recovered fuel cost balance in light of these higher fuel costs. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL — “PSC Matters — Fuel Cost Recovery” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Alabama Power Retail Regulatory Matters” and “Georgia Power Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information.

     On March 17, 2006, Georgia Power and Savannah Electric filed a combined request for fuel cost recovery rate changes with the Georgia PSC to be effective July 1, 2006. On June 15, 2006, the Georgia PSC ruled on the combined request and approved an increase in Georgia Power’s total annual fuel billings of approximately $400 million. The Georgia PSC order provided for a combined ongoing fuel forecast but reduced the requested increase related to such forecast by $200 million. The Georgia PSC order included no disallowances of previously incurred fuel costs. Estimated under recovered fuel costs as of June 30, 2006 are to be recovered over 35 months for customers in the former Georgia Power territory and over 41 months for customers in the former Savannah Electric territory. The order also requires Georgia Power to file for a new fuel cost recovery rate on a semi-annual basis, beginning September 30, 2006. As of June 30, 2006, Savannah Electric had an under recovered fuel balance of $82 million and Georgia Power had an under recovered fuel balance of approximately $850 million. See Note (H) to the Condensed Financial Statements herein for additional information.

Storm Damage Cost Recovery

In July and August 2005, Hurricanes Dennis and Katrina, respectively, hit the Gulf Coast of the United States and caused significant damage within Southern Company’s service area, including portions of Gulf Power, Alabama Power, and Mississippi Power. Hurricane Ivan hit the Gulf coast of Florida and Alabama in September 2004, causing significant damage to the service areas of both Gulf Power and Alabama Power. Each retail operating company maintains a reserve to cover the cost of damages from major storms to its transmission and distribution lines and the cost of uninsured damages to its generation facilities and other property. In addition, each of the affected retail operating companies has been authorized by its state PSC to defer the portion of the hurricane restoration costs that exceeded the balance in its storm damage reserve account. As of June 30, 2006, the deficit balance in Southern Company’s storm damage reserve accounts totaled approximately

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

$374 million, of which approximately $68 million and $306 million, respectively, are included in the Condensed Balance Sheets herein under “Other Current Assets” and “Other Regulatory Assets.” See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters — Storm Damage Cost Recovery” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Storm Damage Cost Recovery” in Item 8 of the Form 10-K for additional information.

     In June 2006, the Mississippi PSC approved an order based upon a stipulation between Mississippi Power and the Mississippi Public Utilities Staff. The stipulation and the associated order certified actual storm restoration costs relating to Hurricane Katrina through April 30, 2006 of $267.9 million and affirmed estimated additional costs through December 31, 2007 of $34.5 million, for total storm restoration costs of $302.4 million, without offset for the property damage reserve of $3.0 million. Of the total amount, $292.8 million applies to Mississippi Power’s retail jurisdiction. The order directs Mississippi Power to file an application with the Mississippi Development Authority (MDA) for Community Development Block Grants (CDBG). The MDA has indicated that $360 million of CDBG will be available to utilities within the State of Mississippi impacted by Hurricane Katrina. All CDBG proceeds received by Mississippi Power will be applied to both retail and wholesale storm restoration costs. The retail portion of any certified restoration costs not covered by the CDBG program are expected to be funded through the state bond program previously approved by the State of Mississippi legislature. The Mississippi PSC order also indicated that the state bond program would be appropriate funding for all or a portion of a new storm operations center if approved and for an appropriate storm reserve, both of which require additional Mississippi PSC action. If state bonds are used for any portion of the Hurricane Katrina restoration costs, periodic true-up mechanisms will be structured to comply with terms and requirements from the legislation. Mississippi Power expects to file the CDBG application with the MDA in the third quarter 2006, at which time the MDA is expected to assess applications and award grants. Mississippi Power filed an application for a financing order with the Mississippi PSC on July 3, 2006 for restoration costs under the state bond program, including the property damage reserve funding and the construction of the storm operations center. The final outcome of these matters cannot now be determined. See Note (I) to the Condensed Financial Statements herein for additional information.

     In July 2006, the Florida PSC issued its order approving a stipulation and settlement between Gulf Power and several consumer groups that resolved all matters relating to Gulf Power’s request for recovery of incurred costs for storm-recovery activities, the replenishment of Gulf Power’s property damage reserve, and the related request for permission to issue $87.2 million in securitized storm-recovery bonds. The order provides for an extension of the storm-recovery surcharge currently being collected by Gulf Power for an additional 27 months, expiring in June 2009, in lieu of the requested issuance of storm-recovery bonds. According to the stipulation, the funds resulting from the extension of the current surcharge will first be credited to the unrecovered balance of storm-recovery costs associated with Hurricane Ivan until these costs have been fully recovered. The funds will then be credited to the property reserve for recovery of the storm-recovery costs of $53.3 million associated with Hurricanes Dennis and Katrina that were previously charged to the reserve. Should revenues collected by Gulf Power through the extension of the storm-recovery surcharge exceed the storm-recovery costs associated with Hurricanes Dennis and Katrina, the excess revenues will be credited to the reserve. See Note (K) to the Condensed Financial Statements herein for additional information.

Mirant Matters

Mirant was an energy company with businesses that included independent power projects and energy trading and risk management companies in the U.S. and selected other countries. It was a wholly-owned subsidiary of Southern Company until its initial public offering in October 2000. In April 2001, Southern Company completed a spin-off to its shareholders of its remaining ownership, and Mirant became an independent corporate entity. In July 2003, Mirant filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code. See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Bankruptcy” in Item 8 of the Form 10-K for information regarding Southern Company’s contingent liabilities

21

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

associated with Mirant, including guarantees of contractual commitments, litigation, and joint and several liabilities in connection with the consolidated federal income tax return.

Mirant Bankruptcy Litigation

See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Bankruptcy Litigation” in Item 8 of the Form 10-K for information regarding the complaint filed in June 2005 against Southern Company alleging fraudulent activities and payments of illegal dividends prior to the spin-off. In May 2006, Southern Company filed a motion for summary judgment on all claims in the case. The ultimate outcome of this matter cannot be determined at this time.

Mirant Securities Litigation

See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Securities Litigation” in Item 8 of the Form 10-K for information regarding a class action lawsuit that several Mirant shareholders (plaintiffs) originally filed against Mirant and certain Mirant officers in May 2002. In November 2002, Southern Company, certain former and current senior officers of Southern Company, and 12 underwriters of Mirant’s initial public offering were added as defendants. On March 24, 2006, the plaintiffs filed a Motion for Reconsideration requesting that the court vacate that portion of its July 14, 2003 order dismissing the plaintiffs’ claims based upon Mirant’s alleged improper energy trading and marketing activities involving the California energy market. Southern Company and the other defendants have opposed the plaintiffs’ motion. The plaintiffs have also stated that they intend to request that the court grant leave for them to amend the complaint to add allegations based upon claims asserted against Southern Company in the Mirant bankruptcy litigation. See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Bankruptcy Litigation” in Item 8 of the Form 10-K for additional information. The ultimate outcome of these matters cannot be determined at this time.

Southern Company Employee Savings Plan Litigation

See Note 3 to the financial statements of Southern Company under “Mirant Matters – Southern Company Employee Savings Plan Litigation” in Item 8 of the Form 10-K for information related to the class action complaint filed under ERISA in June 2004, and amended in December 2004 and November 2005, on behalf of a purported class of participants in or beneficiaries of The Southern Company Employee Savings Plan at any time since April 2, 2001 and whose plan accounts included investments in Mirant common stock. In April 2006, the U.S. District Court for the Northern District of Georgia granted summary judgment in favor of Southern Company and all individually named defendants in the case. The plaintiff has filed an appeal of the ruling. The final outcome of this matter cannot be determined at this time.

Income Tax Matters

Leveraged Lease Transactions

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Income Tax Matters - Leveraged Lease Transactions” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Income Tax Matters — Leveraged Lease Transactions” in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Leveraged Lease Transactions” herein for information regarding IRS challenges to Southern Company’s transactions related to international leveraged leases that could have material impacts on Southern Company’s financial statements. In July 2006, the FASB released new guidance for the accounting for both leveraged leases and uncertain tax positions that will be effective beginning in 2007. For the lease-in-lease-out (LILO) transaction settled with the IRS in February 2005, the new standard for leveraged leases will require Southern

22

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

Company to change the timing of income recognized under the lease, including a cumulative effect upon adoption of the change. Southern Company estimates such cumulative effect will reduce Southern Company’s retained earnings by approximately $17 million. The impact of these proposed changes related to the sale-in-lease-out transactions would be dependent on the outcome of pending litigation, but could be significant, and potentially material, to Southern Company’s net income. Southern Company believes these transactions are valid leases for U.S. tax purposes and the related deductions are allowable.

     In the third quarter 2006, Southern Company will pay the full amount of the disputed tax and the applicable interest and will file a claim for refund. The disputed tax amount is $79 million and the related interest is approximately $27 million. Southern Company has accounted for this payment as a deposit, and recorded the liability in the second quarter 2006. This payment will close the issue with the IRS and Southern Company will then proceed to litigate this matter. The ultimate outcome of these matters cannot now be determined.

Synthetic Fuel Tax Credits

As discussed in MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Income Tax Matters — Synthetic Fuel Tax Credits” of Southern Company in Item 7 of the Form 10-K, Southern Company has made investments in two entities that produce synthetic fuel and receive tax credits under Section 45K (formerly Section 29) of the IRC. In accordance with Section 45K of the IRC, these tax credits are subject to limitation as the annual average price of oil (as determined by the DOE) increases over a specified, inflation-adjusted dollar amount published in the spring of the subsequent year. Southern Company, along with its partners in these investments, has continued to monitor oil prices. Reserves against these tax credits of $36 million have been recorded in the first half of 2006 due to projected phase-outs of the credits in 2006 as a result of current and projected future oil prices. See Note (J) to the Condensed Financial Statements herein for additional information regarding the impact of these reserves on the effective tax rate.

     On May 11, 2006, production at one of the synthetic fuel investments was idled due to continued uncertainty over the value of tax credits. In addition, Southern Company entered into an agreement in June 2006 which terminated its ownership interest in its other synthetic fuel investment effective July 1, 2006. Also in June 2006, Southern Company entered into derivative transactions designed to reduce its exposure to changes in the value of tax credits associated with its synthetic fuel investments. The derivative transactions will be marked to market over the remainder of the year through other income (expense), net. As a result of these actions and the projected continued phase out of tax credits because of high oil prices, the investments in these two synthetic fuel entities were considered fully impaired and approximately $15.3 million was written off at June 30, 2006. This write-off is reflected in the line item “Impairment loss on equity method investments” on the income statement herein. See Note (F) to the Condensed Financial Statements herein for additional information regarding the impact of these derivatives. The final outcome of these matters cannot now be determined.

Other Matters

See Note 3 to the financial statements of Southern Company under “Plant Franklin Construction Project” in Item 8 of the Form 10-K for information on the suspension of construction activities. On May 6, 2006, Southern Power signed a PPA with Progress Ventures, Inc. for 621 MW of capacity from Plant Franklin. The PPA term is from 2009 through 2015. To provide this capacity, Southern Power expects to complete construction of Franklin Unit 3 at a total cost of approximately $351 million, of which $172 million had been spent as of June 30, 2006. Construction is expected to be complete in 2008.

     On March 16, 2006, a subsidiary of Southern Company entered into a development agreement with Duke Energy Corporation (Duke) to evaluate the potential construction of a new two-unit nuclear plant at a jointly owned site in Cherokee County, South Carolina. If constructed, Southern Company would own an interest in

23

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

Unit 1, representing approximately 500 MW. Duke will be the developer and licensed operator of any plant built at the site.

     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 such as opacity and other air quality standards, 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 pending or potential litigation against Southern Company and its subsidiaries cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Southern Company in Item 8 of the Form 10-K, 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 other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

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

New Accounting Standards

Stock Options

On January 1, 2006, Southern Company adopted FASB Statement No. 123(R), “Share-Based Payment,” using the modified prospective method. This statement requires that compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. Although the compensation expense required under the revised statement differs slightly, the impacts on Southern Company’s financial statements are similar to the pro forma disclosures previously included in Note 1 to the financial statements of Southern Company under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein.

Income Taxes

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” This interpretation requires that tax benefits must be “more likely than not” of being sustained in order to be recognized. The provisions of FIN 48 must be applied to all tax positions beginning January 1, 2007. Southern Company is currently assessing the impact of FIN 48. The impact on Southern Company’s financial statements has not yet been determined.

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

Leveraged Leases

Also in July 2006, the FASB issued FASB Staff Position No. FAS 13-2 (FSP 13-2), “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction.” This staff position amends SFAS No. 13, “Accounting for Leases” to require recalculation of the rate of return and the allocation of income whenever the projected timing of the income tax cash flows generated by a leveraged lease is revised. Southern Company plans to adopt FSP 13-2 on January 1, 2007. This adoption will require Southern Company to recognize a cumulative effect of $17 million to retained earnings as of January 1, 2007 related to the LILO transaction settled with the IRS in February 2005. See FUTURE EARNINGS POTENTIAL under “Income Tax Matters” above and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Leveraged Lease Transactions” herein for further details about the effect of FSP 13-2.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Net cash flow from operating activities totaled $744 million for first six months of 2006, compared to $796 million for the corresponding period in 2005. The $53 million decrease is primarily due to increases in fuel and storm damage costs and discontinued operations associated with the sale of Southern Company Gas assets. For additional information regarding the sale of Southern Company Gas assets, see Note (B) to the Condensed Financial Statements herein under “SOUTHERN COMPANY GAS SALE.” Gross property additions to utility plant were $1.2 billion in the first six months of 2006.

     Significant balance sheet changes include a $339 million increase in long-term debt for the first six months of 2006 primarily for general corporate purposes. Property, plant, and equipment increased $481 million during the first six months of 2006 primarily from routine additions and plant acquisitions. See Note (L) to the Condensed Financial Statements herein for additional information on the DeSoto acquisition.

     The market price of Southern Company’s common stock at June 30, 2006 was $32.05 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $14.62 per share, representing a market-to-book ratio of 219%, compared to $34.53, $14.42, and 240%, respectively, at the end of 2005. The dividend for the second quarter 2006 was $0.3875 per share compared to $0.3725 per share in the second quarter 2005.

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

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Capital Requirements and Contractual Obligations” of Southern Company in Item 7 of the Form 10-K for a description of Southern Company’s capital requirements for its construction program and other funding requirements associated with scheduled maturities of long-term debt, as well as the related interest, preferred and preference stock dividends, leases, trust funding requirements, and other purchase commitments. Approximately $993 million will be required by June 30, 2007 for redemptions and maturities of long-term debt.

25

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

Sources of Capital

Southern Company intends to meet its future capital needs through internal cash flow and external security issuances. Equity capital can be provided from any combination of Southern Company’s stock plans, private placements, or public offerings. 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, with short-term debt and external security issuances providing additional funds. However, the amount, type, and timing of any financings, if needed, will depend upon maintenance of adequate earnings, prevailing market conditions, regulatory approval, and other factors. Mississippi Power is considering other sources of funding for storm recovery costs. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Sources of Capital” of Southern Company in Item 7 of the Form 10-K for additional information.

     Southern Company’s current liabilities frequently 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, 2006 approximately $263 million of cash and cash equivalents and approximately $3.3 billion of unused credit arrangements with banks, of which $495 million expire in 2006 and $2.8 billion expire in 2007 and beyond. Of the facilities maturing in 2006, $275 million contain provisions allowing one-year term loans executable at the expiration date and $148 million contain provisions allowing two-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. Subsequent to June 30, 2006, Southern Company and its subsidiaries refinanced a portion of these facilities with approximately $2.4 billion of facilities maturing in 2011, increasing total unused credit arrangements to approximately $3.5 billion. Southern Company expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Southern Company under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. 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, 2006, the Southern Company system had outstanding commercial paper of $1.4 billion, bank notes of $375 million, and extendible commercial notes of $74 million. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.

Off-Balance Sheet Financing Arrangements

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

Credit Rating Risk

Southern Company does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB and Baa2, or BBB- or Baa3 or below. These contracts are primarily for physical electricity purchases and sales. At June 30, 2006, the maximum potential collateral requirements at a BBB and Baa2 rating were approximately $9 million and at a BBB- or Baa3 rating were approximately $239 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $662 million. Generally, collateral may be provided by a

26

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

Southern Company guaranty, letter of credit, or cash. Southern Company’s operating subsidiaries are also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas price risk management activities. At June 30, 2006, Southern Company’s total exposure to these types of agreements was approximately $14.2 million.

Market Price Risk

Southern Company’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2005 reporting period. In addition, Southern Company is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

     Due to cost-based rate regulations, the retail operating companies have limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. In addition, Southern Power’s exposure to market volatility in commodity fuel prices and prices of electricity is limited because its long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. To mitigate residual risks relative to movements in electricity prices, the retail operating companies and Southern Power enter into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, into financial hedge contracts for natural gas purchases. The retail operating companies have implemented fuel-hedging programs at the instruction of their respective state PSCs. The fair value of derivative energy contracts at June 30, 2006 was as follows:

	Second Quarter			Year-to-Date
	2006			2006
	Changes			Changes
	Fair Value
	(in millions)
Contracts beginning of period	$	(35.0	)	$	100.5
Contracts realized or settled		28.3			12.4
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		(50.9	)		(170.5	)
Contracts at June 30, 2006	$	(57.6	)	$	(57.6	)

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

	Source of June 30, 2006
	Valuation Prices
	Total			Maturity
	Fair Value			Year 1			1-3 Years
	(in millions)
Actively quoted	$	(60.0	)	$	(64.8	)	$	4.8
External sources		2.4			2.4			—
Models and other methods		—			—			—
Contracts at June 30, 2006	$	(57.6	)	$	(62.4	)	$	4.8

     Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to the retail operating companies’ fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through the retail operating companies’ fuel cost recovery clauses. In addition, unrealized gains and losses on energy-related derivatives used by Southern Power to hedge anticipated purchases and sales are deferred in other comprehensive income. Gains and losses on derivative contracts that are not designated as hedges are recognized in the income

27

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

statement as incurred. At June 30, 2006, the fair value gain / (loss) of derivative energy contracts was reflected in the financial statements as follows:

	Amounts
	(in millions)
Regulatory assets, net	$	(60.2	)
Accumulated other comprehensive income		1.6
Net income		1.0
Total fair value loss	$	(57.6	)

     Unrealized pre-tax gains and losses recognized in income were not material for any period presented.

     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 2006, Southern Company and its subsidiaries issued $950 million of senior notes and $10 million of obligations related to pollution control revenue bonds, settled $630 million notional amount of related interest rate hedges at a gain of $20 million, and issued $20 million of common stock, including treasury stock, through employee and director stock plans. The proceeds were primarily used to refund senior notes and pollution control revenue bonds and to fund ongoing construction projects. The remainder was used to repay short-term indebtedness. Approximately $18 million of the hedge gain will be deferred in other comprehensive income and amortized to income over a 10-year period. The remaining $2 million related to a discontinued hedge and was recognized immediately in income through interest expense. See Southern Company’s Condensed Consolidated Statements of Cash Flows herein for further details on financing activities during the first six months of 2006.

     In July 2006, Georgia Power incurred obligations in connection with the issuance of $67 million 4.40% Pollution Control Revenue Bonds and $48.7 million 4.90% Pollution Control Revenue Bonds. Proceeds from the sales will be used for the legal defeasance and redemption in August 2006 of $67 million of 5.0% and $48.7 million of 5.25% Pollution Control Revenue Bonds.

     During the second quarter 2006, Southern Company and its subsidiaries entered into derivative transactions designed to hedge interest rate risk of future debt issuances. The total notional amount of these derivatives was $480 million. See Note (F) to the Condensed Financial Statements herein for further details.

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

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PART I

Item 3. Quantitative And Qualitative Disclosures About Market Risk.

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Market Price Risk” herein for each registrant, Notes 1 and 6 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power and Notes 1 and 5 to the financial statements of Southern Power 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, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power conducted separate evaluations under the supervision and with the participation of each company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon these evaluations, the Chief Executive Officer and the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures are effective in alerting them in a timely manner to material information relating to their company (including its consolidated subsidiaries, if any) required to be included in periodic filings with the SEC.

     (b) Changes in internal controls.

     There have been no changes in Southern Company’s, Alabama Power’s, Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the second quarter of 2006 that have materially affected or are reasonably likely to materially affect Southern Company’s, Alabama Power’s, Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s internal control over financial reporting.

29

ALABAMA POWER COMPANY

30

ALABAMA POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006			2005
	(in thousands)						(in thousands)
Operating Revenues:
Retail revenues	$	1,026,643		$	863,155		$	1,828,852		$	1,572,241
Sales for resale —
Non-affiliates		156,328			130,598			302,682			245,012
Affiliates		26,098			47,934			105,413			155,220
Other revenues		40,355			44,152			85,184			83,102
Total operating revenues		1,249,424			1,085,839			2,322,131			2,055,575
Operating Expenses:
Fuel		419,176			323,328			760,943			623,148
Purchased power —
Non-affiliates		32,618			34,316			54,704			58,182
Affiliates		89,073			61,487			145,738			109,785
Other operations		176,059			168,987			345,072			315,277
Maintenance		96,947			80,858			206,447			204,412
Depreciation and amortization		112,295			101,019			222,157			209,510
Taxes other than income taxes		65,286			62,985			130,943			125,534
Total operating expenses		991,454			832,980			1,866,004			1,645,848
Operating Income		257,970			252,859			456,127			409,727
Other Income and (Expense):
Allowance for equity funds used during construction		3,835			4,785			9,364			10,439
Interest income		3,868			4,001			8,042			7,569
Interest expense, net of amounts capitalized		(59,074	)		(50,415	)		(112,293	)		(96,722	)
Interest expense to affiliate trusts		(4,060	)		(4,060	)		(8,119	)		(8,119	)
Other income (expense), net		(728	)		(1,032	)		(9,733	)		(3,837	)
Total other income and (expense)		(56,159	)		(46,721	)		(112,739	)		(90,670	)
Earnings Before Income Taxes		201,811			206,138			343,388			319,057
Income taxes		77,634			78,573			130,997			92,018
Net Income		124,177			127,565			212,391			227,039
Dividends on Preferred Stock		6,072			6,072			12,144			12,144
Net Income After Dividends on Preferred Stock	$	118,105		$	121,493		$	200,247		$	214,895

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006			2005
	(in thousands)						(in thousands)
Net Income After Dividends on Preferred Stock	$	118,105		$	121,493		$	200,247		$	214,895
Other comprehensive income (loss):
Changes in fair value of qualifying hedges, net of tax of $910, $(4,490), $2,383, and $(5,203), respectively		1,497			(7,386	)		3,920			(8,558	)
Reclassification adjustment for amounts included in net income, net of tax of $(1,009), $(347), $(2,015), and $(281), respectively		(1,660	)		(569	)		(3,314	)		(461	)
COMPREHENSIVE INCOME	$	117,942		$	113,538		$	200,853		$	205,876

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

31

ALABAMA POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months
	Ended June 30,
	2006			2005
	(in thousands)
Operating Activities:
Net income	$	212,391		$	227,039
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		257,676			247,403
Deferred income taxes and investment tax credits, net		(6,511	)		17,335
Deferred revenues		(599	)		(6,689	)
Allowance for equity funds used during construction		(9,364	)		(10,439	)
Pension, postretirement, and other employee benefits		(3,134	)		(5,973	)
Stock option expense		4,002			—
Tax benefit of stock options		184			13,373
Hedge settlements		18,006			(21,445	)
Storm damage accounting order		—			45,000
Other, net		(20,864	)		(10,632	)
Changes in certain current assets and liabilities —
Receivables		33,917			(41,345	)
Fossil fuel stock		(33,100	)		(61,777	)
Materials and supplies		(2	)		(5,975	)
Other current assets		(6,877	)		6,086
Accounts payable		(156,487	)		(92,512	)
Accrued taxes		41,031			(11,344	)
Accrued compensation		(53,489	)		(29,589	)
Other current liabilities		23,924			26,527
Net cash provided from operating activities		300,704			285,043
Investing Activities:
Property additions		(416,892	)		(365,016	)
Nuclear decommisioning trust fund purchases		(143,829	)		(119,588	)
Nuclear decommisioning trust fund sales		143,829			119,588
Cost of removal net of salvage		(22,296	)		(25,453	)
Other		(14,547	)		(4,934	)
Net cash used for investing activities		(453,735	)		(395,403	)
Financing Activities:
Decrease in notes payable, net		(315,278	)		—
Proceeds —
Common stock issued to parent		40,000			40,000
Senior notes		950,000			250,000
Gross excess tax benefit of stock options		368			—
Redemptions —
Pollution control bonds		(2,950	)		—
Senior notes		(196,500	)		—
Payment of preferred stock dividends		(12,140	)		(10,815	)
Payment of common stock dividends		(220,300	)		(204,950	)
Other		(21,866	)		(2,438	)
Net cash provided from financing activities		221,334			71,797
Net Change in Cash and Cash Equivalents		68,303			(38,563	)
Cash and Cash Equivalents at Beginning of Period		22,472			79,711
Cash and Cash Equivalents at End of Period	$	90,775		$	41,148
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $3,988 and $4,133 capitalized for 2006 and 2005, respectively)	$	127,055		$	81,932
Income taxes (net of refunds)	$	122,089		$	84,604

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

32

ALABAMA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Assets	2006			2005
	(in thousands)
Current Assets:
Cash and cash equivalents	$	90,775		$	22,472
Receivables —
Customer accounts receivable		322,304			275,702
Unbilled revenues		110,969			95,039
Under recovered regulatory clause revenues		104,956			132,139
Other accounts and notes receivable		48,339			50,008
Affiliated companies		21,192			77,304
Accumulated provision for uncollectible accounts		(7,753	)		(7,560	)
Fossil fuel stock, at average cost		150,715			102,420
Vacation pay		45,094			44,893
Materials and supplies, at average cost		229,955			244,417
Prepaid expenses		79,341			58,845
Other regulatory assets		66,571			43,621
Other		19,435			54,885
Total current assets		1,281,893			1,194,185
Property, Plant, and Equipment:
In service		15,774,064			15,300,346
Less accumulated provision for depreciation		5,483,598			5,313,731
		10,290,466			9,986,615
Nuclear fuel, at amortized cost		116,766			127,199
Construction work in progress		359,731			469,018
Total property, plant, and equipment		10,766,963			10,582,832
Other Property and Investments:
Equity investments in unconsolidated subsidiaries		47,561			46,913
Nuclear decommissioning trusts, at fair value		473,097			466,963
Other		40,608			41,457
Total other property and investments		561,266			555,333
Deferred Charges and Other Assets:
Deferred charges related to income taxes		381,355			388,634
Prepaid pension costs		527,141			515,281
Deferred under recovered regulatory clause revenues		194,640			186,864
Other regulatory assets		104,894			122,378
Other		160,670			144,400
Total deferred charges and other assets		1,368,700			1,357,557
Total Assets	$	13,978,822		$	13,689,907

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

33

ALABAMA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Liabilities and Stockholder’s Equity		2006			2005
	(in thousands)
Current Liabilities:
Securities due within one year	$	518,674		$	546,645
Notes payable		—			315,278
Accounts payable —
Affiliated		164,624			190,744
Other		150,727			266,174
Customer deposits		60,609			56,709
Accrued taxes —
Income taxes		21,619			63,844
Other		73,533			31,692
Accrued interest		55,808			46,018
Accrued vacation pay		37,646			37,646
Accrued compensation		39,295			92,784
Other		78,117			72,991
Total current liabilities		1,200,652			1,720,525
Long-term Debt		4,335,465			3,560,186
Long-term Debt Payable to Affiliated Trusts		309,279			309,279
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		2,100,519			2,070,746
Deferred credits related to income taxes		99,810			101,678
Accumulated deferred investment tax credits		192,583			196,585
Employee benefit obligations		221,993			208,663
Asset retirement obligations		458,753			446,268
Other cost of removal obligations		588,050			600,104
Other regulatory liabilities		161,452			194,135
Other		27,293			23,966
Total deferred credits and other liabilities		3,850,453			3,842,145
Total Liabilities		9,695,849			9,432,135
Preferred Stock		465,046			465,046
Common Stockholder’s Equity:
Common stock, par value $40 per share —
Authorized — June 30, 2006: 25,000,000 shares
— December 31, 2005: 15,000,000 shares
Outstanding — June 30, 2006: 10,250,000 shares
— December 31, 2005: 9,250,000 shares		410,000			370,000
Paid-in capital		1,999,700			1,995,056
Retained earnings		1,419,095			1,439,144
Accumulated other comprehensive loss		(10,868	)		(11,474	)
Total common stockholder’s equity		3,817,927			3,792,726
Total Liabilities and Stockholder’s Equity	$	13,978,822		$	13,689,907

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

34

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SECOND QUARTER 2006 vs. SECOND QUARTER 2005
AND
YEAR-TO-DATE 2006 vs. YEAR-TO-DATE 2005

OVERVIEW

Alabama Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the State of Alabama and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Alabama Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover rising costs related to growing demand and increasingly stringent environmental standards.

     Alabama Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS — OVERVIEW — “Key Performance Indicators” of Alabama Power in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Alabama Power’s net income after dividends on preferred stock for the second quarter and year-to-date 2006 was $118.1 million and $200.2 million, respectively, compared to $121.5 million and $214.9 million, respectively, for the corresponding periods of 2005. Earnings in the second quarter 2006 decreased by $3.4 million, or 2.8%, and earnings year-to-date 2006 decreased by $14.7 million, or 6.8%. Excluding the offsetting natural disaster reserve impacts recorded in the first quarter 2005 (see MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters — Natural Disaster Cost Recovery” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters — Natural Disaster Cost Recovery” in Item 8 of the Form 10-K), the decrease in year-to-date earnings was primarily due to increases in other operations expense, interest expense, and depreciation and amortization expense and the consent decree agreement with the EPA (as described in “Other income (expense), net” below). These increases in expense were partially offset by an increase in retail base-rate revenues due to favorable weather conditions during 2006 and a 1.2% increase in retail rates that took effect January 1, 2006 under Alabama Power’s environmental rate order approved by the Alabama PSC. See Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information on Alabama Power’s rates.

35

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

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Second Quarter						Year-to-Date
	(in thousands)			%			(in thousands)			%
Retail revenues	$	163,488			18.9		$	256,611			16.3
Sales for resale-non-affiliates		25,730			19.7			57,670			23.5
Sales for resale-affiliates		(21,836	)		(45.6	)		(49,807	)		(32.1	)
Fuel expense		95,848			29.6			137,795			22.1
Purchased power-non-affiliates		(1,698	)		(4.9	)		(3,478	)		(6.0	)
Purchased power-affiliates		27,586			44.9			35,953			32.7
Other operations expense		7,072			4.2			29,795			9.5
Maintenance expense		16,089			19.9			2,035			1.0
Depreciation and amortization		11,276			11.2			12,647			6.0
Interest expense, net of amounts capitalized.		8,659			17.2			15,571			16.1
Other income (expense), net		304			29.5			(5,896	)		(153.7	)
Income taxes		(939	)		(1.2	)		38,979			42.4

     Retail revenues. The chart below reflects the primary drivers of the 18.9% increase in retail revenues in the second quarter 2006 compared to the same period in the prior year and the 16.3% increase in retail revenues year-to-date compared to the corresponding period in 2005. Energy and other cost recovery revenues which include the recovery of costs associated with fuel, purchased power and PPAs certified by the Alabama PSC, and revenues associated with the replenishment of Alabama Power’s natural disaster reserve, generally do not affect net income. Excluding these revenues, retail revenues increased by $30.0 million, or 5.2%, for the second quarter 2006 and $62 million, or 5.6%, year-to-date 2006 when compared to the corresponding periods in 2005. These increases were primarily due to a 4.0% increase and a 2.6% increase in KWH energy sales for the second quarter and year-to-date 2006 when compared to corresponding periods in 2005, as well as the retail rate increase implemented in January 2006 to recover environmental costs. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters — Retail Rate Adjustments” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters –Rate CNP” in Item 8 of the Form 10-K. KWH energy sales to residential and commercial customers increased 10.7% and 4.9%, respectively, for the second quarter 2006 and increased 6.0% and 3.5%, respectively, year-to-date 2006 when compared to the corresponding periods in 2005 due to favorable weather conditions. KWH energy sales to industrial customers decreased 1.0% for the second quarter 2006 and decreased 0.3% year-to-date 2006 when compared to the corresponding periods of 2005 as a result of decreased sales demand in the textile and chemical sectors.

     Details of retail revenues are as follows:

	Second Quarter						Year-to-Date
	2006						2006
	(in millions)			% change			(in millions)		% change
Retail – prior year	$	863					$	1,572
Change in —
Base rates		9			1.0			19		1.2
Sales growth		(4	)		(0.5	)		19		1.2
Weather		25			2.9			24		1.5
Energy cost recovery		119			13.8			169		10.7
Other cost recovery		15			1.7			26		1.7
Retail – current year	$	1,027			18.9	%	$	1,829		16.3	%

36

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

     Sales for resale — non-affiliates. Energy sales to non-affiliates will vary depending on the market cost of available energy compared to the cost of Alabama Power and Southern Company system owned generation, demand for energy within the Southern Company service territory, and availability of Southern Company system generation. In the second quarter 2006, revenues from sales for resale to non-affiliates increased $25.7 million when compared to the same period in 2005 primarily due to a 7.7% increase in price and an 11.2% increase in KWH sales. Year-to-date 2006, revenues from sales for resale to non-affiliates increased $57.7 million primarily due to a 20.2% increase in price while KWH sales remained relatively flat. The 2006 price increases are generally the result of increased costs for both coal and natural gas. These transactions did not have a significant impact on earnings since energy is usually sold at variable cost.

     Sales for resale — affiliates.Energy sales to affiliated companies within the Southern Company system vary from period to period depending on demand and the availability and cost of generating resources at each company. These sales are made in accordance with the IIC, as approved by the FERC. In the second quarter 2006, revenues from sales for resale to affiliates decreased $21.8 million when compared to the same period in 2005 primarily due to a 51.7% decrease in KWH sales to affiliates offset by a 12.8% increase in price. Year-to-date 2006, revenues from sales for resale to affiliates decreased $49.8 million due to a 35.9% decrease in KWH sales to affiliates offset by a 5.9% increase in price. These decreases in revenues from sales to affiliates are a result of a decrease in availability of Alabama Power’s generating resources for such sales due to increased KWH sales growth in Alabama Power’s service territory during 2006. These transactions did not have a significant impact on earnings since energy is generally sold at marginal cost.

     Fuel expense, purchased power — non-affiliates, and purchased power – affiliates.Total fuel and purchased power expense increased $121.7 million in the second quarter 2006 and $170.3 million year-to-date 2006 when compared to the corresponding periods in 2005. These increases are due to $74.8 million and $156.2 million increases in the cost of fuel, respectively, and $46.9 million and $14.1 million increases related to greater KWHs generated and purchased, respectively. Details of the individual components follow.

Fuel expense was $95.8 million higher in the second quarter of 2006 when compared to the corresponding period in 2005 due to a 26.6% increase in natural gas prices, a 12.0% increase in the average cost of coal, and a 3.9% increase in overall generation from Alabama Power-owned facilities. The year-to-date 2006 increase in fuel expense of $137.8 million is mainly due to a 27.6% increase in natural gas prices and a 14.4% increase in the average cost of coal. Overall generation from Alabama Power-owned facilities remained relatively flat for the first six months of 2006 compared to 2005. These transactions did not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Alabama Power’s energy cost recovery clause.

Purchased power from non-affiliates will vary depending on market cost of available energy being lower than Southern Company system generated energy, demand for energy within the service territory, and availability of Southern Company system generation. Year-to-date 2006, purchased power from non-affiliates decreased $3.5 million when compared to the same period in 2005 mainly due to a 14.0% decrease in energy purchased partially offset by a 9.3% increase in price. 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 from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC, as approved by the FERC. Purchased power from affiliates increased $27.6 million in the second quarter 2006 compared to the same period in 2005 due to a 44.8% increase in the amount of energy purchased as a result of increased demand within Alabama Power’s service territory. Year-to-date 2006, purchased power

37

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

from affiliates increased $36.0 million when compared to the same period in 2005 mainly due to a 24.2% increase in the amount of energy purchased as a result of increased demand and a 6.9% increase in price primarily resulting from increased fuel costs. 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.

     Other operations expense.The year-to-date 2006 increase in other operations expense of $29.8 million is primarily due to an $11.8 million increase in administrative and general expenses chiefly related to a $6.0 million increase in outside service expenses and a $4.1 million increase in employee benefits. In addition, year-to-date 2006 other operations expense increased due to a $4.3 million increase in steam power expenses related primarily to engineering and supervision charges and rent expense, a $4.3 million increase in nuclear power expenses related to regulatory fees and labor costs, a $2.9 million increase in transmission expense associated with external electric purchases and system planning, and a $1.9 million increase in distribution expenses related to engineering and supervision charges.

     Maintenance expense.Maintenance expense increased $16.1 million for the second quarter 2006 when compared to the same period in 2005 due to a $14.3 million increase in transmission and distribution expenses primarily associated with the 2006 natural disaster reserve accrual and amortization of deferred storm expense. Year-to-date 2006, maintenance expense only increased $2.0 million when compared to the same period in 2005 primarily due to the recording of $45 million additional transmission and distribution expense in 2005 as a result of the Alabama PSC accounting order to offset the costs of the damage from Hurricane Ivan in September 2004 and to restore a balance in the natural disaster reserve. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters – Natural Disaster Cost Recovery” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Natural Disaster Cost Recovery” in Item 8 of the Form 10-K. Excluding the natural disaster reserve impacts of the 2005 accounting order, maintenance expense increased $47.0 million year-to-date 2006 when compared to the same period in 2005. This increase was due to a $28.2 million increase in transmission and distribution expenses primarily associated with the 2006 natural disaster reserve accrual, amortization of deferred storm expense, and maintenance of station equipment, and an $8.6 million increase in steam expense associated with outage maintenance cost at various coal-fired facilities. In addition, nuclear power maintenance expense increased $5.1 million, administrative and general maintenance expense increased $2.2 million, other power generation maintenance expense increased $2.0 million, and hydro maintenance expense increased $1.0 million.

     Depreciation and amortization.The increases of $11.3 million and $12.6 million in depreciation and amortization expense for the second quarter and year-to-date 2006, respectively, when compared to the same periods in 2005 are primarily attributed to an increase in the 2006 property, plant, and equipment related to steam and distribution capital projects.

     Interest expense, net of amounts capitalized.The increases of $8.7 million and $15.6 million in interest expense, net of amounts capitalized for the second quarter and year-to-date 2006, respectively, when compared to the same periods in 2005 are primarily due to a $426 million increase of long-term debt outstanding at June 30, 2006 when compared to June 30, 2005. For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Financing Activities” of Alabama Power in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY – “Financing Activities” herein.

     Other income (expense), net.Year-to-date 2006, other income, net decreased $5.9 million when compared to year-to-date 2005 mainly due to the consent decree entered into in June 2006 with the EPA in the NSR litigation. See FUTURE EARNINGS POTENTIAL — “Environmental Matters — New Source Review Litigation” and Note (B) to the Condensed Financial Statements herein for additional information.

38

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

     Income taxes.Year-to-date 2006, income tax expense increased $39.0 million when compared to the corresponding period in 2005. In accordance with the Alabama PSC accounting order described above under “Maintenance expense,” Alabama Power returned $27.7 million of regulatory liabilities related to deferred income taxes to its retail customers in 2005. The remainder of the increase in income tax expense for year-to-date 2006 compared to the same period in 2005 primarily reflects the $17.3 million tax effect of the additional maintenance expenses recorded under the accounting order in 2005. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters – Natural Disaster Cost Recovery” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters – Natural Disaster Cost Recovery” in Item 8 of Form 10-K and Note (J) to the Condensed Financial Statements herein for additional information.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Alabama Power’s future earnings potential. The level of future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Alabama Power’s business of selling electricity. These factors include Alabama Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Alabama Power’s service area. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL of Alabama Power 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 fully recovered in rates on a timely basis. As discussed in the Form 10-K, environmental compliance spending over the next several years may exceed amounts estimated. Some of the factors driving the anticipated increase are higher commodity costs, market demand for labor, and scope additions and clarifications. The timing, specific requirements, and estimated costs could also change as environmental regulations are modified. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.

New Source Review Litigation

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters – New Source Review Actions” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding a civil action brought by the EPA alleging that Alabama Power had violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of its coal-fired generating facilities. On June 19, 2006, the U.S. District Court for the Northern District of Alabama entered a consent decree between Alabama Power and the EPA, resolving alleged NSR violations at Plant Miller. The consent decree requires Alabama Power to pay $100,000 to resolve the government’s claim for a civil penalty and donate $4.9 million of sulfur dioxide emission allowances to a nonprofit charitable organization. As a result, Alabama Power has recognized $5 million in other income (expense), net related to the consent decree. The consent decree also formalizes specific emissions reductions to be accomplished by Alabama Power, consistent with other Clean Air Act programs that require emissions reductions. On May 31,

39

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

2006, Alabama Power filed a motion for summary judgment and entry of a final order on claims related to Plants Barry, Gaston, Gorgas, and Greene County, based on the district court’s previous ruling regarding the correct legal tests and stipulations entered between the parties. The final resolution of these claims is dependent on further court action and subject to possible appeals and, therefore, cannot be determined at this time.

New Source Review Reform Rules

On October 20, 2005, the EPA published a proposed rule clarifying the test for determining when an emissions increase is subject to the NSR requirements. On March 17, 2006, the U.S. Court of Appeals for the District of Columbia Circuit vacated the EPA’s proposed rule which sought to clarify the scope of the existing Routine Maintenance, Repair, and Replacement Exclusion. Because this rule was not yet in effect, the court’s ruling is not anticipated to have any impact on Alabama Power. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters – New Source Review Actions” of Alabama Power in Item 7 of the Form 10-K for additional information.

Birmingham Area Eight-Hour Ozone Attainment Redesignation

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters - Environmental Statutes and Regulations — Air Quality” of Alabama Power in Item 7 of the Form 10-K for additional information regarding non-attainment designations for the eight-hour ozone air quality standard. On May 12, 2006, the EPA published a final rule approving the State of Alabama’s request to redesignate the Birmingham eight-hour ozone non-attainment area to attainment under the standard. The EPA also approved a revision to the Alabama state implementation plan, containing a maintenance plan to ensure the area’s continued compliance with the standard and to address any future exceedances of the standard. The EPA’s redesignation determination became effective on June 12, 2006.

FERC and Alabama PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS— FUTURE EARNINGS POTENTIAL — “FERC Matters – Market-Based Rate Authority” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Alabama Power has authorization from the FERC to sell power to non-affiliates at market-based prices. Alabama Power also has FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. On February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. A hearing before an ALJ originally scheduled for March 2006 has been held in abeyance to allow the parties to explore settlement. Any new market-based rate transactions in its retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. Such sales through May 27, 2006, the end of the 15-month refund period, were approximately $4 million for Alabama Power. In the event that the FERC’s default mitigation measures for entities that are found to have market power are ultimately applied, Alabama Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The 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.

40

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

     In addition, in May 2005, the FERC initiated an investigation to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing. The FERC established a new 15-month refund period related to this expanded investigation. Any new market-based rate transactions involving any Southern Company subsidiary will be subject to refund to the extent the FERC orders lower rates as a result of this new investigation, with the refund period beginning July 19, 2005. The impact of such sales involving Alabama Power through June 30, 2006 is not expected to exceed $11.6 million, of which $3.4 million relates to sales inside the retail service territory discussed above. The FERC also directed that this expanded proceeding be held in abeyance pending the outcome of the proceeding on the IIC discussed below.

     Alabama Power believes that there is no meritorious basis for this proceeding and is vigorously defending itself in this matter. However, the final outcome of this matter, including any remedies to be applied in the event of an adverse ruling in this proceeding, cannot now be determined.

Intercompany Interchange Contract

Also in May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the power pool of Southern Company is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (2) whether any parties to the IIC have violated the FERC’s standards of conduct applicable to utility companies that are transmission providers, and (3) whether Southern Company’s code of conduct defining Southern Power as a “system company” rather than a “marketing affiliate” is just and reasonable. In connection with the formation of Southern Power, the FERC authorized Southern Power’s inclusion in the IIC in 2000. The FERC also previously approved Southern Company’s code of conduct. The FERC order directs that the ALJ who presided over a proceeding involving approval of PPAs between Southern Power and Georgia Power and Savannah Electric be assigned to preside over the hearing in this proceeding and that the testimony and exhibits presented in that proceeding be preserved to the extent appropriate. Effective July 19, 2005, revenues from transactions under the IIC involving any Southern Company subsidiaries will be subject to refund to the extent the FERC orders any changes to the IIC. On April 11, 2006, Southern Company, Calpine Corporation, Coral Energy, and Dalton Utilities filed a settlement offer that would resolve the proceeding, and does not require any refunds. The ALJ has certified the settlement to the FERC, where it is pending. Since the offer is pending, the final outcome of this matter cannot now be determined.See MANAGEMENT’S DISCUSSION AND ANALYSIS— FUTURE EARNINGS POTENTIAL — “FERC Matters – Intercompany Interchange Contract” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for additional information.

Retail Fuel Cost Recovery

Alabama Power has established fuel cost recovery rates approved by the Alabama PSC. Alabama Power’s under recovered fuel costs as of June 30, 2006 totaled $278.0 million as compared to $285.1 million at December 31, 2005. Alabama Power increased its fuel billing factor in January 2006 in accordance with Rate ECR. Alabama Power will continue to monitor the under recovered fuel cost balance to determine if an additional adjustment to billing rates should be requested from the Alabama PSC. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters – Retail Fuel Cost Recovery” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters – Fuel Cost Recovery” in Item 8 of the Form 10-K for additional information.

41

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

Other Matters

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 such as opacity and other air quality standards, 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 pending or potential litigation against Alabama Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Alabama Power in Item 8 of the Form 10-K, 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 Note (B) to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated 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, Contingent Obligations, and Unbilled Revenues.

New Accounting Standards

Stock Options

On January 1, 2006, Alabama Power adopted FASB Statement No. 123(R), “Share-Based Payment,” using the modified prospective method. This statement requires that compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. Although the compensation expense required under the revised statement differs slightly, the impacts on Alabama Power’s financial statements are similar to the pro forma disclosures previously included in Note 1 to the financial statements of Alabama Power under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein.

Income Taxes

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” This interpretation requires that tax benefits must be “more likely than not” of being sustained in order to be recognized. The provisions of FIN 48 must be applied to all tax positions beginning January 1, 2007. Alabama Power is currently assessing the impact of FIN 48. The impact on Alabama Power’s financial statements has not yet been determined.

42

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

FINANCIAL CONDITION AND LIQUIDITY

Overview

Alabama Power’s financial condition remained stable at June 30, 2006. Net cash flows from operating activities totaled $300.7 million for the first six months of 2006, compared to $285.0 million for the first six months of 2005. The $15.7 million increase in the first six months of 2006 relates to a decrease in under recovered fuel cost receivable due to higher recovery rates, favorable financial hedge settlements, and an increase in the accrued tax liability. These positive changes were partially offset by a decrease in accounts payable resulting from increased expenditures accrued in the fourth quarter 2005 that were paid in the first quarter 2006 and a decrease in deferred income tax expense. The changes in the accrued tax liability and deferred income tax expense are due to the reversal of prior favorable timing differences. Property additions to utility plant were $416.9 million in the first six months of 2006 and are included in the balance sheets herein.

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, scheduled maturities of long-term debt, as well as related interest, preferred stock dividends, lease obligations, purchase commitments, and trust funding requirements. In the second quarter, Alabama Power renewed railcar leases representing 33% of the total railcar fleet. These leases have an estimated minimum rental commitment of $27 million over the additional four-year term and contain residual value guarantees with a potential maximum obligation of $49 million. Approximately $519 million will be required through June 30, 2007 for redemptions and maturities of long-term debt.

     Alabama Power has entered into three new contracts for the purchase of uranium concentrates and uranium enrichment services at Plant Farley that result in additional obligations of approximately $23 million in 2007 through 2008, $34 million in 2009 through 2010, and $64 million thereafter. These costs are expected to be recovered through Alabama Power’s fuel cost recovery clause. See Note 7 to the financial statements of Alabama Power under “Fuel Commitments” in Item 8 of the Form 10-K for additional information.

Sources of Capital

Alabama Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past, which were primarily operating cash flows, with capital contributions from Southern Company, short-term debt, and external security issuances providing additional funds. However, the amount, type, and timing of any future financings — if needed — will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Sources of Capital” of Alabama Power in Item 7 of the Form 10-K for additional information.

     To meet short-term cash needs and contingencies, Alabama Power had at June 30, 2006 approximately $91 million of cash and cash equivalents, unused committed lines of credit of approximately $865 million, and an extendible commercial note program. Subsequent to June 30, 2006, Alabama Power has modified and replaced certain committed lines of credit and the unused committed lines currently total approximately $964 million (including $563 million of such lines which are dedicated to funding purchase obligations relating to variable rate pollution control bonds). Of the current credit facilities, $364 million will expire at various times in 2006 and 2007 (of which $201 million allow for one-year term loans). The remaining $600 million of credit facilities expire in 2011. Alabama Power expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Alabama Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K

43

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

for additional information. 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 $1.4 billion of short-term borrowings. At June 30, 2006, Alabama Power had no commercial paper, bank notes, or extendible commercial notes outstanding. Management believes that the need for working capital can be adequately met by issuing commercial paper or utilizing lines of credit without maintaining large cash balances.

Credit Rating Risk

Alabama Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. However, Alabama Power, along with all members of the Southern Company power pool, is party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for it and/or Georgia Power. These agreements are primarily for natural gas price risk management activities. At June 30, 2006, Alabama Power’s total exposure to these types of agreements was approximately $14.2 million.

Market Price Risk

Alabama Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2005 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 physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. 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, 2006 was as follows:

	Second Quarter			Year-to-Date
	2006			2006
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	(22,448	)	$	28,978
Contracts realized or settled		13,580			7,664
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		(20,806	)		(66,316	)
Contracts at June 30, 2006	$	(29,674	)	$	(29,674	)

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

44

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

	Source of June 30, 2006
	Valuation Prices
	Total			Maturity
	Fair Value			Year 1			1-3 Years
	(in thousands)
Actively quoted	$	(29,795	)	$	(30,375	)	$	580
External sources		121			121			—
Models and other methods		—			—			—
Contracts at June 30, 2006	$	(29,674	)	$	(30,254	)	$	580

     Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to Alabama Power’s fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through Alabama Power’s fuel cost recovery clause. Certain other energy related derivatives, designated as hedges, are deferred in other comprehensive income. Gains and losses on derivative contracts that are not designated as hedges are recognized in the statements of income as incurred. At June 30, 2006, the fair value gain/(loss) of derivative energy contracts was reflected in the financial statements as follows:

	Amounts
	(in thousands)
Regulatory assets, net	$	(29,731	)
Accumulated other comprehensive income		121
Net income		(64	)
Total fair value loss	$	(29,674	)

     Unrealized pre-tax gains (losses) on energy contracts recognized in income were not material for any period presented.

     For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Market Price Risk” of Alabama Power in Item 7 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

Alabama Power issued a total of $800 million of senior notes in the first quarter of 2006. The proceeds were used to repay a portion of Alabama Power’s outstanding short-term indebtedness and for other general corporate purposes, including Alabama Power’s continuing construction activities. Alabama Power settled interest rate swaps related to the transactions at a gain of $18 million, which was recorded in other comprehensive income. The gain will be amortized to interest expense over a 10-year period. Also in the first quarter 2006, $170 million in aggregate principal amount of Series U 2.65% Senior Notes matured.

     In April 2006, $26.5 million in aggregate principal amount of Series W Senior Notes matured.

     In May 2006, Alabama Power redeemed $2.95 million of The Industrial Development Board of the Town of Parish (Alabama) 5 1/2% Pollution Control Revenue Refunding Bonds, Series 1994 (Alabama Power Company Project) due January 1, 2024 issued for the benefit of Alabama Power.

45

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

     In June 2006, Alabama Power issued $150 million of Series JJ 6.375% Senior Notes due June 15, 2046. The proceeds from this issuance were used to repay a portion of Alabama Power’s outstanding short-term indebtedness and for other general corporate purposes, including Alabama Power’s continuing construction activities.

     Also in June 2006, Alabama Power issued a total of 1,000,000 shares of common stock to Southern Company at $40.00 a share ($40 million aggregate purchase price). The proceeds from the sale were used by Alabama Power for general corporate purposes.

     In June 2006, Alabama Power entered into a series of interest rate derivatives designed to hedge interest rate risk of anticipated senior note issuances in late 2007. Alabama Power utilized collar transactions with a notional amount of $200 million. See Note (F) to the Condensed Financial Statements herein for further details.

     In June 2006, Alabama Power satisfied and discharged its first mortgage bond indenture. As a result, there are no longer any first mortgage bond liens on Alabama Power’s fixed property and franchises.

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

46

GEORGIA POWER COMPANY

47

GEORGIA POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006			2005
	(in thousands)						(in thousands)
Operating Revenues:
Retail revenues	$	1,420,762		$	1,227,087		$	2,687,718		$	2,412,323
Sales for resale —
Non-affiliates		132,557			126,000			265,921			238,852
Affiliates		85,674			54,743			120,616			80,374
Other revenues		59,745		��	51,358			111,932			98,069
Total operating revenues		1,698,738			1,459,188			3,186,187			2,829,618
Operating Expenses:
Fuel		556,691			412,050			991,465			721,316
Purchased power —
Non-affiliates		82,321			64,523			138,876			117,497
Affiliates		145,518			140,800			336,037			360,804
Other operations		226,256			223,471			444,976			425,550
Maintenance		119,876			123,575			239,176			240,225
Depreciation and amortization		117,590			124,999			235,447			248,099
Taxes other than income taxes		68,945			58,648			136,090			119,407
Total operating expenses		1,317,197			1,148,066			2,522,067			2,232,898
Operating Income		381,541			311,122			664,120			596,720
Other Income and (Expense):
Allowance for equity funds used during construction		6,338			7,935			12,123			17,192
Interest income		199			31			515			502
Interest expense, net of amounts capitalized		(61,322	)		(55,174	)		(121,529	)		(105,594	)
Interest expense to affiliate trusts		(14,877	)		(14,877	)		(29,755	)		(29,755	)
Other income (expense), net		3,370			2,821			2,376			(21	)
Total other income and (expense)		(66,292	)		(59,264	)		(136,270	)		(117,676	)
Earnings Before Income Taxes		315,249			251,858			527,850			479,044
Income taxes		119,059			94,140			199,003			178,794
Net Income		196,190			157,718			328,847			300,250
Dividends on Preferred Stock		—			167			1,010			335
Net Income After Dividends on Preferred Stock	$	196,190		$	157,551		$	327,837		$	299,915

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006			2005
	(in thousands)						(in thousands)
Net Income After Dividends on Preferred Stock	$	196,190		$	157,551		$	327,837		$	299,915
Other comprehensive income (loss):
Change in fair value of marketable securities, net of tax of $(66), $28, $(163), and $103, respectively		(103	)		46			(258	)		164
Changes in fair value of qualifying hedges, net of tax of $6,026, $(7,260), $11,241, and $(5,890), respectively		9,554			(11,510	)		17,821			(9,338	)
Reclassification adjustment for amounts included in net income, net of tax of $(58), $345, $52, and $521, respectively		(93	)		246			82			526
COMPREHENSIVE INCOME	$	205,548		$	146,333		$	345,482		$	291,267

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

48

GEORGIA POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months
	Ended June 30,
	2006			2005
	(in thousands)
Operating Activities:
Net income	$	328,847		$	300,250
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		276,048			292,447
Deferred income taxes and investment tax credits		13,433			89,724
Deferred expenses — affiliates		18,717			20,302
Allowance for equity funds used during construction		(12,123	)		(17,192	)
Pension, postretirement, and other employee benefits		(1,225	)		5,318
Stock option expense		4,330			—
Tax benefit of stock options		282			10,854
Other, net		8,447			(12,437	)
Changes in certain current assets and liabilities —
Receivables		(89,773	)		(247,466	)
Fossil fuel stock		(80,881	)		(23,692	)
Materials and supplies		(28,885	)		(16,024	)
Prepaid income taxes		61,519			17,892
Other current assets		(11,520	)		(3,837	)
Accounts payable		(128,890	)		(59,236	)
Accrued taxes		38,209			43,098
Accrued compensation		(83,215	)		(64,952	)
Other current liabilities		6,382			22,357
Net cash provided from operating activities		319,702			357,406
Investing Activities:
Property additions		(448,857	)		(381,191	)
Nuclear decommissioning trust fund purchases		(241,021	)		(205,261	)
Nuclear decommissioning trust fund sales		234,141			196,562
Cost of removal net of salvage		(10,658	)		(10,359	)
Change in construction payables, net of joint owner portion		(7,136	)		(39,400	)
Other		(1,963	)		6,126
Net cash used for investing activities		(475,494	)		(433,523	)
Financing Activities:
Increase in notes payable, net		389,817			171,669
Proceeds —
Senior notes		—			375,000
Capital contributions from parent company		232,328			100,000
Pollution control bonds		10,125			185,000
Gross excess tax benefit of stock options		611			—
Redemptions —
Senior notes		(150,000	)		(300,000	)
Pollution control bonds		(10,125	)		(85,000	)
Preferred stock		(14,569	)		—
Special deposit — redemption funds		—			(100,000	)
Payment of preferred stock dividends		(12	)		(211	)
Payment of common stock dividends		(301,250	)		(278,050	)
Other		(347	)		(16,494	)
Net cash provided from financing activities		156,578			51,914
Net Change in Cash and Cash Equivalents		786			(24,203	)
Cash and Cash Equivalents at Beginning of Period		10,636			33,497
Cash and Cash Equivalents at End of Period	$	11,422		$	9,294
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $4,904 and $6,996 capitalized for 2006 and 2005, respectively)	$	157,809		$	123,323
Income taxes (net of refunds)	$	26,441		$	3,310

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

49

GEORGIA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Assets	2006			2005
	(in thousands)
Current Assets:
Cash and cash equivalents	$	11,422		$	10,636
Receivables —
Customer accounts receivable		416,118			418,154
Unbilled revenues		176,184			141,875
Under recovered regulatory clause revenues		372,587			454,683
Other accounts and notes receivable		85,136			110,397
Affiliated companies		55,814			84,597
Accumulated provision for uncollectible accounts		(8,521	)		(8,647	)
Fossil fuel stock, at average cost		262,620			181,739
Vacation pay		59,646			59,190
Materials and supplies, at average cost		352,866			323,908
Prepaid expenses		13,973			70,825
Other		101,087			50,248
Total current assets		1,898,932			1,897,605
Property, Plant, and Equipment:
In service		19,957,393			19,603,249
Less accumulated provision for depreciation		7,775,166			7,575,926
		12,182,227			12,027,323
Nuclear fuel, at amortized cost		148,604			134,798
Construction work in progress		599,874			563,155
Total property, plant, and equipment		12,930,705			12,725,276
Other Property and Investments:
Equity investments in unconsolidated subsidiaries		68,470			68,188
Nuclear decommissioning trusts, at fair value		499,868			486,591
Other		70,800			71,468
Total other property and investments		639,138			626,247
Deferred Charges and Other Assets:
Deferred charges related to income taxes		497,775			500,882
Prepaid pension costs		487,462			476,458
Deferred under recovered regulatory clause revenues		477,611			295,116
Other regulatory assets		330,752			330,483
Other		174,519			195,716
Total deferred charges and other assets		1,968,119			1,798,655
Total Assets	$	17,436,894		$	17,047,783

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

50

GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Liabilities and Stockholder’s Equity	2006			2005
	(in thousands)
Current Liabilities:
Securities due within one year	$	2,822		$	167,317
Notes payable		657,559			267,743
Accounts payable —
Affiliated		207,585			285,019
Other		292,313			360,455
Customer deposits		140,292			129,293
Accrued taxes —
Income taxes		313,302			150,896
Other		146,254			204,778
Accrued interest		74,533			88,885
Accrued vacation pay		45,692			45,602
Accrued compensation		55,416			137,303
Other		155,354			120,312
Total current liabilities		2,091,122			1,957,603
Long-term Debt		4,177,916			4,179,218
Long-term Debt Payable to Affiliated Trusts		969,073			969,073
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		2,693,006			2,730,303
Deferred credits related to income taxes		153,196			158,759
Accumulated deferred investment tax credits		281,581			287,726
Employee benefit obligations		379,656			358,137
Asset retirement obligations		647,003			627,465
Other cost of removal obligations		403,322			404,614
Other regulatory liabilities		78,709			97,015
Other		65,992			63,335
Total deferred credits and other liabilities		4,702,465			4,727,354
Total Liabilities		11,940,576			11,833,248
Common Stockholder’s Equity:
Common stock, without par value—
Authorized — June 30, 2006: 20,000,000 shares               — December 31, 2005: 15,000,000 shares
Outstanding - 7,761,500 shares		344,250			344,250
Paid-in capital		2,880,563			2,643,012
Retained earnings		2,288,285			2,261,698
Accumulated other comprehensive loss		(16,780	)		(34,425	)
Total common stockholder’s equity		5,496,318			5,214,535
Total Liabilities and Stockholder’s Equity	$	17,436,894		$	17,047,783

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

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GEORGIA POWER COMPANY

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

SECOND QUARTER 2006 vs. SECOND QUARTER 2005
AND
YEAR-TO-DATE 2006 vs. YEAR-TO-DATE 2005

OVERVIEW

Georgia Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the State of Georgia and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Georgia Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover rising costs related to growing demand and increasingly stringent environmental standards. In addition, fuel costs rose significantly during 2005 and the first half of 2006. Georgia Power has received a Georgia PSC order to increase its fuel recovery rate effective July 1, 2006 and will continue to work with the Georgia PSC to enable the timely recovery of these costs.

     Effective July 1, 2006, Savannah Electric was merged into Georgia Power. Prior to the merger, Southern Company was the sole common shareholder of both Georgia Power and Savannah Electric. At the time of the merger, each outstanding share of Savannah Electric common stock was cancelled and Southern Company was issued an additional 1,500,000 shares of Georgia Power common stock, no par value per share. In addition, at the time of the merger, each outstanding share of Savannah Electric’s preferred stock was cancelled and converted into the right to receive one share of Georgia Power 6 1/8% Series Class A Preferred Stock, Non-Cumulative, Par Value $25 Per Share, resulting in the issuance by Georgia Power of 1,800,000 shares of such Class A Preferred Stock in July 2006. Following completion of the merger, the outstanding capital stock of Georgia Power consists of 9,261,500 shares of common stock, all of which are held by Southern Company, and 1,800,000 shares of preferred stock. Georgia Power will account for the merger in a manner similar to a pooling of interests, and Georgia Power’s financial statements will reflect the merger effective July 1, 2006.

     Georgia Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS — OVERVIEW — “Key Performance Indicators” of Georgia Power in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Georgia Power’s net income after dividends on preferred stock for the second quarter and year-to-date 2006 was $196.2 million and $327.8 million, respectively, compared to $157.6 million and $299.9 million, respectively, for the corresponding periods in 2005. The $38.6 million, or 24.5%, increase and $27.9 million, or 9.3%, increase in the second quarter and year-to-date 2006, respectively, over the corresponding periods in 2005 are primarily attributed to higher base retail revenues and wholesale non-fuel revenues, partially offset by higher non-fuel operating expenses and higher financing costs.

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

     Significant income statement items appropriate for discussion include the following:

	Increase(Decrease)
	Second Quarter						Year-to-Date
	(in thousands)			%			(in thousands)			%
Retail revenues	$	193,675			15.8		$	275,395			11.4
Sales for resale – non-affiliates		6,557			5.2			27,069			11.3
Sales for resale – affiliates		30,931			56.5			40,242			50.1
Other revenues		8,387			16.3			13,863			14.1
Fuel expense		144,641			35.1			270,149			37.5
Purchased power expense – non-affiliates		17,798			27.6			21,379			18.2
Purchased power expense – affiliates		4,718			3.4			(24,767	)		(6.9	)
Depreciation and amortization		(7,409	)		(5.9	)		(12,652	)		(5.1	)
Taxes other than income taxes		10,297			17.6			16,683			14.0
Allowance for equity funds used during construction		(1,597	)		(20.1	)		(5,069	)		(29.5	)
Interest expense, net of amounts capitalized		6,148			11.1			15,935			15.1

     Retail revenues.The chart below reflects the primary drivers of the 15.8% and 11.4% increases in retail revenues in the second quarter and year-to-date 2006, respectively, compared to the same periods in the prior year. Excluding fuel cost recovery revenues, which generally do not affect net income, retail sales revenue increased by $57.2 million, or 6.9%, and $63.5 million, or 4.0%, in the second quarter and year-to-date 2006, respectively, compared to the corresponding periods in 2005, primarily due to customer growth of 2.0%, more favorable weather and sustained economic growth. In the second quarter 2006, KWH energy sales to residential, commercial, and industrial customers increased by 11.9%, 5.5%, and 0.9%, respectively, which resulted in total KWH energy sales increasing 5.6%. Year-to-date KWH energy sales to residential and commercial customers increased 7.1% and 4.9%, respectively, while KWH energy sales to industrial customers decreased by 1.0%. The decrease in KWH energy sales to industrial customers was primarily the result of a 1.7% decrease in industrial customers resulting from the reclassification of customers from industrial to commercial when compared to the same period in 2005.

     Details of retail revenues are as follows:

	Second Quarter					Year-to-Date
	2006					2006
	(in millions)		% change			(in millions)		% change
Retail – prior year	$	1,227				$	2,412
Change in —
Base rates		—		—			—		—
Sales growth		35		2.8			47		1.9
Weather		22		1.8			17		0.7
Fuel cost recovery		137		11.2			212		8.8
Retail – current year	$	1,421		15.8	%	$	2,688		11.4	%

     Sales for resale — non-affiliates.Energy revenues from sales for resale to non-affiliates increased in the second quarter and year-to-date 2006 when compared to the same periods in 2005 as a result of 4.6% and 3.4% increases in the demand for KWH energy sales, respectively. In addition, for year-to-date 2006, $10.4 million in higher costs for sulfur dioxide emission allowances increased the price for these sales. Energy sales do not have a significant impact on earnings since energy is usually sold at variable cost. The capacity component of these transactions remained relatively constant in the second quarter and year-to-date 2006 when compared to the corresponding periods in 2005.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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     Sales for resale — affiliates.Energy sales to affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. These sales are made in accordance with the IIC, as approved by the FERC. These transactions did not have a significant impact on earnings since this energy is generally sold at marginal cost. In the second quarter and year-to-date 2006, revenues from sales for resale increased primarily due to 39.3% and 37.0% increases in KWH sales, respectively, due to the lower cost of Georgia Power-owned generation compared to its affiliates as well as higher fuel costs.

     Other revenues. During the second quarter and year-to-date 2006, other revenues increased when compared with the same periods in 2005 primarily due to increased transmission revenues of $7.0 million and $11.1 million, respectively, related to work performed for the other owners of the integrated transmission system in the State of Georgia and higher outdoor lighting revenues of $1.6 million and $3.0 million, respectively, due to a 6.0% increase in customers.

     Fuel expense and purchased power expense. Fuel expense and purchased power expense together increased $167.2 million in the second quarter and $266.8 million year-to-date 2006 when compared to the same periods in the prior year due to $95.8 million and $232.8 million increases in the cost of fuel, respectively, and $71.4 million and $34.0 million increases related to more KWHs generated and purchased, respectively. Details of the individual components follow.

Fuel expense in the second quarter and year-to-date 2006 increased $144.6 million and $270.1 million, respectively, when compared to the same periods in 2005 primarily due to an increase in the average cost of fuel per net KWH generated of 22.2% and 24.7%, respectively, due to higher coal and natural gas prices. 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 — “PSC Matters — Fuel Cost Recovery” and Note (H) to the Condensed Financial Statements herein for additional information.

Purchased power from affiliates increased in the second quarter 2006 mainly due to a 15.2% increase in KWH to meet higher demand when compared to the same period in 2005. Purchased power from affiliates decreased year-to-date 2006 due to a 10.6% decrease in KWH due to the lower cost of Georgia Power-owned generation compared to its affiliates, partially offset by an increase of 12.0% in the average cost of purchased power per net KWH when compared to the corresponding period in 2005. Energy purchases from affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. These purchases are made in accordance with the IIC, as approved by the FERC. These transactions did not have a significant impact on earnings since the energy purchases are generally offset by energy revenues through Georgia Power’s fuel cost recovery clause.

Purchased power expense — non-affiliates increased 27.6% and 18.2%, respectively, during the second quarter and year-to-date 2006 due to higher demand of 27.2% and 9.3%, respectively, as a result of the warmer weather and 0.2% and 7.9% increases in the average cost of purchased power per net KWH when compared to the corresponding periods in 2005. 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.

     Depreciation and amortization expense.Depreciation and amortization expense in the second quarter and year-to-date 2006 was lower compared to the corresponding periods in 2005. These decreases resulted primarily from the amortization of a regulatory liability related to the inclusion of new certified PPAs in retail rates on a levelized basis as ordered by the Georgia PSC under the terms of the retail order effective January 1, 2005.

     Taxes other than income taxes.Taxes other than income taxes increased 17.6% and 14.0% in the second quarter and year-to-date 2006, respectively, as a result of higher property taxes of $5.2 million and $9.4 million, respectively, due to an increase in property values and higher municipal gross receipts taxes of $4.5 million and $7.4 million, respectively, as a result of increased sales when compared to the corresponding periods in 2005.

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

     Allowance for equity funds used during construction.The 20.1% and 29.5% decreases in the allowance for equity funds used during construction in the second quarter and year-to-date 2006 when compared to the second quarter and year-to-date 2005 are attributed to completion of the McIntosh combined cycle units 10 and 11 which were placed in service in June 2005.

     Interest expense, net of amounts capitalized. During the second quarter and year-to-date 2006, interest expense, net of amounts capitalized increased 11.1% and 15.1%, respectively, when compared to the corresponding periods in 2005 due to the issuance of additional senior notes in 2005 and generally higher interest rates on variable rate debt and commercial paper.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Georgia Power’s future earnings potential. The level of future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Georgia Power’s business of selling electricity. These factors include Georgia Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs. Future earnings in the near term will depend, in part, upon growth in energy sales which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Georgia Power’s service area. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL of Georgia Power 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 fully recovered in rates on a timely basis. As discussed in the Form 10-K, environmental compliance spending over the next several years may exceed amounts estimated. Some of the factors driving the anticipated increase are higher commodity costs, market demand for labor, and scope additions and clarifications. The timing, specific requirements, and estimated costs could also change as environmental regulations are modified. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.

New Source Review Reform Rules

On October 20, 2005, the EPA published a proposed rule clarifying the test for determining when an emissions increase is subject to the NSR requirements. On March 17, 2006, the U.S. Court of Appeals for the District of Columbia Circuit vacated the EPA’s proposed rule which sought to clarify the scope of the existing Routine Maintenance, Repair, and Replacement Exclusion. Because this rule was not yet in effect, the court’s ruling is not anticipated to have any impact on Georgia Power. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters – New Source Review Actions” of Georgia Power in Item 7 of the Form 10-K for additional information.

Plant Wansley Environmental Litigation

On March 30, 2006, the U.S. Court of Appeals for the Eleventh Circuit ruled in favor of Georgia Power on its appeal and reversed the district court’s order regarding certain alleged opacity violations at Plant Wansley. The court of appeals remanded the case to the U.S. District Court for the Northern District of Georgia for further proceedings consistent with its decision. The ultimate outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental

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

Matters — Plant Wansley Environmental Litigation” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Environmental Matters — Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K for additional information.

FERC and Georgia PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS — 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 – Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Georgia Power has authorization from the FERC to sell power to non-affiliates at market-based prices. Georgia Power also has FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. On February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. A hearing before an ALJ originally scheduled for March 2006 has been held in abeyance to allow the parties to explore settlement. Any new market-based rate transactions in its retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. Such sales through May 27, 2006, the end of the 15-month refund period, were approximately $5.4 million for Georgia Power. In the event that the FERC’s default mitigation measures for entities that are found to have market power are ultimately applied, Georgia Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The 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.

     In addition, in May 2005, the FERC initiated an investigation to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing. The FERC established a new 15-month refund period related to this expanded investigation. Any new market-based rate transactions involving any Southern Company subsidiary will be subject to refund to the extent the FERC orders lower rates as a result of this new investigation, with the refund period beginning July 19, 2005. The impact of such sales involving Georgia Power through June 30, 2006 is not expected to exceed $14.1 million, of which $4.1 million relates to sales inside the retail service territory discussed above. The FERC also directed that this expanded proceeding be held in abeyance pending the outcome of the proceeding on the IIC discussed below.

     Georgia Power believes that there is no meritorious basis for this proceeding and is vigorously defending itself in this matter. However, the final outcome of this matter, including any remedies to be applied in the event of an adverse ruling in this proceeding, cannot now be determined.

Intercompany Interchange Contract

Also in May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the power pool of Southern Company is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (2) whether any parties to the IIC have violated the FERC’s standards of conduct applicable to utility companies that are transmission providers, and (3) whether Southern Company’s code of conduct defining Southern Power as a “system company” rather than a “marketing affiliate” is just and reasonable. In connection with the formation of

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

Southern Power, the FERC authorized Southern Power’s inclusion in the IIC in 2000. The FERC also previously approved Southern Company’s code of conduct. The FERC order directs that the ALJ who presided over a proceeding involving approval of PPAs between Southern Power and Georgia Power and Savannah Electric be assigned to preside over the hearing in this proceeding and that the testimony and exhibits presented in that proceeding be preserved to the extent appropriate. Effective July 19, 2005, revenues from transactions under the IIC involving any Southern Company subsidiaries will be subject to refund to the extent the FERC orders any changes to the IIC. On April 11, 2006, Southern Company, Calpine Corporation, Coral Energy, and Dalton Utilities filed a settlement offer that would resolve the proceeding, and does not require any refunds. The ALJ has certified the settlement to the FERC, where it is pending. Since the offer is pending, the final outcome of this matter cannot now be determined.See MANAGEMENT’S DISCUSSION AND ANALYSIS— FUTURE EARNINGS POTENTIAL — “FERC Matters – Intercompany Interchange Contract” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for additional information.

Retail Fuel Cost Recovery

On March 17, 2006, Georgia Power and Savannah Electric filed a combined request for fuel cost recovery rate changes with the Georgia PSC to be effective July 1, 2006. On June 15, 2006, the Georgia PSC ruled on the combined request and approved an increase in Georgia Power’s total annual fuel billings of approximately $400 million. The Georgia PSC order provided for a combined ongoing fuel forecast but reduced the requested increase related to such forecast by $200 million. The Georgia PSC order included no disallowances of previously incurred fuel costs. Estimated under recovered fuel costs as of June 30, 2006 are to be recovered over 35 months for customers in the former Georgia Power territory and over 41 months for customers in the former Savannah Electric territory. As of June 30, 2006, Georgia Power had an under recovered fuel balance of approximately $850 million and Savannah Electric had an under recovered fuel balance of $82 million. Such balances exceed the estimates used to determine the rates approved in the order for customers in the former Georgia Power territory and former Savannah Electric territory by $130 million and $4 million, respectively. The order also requires Georgia Power to file for a new fuel cost recovery rate, which would include a true-up of these balances, on a semi-annual basis, beginning September 30, 2006. Fuel cost recovery revenues as recorded on the financial statements are adjusted for differences in actual recoverable costs and amounts billed in current regulated rates. Accordingly, any changes in the billing factor will have no significant effect on Georgia Power’s revenues or net income, but will affect cash flow. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters – Fuel Cost Recovery” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Retail Regulatory Matters – Fuel Cost Recovery” in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements herein for additional information.

Merger

With respect to the merger between Georgia Power and Savannah Electric, which was completed on July 1, 2006, the Georgia PSC voted on June 15, 2006 to set the Merger Transition Adjustment (MTA) applicable to customers in the former Savannah Electric service territory so that the new fuel rate plus the MTA equals the applicable fuel rate paid by such customers as of June 30, 2006. Amounts collected under the MTA are being credited to customers in the former Georgia Power service territory through a Merger Transition Credit (MTC). The MTA and the MTC will be in effect until December 31, 2007, when Georgia Power’s base rates are scheduled to be adjusted.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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Nuclear

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters – Nuclear” in Item 7 of the Form 10-K for information on Georgia Power’s involvement in nuclear initiatives. As part of a potential expansion of Plant Vogtle, Georgia Power and Southern Nuclear Operating Company, Inc. have notified the NRC of their intent to apply for an early site permit (ESP) this year and a combined construction and operating license (COL) in 2008. Ownership agreements have been signed with each of the existing Plant Vogtle co-owners. In February 2006, Georgia Power filed a request with the Georgia PSC to establish an accounting order that would allow Georgia Power to defer for future recovery the ESP and COL costs, of which Georgia Power’s portion is estimated to total approximately $51 million over the next four years. On June 22, 2006, the Georgia PSC approved the request. At this point, no final decision has been made regarding actual construction. Any new generation resource must be certified by the Georgia PSC in a separate proceeding.

Other Matters

Georgia Power has entered into three PPAs for a total of approximately 1,000 MW annually from June 2009 through May 2024. These agreements are subject to certification by the Georgia PSC in accordance with the capacity needs identified in Georgia Power’s Integrated Resource Plan. These agreements satisfy approximately 550 MW of growth, replace an existing 450 MW agreement that expires in May 2009, and are expected to result in higher operating and maintenance expenses that will be subject to recovery through future base rates.

     On February 23, 2006, approximately 170 current and former employees of Georgia Power filed a collective action against Georgia Power in the U.S. District Court for the Northern District of Georgia, alleging that Georgia Power violated the Fair Labor Standards Act by failing to properly compensate certain employees (primarily linemen and crew leaders whose work is governed by a union collective bargaining agreement) while the employees were subject to being called back into work under on-call work rules and regulations. The plaintiffs are seeking overtime compensation for on-call time for the three-year period prior to the filing of the action, liquidated damages in an amount equal to unpaid overtime compensation they say they have been denied, declaratory and injunctive relief, and attorney’s fees and expenses of litigation. Georgia Power believes that it has complied with the provisions of the Fair Labor Standards Act and is vigorously defending itself in this action. The ultimate outcome of this matter cannot now be determined.

     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 such as opacity and other air quality standards, 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 pending or potential litigation against Georgia Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Georgia Power in Item 8 of the Form 10-K, 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 other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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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. Also 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, Contingent Obligations, and Unbilled Revenues.

New Accounting Standards

Stock Options

On January 1, 2006, Georgia Power adopted FASB Statement No. 123(R), “Share-Based Payment,” using the modified prospective method. This statement requires that compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. Although the compensation expense required under the revised statement differs slightly, the impacts on Georgia Power’s financial statements are similar to the pro forma disclosures previously included in Note 1 to the financial statements of Georgia Power under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein.

Income Taxes

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” This interpretation requires that tax benefits must be “more likely than not” of being sustained in order to be recognized. The provisions of FIN 48 must be applied to all tax positions beginning January 1, 2007. Georgia Power is currently assessing the impact of FIN 48. The impact on Georgia Power’s financial statements has not yet been determined.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Georgia Power’s financial condition remained stable at June 30, 2006. Net cash flow from operating activities decreased $38 million for the first six months of 2006 compared to the same period in 2005. The decrease in 2006 is primarily the result of higher fuel inventories and an increase in under recovered deferred fuel costs. Year-to-date 2006, gross property additions were $473 million. These additions were primarily related to the construction of transmission and distribution facilities, purchases of nuclear fuel, and purchases of equipment to comply with environmental standards. The majority of funds for these additions and other capital requirements were derived primarily from operating and financing activities and capital contributions from Southern Company. See Georgia Power’s Condensed Statements of Cash Flows herein for further details.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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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, scheduled maturities of long-term debt, as well as related interest, lease obligations, purchase commitments, and trust funding requirements. Since December 31, 2005, Georgia Power entered into three PPAs that, subject to certification by the Georgia PSC, are expected to result in additional obligations of $55 million in 2009 through 2010 and $483 million thereafter. Approximately $3 million will be required by June 30, 2007 for redemptions and maturities of long-term debt.

     In addition, Georgia Power has entered into three new contracts for the purchase of uranium concentrates and uranium enrichment services at Plants Hatch and Vogtle that result in additional obligations of approximately $34 million in 2007 through 2008, $50 million in 2009 through 2010, and $63 million thereafter. These costs are expected to be recovered through Georgia Power’s fuel cost recovery clause. See Note 7 to the financial statements of Georgia Power under “Fuel Commitments” in Item 8 of the Form 10-K for additional information.

Sources of Capital

Georgia Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past, which were primarily operating cash flows, with capital contributions from Southern Company, short-term debt, and external security issuances providing additional funds. However, the amount, type and timing of any future financings, if needed, will depend on maintenance of adequate earnings, prevailing market conditions, regulatory approval, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Sources of Capital” of Georgia Power in Item 7 of the Form 10-K for additional information.

     To meet short-term cash needs and contingencies, Georgia Power had at June 30, 2006 approximately $11.4 million of cash and cash equivalents and $743 million of unused credit arrangements with banks, of which $390 million expire in 2007 and $353 million expire in 2010. Of the facilities that expire in 2007, $40 million contain provisions allowing two-year term loans executable at expiration. See Note 6 to the financial statements of Georgia Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. Subsequent to June 30, 2006, Georgia Power refinanced facilities totaling $710 million with an $870 million credit facility that expires in July 2011 which revised total unused credit arrangements to $903 million. Georgia Power expects to renew its credit facilities, as needed, prior to expiration. These unused credit arrangements provide liquidity support to Georgia Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Georgia Power may also meet short-term cash needs through 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, 2006, Georgia Power had approximately $447.8 million of commercial paper, $59.8 million of extendible commercial notes, and $150 million of bank loans outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.

Credit Rating Risk

Georgia Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- or Baa3 or below. These contracts are primarily for physical electricity purchases and sales. At June 30, 2006, the maximum potential collateral requirements at a BBB- or Baa3 rating were approximately $8 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $248 million. Generally, collateral may be

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

provided for by a Southern Company guaranty, letter of credit, or cash. Georgia Power, along with all members of the Southern Company power pool, is also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for it and/or Alabama Power. These agreements are primarily for natural gas price risk management activities. At June 30, 2006, Georgia Power’s total exposure to these types of agreements was approximately $14.2 million.

Market Price Risk

Georgia Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2005 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 physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Georgia Power has also implemented a fuel hedging program at the instruction of the Georgia PSC.

     The fair value of derivative energy contracts at June 30, 2006 was as follows:

	Second Quarter			Year-to-Date
	2006			2006
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	(20,274	)	$	26,562
Contracts realized or settled		12,799			7,468
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		(16,874	)		(58,379	)
Contracts at June 30, 2006	$	(24,349	)	$	(24,349	)

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

	Source of June 30, 2006
	Valuation Prices
	Total			Maturity
	Fair Value			Year 1			1-3 Years
	(in thousands)
Actively quoted	$	(24,500	)	$	(24,988	)	$	488
External sources		151			151			—
Models and other methods		—			—			—
Contracts at June 30, 2006	$	(24,349	)	$	(24,837	)	$	488

     Unrealized gains and losses from mark to market adjustments on derivative contracts related to Georgia Power’s fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through Georgia Power’s fuel cost recovery mechanism. Though June 30, 2006, Georgia Power was allowed to retain 25% of any net gains under an existing Georgia PSC order. In connection with the fuel cost recovery decision, effective July 1, 2006, the Georgia PSC ordered the suspension of the profit sharing framework related to the fuel hedging program. New profit sharing arrangements as well as other changes to the fuel hedging program are currently under development. Such changes are not expected to have a material impact on Georgia Power’s financial statements.

61

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

See Note 3 to the financial statements of Georgia Power under “Retail Regulatory Matters — Fuel Hedging Program” in Item 8 of the Form 10-K for additional information. Gains and losses on derivative contracts that are not designated as hedges are recognized in the statements of income as incurred. At June 30, 2006, the fair value gain / (loss) of all derivative energy contracts was reflected in the financial statements as follows:

	Amounts
	(in thousands)
Regulatory assets, net	$	(24,268	)
Accumulated other comprehensive income		—
Net income		(81	)
Total fair value loss	$	(24,349	)

     Unrealized pre-tax gains and losses recognized in income were not material for any period presented.

     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 2006, all outstanding shares of the remaining issue of preferred stock were redeemed. In February 2006, Georgia Power redeemed $150 million of Series G 6.200% Senior Notes. Also during the first quarter, Georgia Power entered into two derivative transactions to reduce its exposure to interest rate risk. The transactions consisted of a hedge of an anticipated $150 million senior note issuance in 2006 and a hedge of an anticipated $225 million senior note issuance in 2007.

     In June 2006, Georgia Power incurred obligations in connection with the issuance of $10.1 million Auction Rate Pollution Control Revenue Bonds. The proceeds were used to defease and redeem in July 2006 a like amount of 5.25% Pollution Control Revenue Bonds. No other long-term securities were issued during the first six months of 2006.

     In July 2006, Georgia Power incurred obligations in connection with the issuance of $67 million 4.40% Pollution Control Revenue Bonds and $48.7 million 4.90% Pollution Control Revenue Bonds. Proceeds from the sales will be used for the legal defeasance and redemption in August 2006 of $67 million of 5.0% and $48.7 million of 5.25% Pollution Control Revenue Bonds.

     In connection with Savannah Electric’s merger into Georgia Power, all of Savannah Electric’s obligations under five series of senior notes outstanding at June 30, 2006, totaling $195 million, and the obligations related to three series of pollution control revenue bonds, totaling $18 million, were assumed by Georgia Power. Georgia Power also assumed Savannah Electric’s commercial paper and extendible commercial note obligations of $84 million.

     In addition, at the time of the merger, each of the 1,800,000 outstanding shares of Savannah Electric’s preferred stock was cancelled and converted into one share of Georgia Power 6 1/8% Series Class A Preferred Stock, Non-Cumulative, Par Value $25 Per Share.

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

62

GULF POWER COMPANY

63

GULF POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006			2005
	(in thousands)						(in thousands)
Operating Revenues:
Retail revenues	$	245,656		$	207,110		$	424,973		$	369,392
Sales for resale —
Non-affiliates		20,344			19,614			41,182			39,326
Affiliates		15,417			14,443			68,025			47,043
Other revenues		11,305			10,130			21,584			20,133
Total operating revenues		292,722			251,297			555,764			475,894
Operating Expenses:
Fuel		120,915			94,814			242,156			187,444
Purchased power —
Non-affiliates		4,531			4,958			9,327			10,066
Affiliates		15,137			10,829			22,127			16,841
Other operations		46,761			41,148			90,251			74,917
Maintenance		16,142			16,286			30,714			33,885
Depreciation and amortization		22,381			21,333			44,366			42,082
Taxes other than income taxes		19,793			17,776			38,682			35,277
Total operating expenses		245,660			207,144			477,623			400,512
Operating Income		47,062			44,153			78,141			75,382
Other Income and (Expense):
Interest income		769			444			1,550			699
Interest expense, net of amounts capitalized		(9,785	)		(8,991	)		(19,057	)		(17,251	)
Interest expense to affiliate trusts		(1,147	)		(1,147	)		(2,295	)		(2,295	)
Other income (expense), net		(347	)		(160	)		(897	)		32
Total other income and (expense)		(10,510	)		(9,854	)		(20,699	)		(18,815	)
Earnings Before Income Taxes		36,552			34,299			57,442			56,567
Income taxes		13,689			12,787			21,352			20,355
Net Income		22,863			21,512			36,090			36,212
Dividends on Preferred and Preference Stock		825			54			1,650			108
Net Income After Dividends on Preferred and Preference Stock	$	22,038		$	21,458		$	34,440		$	36,104

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months					For the Six Months
	Ended June 30,					Ended June 30,
	2006			2005		2006			2005
	(in thousands)					(in thousands)
Net Income After Dividends on Preferred and Preference Stock	$	22,038		$	21,458	$	34,440		$	36,104
Other comprehensive income (loss):
Changes in fair value of qualifying hedges, net of tax of $(191) and $(191), respectively		(304	)		—		(304	)		—
Reclassification adjustment for amounts included in net income, net of tax of $32, $32, $63 and $63, respectively		50			49		100			100
COMPREHENSIVE INCOME	$	21,784		$	21,507	$	34,236		$	36,204

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

64

GULF POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months
	Ended June 30,
	2006			2005
	(in thousands)
Operating Activities:
Net income	$	36,090		$	36,212
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		47,115			45,007
Deferred income taxes		(9,061	)		(2,553	)
Pension, postretirement, and other employee benefits		1,480			1,123
Stock option expense		745			—
Tax benefit of stock options		68			2,659
Other, net		1,429			(2,151	)
Changes in certain current assets and liabilities —
Receivables		(9,935	)		(2,134	)
Fossil fuel stock		(11,273	)		(17,991	)
Materials and supplies		(15,973	)		1,270
Prepaid income taxes		1,446			4,019
Property damage cost recovery		11,765			6,462
Other current assets		926			6,282
Accounts payable		7,865			(38,761	)
Accrued taxes		17,204			6,256
Accrued compensation		(12,897	)		(7,837	)
Other current liabilities		6,282			7,987
Net cash provided from operating activities		73,276			45,850
Investing Activities:
Property additions		(73,761	)		(70,701	)
Cost of removal net of salvage		(2,159	)		(2,668	)
Construction payables		(5,704	)		(14,421	)
Other		(9,404	)		89
Net cash used for investing activities		(91,028	)		(87,701	)
Financing Activities:
Increase in notes payable, net		48,310			13,710
Proceeds —
Capital contributions from parent company		21,140			—
Gross excess tax benefit of stock options		167			—
Redemptions — Pollution control bonds		(12,075	)		—
Payment of preferred and preference stock dividends		(1,650	)		(108	)
Payment of common stock dividends		(35,150	)		(34,200	)
Other		(1,190	)		(270	)
Net cash provided from (used for) financing activities		19,552			(20,868	)
Net Change in Cash and Cash Equivalents		1,800			(62,719	)
Cash and Cash Equivalents at Beginning of Period		3,847			64,829
Cash and Cash Equivalents at End of Period	$	5,647		$	2,110
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $12 and $454 capitalized for 2006 and 2005, respectively)	$	17,175		$	17,814
Income taxes (net of refunds)	$	16,984		$	14,419

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

65

GULF POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Assets		2006			2005
	(in thousands)
Current Assets:
Cash and cash equivalents	$	5,647		$	3,847
Receivables —
Customer accounts receivable		67,023			51,567
Unbilled revenues		50,895			39,951
Under recovered regulatory clause revenues		38,330			33,205
Other accounts and notes receivable		12,620			10,533
Affiliated companies		5,738			24,001
Accumulated provision for uncollectible accounts		(1,105	)		(1,134	)
Fossil fuel stock, at average cost		56,013			44,740
Materials and supplies, at average cost		48,949			32,976
Property damage cost recovery		27,898			28,744
Other regulatory assets		18,022			9,895
Other		7,128			19,636
Total current assets		337,158			297,961
Property, Plant, and Equipment:
In service		2,540,385			2,502,057
Less accumulated provision for depreciation		875,656			865,989
		1,664,729			1,636,068
Construction work in progress		29,244			28,177
Total property, plant, and equipment		1,693,973			1,664,245
Other Property and Investments		16,141			6,736
Deferred Charges and Other Assets:
Deferred charges related to income taxes		16,937			17,379
Prepaid pension costs		46,429			46,374
Other regulatory assets		108,783			123,258
Other		18,056			19,844
Total deferred charges and other assets		190,205			206,855
Total Assets	$	2,237,477		$	2,175,797

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

66

GULF POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Liabilities and Stockholder’s Equity	2006			2005
	(in thousands)
Current Liabilities:
Securities due within one year	$	25,000		$	37,075
Notes payable		137,775			89,465
Accounts payable —
Affiliated		38,266			36,717
Other		36,578			44,139
Customer deposits		20,340			18,834
Accrued taxes —
Income taxes		22,462			12,823
Other		18,495			11,689
Accrued interest		7,428			7,713
Accrued compensation		7,152			20,336
Other regulatory liabilities		17,054			15,671
Other		26,023			21,844
Total current liabilities		356,573			316,306
Long-term Debt		544,585			544,388
Long-term Debt Payable to Affiliated Trusts		72,166			72,166
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		251,215			256,490
Accumulated deferred investment tax credits		15,637			16,569
Employee benefit obligations		57,769			56,235
Other cost of removal obligations		159,594			153,665
Other regulatory liabilities		25,135			26,795
Other		77,366			76,948
Total deferred credits and other liabilities		586,716			586,702
Total Liabilities		1,560,040			1,519,562
Preference Stock		53,887			53,891
Common Stockholder’s Equity:
Common stock, without par value—
Authorized - 20,000,000 shares
Outstanding - 992,717 shares		38,060			38,060
Paid-in capital		422,935			400,815
Retained earnings		165,569			166,279
Accumulated other comprehensive loss		(3,014	)		(2,810	)
Total common stockholder’s equity		623,550			602,344
Total Liabilities and Stockholder’s Equity	$	2,237,477		$	2,175,797

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

67

GULF POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SECOND QUARTER 2006 vs. SECOND QUARTER 2005
AND
YEAR-TO-DATE 2006 vs. YEAR-TO-DATE 2005

OVERVIEW

Gulf Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located in northwest Florida and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Gulf Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover rising costs. These costs include those related to growing demand, increasingly stringent environmental standards, fuel prices, and storm restoration costs. Appropriately balancing environmental expenditures with customer prices will continue to challenge Gulf Power for the foreseeable future.

     Hurricanes Dennis and Katrina hit Gulf Power’s service territory in July and August 2005, respectively. As a result of these storms, as well as Hurricane Ivan in September 2004, Gulf Power has incurred significant restoration costs. Recent Florida PSC actions should assure the timely recovery of these costs, while minimizing the impact upon Gulf Power’s customers. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters — Storm Damage Cost Recovery” of Gulf Power in Item 7 of the Form 10-K and FUTURE EARNINGS POTENTIAL — “FERC and Florida PSC Matters — Storm Damage Cost Recovery” and Note (K) to the Condensed Financial Statements herein for additional information.

     Gulf Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS — OVERVIEW — “Key Performance Indicators” of Gulf Power in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Gulf Power’s net income after dividends on preferred and preference stock for the second quarter and year-to-date 2006 was $22.0 million and $34.4 million, respectively, compared to $21.5 million and $36.1 million, respectively, for the corresponding periods in 2005. Earnings in the second quarter 2006 increased by $0.6 million, or 2.7%, primarily due to increased retail revenue as a result of favorable weather and customer growth. Earnings year-to-date 2006 decreased by $1.7 million, or 4.6%, primarily due to increased dividends and increased interest expense, net of amounts capitalized, resulting from higher interest rates on variable-rate pollution control bonds, the issuance of $60 million in senior notes in August 2005, and the issuance of $55 million of preference stock in November 2005.

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

     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Second Quarter						Year-to-Date
	(in thousands)			%			(in thousands)			%
Retail revenues	$	38,546			18.6		$	55,581			15.0
Sales for resale – affiliates		974			6.7			20,982			44.6
Other revenues		1,175			11.6			1,451			7.2
Fuel expense		26,101			27.5			54,712			29.2
Purchased power – affiliates		4,308			39.8			5,286			31.4
Other operations expense		5,613			13.6			15,334			20.5
Maintenance expense		(144	)		(0.9	)		(3,171	)		(9.4	)
Depreciation and amortization		1,048			4.9			2,284			5.4
Taxes other than income taxes		2,017			11.3			3,405			9.7
Interest expense, net of amounts capitalized		794			8.8			1,806			10.5

     Retail revenues.The chart below reflects the primary drivers of the 18.6% increase and 15.0% increase in retail revenues in the second quarter and year-to-date 2006, respectively, when compared to the corresponding periods in 2005. Excluding revenues related to fuel and other cost recovery, which do not affect net income, retail revenues increased by $8.6 million, or 4.1%, for the second quarter 2006 and increased by $7.7 million, or 2.1%, year-to-date 2006 as compared to the corresponding periods in the prior year. Retail energy sales to residential, commercial, and industrial customers increased by 12.3%, 6.0%, and 3.9%, respectively, in the second quarter 2006, when compared to the same period in the prior year. Retail energy sales to residential, commercial, and industrial customers increased by 5.1%, 4.6%, and 1.4%, respectively, year-to-date 2006, when compared to the same period in the prior year. The increases in sales to residential customers in the second quarter and year-to-date 2006 are primarily a result of more favorable weather and 3.0% customer growth. The increases in sales to commercial customers in the second quarter and year-to-date 2006 are primarily a result of favorable weather. The increases in sales to industrial customers in the second quarter and year-to-date 2006 are primarily a result of additional sales to customers with gas-fired cogeneration resulting from high natural gas prices. Other cost recovery for the second quarter and year-to-date 2006 includes approximately $6.9 million and $12.4 million, respectively, of revenues related to the recovery of expenses for Hurricane Ivan as approved by the Florida PSC. See Note 3 to the financial statements of Gulf Power under “Retail Regulatory Matters — Storm Damage Cost Recovery” in Item 8 of the Form 10-K and FUTURE EARNINGS POTENTIAL — “FERC and Florida PSC Matters — Storm Damage Cost Recovery” herein for additional information on storm damage cost recovery related to Hurricane Ivan.

     Details of retail revenues are as follows:

	Second Quarter 2006					Year-to-Date 2006
	(in thousands)		%			(in thousands)			%
Retail – prior year	$	207,110				$	369,392
Change in —
Sales growth		728		0.4			(339	)		(0.1	)
Weather		7,838		3.8			7,990			2.1
Fuel cost recovery		25,730		12.3			33,941			9.2
Other cost recovery		4,250		2.1			13,989			3.8
Retail – current year	$	245,656		18.6	%	$	424,973			15.0	%

69

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

     Sales for resale — affiliates. Revenues from sales for resale to affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost. The increases in sales for resale to affiliates of 6.7% in the second quarter and 44.6% year-to-date 2006, compared to the corresponding periods in 2005, are primarily a result of increased sales of available generation at a higher unit cost due to higher fuel prices.

     Other revenues. Other revenues increased $1.2 million and $1.5 million in the second quarter and year-to-date 2006, respectively, when compared to the same periods in 2005, primarily as a result of higher franchise fees, which have no impact on earnings. Franchise fees are generally proportional to sales revenue and are offset by franchise and gross receipt taxes.

     Fuel expense. Fuel expense increased $26.1 million in the second quarter 2006 when compared to the same period in 2005 due to a $22.1 million increase in the cost of fuel and related costs, and a $4.0 million increase resulting from an increase in total KWHs generated. Fuel expense increased $54.7 million year-to-date 2006 when compared to the same period in 2005 due to a $39.3 million increase in the cost of fuel and related costs, and a $15.4 million increase resulting from an increase in total KWHs generated. 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. See FUTURE EARNINGS POTENTIAL — “FERC and Florida PSC Matters — Fuel Cost Recovery” herein for additional information.

     Purchased power — affiliates. Purchased power from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC, as approved by the FERC. Purchased power from affiliates increased $4.3 million in the second quarter 2006 when compared to the same period in 2005 due to a $4.8 million increase resulting from increased KWH purchases, partially offset by a $0.5 million decrease resulting from lower average cost of purchased power per net KWH. Purchased power from affiliates increased $5.3 million year-to-date 2006 when compared to the same period in 2005 due to a $3.5 million increase resulting from increased KWH purchases, and a $1.8 million increase resulting from the higher average cost of purchased power per net KWH.

     Other operations expense. The increases in other operations expense in second quarter and year-to-date 2006 of $5.6 million and $15.3 million, respectively, as compared to the same periods in 2005, are primarily due to the recovery of Hurricane Ivan restoration costs as approved by the Florida PSC. Since these costs are recognized as revenues are collected, there is no impact on net income. See Note 3 to the financial statements of Gulf Power under “Retail Regulatory Matters – Storm Damage Cost Recovery” in Item 8 of the Form 10-K and FUTURE EARNINGS POTENTIAL — “FERC and Florida PSC Matters — Storm Damage Cost Recovery” and Note (K) to the Condensed Financial Statements herein for additional information.

     Maintenance expense. Maintenance expense decreased $3.2 million year-to-date 2006 than in the same period in 2005 primarily due to a delay in scheduled maintenance performed on power generation facilities in 2006.

     Depreciation and amortization. Depreciation and amortization increased $1.0 million and $2.3 million in the second quarter and year-to-date 2006, respectively, when compared to the same periods in 2005, due to the construction of two major generation projects that were placed in service in the second and fourth quarters of 2005.

     Taxes other than income taxes. The increases in taxes other than income taxes in the second quarter and year-to-date 2006 of $2.0 million and $3.4 million, respectively, as compared to the same periods in 2005, are

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

primarily the result of increases in franchise and gross receipts taxes, which are directly related to increases in retail revenues.

     Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized, increased $0.8 million and $1.8 million in the second quarter and year-to-date 2006, respectively, as compared to the same periods in 2005 primarily due to higher interest rates on variable-rate pollution control bonds and the issuance of $60 million in senior notes in August 2005.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Gulf Power’s future earnings potential. The level of future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Gulf Power’s business of selling electricity. These factors include Gulf Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Gulf Power’s service area. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL of Gulf Power 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 fully recovered in rates on a timely basis. As discussed in the Form 10-K, environmental compliance spending over the next several years may exceed amounts estimated. Some of the factors driving the anticipated increase are higher commodity costs, market demand for labor, and scope additions and clarifications. The timing, specific requirements, and estimated costs could also change as environmental regulations are modified. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.

New Source Review Reform Rules

On October 20, 2005, the EPA published a proposed rule clarifying the test for determining when an emissions increase is subject to the NSR requirements. On March 17, 2006, the U.S. Court of Appeals for the District of Columbia Circuit vacated the EPA’s proposed rule which sought to clarify the scope of the existing Routine Maintenance, Repair, and Replacement Exclusion. Because this rule was not yet in effect, the court’s ruling is not anticipated to have any impact on Gulf Power. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — New Source Review Actions” of Gulf Power in Item 7 of the Form 10-K for additional information.

FERC and Florida PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “FERC Matters — Market-Based Rate Authority” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s

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generation dominance within its retail service territory. Gulf Power has authorization from the FERC to sell power to non-affiliates at market-based prices. Gulf Power also has FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. On February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. A hearing before an ALJ originally scheduled for March 2006 has been held in abeyance to allow the parties to explore settlement. Any new market-based rate transactions in its retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. Such sales through May 27, 2006, the end of the 15-month refund period, were approximately $0.9 million for Gulf Power. In the event that the FERC’s default mitigation measures for entities that are found to have market power are ultimately applied, Gulf Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The 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.

     In addition, in May 2005, the FERC initiated an investigation to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing. The FERC established a new 15-month refund period related to this expanded investigation. Any new market-based rate transactions involving any Southern Company subsidiary will be subject to refund to the extent the FERC orders lower rates as a result of this new investigation, with the refund period beginning July 19, 2005. The impact of such sales involving Gulf Power through June 30, 2006 is not expected to exceed $2.4 million, of which $0.7 million relates to sales inside the retail service territory discussed above. The FERC also directed that this expanded proceeding be held in abeyance pending the outcome of the proceeding on the IIC discussed below.

     Gulf Power believes that there is no meritorious basis for this proceeding and is vigorously defending itself in this matter. However, the final outcome of this matter, including any remedies to be applied in the event of an adverse ruling in this proceeding, cannot now be determined.

Intercompany Interchange Contract

Also in May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the power pool of Southern Company is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (2) whether any parties to the IIC have violated the FERC’s standards of conduct applicable to utility companies that are transmission providers, and (3) whether Southern Company’s code of conduct defining Southern Power as a “system company” rather than a “marketing affiliate” is just and reasonable. In connection with the formation of Southern Power, the FERC authorized Southern Power’s inclusion in the IIC in 2000. The FERC also previously approved Southern Company’s code of conduct. The FERC order directs that the ALJ who presided over a proceeding involving approval of PPAs between Southern Power and Georgia Power and Savannah Electric be assigned to preside over the hearing in this proceeding and that the testimony and exhibits presented in that proceeding be preserved to the extent appropriate. Effective July 19, 2005, revenues from transactions under the IIC involving any Southern Company subsidiaries will be subject to refund to the extent the FERC orders any changes to the IIC. On April 11, 2006, Southern Company, Calpine Corporation, Coral Energy, and Dalton Utilities filed a settlement offer that would resolve the proceeding, and does not require any refunds. The ALJ has certified the settlement to the FERC, where it is pending. Since the offer is pending, the final outcome of this matter cannot now be determined.See MANAGEMENT’S DISCUSSION AND ANALYSIS— FUTURE EARNINGS POTENTIAL — “FERC

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Matters – Intercompany Interchange Contract” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for additional information.

Storm Damage Cost Recovery

See Note 1 to the financial statements of Gulf Power under “Property Damage Reserve” and Note 3 to the financial statements of Gulf Power under “Retail Regulatory Matters – Storm Damage Cost Recovery” in Item 8 of the Form 10-K for information on how Gulf Power maintains a reserve for property damage to cover the cost of damages from major storms to its transmission and distribution facilities and the cost of uninsured damages to its generation facilities and other property, and the impact of recent hurricanes on that reserve.

     In July and August 2005, Hurricanes Dennis and Katrina, respectively, hit the Gulf Coast of the United States and caused significant damage within Gulf Power’s service area. Hurricane Ivan hit the Gulf Coast of Florida and Alabama in September 2004, also causing significant damage to Gulf Power’s service area. Gulf Power was authorized by the Florida PSC to defer the portion of the hurricane restoration costs that exceeded the balance in its property damage reserve account. As of June 30, 2006, the deficit balance in Gulf Power’s property damage reserve account totaled approximately $41.2 million, of which approximately $8.5 million and $32.7 million, respectively, are included in the Condensed Balance Sheets herein under “Current Assets” and “Deferred Charges and Other Assets.” As of June 30, 2006, Gulf Power had recovered $33.7 million of the costs allowed for recovery related to Hurricane Ivan.

     In July 2006, the Florida PSC issued its order approving a stipulation and settlement between Gulf Power and several consumer groups that resolved all matters relating to Gulf Power’s request for recovery of incurred costs for storm-recovery activities, the replenishment of Gulf Power’s property damage reserve, and the related request for permission to issue $87.2 million in securitized storm-recovery bonds. The order provides for an extension of the storm recovery surcharge currently being collected by Gulf Power for an additional 27 months, expiring in June 2009, in lieu of the requested issuance of storm-recovery bonds.

     According to the stipulation, the funds resulting from the extension of the current surcharge will first be credited to the unrecovered balance of storm-recovery costs associated with Hurricane Ivan until these costs have been fully recovered. The funds will then be credited to the property reserve for recovery of the storm-recovery costs of $53.3 million associated with Hurricanes Dennis and Katrina that were previously charged to the reserve. Should revenues collected by Gulf Power through the extension of the storm-recovery surcharge exceed the storm-recovery costs associated with Hurricanes Dennis and Katrina, the excess revenues will be credited to the reserve.

     The annual accrual to the reserve of $3.5 million and Gulf Power’s limited discretionary authority to make additional accruals to the reserve will continue as previously approved by the Florida PSC. As part of the March 2005 agreement regarding Hurricane Ivan costs that established the existing surcharge, Gulf Power agreed that it would not seek any additional increase in its base rates and charges to become effective on or before March 1, 2007. The terms of the stipulation do not alter or affect that portion of the prior agreement.

     According to the order, in the case of future storms, if Gulf Power incurs cumulative costs for storm-recovery activities in excess of $10 million during any calendar year, Gulf Power will be permitted to file a streamlined formal request for an interim surcharge. Any interim surcharge would provide for the recovery, subject to refund, of up to 80% of the claimed costs for storm-recovery activities. Gulf Power would then petition the Florida PSC for full recovery through an additional surcharge or other cost recovery mechanism.

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Fuel Cost Recovery

Gulf Power has established fuel cost recovery rates approved by the Florida PSC. In 2005 and the first six months of 2006, Gulf Power has experienced higher than expected fuel costs for coal and natural gas. If the projected fuel revenue over or under recovery exceeds 10% of the projected fuel costs for the period, Gulf Power is required to notify the Florida PSC and indicate if an adjustment to the fuel cost recovery factor is being requested. Gulf Power filed such notice with the Florida PSC on July 21, 2006, but no adjustment to the factor was requested. Under recovered fuel costs at June 30, 2006 totaled $36.8 million, and are included in “Under Recovered Regulatory Clause Revenues” on the Condensed Balance Sheets. Fuel cost recovery revenues, as recorded on the financial statements, are adjusted for differences in actual recoverable costs and amounts billed in current regulated rates. Accordingly, any change in the billing factor would have no significant effect on Gulf Power’s revenues or net income, but would affect cash flow.

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 such as opacity and other air quality standards, 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 pending or potential litigation against Gulf Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Gulf Power in Item 8 of the Form 10-K, 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 Note (B) to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

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

New Accounting Standards

Stock Options

On January 1, 2006, Gulf Power adopted FASB Statement No. 123(R), “Share-Based Payment,” using the modified prospective method. This statement requires that compensation cost relating to share-based payment

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transactions be recognized in the financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. Although the compensation expense required under the revised statement differs slightly, the impacts on Gulf Power’s financial statements are similar to the pro forma disclosures previously included in Note 1 to the financial statements of Gulf Power under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein.

Income Taxes

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” This interpretation requires that tax benefits must be “more likely than not” of being sustained in order to be recognized. The provisions of FIN 48 must be applied to all tax positions beginning January 1, 2007. Gulf Power is currently assessing the impact of FIN 48. The impact on Gulf Power’s financial statements has not yet been determined.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Gulf Power’s financial condition remained stable at June 30, 2006. Net cash flow from operating activities totaled $73.3 million for the first six months of 2006, compared to $45.9 million for the corresponding period in 2005. The $27.4 million increase in 2006 resulted primarily from a decrease in payments related to storm damage costs partially offset by increased purchases of emission allowances. Gross property additions to utility plant were $68.3 million in the first six months of 2006. Funds for Gulf Power’s property additions were provided by operating activities and other financing activities. See Gulf 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 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, preference stock dividends, purchase commitments, and trust funding requirements. Approximately $25 million will be required by June 30, 2007 for maturities of long-term debt.

Sources of Capital

Gulf Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past, which were primarily operating cash flows, with capital contributions from Southern Company, short-term debt, and external security issuances providing additional funds. However, the amount, type, and timing of any future financings, if needed, will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions, and other factors. SeeMANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Sources of Capital” of Gulf Power in Item 7 of the Form 10-K for additional information.

     At June 30, 2006, Gulf Power’s current liabilities exceed current assets primarily due to the scheduled maturity of $25 million of long-term debt in 2006. To meet short-term cash needs and contingencies, Gulf Power has various internal and external sources of liquidity. At June 30, 2006, Gulf Power had approximately $5.6 million of cash and cash equivalents and $120 million of unused committed lines of credit with banks. Of these facilities, $90 million expire in 2006 and $30 million expire in 2007. Approximately $60 million of these

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credit arrangements contain provisions allowing two-year term loans executable at expiration and $15 million contains provisions allowing one-year term loans executable at expiration. Gulf Power expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Gulf Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. These credit arrangements provide liquidity support to Gulf Power’s obligations with respect to variable rate pollution control bonds and commercial paper. A portion of these facilities may be used to fund or provide liquidity support for commercial paper issuances to fund costs related to Hurricanes Ivan, Dennis, and Katrina. In addition, Gulf Power has substantial cash flow from operating activities. 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, 2006, Gulf Power had outstanding $62.8 million in commercial paper and $75 million in bank notes. There were no extendible commercial notes outstanding at June 30, 2006.

Credit Rating Risk

Gulf Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- or Baa3, or below. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit, or cash. These contracts are primarily for physical electricity purchases and sales. At June 30, 2006, the maximum potential collateral requirements at a BBB- or Baa3 rating were approximately $5 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $10 million. Gulf Power, along with all members of the Southern Company power pool, is also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas price risk management activities. At June 30, 2006, Gulf Power’s total exposure to these types of agreements was approximately $14.2 million.

Market Price Risk

Gulf Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2005 reporting period. In addition, Gulf Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

     Due to cost-based rate regulation, 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 physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Gulf Power has implemented a fuel-hedging program with the approval of the Florida PSC.

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     The fair value of derivative energy contracts at June 30, 2006 was as follows:

	Second Quarter			Year-to-Date
	2006			2006
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	(3,261	)	$	11,526
Contracts realized or settled		2,886			(25	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		(5,658	)		(17,534	)
Contracts at June 30, 2006	$	(6,033	)	$	(6,033	)

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

	Source of June 30, 2006
	Valuation Prices
	Total			Maturity
	Fair Value			Year 1			1-3 Years
	(in thousands)
Actively quoted	$	(6,058	)	$	(6,817	)	$	759
External sources		25			25			—
Models and other methods		—			—			—
Contracts at June 30, 2006	$	(6,033	)	$	(6,792	)	$	759

     Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to Gulf Power’s fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through Gulf Power’s fuel cost recovery clause. Gains and losses on derivative contracts that are not designated as hedges are recognized in the statements of income as incurred. At June 30, 2006, the fair value gain / (loss) of derivative energy contracts was reflected in the financial statements as follows:

	Amounts
	(in thousands)
Regulatory assets, net	$	(6,020	)
Accumulated other comprehensive income		—
Net income		(13	)
Total fair value loss	$	(6,033	)

     Unrealized gains (losses) recognized in income were not material for any period presented.

     For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Market Price Risk” of Gulf Power in Item 7 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.

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Financing Activities

Gulf Power did not issue or redeem any long-term securities in the first six months of 2006; Gulf Power’s obligations in connection with pollution control bonds totaling $12.1 million matured in April 2006. In the second quarter 2006, Gulf Power entered into a derivative transaction to hedge the interest rate risk of an anticipated future financing. The derivative has a total notional amount of $80 million and will be settled at the time of the future financing, with any resulting gain or loss amortized over a 10-year period. For further details, see Note (F) to the Condensed Financial Statements herein.

     In addition to any financings that may be necessary to meet capital requirements, contractual obligations, and storm recovery, Gulf Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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MISSISSIPPI POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006			2005
	(in thousands)						(in thousands)
Operating Revenues:
Retail revenues	$	173,145		$	166,597		$	304,509		$	298,391
Sales for resale —
Non-affiliates		66,606			67,726			127,928			127,312
Affiliates		10,781			9,988			22,553			28,920
Other revenues		4,388			4,265			8,871			9,169
Total operating revenues		254,920			248,576			463,861			463,792
Operating Expenses:
Fuel		104,386			90,639			182,649			181,678
Purchased power —
Non-affiliates		4,615			5,210			9,317			10,629
Affiliates		17,381			24,919			36,417			34,523
Other operations		41,134			39,724			78,411			79,234
Maintenance		19,360			21,683			33,775			37,221
Depreciation and amortization		12,002			8,195			24,322			16,252
Taxes other than income taxes		15,650			15,147			29,850			29,292
Total operating expenses		214,528			205,517			394,741			388,829
Operating Income		40,392			43,059			69,120			74,963
Other Income and (Expense):
Interest income		22			31			71			66
Interest expense		(4,221	)		(597	)		(8,512	)		(4,123	)
Interest expense to affiliate trusts		(650	)		(650	)		(1,299	)		(1,299	)
Other income (expense), net		1,550			217			2,493			646
Total other income and (expense)		(3,299	)		(999	)		(7,247	)		(4,710	)
Earnings Before Income Taxes		37,093			42,060			61,873			70,253
Income taxes		13,894			15,995			22,959			26,808
Net Income		23,199			26,065			38,914			43,445
Dividends on Preferred Stock		433			433			866			866
Net Income After Dividends on Preferred Stock	$	22,766		$	25,632		$	38,048		$	42,579

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2006		2005		2006		2005
	(in thousands)				(in thousands)
Net Income After Dividends on Preferred Stock	$	22,766	$	25,632	$	38,048	$	42,579
Other comprehensive income (loss):
Changes in fair value of qualifying hedges, net of tax of $64, $47, $204 and $(125), respectively		105		74		330		(203	)
COMPREHENSIVE INCOME	$	22,871	$	25,706	$	38,378	$	42,376

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

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CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months
	Ended June 30,
	2006			2005
	(in thousands)
Operating Activities:
Net income	$	38,914		$	43,445
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		33,111			31,097
Deferred income taxes and investment tax credits, net		21,218			27,486
Plant Daniel capacity		(6,504	)		(12,563	)
Pension, postretirement, and other employee benefits		2,518			1,259
Stock option expense		850			—
Tax benefit of stock options		49			2,676
Other, net		(9,188	)		(3,120	)
Changes in certain current assets and liabilities —
Receivables		41,243			(16,905	)
Fossil fuel stock		5,629			(15,097	)
Materials and supplies		61			2,491
Other current assets		30,303			1,683
Hurricane Katrina accounts payable		(41,638	)		—
Other accounts payable		(51,837	)		(10,540	)
Accrued taxes		(11,342	)		(14,855	)
Accrued compensation		(14,117	)		(11,305	)
Over recovered regulatory clause revenues		(22,354	)		(1,851	)
Other current liabilities		465			551
Net cash provided from operating activities		17,381			24,452
Investing Activities:
Property additions		(91,231	)		(32,385	)
Cost of removal net of salvage		(4,040	)		(1,366	)
Other		(12,500	)		(1,167	)
Net cash used for investing activities		(107,771	)		(34,918	)
Financing Activities:
Increase in notes payable, net		115,128			37,887
Proceeds —
Senior notes		—			30,000
Gross excess tax benefit of stock options		36			—
Redemptions — First mortgage bonds		—			(30,000	)
Special deposits — Redemption fund		—			(2,482	)
Capital distributions to parent company		(2,378	)		—
Payment of preferred stock dividends		(866	)		(866	)
Payment of common stock dividends		(32,600	)		(31,000	)
Net cash provided from financing activities		79,320			3,539
Net Change in Cash and Cash Equivalents		(11,070	)		(6,927	)
Cash and Cash Equivalents at Beginning of Period		14,301			6,945
Cash and Cash Equivalents at End of Period	$	3,231		$	18
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest	$	15,471		$	6,783
Income taxes (net of refunds)	$	(42,560	)	$	(11,811	)

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

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CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Assets	2006			2005
	(in thousands)
Current Assets:
Cash and cash equivalents	$	3,231		$	14,301
Receivables —
Customer accounts receivable		43,244			36,747
Unbilled revenues		27,421			20,267
Under recovered regulatory clause revenues		77,102			105,505
Other accounts and notes receivable		3,153			21,507
Insurance receivable		42,526			60,163
Affiliated companies		14,760			19,595
Accumulated provision for uncollectible accounts		(778	)		(2,321	)
Fossil fuel stock, at average cost		44,815			50,444
Materials and supplies, at average cost		28,616			28,678
Prepaid income taxes		6,016			42,278
Other regulatory assets		31,468			23,042
Other		17,032			25,160
Total current assets		338,606			445,366
Property, Plant, and Equipment:
In service		2,030,990			1,987,294
Less accumulated provision for depreciation		826,633			803,754
		1,204,357			1,183,540
Construction work in progress		46,327			52,225
Total property, plant, and equipment		1,250,684			1,235,765
Other Property and Investments		7,109			6,821
Deferred Charges and Other Assets:
Deferred charges related to income taxes		9,542			9,863
Prepaid pension costs		16,219			17,264
Deferred property damage		248,381			209,324
Other		51,037			56,866
Total deferred charges and other assets		325,179			293,317
Total Assets	$	1,921,578		$	1,981,269

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

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CONDENSED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Liabilities and Stockholder’s Equity	2006			2005
	(in thousands)
Current Liabilities:
Notes payable	$	317,252		$	202,124
Accounts payable —
Affiliated		28,453			122,899
Other		50,959			89,598
Customer deposits		8,132			7,298
Accrued taxes —
Income taxes		26,881			17,736
Other		28,454			48,296
Accrued interest		2,821			3,408
Accrued compensation		10,471			24,587
Over recovered regulatory clause revenues		3,834			26,188
Plant Daniel capacity		9,334			13,008
Other		31,442			40,334
Total current liabilities		518,033			595,476
Long-term Debt		242,550			242,548
Long-term Debt Payable to Affiliated Trusts		36,082			36,082
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		287,739			266,629
Deferred credits related to income taxes		18,148			19,003
Accumulated deferred investment tax credits		16,871			17,465
Employee benefit obligations		59,791			58,318
Other cost of removal obligations		84,063			81,284
Other regulatory liabilities		6,353			13,755
Other		53,673			56,769
Total deferred credits and other liabilities		526,638			513,223
Total Liabilities		1,323,303			1,387,329
Preferred Stock		32,780			32,780
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		298,092			299,536
Retained earnings		233,150			227,701
Accumulated other comprehensive loss		(3,438	)		(3,768	)
Total common stockholder’s equity		565,495			561,160
Total Liabilities and Stockholder’s Equity	$	1,921,578		$	1,981,269

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

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SECOND QUARTER 2006 vs. SECOND QUARTER 2005
AND
YEAR-TO-DATE 2006 vs. YEAR-TO-DATE 2005

OVERVIEW

Mississippi Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the State of Mississippi and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Mississippi Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand, storm restoration, and increasingly stringent environmental standards. Hurricane Katrina hit Mississippi Power’s service territory in August 2005. As a result, Mississippi Power has incurred significant restoration costs. In addition, fuel costs rose significantly during 2005 and the first six months of 2006. Recent Mississippi PSC actions should assure the timely recovery of the storm recovery costs, while minimizing the impact on Mississippi Power’s customers. Mississippi Power will continue to work with the Mississippi PSC to ensure timely recovery of the storm recovery and fuel costs. See Note (I) to the Condensed Financial Statements herein for additional information on the recent storm recovery order.

     Mississippi Power continues to focus on several key performance indicators. In recognition that Mississippi Power’s long-term financial success is dependent upon how well it satisfies its customers’ needs, Mississippi Power’s retail base rate mechanism, PEP, includes performance indicators that directly tie customer service indicators to Mississippi Power’s allowed return. In addition to the PEP performance indicators, Mississippi Power focuses on other performance measures, including broader measures of customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS — OVERVIEW — “Key Performance Indicators” of Mississippi Power in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Mississippi Power’s net income after dividends on preferred stock for the second quarter and year-to-date 2006 was $22.8 million and $38.0 million, respectively, compared to $25.6 million and $42.6 million, respectively, for the corresponding periods of 2005. Earnings in the second quarter 2006 decreased by $2.9 million, or 11.2%, compared to the same period of 2005 primarily as a result of a $3.0 million reduction in net energy sales (revenue from energy sales less fuel and purchased power expense), a $3.8 million increase in depreciation and amortization expense, and a $3.6 million increase in interest expense, which were partially offset by a $3.7 million increase in territorial base revenues, a $0.8 million decrease in non-fuel operations and maintenance expenses, and a $1.3 million increase in other income (expense), net, of which $0.9 million is related to the increase in interest income associated with the recovery mechanism for fuel hedging and energy cost hedging. Year-to-date earnings in 2006 decreased $4.5 million, or 10.6%, compared to the same period of 2005 primarily as a result of a $0.4 million decrease in territorial base revenues, a $1.0 million reduction in net energy sales, an $8.1 million increase in depreciation and amortization expense, and a $4.4 million increase in interest expense, all of which were partially offset by a $4.3 million decrease in non-fuel operations and maintenance expenses and a $1.8 million increase in other income (expense), net, related to the increase in interest income associated with the recovery mechanism for fuel hedging and energy cost hedging.

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     Significant income statement items appropriate for discussion include the following:

	Increase (Decrease)
	Second Quarter						Year-to-Date
	(in thousands)			%			(in thousands)			%
Retail revenues	$	6,548			3.9		$	6,118			2.1
Sales for resale – affiliates		793			7.9			(6,367	)		(22.0	)
Fuel expense		13,747			15.2			971			0.5
Purchased power expense – non-affiliates		(595	)		(11.4	)		(1,312	)		(12.3	)
Purchased power expense – affiliates		(7,538	)		(30.3	)		1,894			5.5
Maintenance expense		(2,323	)		(10.7	)		(3,446	)		(9.3	)
Depreciation and amortization		3,807			46.5			8,070			49.7
Interest expense		3,624			N/M			4,389			106.5
Other income (expense), net		1,333			N/M			1,847			N/M
Income taxes		(2,101	)		(13.1	)		(3,849	)		(14.4	)

N/M – Not meaningful

     Retail revenues.The chart below reflects the primary drivers of the 3.9% increase and 2.1% increase in retail revenues in the second quarter and year-to-date 2006, respectively, compared to the same periods in the prior year. Excluding revenues related to fuel and other cost recovery, which do not affect net income, retail revenues increased slightly in the second quarter and remained stable for the year-to-date 2006 when compared to the same periods of 2005. In the second quarter 2006, KWH sales to residential, commercial, and industrial customers decreased 4.1%, 12.3%, and 3.4%, respectively, when compared to the corresponding period in 2005, and year-to-date 2006 KWH sales to residential, commercial, and industrial customers decreased 9.8%, 13.3%, and 5.5%, respectively, when compared to the corresponding period in 2005 due to Hurricane Katrina and the loss of approximately 16,000 customers.

     Details of retail revenues are as follows:

	Second Quarter						Year-to-Date
	2006						2006
	(in thousands)			% change			(in thousands)			% change
Retail – prior year	$	166,597					$	298,391
Change in —
Base rates		8,018			4.8			9,728			3.3
Sales growth and weather		(4,934	)		(3.0	)		(10,509	)		(3.5	)
Fuel cost recovery		3,498			2.1			7,110			2.4
Other cost recovery		(34	)		—			(211	)		(0.1	)
Retail – current year	$	173,145			3.9	%	$	304,509			2.1	%

     Sales for resale—affiliates. Revenues from sales for resale to affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since the energy is generally sold at marginal cost. The 7.9% increase in sales for resale to affiliates in the second quarter 2006 as compared to the same period in 2005 is primarily due to a decrease in Mississippi Power’s territorial demand resulting in available generation for sale to affiliates. The 22.0% decrease in sales for resale to affiliates for year-to-date 2006 as compared to the same period in 2005 is primarily due to higher gas prices.

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     Fuel expense and purchased power expense.Fuel expense and purchased power expense, together, increased $5.6 million and $1.6 million in the second quarter and year-to-date 2006, respectively, compared to the same periods in the prior year. Details of the individual components follow.

Fuel expense increased in the second quarter 2006 by $13.7 million when compared to the same period in 2005 primarily due to an increase in the cost of fuel. The year-to-date increase in fuel of $1 million as compared to the same period in 2005 is primarily due to a $21.8 million increase in the cost of fuel offset by a $20.7 million decrease related to fewer KWHs generated. 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 expense — non-affiliates decreased $0.6 million and $1.3 million in the second quarter and year-to-date 2006, respectively, as compared to the same periods in 2005 primarily as the result of lower prices within the Southern Company system compared to the market.

Purchased power from affiliates decreased 30.3% in the second quarter 2006 as compared to the same period in 2005 due to decreased sales outside the Southern Company system. The 5.5% increase in purchased power from affiliates for the year-to-date 2006 as compared to the same period in 2005 is due to reduced generation because of increased fuel prices, resulting in more purchased power needed to meet the gap between generation and demand. This increase was offset by purchased power reductions due to fewer sales outside the Southern Company system. Energy purchases from affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. These purchases are made in accordance with the IIC, as approved by the FERC. These transactions did not have a significant impact on earnings since the energy purchases are generally offset by energy revenues through Mississippi Power’s retail and wholesale fuel cost recovery clauses.

     Maintenance expense. The second quarter and year-to-date 2006 decreases in maintenance expense when compared to the same periods in 2005 resulted from the decreased expenses of $1.3 million in Mississippi Power’s combined cycle long-term service agreement due to reduced operating hours as a result of higher cost of gas, approximately $1 million in decreases associated with overhead line clearing, stations equipment, and miscellaneous transmission plant maintenance, and approximately $1.4 million primarily associated with maintenance of overhead lines.

     Depreciation and amortization.The second quarter and year-to-date 2006 increases of $3.8 million and $8.1 million, respectively, in depreciation and amortization expense when compared to the same periods in 2005 are primarily due to the decrease in the credit amortization of the regulatory liability related to additional Plant Daniel capacity and to the new depreciation rates approved by the Mississippi PSC effective January 1, 2006. See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information.

     Interest expense.The $3.6 million and $4.4 million increases in interest expense for the second quarter and year-to-date 2006, respectively, as compared to the same periods in 2005 are due to the increase in short-term indebtedness, higher interest rates, and reversal of a $2.5 million liability in June 2005 for a transmission facility agreement as a result of changes in the legal and regulatory environment.

     Other income (expense), net.The second quarter and year-to-date 2006 increases in other income (expense), net when compared to the same periods in 2005 are primarily the result of increases of $0.9 million and $1.8 million, respectively, in interest income related to the regulatory recovery of hedging activities.

     Income taxes.The $2.1 million and $3.8 million decreases in income taxes for the second quarter and year-to-date 2006, respectively, as compared to the same periods in 2005 are primarily related to the reductions in pre-tax income.

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FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Mississippi Power’s future earnings potential. The level of future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Mississippi Power’s business of selling electricity. These factors include Mississippi Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Mississippi Power’s service area in the aftermath of Hurricane Katrina. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL of Mississippi Power 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 fully recovered in rates on a timely basis. As discussed in the Form 10-K, environmental compliance spending over the next several years may exceed amounts estimated. Some of the factors driving the anticipated increase are higher commodity costs, market demand for labor, and scope additions and clarifications. The timing, specific requirements, and estimated costs could also change as environmental regulations are modified. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters” of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.

New Source Review Reform Rules

On October 20, 2005, the EPA published a proposed rule clarifying the test for determining when an emissions increase is subject to the NSR requirements. On March 17, 2006, the U.S. Court of Appeals for the District of Columbia Circuit vacated the EPA’s proposed rule which sought to clarify the scope of the existing Routine Maintenance, Repair, and Replacement Exclusion. Because this rule was not yet in effect, the court’s ruling is not anticipated to have any impact on Mississippi Power. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — New Source Review Actions” of Mississippi Power in Item 7 of the Form 10-K for additional information.

FERC and Mississippi PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS— 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 –Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Mississippi Power has authorization from the FERC to sell power to non-affiliates at market-based prices. Mississippi Power also has FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. On February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. A hearing before an ALJ originally scheduled for March 2006 has been held in abeyance to allow the parties to explore settlement. Any new market-based rate

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transactions in its retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. Such sales through May 27, 2006, the end of the 15-month refund period, were approximately $8.5 million for Mississippi Power. In the event that the FERC’s default mitigation measures for entities that are found to have market power are ultimately applied, Mississippi Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The 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.

     In addition, in May 2005, the FERC initiated an investigation to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing. The FERC established a new 15-month refund period related to this expanded investigation. Any new market-based rate transactions involving any Southern Company subsidiary will be subject to refund to the extent the FERC orders lower rates as a result of this new investigation, with the refund period beginning July 19, 2005. The impact of such sales involving Mississippi Power through June 30, 2006 is not expected to exceed $11.7 million, of which $7.8 million relates to sales inside the retail service territory discussed above. The FERC also directed that this expanded proceeding be held in abeyance pending the outcome of the proceeding on the IIC discussed below.

     Mississippi Power believes that there is no meritorious basis for this proceeding and is vigorously defending itself in this matter. However, the final outcome of this matter, including any remedies to be applied in the event of an adverse ruling in this proceeding, cannot now be determined.

Intercompany Interchange Contract

Also in May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the power pool of Southern Company is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (2) whether any parties to the IIC have violated the FERC’s standards of conduct applicable to utility companies that are transmission providers, and (3) whether Southern Company’s code of conduct defining Southern Power as a “system company” rather than a “marketing affiliate” is just and reasonable. In connection with the formation of Southern Power, the FERC authorized Southern Power’s inclusion in the IIC in 2000. The FERC also previously approved Southern Company’s code of conduct. The FERC order directs that the ALJ who presided over a proceeding involving approval of PPAs between Southern Power and Georgia Power and Savannah Electric be assigned to preside over the hearing in this proceeding and that the testimony and exhibits presented in that proceeding be preserved to the extent appropriate. Effective July 19, 2005, revenues from transactions under the IIC involving any Southern Company subsidiaries will be subject to refund to the extent the FERC orders any changes to the IIC. On April 11, 2006, Southern Company, Calpine Corporation, Coral Energy, and Dalton Utilities filed a settlement offer that would resolve the proceeding, and does not require any refunds. The ALJ has certified the settlement to the FERC, where it is pending. Since the offer is pending, the final outcome of this matter cannot now be determined.See MANAGEMENT’S DISCUSSION AND ANALYSIS— FUTURE EARNINGS POTENTIAL — “FERC Matters – Intercompany Interchange Contract” of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for additional information.

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Storm Damage Cost Recovery

In August 2005, Hurricane Katrina hit the Gulf Coast of the United States and caused significant damage within Mississippi Power’s service area. Mississippi Power maintains a reserve to cover the cost of damages from major storms to its transmission and distribution lines and the cost of uninsured damages to its generation facilities and other property. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters — Storm Damage Cost Recovery” of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters – Storm Damage Cost Recovery” in Item 8 of the Form 10-K for additional information.

     On June 28, 2006, the Mississippi PSC approved an order based upon a stipulation between Mississippi Power and the Mississippi Public Utilities Staff. The stipulation and the associated order certified actual storm restoration costs relating to Hurricane Katrina through April 30, 2006 of $267.9 million and affirmed estimated additional costs through December 31, 2007 of $34.5 million, for total storm restoration costs of $302.4 million, without offset for the property damage reserve of $3.0 million. Of the total amount, $292.8 million applies to Mississippi Power’s retail jurisdiction. The order directs Mississippi Power to file an application with the Mississippi Development Authority (MDA) for Community Development Block Grants (CDBG). The MDA has indicated that $360 million of CDBG will be available to utilities within the State of Mississippi impacted by Hurricane Katrina. All CDBG proceeds received by Mississippi Power will be applied to both retail and wholesale storm restoration costs. The retail portion of any certified restoration costs not covered by the CDBG program are expected to be funded through a state bond program previously approved by the State of Mississippi legislature. The Mississippi PSC order also indicated that the state bond program would be appropriate funding for all or a portion of a new storm operations center if approved and for an appropriate storm reserve, both of which require additional Mississippi PSC action. If state bonds are used for any portion of the Hurricane Katrina restoration costs, periodic true-up mechanisms will be structured to comply with terms and requirements from the legislation.

     The Mississippi PSC order also granted continuing authority to record a regulatory asset in an amount equal to the retail portion of the recorded Hurricane Katrina restoration costs. The balance in the regulatory asset account at June 30, 2006 is $248.4 million, which is net of insurance proceeds of $80.1 million. These costs include approximately $142 million of capital additions and $106 million of operation and maintenance expenditures. For any future event causing damage to property beyond the balance in the reserve, the order also granted Mississippi Power the authority to record a regulatory asset. Mississippi Power would then apply to the Mississippi PSC for recovery of such amounts or for authority to otherwise dispose of the regulatory asset.

     Mississippi Power expects to file the CDBG application with the MDA in the third quarter 2006, at which time the MDA is expected to assess applications and award grants. Mississippi Power filed an application for a financing order with the Mississippi PSC on July 3, 2006 for restoration costs under the state bond program, including the property damage reserve funding and the construction of the storm operations center. The final outcome of these matters cannot now be determined.

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Retail Regulatory Matters

In December 2005, Mississippi Power submitted its annual PEP filing to the Mississippi PSC. Ordinarily, PEP limits annual rate increases to 4%; however, Mississippi Power requested that the Mississippi PSC approve a temporary change to allow it to exceed this cap as a result of the ongoing effects of Hurricane Katrina. Mississippi Power had requested a 5.05%, or $32 million, retail base rate increase to become effective in April 2006. Hearings were held in March 2006 and the full increase was approved by the Mississippi PSC later in March 2006.

     In February 2006, Mississippi Power filed with the Mississippi PSC its annual ECO Plan evaluation. Mississippi Power requested a 12 cent per 1,000 KWH reduction for retail customers. This decrease would represent a reduction of approximately $1.3 million per year in annual revenues for Mississippi Power. Hearings were held in April 2006. The Mississippi PSC unanimously approved the decrease at the hearings and issued an order confirming approval in April 2006.

Fuel Cost Recovery

Mississippi Power has an established fuel cost recovery factor that is approved by the Mississippi PSC. In 2005 and the first six months of 2006, Mississippi Power experienced higher than expected fuel costs for coal and gas, which led to an increase in the under recovered fuel costs. Mississippi Power is required to file for an adjustment to the fuel cost recovery factor annually; the last such filing was made in November 2005, with the new rate becoming effective in January 2006. At June 30, 2006, the under recovered balance of fuel recorded in the Condensed Balance Sheets herein was $73.3 million. Mississippi Power’s operating revenues are adjusted for differences in actual recoverable fuel cost and amounts billed in accordance with the currently approved cost recovery rate. Accordingly, changes to the billing factor will have no significant effect on Mississippi Power’s revenues or net income but will affect cash flow.

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 such as opacity and other air quality standards, 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 pending or potential litigation against Mississippi Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Mississippi Power in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Mississippi Power’s financial statements.

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

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ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

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

New Accounting Standards

Stock Options

On January 1, 2006, Mississippi Power adopted FASB Statement No. 123(R), “Share-Based Payment,” using the modified prospective method. This statement requires that compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. Although the compensation expense required under the revised statement differs slightly, the impacts on Mississippi Power’s financial statements are similar to the pro forma disclosures previously included in Note 1 to the financial statements of Mississippi Power under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein.

Income Taxes

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” This interpretation requires that tax benefits must be “more likely than not” of being sustained in order to be recognized. The provisions of FIN 48 must be applied to all tax positions beginning January 1, 2007. Mississippi Power is currently assessing the impact of FIN 48. The impact on Mississippi Power’s financial statements has not yet been determined.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Mississippi Power’s financial condition remained stable at June 30, 2006. Net cash provided from operating activities totaled $17.4 million for the first six months of 2006, compared to net cash flow provided from operating activities of $24.5 million for the same period in 2005. The $7.1 million decrease in 2006 resulted primarily from cash requirements associated with Hurricane Katrina restoration.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Capital Requirements and Contractual Obligations” of Mississippi Power in Item 7 of the Form 10-K for a description of Mississippi Power’s capital requirements for its construction program, lease obligations, purchase commitments, preferred stock dividends, and trust funding requirements. Mississippi Power has no maturities or redemptions of long-term debt required by June 30, 2007.

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Sources of Capital

Mississippi Power plans to obtain the funds required for construction, continued storm damage restoration, and other purposes from sources similar to those used in the past, including operating cash flows, capital contributions from Southern Company, short-term debt, and external security issuances. The amount, type, and timing of any future financings, if needed, will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Sources of Capital” of Mississippi Power in Item 7 of the Form 10-K for additional information.

     At June 30, 2006, Mississippi Power’s current liabilities exceeded current assets primarily as a result of obligations incurred as a result of Hurricane Katrina, as well as 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, Mississippi Power had at June 30, 2006 approximately $3.2 million of cash and cash equivalents and $275.5 million of unused committed credit arrangements with banks. Of these facilities, $50.5 million expire in 2006, $50 million expire in 2007, and $175 million expire in 2008. See Note 6 to the financial statements of Mississippi Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. Approximately $38 million of these credit arrangements contain provisions allowing two-year term loans executable at expiration and $15 million contain provisions allowing one-year term loans executable at expiration. 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. A portion of these facilities may be used to fund or provide liquidity support for commercial paper issuances to fund costs on an interim basis related to Hurricane Katrina. At June 30, 2006, Mississippi Power had $167.3 million in commercial paper, $150 million in bank notes, and no extendible commercial notes 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.

Off-Balance Sheet Financing Arrangements

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

Credit Rating Risk

Mississippi Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. However, Mississippi Power, along with all members of the Southern Company power pool, is party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas price risk management activities. At June 30, 2006, Mississippi Power’s total exposure to these types of agreements was approximately $14.2 million.

Market Price Risk

Mississippi Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2005 reporting period. However, as a result of storm damage from Hurricane Katrina, Mississippi Power expects to maintain the increase in short-term indebtedness in the coming months while issues relating to storm cost recovery are resolved, which could significantly increase its exposure to

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interest rate risk. Mississippi Power will manage this increased exposure through a number of means, including interest rate hedges, where appropriate.

     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 physical 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 value of derivative, fuel, and energy contracts at June 30, 2006 was as follows:

	Second Quarter			Year-to-Date
	2006			2006
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of period	$	9,892		$	27,106
Contracts realized or settled		(1,345	)		(4,376	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		(6,975	)		(21,158	)
Contracts at June 30, 2006	$	1,572		$	1,572

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

	Source of June 30, 2006
	Valuation Prices
	Total		Maturity
	Fair Value		Year 1			1-3 Years
	(in thousands)
Actively quoted	$	879	$	(1,441	)	$	2,320
External sources		693		693			—
Models and other methods		—		—			—
Contracts at June 30, 2006	$	1,572	$	(748	)	$	2,320

     Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to Mississippi Power’s fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through Mississippi Power’s energy cost management clause. In addition, any unrealized gains and losses on energy-related derivatives used to hedge anticipated purchases and sales are deferred in other comprehensive income. Gains and losses on derivative contracts that are not designated as hedges are recognized in the statements of income as incurred. These amounts were not material in any period presented. At June 30, 2006, the fair value gain/(loss) of derivative energy contracts was reflected in the financial statements as follows:

	Amounts
	( in thousands)
Regulatory liabilities, net	$	1,393
Accumulated other comprehensive income		192
Net income		(13	)
Total fair value gain	$	1,572

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

     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

Mississippi Power did not issue or redeem any long-term securities in the first six months of 2006. In addition to any financings that may be necessary to meet capital requirements, contractual obligations, and storm restoration costs, Mississippi Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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SOUTHERN POWER COMPANY
AND SUBSIDIARY COMPANIES

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2006			2005			2006			2005
	(in thousands)						(in thousands)
Operating Revenues:
Sales for resale —
Non-affiliates	$	62,915		$	39,703		$	114,612		$	79,807
Affiliates		129,947			109,217			217,270			221,554
Other revenues		777			306			1,586			686
Total operating revenues		193,639			149,226			333,468			302,047
Operating Expenses:
Fuel		40,245			26,730			54,504			61,274
Purchased power —
Non-affiliates		12,684			10,772			26,655			19,634
Affiliates		26,362			16,159			45,769			37,113
Other operations		16,792			13,814			34,299			26,533
Maintenance		5,519			4,939			11,404			8,198
Depreciation and amortization		15,864			13,109			30,571			25,892
Taxes other than income taxes		3,800			3,092			7,461			6,047
Total operating expenses		121,266			88,615			210,663			184,691
Operating Income		72,373			60,611			122,805			117,356
Other Income and (Expense):
Interest expense, net of amounts capitalized		(20,656	)		(19,935	)		(40,998	)		(39,179	)
Other income (expense), net		899			202			3,302			294
Total other income and (expense)		(19,757	)		(19,733	)		(37,696	)		(38,885	)
Earnings Before Income Taxes		52,616			40,878			85,109			78,471
Income taxes		20,795			15,644			33,388			30,164
Net Income	$	31,821		$	25,234		$	51,721		$	48,307

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2006		2005		2006		2005
	(in thousands)				(in thousands)
Net Income	$	31,821	$	25,234	$	51,721	$	48,307
Other comprehensive income (loss):
Changes in fair value of qualifying hedges, net of tax of $1,048, $50, $969, and $50, respectively		1,625		72		1,503		72
Reclassification adjustment for amounts included in net income, net of tax of $1,125, $1,050, $2,237, and $2,091, respectively		1,736		1,620		3,468		3,232
COMPREHENSIVE INCOME	$	35,182	$	26,926	$	56,692	$	51,611

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

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months
	Ended June 30,
	2006			2005
	(in thousands)
Operating Activities:
Net income	$	51,721		$	48,307
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		37,395			33,271
Deferred income taxes and investment tax credits, net		22,753			23,272
Deferred revenues		(24,929	)		(26,309	)
Tax benefit of stock options		—			231
Other, net		1,475			(1,205	)
Changes in certain current assets and liabilities —
Receivables		(7,141	)		(34,828	)
Fossil fuel stock		(369	)		(3,092	)
Materials and supplies		(719	)		(2,494	)
Other current assets		7,274			5,659
Accounts payable		(27,505	)		213
Accrued taxes		6,904			6,794
Accrued interest		114			49
Net cash provided from operating activities		66,973			49,868
Investing Activities:
Property additions		(94,294	)		(218,822	)
Sale of property to affiliate		15,674			—
Other		(638	)		(103	)
Net cash used for investing activities		(79,258	)		(218,925	)
Financing Activities:
Increase in notes payable, net		54,861			163,090
Redemptions — Other long term debt		(200	)		(200	)
Payment of common stock dividends		(38,850	)		—
Other		—			(958	)
Net cash provided from financing activities		15,811			161,932
Net Change in Cash and Cash Equivalents		3,526			(7,125	)
Cash and Cash Equivalents at Beginning of Period		27,631			25,241
Cash and Cash Equivalents at End of Period	$	31,157		$	18,116
Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $48 and $0 capitalized for 2006 and 2005, respectively)	$	33,891		$	31,562
Income taxes (net of refunds)	$	4,767		$	3,582

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

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	At June 30,		At December 31,
Assets	2006		2005
		(in thousands)
Current Assets:
Cash and cash equivalents	$	31,157	$	27,631
Receivables —
Customer accounts receivable		25,752		20,953
Other accounts receivable		72		93
Affiliated companies		62,940		60,505
Fossil fuel stock, at average cost		7,604		7,221
Materials and supplies, at average cost		17,416		15,628
Prepaid service agreements — current		21,102		6,178
Other prepaid expenses		2,581		4,610
Other		6,393		251
Total current assets		175,017		143,070
Property, Plant, and Equipment:
In service		2,110,923		2,030,996
Less accumulated provision for depreciation		184,699		161,358
		1,926,224		1,869,638
Construction work in progress		211,626		218,812
Total property, plant, and equipment		2,137,850		2,088,450
Deferred Charges and Other Assets:
Prepaid long-term service agreements		33,661		46,447
Other—
Affiliated		5,957		4,496
Other		16,790		20,513
Total deferred charges and other assets		56,408		71,456
Total Assets	$	2,369,275	$	2,302,976

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

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	At June 30,			At December 31,
Liabilities and Stockholder’s Equity	2006			2005
		(in thousands)
Current Liabilities:
Securities due within one year	$	1,209		$	200
Notes payable		165,553			110,692
Accounts payable —
Affiliated		36,260			65,262
Other		10,054			7,651
Accrued taxes —
Income taxes		9,326			3,477
Other		10,234			2,524
Accrued interest		29,275			29,161
Other		581			71
Total current liabilities		262,492			219,038
Long-term Debt		1,098,491			1,099,520
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		95,570			68,535
Deferred capacity revenues — Affiliated		12,890			37,534
Other—
Affiliated		9,200			10,792
Other		6,447			1,214
Total deferred credits and other liabilities		124,107			118,075
Total Liabilities		1,485,090			1,436,633
Common Stockholder’s Equity:
Common stock, par value $.01 per share —
Authorized - 1,000,000 shares
Outstanding - 1,000 shares		—			—
Paid-in capital		746,243			746,243
Retained earnings		177,396			164,525
Accumulated other comprehensive loss		(39,454	)		(44,425	)
Total common stockholder’s equity		884,185			866,343
Total Liabilities and Stockholder’s Equity	$	2,369,275		$	2,302,976

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 AND SUBSIDIARY COMPANIES

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

SECOND QUARTER 2006 vs. SECOND QUARTER 2005
AND
YEAR-TO-DATE 2006 vs. YEAR-TO-DATE 2005

OVERVIEW

Southern Power constructs, owns, and manages Southern Company’s competitive generation assets and sells electricity at market-based rates in the Super Southeast wholesale market. Southern Power continues to focus on executing its regional strategy in the Super Southeast in 2006, including potential acquisition and/or expansion opportunities. Southern Power continues to address questions at the federal regulatory level relative to market power and affiliate transactions. See FUTURE EARNINGS POTENTIAL — “FERC Matters” herein for additional detail.

     To evaluate operating results and to ensure Southern Power’s ability to meet its contractual commitments to customers, Southern Power focuses on several key performance indicators. These indicators consist of plant availability, peak season equivalent forced outage rate (EFOR), and net income. Plant availability shows the percentage of time during the year that Southern Power’s generating units are available to be called upon to generate (the higher the better), whereas the EFOR more narrowly defines the hours during peak demand times when Southern Power’s generating units are not available due to forced outages (the lower the better). For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS — OVERVIEW — “Key Performance Indicators” of Southern Power in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Earnings

Southern Power’s net income for the second quarter and year-to-date 2006 was $31.8 million and $51.7 million compared to $25.2 million and $48.3 million, respectively, for the corresponding periods of 2005. The increase in second quarter 2006 earnings of $6.6 million, or 26.1%, was primarily the result of increased demand under affiliate company PPAs due to warmer weather within the Southern Company service territory, operations of Plant Oleander acquired in June 2005, and new operations from Plant DeSoto acquired in June 2006. Year-to-date 2006 earnings were $3.4 million, or 7.1%, higher than year-to-date 2005 as a result of a full period of operations at Plant Oleander, a new PPA with Piedmont Municipal Power Authority (PMPA), effective January 1, 2006, gains on open derivative positions, and the acquisition of Plant DeSoto in June 2006. These factors were partially offset by higher operating and maintenance expenses, as well as increased depreciation expense.

     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	$	23,212		58.5		34,805			43.6
Sales for resale – affiliates		20,730		19.0		(4,284	)		(1.9	)
Fuel expense		13,515		50.6		(6,770	)		(11.0	)
Purchased power expense – non-affiliates		1,912		17.7		7,021			35.8
Purchased power expense – affiliates		10,203		63.1		8,656			23.3
Other operations expense		2,978		21.6		7,766			29.3
Maintenance expense		580		11.7		3,206			39.1
Depreciation and amortization expense		2,755		21.0		4,679			18.1
Interest expense, net of amounts capitalized		721		3.6		1,819			4.6

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

     Sales for resale—affiliates and non-affiliates. Second quarter 2006 revenues increased for sales for resale to both non-affiliates and affiliates when compared to the corresponding period in 2005. Revenues from non-affiliates increased $23.2 million primarily due to PPA sales from Plant Oleander, acquired in June 2005, and Plant DeSoto, acquired in June 2006, and revenues from affiliates increased by $20.7 million due to weather-related higher demand under PPAs with affiliates in the second quarter 2006. Year-to-date 2006 revenues from sales for resale to non-affiliates increased $34.8 million and revenues from sales for resale to affiliates decreased $4.3 million when compared to the same period in 2005. The increase in revenues from non-affiliates was primarily due to PPA sales from Plant Oleander, the new PMPA PPA, and PPA sales from Plant DeSoto. The decrease in revenues from affiliates was primarily due to lower energy sales under existing affiliate PPAs due to decreased demand as a result of milder weather in the first quarter 2006. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Power Sales Agreements” of Southern Power in Item 7 of the Form 10-K for additional information.

     Fuel expense. Fuel expense in the second quarter 2006 increased $13.5 million when compared to the same period in 2005 primarily from a 77% increase in generation at Plant Wansley under PPAs with Georgia Power and Savannah Electric. Fuel expense decreased $6.8 million year-to-date 2006 when compared to the same period in 2005 due to the effects of the first quarter 2006 decline in energy sales under affiliate PPAs. Existing PPAs generally provide that the purchasers are responsible for substantially all of the fuel costs relating to energy delivered under the PPAs; therefore, fuel expenses do not have a significant impact on net income.

     Purchased power expense—affiliates and non-affiliates. Total purchased power increased $12.1 million in the second quarter and $15.7 million year-to-date 2006 when compared to the corresponding periods in 2005. This was partially due to 7% and 8% price increases in the respective periods and volume increases from available lower cost energy from contracts with Georgia electric membership cooperatives and PMPA.

     Other operations expense.Other operations expense increased $3.0 million in the second quarter and $7.8 million year-to-date 2006 when compared to the corresponding periods in 2005 primarily due to additional administrative expense of $2.4 million and $5.2 million, respectively, and operations at Plant Oleander and Plant DeSoto. Also contributing to the increase were transmission expenses related to the PMPA PPA, which were $0.5 million and $0.8 million in the second quarter and year-to-date 2006, respectively.

     Maintenance expense.Maintenance expense increased $0.6 million in the second quarter and $3.2 million year-to-date 2006 when compared to the corresponding periods in 2005, primarily due to operations at Plant Oleander and Plant DeSoto as well as the timing of plant maintenance activities.

     Depreciation and amortization expense.Depreciation expense increased $2.8 million in the second quarter and $4.7 million year-to-date 2006 when compared to the corresponding periods in 2005, primarily as a result of additional plant in service relating to Plant Oleander and Plant DeSoto, acquired in June 2005 and June 2006, respectively. Higher depreciation rates from a new depreciation study adopted in March 2006 also contributed to the second quarter and year-to-date 2006 increases by $1.5 million and $2.0 million, respectively.

     Interest expense, net of amounts capitalized.Interest expense, net of amounts capitalized increased $0.7 million in the second quarter and $1.8 million year-to-date 2006 when compared to the same periods in 2005 primarily as the result of an increase in outstanding short-term debt incurred to finance plant acquisitions discussed above.

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

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Southern Power’s future earnings potential. Several factors affect the opportunities, challenges, and risks of Southern Power’s competitive wholesale energy business. These factors include the ability to achieve sales growth while containing costs. Another major factor is federal regulatory policy, which may impact Southern Power’s level of participation in this market. The level of future earnings depends on numerous factors, especially regulatory matters, including those related to affiliate contracts, sales, creditworthiness of customers, total generating capacity available in the Southeast, and the successful remarketing of capacity as current contracts expire. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS — 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— FUTURE EARNINGS POTENTIAL — “FERC Matters – Market-Based Rate Authority” of Southern Power in Item 7 and Note 2 to the financial statements of Southern Power under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Southern Power has authorization from the FERC to sell power to non-affiliates at market-based prices. Southern Power also has FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. On February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. A hearing before an ALJ originally scheduled for March 2006 has been held in abeyance to allow the parties to explore settlement. Any new market-based rate transactions in Southern Company’s retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. Such sales through May 27, 2006, the end of the 15-month refund period, were approximately $0.8 million for Southern Power. In the event that the FERC’s default mitigation measures for entities that are found to have market power are ultimately applied, Southern Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The 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.

     In addition, in May 2005, the FERC initiated an investigation to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing. The FERC established a new 15-month refund period related to this expanded investigation. Any new market-based rate transactions involving any Southern Company subsidiary will be subject to refund to the extent the FERC orders lower rates as a result of this new investigation, with the refund period beginning July 19, 2005. The impact of such sales involving Southern Power through June 30, 2006 is not expected to exceed $2.3 million, of which $0.7 million relates to sales inside the retail service territory discussed above. The FERC also directed that this expanded proceeding be held in abeyance pending the outcome of the proceeding on the IIC discussed below.

     Southern Power believes that there is no meritorious basis for this proceeding and is vigorously defending itself in this matter. However, the final outcome of this matter, including any remedies to be applied in the event of an adverse ruling in this proceeding, cannot now be determined.

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

Intercompany Interchange Contract

Also in May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the power pool of Southern Company is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (2) whether any parties to the IIC have violated the FERC’s standards of conduct applicable to utility companies that are transmission providers, and (3) whether Southern Company’s code of conduct defining Southern Power as a “system company” rather than a “marketing affiliate” is just and reasonable. In connection with the formation of Southern Power, the FERC authorized Southern Power’s inclusion in the IIC in 2000. The FERC also previously approved Southern Company’s code of conduct. The FERC order directs that the ALJ who presided over a proceeding involving approval of PPAs between Southern Power and Georgia Power and Savannah Electric be assigned to preside over the hearing in this proceeding and that the testimony and exhibits presented in that proceeding be preserved to the extent appropriate. Effective July 19, 2005, revenues from transactions under the IIC involving any Southern Company subsidiaries will be subject to refund to the extent the FERC orders any changes to the IIC. On April 11, 2006, Southern Company, Calpine Corporation, Coral Energy, and Dalton Utilities filed a settlement offer that would resolve the proceeding, and does not require any refunds. The ALJ has certified the settlement to the FERC, where it is pending. Since the offer is pending, the final outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS— FUTURE EARNINGS POTENTIAL — “FERC Matters – Intercompany Interchange Contract” of Southern Power in Item 7 and Note 2 to the financial statements of Southern Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for additional information.

Franklin Unit 3 Construction Activities

See Note 2 to the financial statements of Southern Power under “Plant Franklin Unit 3 Construction Project” in Item 8 of the Form 10-K for information on the suspension of construction activities. On May 6, 2006, Southern Power signed a PPA with Progress Ventures, Inc. for 621 MW of capacity from Plant Franklin. The PPA term is from 2009 through 2015. To provide this capacity, Southern Power expects to complete construction of Franklin Unit 3 at a total cost of approximately $351 million, of which $172 million had been spent as of June 30, 2006. Construction is expected to be complete in 2008.

Plant Acquisitions

On May 31, 2006, Southern Power acquired all of the outstanding membership interests of DeSoto County Generating Company, LLC (DeSoto) from Progress Genco Ventures LLC, a subsidiary of Progress Energy, Inc. The results of DeSoto’s operations have been included in Southern Power’s consolidated financial statements since that date. Southern Power’s acquisition of the membership interests in DeSoto was pursuant to an agreement dated May 8, 2006 for an aggregate purchase price of $79.2 million. DeSoto owns a dual-fired generating plant near Arcadia, Florida with a nameplate capacity of 340 MW. The plant’s capacity and associated energy is sold under PPAs with Florida Power & Light Company that expire in 2007.

     Also in May 2006, Southern Power entered into an agreement to purchase all of the outstanding membership interests of Rowan County Power, LLC (Rowan) from another subsidiary of Progress Energy, Inc. Rowan owns a dual-fired generating plant near Salisbury, North Carolina with a nameplate capacity of 985 MW. The purchase price is $325 million and, subject to regulatory approval, the acquisition is expected to be completed in the third quarter 2006.

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

Other Matters

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Power Sales Agreements” of Southern Power in Item 7 of the Form 10-K for additional information on long-term 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 the counterparty does not meet certain rating or financial requirements. The PPAs are expected to provide Southern Power with a stable source of revenue during their respective terms.

     See MANAGEMENT’S DISCUSSION AND ANALYSIS — 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. While Southern Power’s PPAs generally contain provisions that permit charging the counterparty with some of the new costs incurred as a result of changes in environmental laws and regulations, the full impact of any such regulatory or legislative changes cannot be determined at this time.

     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 such as opacity and other air quality standards, 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 potential litigation against Southern 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 Southern Power’s financial statements.

     See Note (B) to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

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.

New Accounting Standards

Income Taxes

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” This interpretation requires that tax benefits must be “more likely than not” of being sustained in order to be recognized. The provisions of FIN 48 must be applied to all tax positions beginning January 1, 2007. Southern Power is currently assessing the impact of FIN 48. The impact on Southern Power’s financial statements has not yet been determined.

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

FINANCIAL CONDITION AND LIQUIDITY

Overview

Southern Power’s financial condition remained stable at June 30, 2006. Major changes in Southern Power’s financial condition for the six months ended June 30, 2006 as compared to the same period in 2005 included the payment of $38.8 million in dividends to Southern Company, the completion of the sale of Cherokee Falls Development of South Carolina LLC and all of its assets at cost to Southern Company’s nuclear development affiliate, and the acquisition of Plant DeSoto in June 2006 which contributed an additional $79.2 million of utility plant. This acquisition was financed with the issuance of additional short-term commercial paper. During the second quarter 2006, Southern Power also entered into an agreement to acquire all of the outstanding membership interests of Rowan for $325 million. Rowan owns a dual-fired generating plant near Salisbury, North Carolina with a nameplate capacity of 1,048 MW. Subject to regulatory approvals, the acquisition is expected to be completed in the third quarter 2006.

Capital Requirements and Contractual Obligations

See 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.

Sources of Capital

Southern Power may use operating cash flows, external funds, or capital contributions from Southern Company to finance any new projects, acquisitions, and ongoing capital requirements. Southern Power expects to generate external funds from commercial paper, the issuance of unsecured senior debt, preferred equity securities, or the utilization of credit arrangements from banks. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Sources of Capital” of Southern Power in Item 7 of the Form 10-K for additional information.

     At June 30, 2006, Southern Power’s current liabilities exceeded current assets due to the use of short-term debt as a funding source to finance the Plant Oleander and Plant Desoto acquisitions and for general corporate needs. At June 30, 2006, Southern Power had approximately $31.2 million of cash and cash equivalents to meet short-term cash needs and contingencies. To insure liquidity and capital resource requirements, Southern Power had a $400 million committed credit facility with banks with a 2010 final maturity. Subsequent to June 30, 2006, Southern Power replaced that facility with a $400 million credit agreement that expires in 2011. Proceeds from borrowings under this arrangement may be used for working capital and general corporate purposes as well as liquidity support for Southern Power’s commercial paper program. At June 30, 2006, Southern Power had approximately $166 million of commercial paper outstanding. Amounts drawn under the commercial paper program may be used to finance acquisition and construction costs related to electric generating facilities and for general corporate purposes. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Sources of Capital” of Southern Power in Item 7 of the Form 10-K for additional information.

Credit Rating Risk

Southern Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB and Baa2 or to BBB- or Baa3 or below. Generally, collateral may be provided with a Southern Company guaranty, letter of credit, or cash. These contracts are primarily for physical electricity purchases and sales. At June 30, 2006, the maximum potential collateral requirements at a BBB and Baa2 rating were approximately $9 million and at a BBB- or Baa3 rating were approximately $232 million. The

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

maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $414 million. Southern Power, along with all members of the Southern Company power pool, is also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas price risk management activities. At June 30, 2006, Southern Power’s total exposure to these types of agreements was approximately $14.2 million.

Market Price Risk

Southern Power is exposed to market risks, including changes in interest rates, certain energy-related commodity prices, and, occasionally, currency exchange rates. To manage the volatility attributable to these exposures, Southern Power nets the exposures to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to Southern Power’s policies in areas such as counterparty exposure and hedging practices. Southern Power’s policy is that derivatives are to be used primarily for hedging purposes. Derivative positions are monitored using techniques that include market valuation and sensitivity analysis.

     Southern Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2005 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.

     The fair value of changes in derivative energy contracts at June 30, 2006 was as follows:

	Second Quarter			Year-to-Date
	2006			2006
	Changes			Changes
	Fair Value
	(in thousands)
Contracts beginning of year	$	2,240		$	223
Contracts realized or settled		(527	)		(471	)
New contracts at inception		—			—
Changes in valuation techniques		—			—
Current period changes (a)		2,682			4,643
Contracts at June 30, 2006	$	4,395		$	4,395

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

     At June 30, 2006, the sources of the valuation prices were as follows:

	Total		Maturity
	Fair Value		Year 1		1-3 Years
	(in thousands)
Actively quoted	$	2,971	$	2,965	$	6
External sources		1,424		1,424		—
Models and other methods		—		—		—
Contracts end of quarter	$	4,395	$	4,389	$	6

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

     Unrealized pre-tax gains and losses on electric contracts used to hedge anticipated sales, and gas contracts used to hedge anticipated purchases and sales, are deferred in Other Comprehensive Income. Gains and losses on contracts that are not designated as hedges are recognized in the statements of income as incurred.

     At June 30, 2006, the fair value gain / (loss) of derivative energy contracts was as follows:

	Amounts
	(in thousands)
Net Income	$	3,108
Accumulated other comprehensive income		1,287
Total fair value gain	$	4,395

     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 5 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.

Financing Activities

In the second quarter, Southern Power entered into a derivative transaction to hedge the interest rate risk of a planned future financing. The derivative has a total notional amount of $200 million and will be terminated at the time of the future financing, with any resulting gain or loss amortized over a 10-year period. For further details, see Note (F) to the Condensed Financial Statements herein.

107

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
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES

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, L, M
Alabama Power	A, B, C, D, F, G, J
Georgia Power	A, B, C, D, F, G, H
Gulf Power	A, B, C, D, F, G, K
Mississippi Power	A, B, C, D, F, G, I
Southern Power	A, B, F, L

108

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

NOTES TO THE CONDENSED FINANCIAL STATEMENTS:

(A)	The condensed quarterly financial statements of the registrants included herein have been prepared by each registrant, without audit, pursuant to the rules and regulations of the SEC. The condensed balance sheets as of December 31, 2005 have been derived from the audited financial statements. 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, 2006 and 2005. 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 Quarterly Report on 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 Southern Company and the retail operating companies and Note 2 to the financial statements of Southern Power in Item 8 of the Form 10-K for information relating to various lawsuits and other contingencies.
	NEW SOURCE REVIEW ACTIONS
	New Source Review Litigation
	See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters – New Source Review Actions” of Southern Company and Alabama Power in Item 7 and Note 3 to the financial statements of Southern Company and Alabama Power under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding a civil action brought by the EPA alleging that Alabama Power had violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of its coal-fired generating facilities. On June 19, 2006, the U.S. District Court for the Northern District of Alabama entered a consent decree between Alabama Power and the EPA, resolving alleged NSR violations at Plant Miller. The consent decree requires Alabama Power to pay $100,000 to resolve the government’s claim for a civil penalty and donate $4.9 million of sulfur dioxide emission allowances to a nonprofit charitable organization. As a result, Alabama Power has recognized $5 million in other income (expense), net related to the consent decree. The consent decree also formalizes specific emissions reductions to be accomplished by Alabama Power, consistent with other Clean Air Act programs that require emissions reductions. On May 31, 2006, Alabama Power filed a motion for summary judgment and entry of a final order on claims related to Plants Barry, Gaston, Gorgas, and Greene County, based on the district court’s previous ruling regarding the correct legal tests and stipulations entered between the parties. The final resolution of these claims is dependent on further court action and subject to possible appeals and, therefore, cannot be determined at this time.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

New Source Review Reform Rules

On October 20, 2005, the EPA published a proposed rule clarifying the test for determining when an emissions increase is subject to the NSR requirements. On March 17, 2006, the U.S. Court of Appeals for the District of Columbia Circuit vacated the EPA’s proposed rule which sought to clarify the scope of the existing Routine Maintenance, Repair, and Replacement Exclusion. Because this rule was not yet in effect, the court’s ruling is not anticipated to have any impact on Southern Company or its subsidiaries.

BIRMINGHAM AREA EIGHT-HOUR OZONE ATTAINMENT REDESIGNATION

On May 12, 2006, the EPA published a final rule approving the State of Alabama’s request to redesignate the Birmingham eight-hour ozone non-attainment area to attainment under the standard. The EPA also approved a revision to the Alabama state implementation plan, containing a maintenance plan to ensure the area’s continued compliance with the standard and to address any future exceedances of the standard. The EPA’s redesignation determination became effective on June 12, 2006.

PLANT WANSLEY ENVIRONMENTAL LITIGATION

On March 30, 2006, the U.S. Court of Appeals for the Eleventh Circuit ruled in favor of Georgia Power on its appeal and reversed the district court’s order regarding certain alleged opacity violations at Plant Wansley. The court of appeals remanded the case to the U.S. District Court for the Northern District of Georgia for further proceedings consistent with its decision. The ultimate outcome of this matter cannot now be determined. See Note 3 to the financial statements of Southern Company and Georgia Power under “Environmental Matters - Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K for additional information.

MIRANT MATTERS

Mirant was an energy company with businesses that included independent power projects and energy trading and risk management companies in the U.S. and selected other countries. It was a wholly-owned subsidiary of Southern Company until its initial public offering in October 2000. In April 2001, Southern Company completed a spin-off to its shareholders of its remaining ownership, and Mirant became an independent corporate entity. In July 2003, Mirant filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code. See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Bankruptcy” in Item 8 of the Form 10-K for information regarding Southern Company’s 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.

Mirant Bankruptcy Litigation

See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Bankruptcy Litigation” in Item 8 of the Form 10-K for information regarding the complaint filed in June 2005 against Southern Company alleging fraudulent activities and payments of illegal dividends prior to the spin-off. In May 2006, Southern Company filed a motion for summary judgment on all claims in the case. The ultimate outcome of this matter cannot be determined at this time.

Mirant Securities Litigation

See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Securities Litigation” in Item 8 of the Form 10-K for information regarding a class action lawsuit that several Mirant shareholders (plaintiffs) originally filed against Mirant and certain Mirant officers in May 2002. In November 2002, Southern Company, certain former and current senior officers of Southern Company,

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

and 12 underwriters of Mirant’s initial public offering were added as defendants. On March 24, 2006, the plaintiffs filed a Motion for Reconsideration requesting that the court vacate that portion of its July 14, 2003 order dismissing the plaintiffs’ claims based upon Mirant’s alleged improper energy trading and marketing activities involving the California energy market. Southern Company and the other defendants have opposed the plaintiffs’ motion. The plaintiffs have also stated that they intend to request that the court grant leave for them to amend the complaint to add allegations based upon claims asserted against Southern Company in the Mirant bankruptcy litigation. See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Bankruptcy Litigation” in Item 8 of the Form 10-K for additional information. The ultimate outcome of these matters cannot be determined at this time.

Southern Company Employee Savings Plan Litigation

See Note 3 to the financial statements of Southern Company under “Mirant Matters – Southern Company Employee Savings Plan Litigation” in Item 8 of the Form 10-K for information related to the class action complaint filed under ERISA on behalf of a purported class of participants in or beneficiaries of The Southern Company Employee Savings Plan at any time since April 2, 2001 and whose plan accounts included investments in Mirant common stock. In April 2006, the U.S. District Court for the Northern District of Georgia granted summary judgment in favor of Southern Company and all individually named defendants in the case. The plaintiff has filed an appeal of the ruling. The final outcome of this matter cannot be determined at this time.

FERC MATTERS

Market-Based Rate Authority

See Note 3 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power under “FERC Matters – Market-Based Rate Authority” and Note 2 to the financial statements of Southern Power under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Each of the retail operating companies and Southern Power has authorization from the FERC to sell power to non-affiliates at market-based prices. The retail operating companies and Southern Power also have FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. On February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. A hearing before an ALJ originally scheduled for March 2006 has been held in abeyance to allow the parties to explore settlement. Any new market-based rate transactions in Southern Company’s retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. Such sales through May 27, 2006, the end of the 15-month refund period, were approximately $20 million for the Southern Company system. In the event that the FERC’s default mitigation measures for entities that are found to have market power are ultimately applied, the retail operating companies and Southern Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The 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.

In addition, in May 2005, the FERC initiated an investigation to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing. The FERC established a new 15-month refund period related to this expanded investigation. Any new market-based rate transactions involving any Southern Company subsidiary will be subject to refund to the extent the FERC orders lower rates as a result of this new investigation, with the refund period beginning July 19, 2005. The impact of all such

111

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

sales through June 30, 2006 is not expected to exceed $42.6 million, of which $16.8 million relates to sales inside the retail service territory discussed above. The FERC also directed that this expanded proceeding be held in abeyance pending the outcome of the proceeding on the IIC discussed below.

Southern Company and its subsidiaries believe that there is no meritorious basis for this proceeding and are vigorously defending themselves in this matter. However, the final outcome of this matter, including any remedies to be applied in the event of an adverse ruling in this proceeding, cannot now be determined.

Intercompany Interchange Contract

Also in May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the power pool of Southern Company is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (2) whether any parties to the IIC have violated the FERC’s standards of conduct applicable to utility companies that are transmission providers, and (3) whether Southern Company’s code of conduct defining Southern Power as a “system company” rather than a “marketing affiliate” is just and reasonable. In connection with the formation of Southern Power, the FERC authorized Southern Power’s inclusion in the IIC in 2000. The FERC also previously approved Southern Company’s code of conduct. The FERC order directs that the ALJ who presided over a proceeding involving approval of PPAs between Southern Power and Georgia Power and Savannah Electric be assigned to preside over the hearing in this proceeding and that the testimony and exhibits presented in that proceeding be preserved to the extent appropriate. Effective July 19, 2005, revenues from transactions under the IIC involving any Southern Company subsidiaries will be subject to refund to the extent the FERC orders any changes to the IIC. On April 11, 2006, Southern Company, Calpine Corporation, Coral Energy, and Dalton Utilities filed a settlement offer that would resolve the proceeding, and does not require any refunds. The ALJ has certified the settlement to the FERC, where it is pending. Since the offer is pending, the final outcome of this matter cannot now be determined.See Note 3 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power under “FERC Matters – Intercompany Interchange Contract” and Note 2 to the financial statements of Southern Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for additional information.

INCOME TAX MATTERS

Leveraged Lease Transactions

See Note 3 to the financial statements of Southern Company under “Income Tax Matters” in Item 8 of the Form 10-K. The IRS challenged Southern Company’s deductions related to three international lease transactions (so-called SILO or sale-in-lease-out transactions), in connection with its audit of Southern Company’s 2000 and 2001 tax returns. If the IRS is ultimately successful in disallowing the tax deductions related to these transactions beginning with the 2000 tax year, Southern Company could be subject to additional interest charges of up to $45 million. The IRS had initially proposed a penalty of approximately $16 million, which has now been withdrawn. Discussions with the IRS have ended without resolution. In the third quarter 2006, Southern Company will pay the full amount of the disputed tax and the applicable interest and will file a claim for refund. The disputed tax amount is $79 million and the related interest is approximately $27 million. Southern Company has accounted for this payment as a deposit, and recorded the liability in the second quarter 2006. This payment will close the issue with the IRS and Southern Company will then proceed to litigate this matter.

In July 2006, the FASB released new guidance for the accounting for both leveraged leases and uncertain tax positions that will be effective beginning in 2007. For the lease-in-lease-out transaction settled with the IRS in February 2005, the new standard for leveraged leases (FSP 13-2) will require Southern

112

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

Company to change the timing of income recognized under the lease, including a cumulative effect upon adoption of the change. Southern Company estimates such cumulative effect will reduce Southern Company’s retained earnings by approximately $17 million. The impact of these proposed changes related to the SILO transactions would be dependent on the outcome of pending litigation, but could be significant, and potentially material, to Southern Company’s net income. Southern Company believes these transactions are valid leases for U.S. tax purposes and the related deductions are allowable. Southern Company is continuing to pursue resolution of these matters through litigation; however, the ultimate outcome of these matters cannot now be determined.

Synthetic Fuel Tax Credits

Southern Company has made investments in two entities that produce synthetic fuel and receive tax credits under Section 45K (formerly Section 29) of the IRC. In accordance with Section 45K of the IRC, these tax credits are subject to limitation as the annual average price of oil (as determined by the DOE) increases over a specified, inflation-adjusted dollar amount published in the spring of the subsequent year. Southern Company, along with its partners in these investments, has continued to monitor oil prices. Reserves against these tax credits of $36 million have been recorded in the first half of 2006 due to projected phase-outs of the credits in 2006 as a result of current and projected future oil prices. See Note (J) herein for additional information regarding the impact of these reserves on the effective tax rate.

On May 11, 2006, production at one of the synthetic fuel investments was idled due to continued uncertainty over the value of tax credits. In addition, Southern Company entered into an agreement in June 2006 which terminated its ownership interest in its other synthetic fuel investment, effective July 1, 2006. As a result of these actions and the projected continued phase out of tax credits because of high oil prices, the investments in these two synthetic fuel entities were considered fully impaired and approximately $15.3 million was written off at June 30, 2006. This write-off is reflected in the line item “Impairment loss on equity method investments” on Southern Company’s income statement herein.

SOUTHERN COMPANY GAS SALE

On January 4, 2006, Southern Company completed the sale of substantially all the assets of Southern Company Gas, its competitive retail natural gas marketing subsidiary, including natural gas inventory, accounts receivable, and customer list, to Gas South, LLC, an affiliate of Cobb Electric Membership Corporation. Southern Company Gas’ sale of such assets was pursuant to a Purchase and Sale Agreement dated November 18, 2005 between Southern Company Gas and Gas South. The gross proceeds from the sale were approximately $131 million. This sale had no material impact on Southern Company’s net income for the six months ended June 30, 2006. As a result of the sale, Southern Company’s financial statements and related information reflect Southern Company Gas as discontinued operations.

GEORGIA POWER FAIR LABOR STANDARDS ACT LITIGATION

On February 23, 2006, approximately 170 current and former employees of Georgia Power filed a collective action against Georgia Power in the U.S. District Court for the Northern District of Georgia, alleging that Georgia Power violated the Fair Labor Standards Act by failing to properly compensate certain employees (primarily linemen and crew leaders whose work is governed by a union collective bargaining agreement) while the employees were subject to being called back into work under on-call work rules and regulations. The plaintiffs are seeking overtime compensation for on-call time for the three-year period prior to the filing of the action, liquidated damages in an amount equal to unpaid overtime compensation they say they have been denied, declaratory and injunctive relief, and attorney’s fees and expenses of litigation. Georgia Power believes that it has complied with the provisions of the Fair Labor Standards Act and is vigorously defending itself in this action. The ultimate outcome of this matter cannot now be determined.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(C)	See Note 1 to the financial statements of Southern Company and the retail operating companies under “Stock Options” and Note 8 to the financial statements of Southern Company and the retail operating companies 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 and the retail operating companies have not modified any of their stock option plans or outstanding stock options, nor have they changed the underlying valuation assumptions used in valuing the stock options. Employee stock options vest proportionately over a three-year service period, which each company recognizes on a straight-line basis. Prior to January 1, 2006, Southern Company accounted for options granted in accordance with Accounting Principles Board Opinion No. 25; thus, no compensation expense was recognized because the exercise price of all options granted equaled the fair market value on the date of the grant.
	Effective January 1, 2006, Southern Company and the retail operating companies adopted the fair value recognition provisions of FASB Statement No. 123(R), using the modified prospective method. Under that method, compensation cost recognized in the six-month period ended June 30, 2006 is recognized as the requisite service is rendered and includes: (a) compensation cost for the portion of share-based awards granted prior to and that are outstanding as of January 1, 2006, for which the requisite service has not been rendered, based on the grant-date fair value of those awards as calculated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based awards granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement No. 123(R). Results for prior periods have not been restated.
	For Southern Company and each of the retail operating companies, the adoption of Statement No. 123(R) has resulted in a reduction in earnings from continuing operations before income taxes, net income, and operating cash flows as follows (in millions):

	Three months ended June 30, 2006						Six months ended June 30, 2006
	Earnings
	Before						Earnings
	Income		Net		Operating		Before Income		Net		Operating
	Taxes		Income		Cash Flows1		Taxes		Income		Cash Flows1
Alabama Power	$	0.4	$	0.2	$	0.2	$	4.0	$	2.4	$	0.4
Georgia Power		0.6		0.4		0.2		4.3		2.7		0.6
Gulf Power		0.1		0.1		0.1		0.7		0.5		0.2
Mississippi Power		0.1		—		—		0.8		0.5		—
Southern Company	$	3.1	$	1.9	$	0.5	$	22.2	$	13.7	$	2.5

¹ Financing cash flows have increased by the stated amount for Southern Company and each retail operating company, respectively.

Basic and diluted earnings per share from continuing operations for the three-month period ended June 30, 2006 would have remained as reported if Southern Company had not adopted Statement No. 123(R). For the six-month period ended June 30, 2006, basic and diluted earnings per share from continuing operations would have been $0.89 and $0.89, respectively, compared to reported basic and diluted earnings per share of $0.87 and $0.87, respectively.

114

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

For the periods prior to the adoption of Statement No. 123(R), the pro forma impact of fair-value accounting for options granted on earnings from continuing operations and basic and diluted earnings per share is as follows:

	Three months ended June 30, 2005						Six months ended June 30, 2005
			Options						Options
	As		Impact		Pro		As		Impact		Pro
	Reported		After Tax		Forma		Reported		After Tax		Forma
Net income after dividends on preferred stock (in millions):
Alabama Power	$	121.5	$	0.2	$	121.3	$	214.9	$	2.4	$	212.5
Georgia Power		157.5		0.3		157.2		299.9		2.7		297.2
Gulf Power		21.5		0.1		21.4		36.1		0.5		35.6
Mississippi Power		25.7		—		25.7		42.6		0.5		42.1
Southern Company	$	388.9	$	1.7	$	387.2	$	706.4	$	13.7	$	692.7
Earnings per share (Dollars):
Basic	$	0.52			$	0.52	$	0.95			$	0.93
Diluted	$	0.52			$	0.52	$	0.94			$	0.92

The estimated fair values of stock options granted in 2006 and 2005 were derived using the Black-Scholes stock option pricing model. Expected volatility is based on historical volatility of Southern Company’s stock over a period equal to the expected term. Southern Company uses historical exercise data to estimate the expected term that represents the period of time that options granted to employees are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant that covers the expected term of the stock options. The following table shows the assumptions used in the pricing model and the weighted average grant-date fair value of stock options granted:

	Three months ended June 30						Six months ended June 30
	2006			2005			2006			2005
Expected volatility		16.7	%		17.7	%		16.9	%		17.9	%
Expected term (in years)		5			5			5			5
Interest rate		5.0	%		3.8	%		4.6	%		3.9	%
Dividend yield		4.8	%		4.5	%		4.4	%		4.4	%
Weighted average grant-date fair value	$	3.82		$	3.78		$	4.15		$	3.90

Southern Company and each of the retail operating companies’ activity under the stock option plan as of June 30, 2006, and changes during the six months then ended, is summarized below:

	Southern			Alabama			Georgia			Gulf			Mississippi
Shares Subject to Option	Company			Power			Power			Power			Power
Outstanding at December 31, 2005		31,347,355			5,227,985			6,705,891			1,099,549			1,444,438
Granted		6,633,437			1,147,804			1,337,949			240,825			253,762
Exercised		(849,420	)		(156,316	)		(200,929	)		(48,607	)		(20,797	)
Canceled		(135,254	)		(4,136	)		(2,786	)		—			—
Outstanding at June 30, 2006		36,996,118			6,215,337			7,840,125			1,291,767			1,677,403
Exercisable at June 30, 2006		24,119,197			3,986,933			5,198,898			821,990			1,180,538

115

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

The number of stock options vested and expected to vest at June 30, 2006 is not significantly different from the number of stock options outstanding as detailed above.

	Southern		Alabama		Georgia		Gulf		Mississippi
Weighted-Average Exercise Price	Company		Power		Power		Power		Power
Outstanding at December 31, 2005	$	27.13	$	27.09	$	26.82	$	27.07	$	26.86
Granted		33.81		33.81		33.81		33.81		33.81
Exercised		22.87		23.24		22.92		21.94		24.25
Canceled		31.30		24.52		32.23		—		—
Outstanding at June 30, 2006	$	28.41	$	28.43	$	28.11	$	28.52	$	27.95
Exercisable at June 30, 2006	$	26.10	$	26.03	$	25.77	$	26.11	$	25.94

At June 30, 2006	Southern		Alabama		Georgia		Gulf		Mississippi
(in millions unless stated)	Company		Power		Power		Power		Power
Weighted-Average Remaining Contractual Term – Outstanding (in years)		6.8		7.1		6.8		7.1		6.4
Weighted-Average Remaining Contractual Term – Exercisable (in years)		5.7		6.0		5.7		6.0		5.3
Aggregate Intrinsic Value – Outstanding	$	150.7	$	25.3	$	34.2	$	5.1	$	7.5
Aggregate Intrinsic Value – Exercisable	$	145.4	$	24.3	$	33.1	$	5.0	$	7.3
Six-month period
Total intrinsic value of options exercised during 2006	$	9.3	$	1.4	$	2.3	$	0.6	$	0.2
Total intrinsic value of options exercised during 2005	$	98.8	$	16.1	$	14.6	$	3.2	$	3.9

Southern Company and each of the retail operating companies’ total pre-tax compensation cost related to non-vested awards is expected to be recognized over the remaining three-year service period from the grant date and is approximately (in millions):

	Southern		Alabama		Georgia		Gulf		Mississippi
	Company		Power		Power		Power		Power
Unrecognized compensation	$	15.2	$	2.2	$	3.5	$	0.7	$	0.6

Southern Company has a policy of issuing shares to satisfy share option exercises. Historically, this has been satisfied by the issuance of new common shares; however, during January 2006, Southern Company started reissuing treasury shares that it had previously repurchased. Cash received from issuances related to option exercise under the share-based payment arrangements for the six-month periods ended June 30, 2006 and 2005 was $19.5 million and $147.7 million, respectively.

116

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(D) See Note 1 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power 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 (in millions).

	Balance at		Liabilities		Liabilities						Cash Flow			Balance at
	12/31/05		Incurred		Settled			Accretion			Revisions			6/30/06
Alabama Power	$	446.3	$	—	$	(2.3	)	$	14.8		$	—		$	458.8
Georgia Power		627.5		—		(0.4	)		19.9			—			647.0
Gulf Power		15.3		—		—			(2.9	)		—			12.4
Mississippi Power		15.4		—		—			0.5			(0.2	)		15.7
Southern Company	$	1,117.3	$	—	$	(2.8	)	$	32.7		$	(0.2	)	$	1,147.0

(E) For Southern Company, the only difference in computing basic and diluted earnings per share is attributable to exercised options and outstanding options under the stock option plan. See Note 8 to the financial statements of Southern Company in Item 8 of the Form 10-K for further information on the stock option plan. The effect of the stock options was determined using the treasury stock method. Shares used to compute diluted earnings per share are as follows (in thousands):

	Three Months		Three Months		Six Months		Six Months
	Ended		Ended		Ended		Ended
	June 30, 2006		June 30, 2005		June 30, 2006		June 30, 2005
As reported shares		742,515		746,823		742,355		745,424
Effect of options		3,872		4,193		4,370		3,936
Diluted shares		746,387		751,016		746,725		749,360

(F) See Note 6 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power and Note 5 to the financial statements of Southern Power under “Financial Instruments” in Item 8 of the Form 10-K. At June 30, 2006, the fair value gains/(losses) of derivative energy contracts was reflected in the financial statements as follows (in millions):

	Southern			Alabama			Georgia			Gulf			Mississippi		Southern
	Company			Power			Power			Power			Power		Power
Regulatory (assets)/liabilities, net	$	(60.2	)	$	(29.7	)	$	(24.2	)	$	(6.0	)	$	1.4	$	—
Accumulated other comprehensive income (loss)		1.6			0.1			—			—			0.2		1.3
Net income (loss)		1.0			(0.1	)		(0.1	)		—			—		3.1
Total fair value gain/(loss)	$	(57.6	)	$	(29.7	)	$	(24.3	)	$	(6.0	)	$	1.6	$	4.4

For the six months ended June 30, 2006, the unrealized gain recognized in income for derivative energy contracts that are not hedges was $3.0 million for Southern Power and was immaterial for the other registrants, and for the six months ended June 30, 2005, the amounts were immaterial for all registrants.

The amounts reclassified from other comprehensive income to fuel expense for the three months and six months ended June 30, 2006 were immaterial for each registrant. Additionally, no material ineffectiveness has been recorded in net income for the three months and six months ended June 30, 2006 and 2005. The amounts expected to be reclassified from other comprehensive income to revenue for the next twelve-month period to June 30, 2007 is a $1.4 million gain for Southern Power and is immaterial for the other registrants.

117

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

In June 2006, Southern Company entered into derivative transactions with an initial premium received of $1.6 million to reduce its exposure to a potential phase-out of certain income tax credits in 2006. In accordance with Section 45K of the IRC, these tax credits are subject to limitation as the annual average price of oil increases. At June 30, 2006, the fair value of the derivatives was $2.3 million. For the three months and six months ended June 30, 2006, the fair value gain recognized in income to mark the transactions to market was $3.9 million. For the three months and six months ended June 30, 2005, the fair value expense recognized in income for similar derivative transactions was $1.2 million.

At June 30, 2006, Southern Company had $2.8 billion notional amount of interest rate derivatives outstanding with net fair value gains of $37.9 million as follows:

Fair Value Hedges

							Fair Value Gain
						Hedge	(Loss)
	Notional	Fixed Rate			Variable Rate	Maturity	June 30, 2006
	Amount	Received			Paid	Date	(in millions)
Southern Company	$400 million		5.30	%	6-month LIBOR (in arrears)less 0.10%	February 2007	$	(1.2	)

Cash Flow Hedges

							Fair Value
			Weighted Average			Hedge	Gain (Loss)
	Notional	Variable Rate	Fixed Rate			Maturity	June 30, 2006
	Amount	Received	Paid			Date	(in millions)
Alabama Power	$536 million	BMA Index		2.01	%	January 2007	$	6.4
Alabama Power*	$100 million	3-month LIBOR		6.15	%	November 2017		0.6
Alabama Power*	$100 million	3-month LIBOR		6.15	%	December 2017		0.7
Georgia Power*	$300 million	3-month LIBOR		5.75	%	July 2037		12.9
Georgia Power**	$400 million	Floating		3.20 – 3.85	%	December 2007		1.7
Georgia Power	$225 million	3-month LIBOR		5.29	%	March 2017		7.4
Georgia Power	$150 million	3-month LIBOR		5.30	%	December 2016		4.9
Georgia Power	$300 million	1-month LIBOR		2.67	%	June 2007		3.3
Gulf Power	$80 million	3-month LIBOR		5.82	%	October 2016		(0.5	)
Savannah Electric***	$14 million	BMA Index		2.50	%	December 2007		0.3
Southern Power	$200 million	3-month LIBOR		5.64	%	September 2016		1.4

*	Interest rate collar (showing only the rate cap percentage)
**	Series of interest rate collars with variable rate based on one-month LIBOR (showing range of rate caps)
***	On July 1, 2006, this transaction was assumed by Georgia Power as part of the merger of Savannah Electric into Georgia Power.

The amount of ineffectiveness that has been recorded in net income for the three months and six months ended June 30, 2006 was a gain of $2.1 million. This gain related to a discontinued cash flow hedge of interest exposure on an expected debt issuance at Savannah Electric. Due to the merger of Savannah Electric into Georgia Power, this debt was not issued.

118

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

For the next twelve-month period ending June 30, 2007, the following table reflects the estimated pre-tax gains/(losses) that will be reclassified from Accumulated Other Comprehensive Income to Interest Expense.

	(in millions)
Alabama Power	$	6.3
Georgia Power		2.9
Gulf Power		(0.4	)
Southern Power		(12.2	)
Southern Company	$	(3.1	)

(G) See Note 2 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power 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 ended June 30, 2006 and 2005 are as follows (in millions):

	Southern			Alabama			Georgia			Gulf			Mississippi
PENSION PLANS	Company			Power			Power			Power			Power
Three Months Ended June 30, 2006
Service cost	$	38		$	9		$	13		$	1		$	2
Interest cost		75			19			28			4			4
Expected return on plan assets		(114	)		(35	)		(46	)		(5	)		(5	)
Recognized net (gain)/loss		4			1			1			—			—
Net amortization		7			3			2			1			—
Net cost (income)	$	10		$	(3	)	$	(2	)	$	1		$	1
Six Months Ended June 30, 2006
Service cost	$	76		$	18		$	25		$	3		$	4
Interest cost		150			38			56			7			7
Expected return on plan assets		(228	)		(70	)		(91	)		(10	)		(9	)
Recognized net (gain)/loss		8			2			2			—			—
Net amortization		14			5			4			1			—
Net cost (income)	$	20		$	(7	)	$	(4	)	$	1		$	2
Three Months Ended June 30, 2005
Service cost	$	35		$	8		$	11		$	2		$	2
Interest cost		72			19			27			3			3
Expected return on plan assets		(116	)		(35	)		(46	)		(5	)		(5	)
Recognized net (gain)/loss		3			1			1			—			—
Net amortization		6			2			2			—			—
Net cost (income)	$	—		$	(5	)	$	(5	)	$	—		$	—
Six Months Ended June 30, 2005
Service cost	$	71		$	17		$	23		$	4		$	3
Interest cost		143			37			53			6			7
Expected return on plan assets		(231	)		(70	)		(92	)		(10	)		(9	)
Recognized net (gain)/loss		6			1			2			—			—
Net amortization		11			4			3			—			—
Net cost (income)	$	—		$	(11	)	$	(11	)	$	—		$	1

119

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

	Southern			Alabama			Georgia			Gulf			Mississippi
POSTRETIREMENT PLANS	Company			Power			Power			Power			Power
Three Months Ended June 30, 2006
Service cost	$	8		$	2		$	2		$	1		$	1
Interest cost		24			7			11			1			1
Expected return on plan assets		(12	)		(5	)		(6	)		(1	)		(1	)
Net amortization		10			3			5			—			1
Net cost (income)	$	30		$	7		$	12		$	1		$	2
Six Months Ended June 30, 2006
Service cost	$	15		$	4		$	5		$	1		$	1
Interest cost		49			13			21			2			2
Expected return on plan assets		(24	)		(9	)		(12	)		(1	)		(1	)
Net amortization		21			6			10			—			1
Net cost (income)	$	61		$	14		$	24		$	2		$	3
Three Months Ended June 30, 2005
Service cost	$	7		$	2		$	3		$	—		$	—
Interest cost		24			7			10			1			1
Expected return on plan assets		(11	)		(4	)		(6	)		—			—
Net amortization		10			3			5			—			—
Net cost (income)	$	30		$	8		$	12		$	1		$	1
Six Months Ended June 30, 2005
Service cost	$	14		$	4		$	5		$	1		$	1
Interest cost		48			13			21			2			2
Expected return on plan assets		(22	)		(8	)		(11	)		(1	)		(1	)
Net amortization		19			5			9			—			1
Net cost (income)	$	59		$	14		$	24		$	2		$	3

(H)	See Note 3 to the financial statements of Southern Company under “Georgia Power Retail Regulatory Matters” and “Merger of Georgia Power and Savannah Electric” and Georgia Power under “Retail Regulatory Matters — Merger” and “ — Fuel Cost Recovery” in Item 8 of the Form 10-K for information on the merger of Savannah Electric into Georgia Power and its impact on retail fuel cost recovery.
	With respect to the merger, all required shareholder and regulatory approvals were received and, effective July 1, 2006, Savannah Electric was merged into Georgia Power. Prior to the merger, Southern Company was the sole common shareholder of both Georgia Power and Savannah Electric. At the time of the merger, each outstanding share of Savannah Electric common stock was cancelled, and Southern Company was issued an additional 1,500,000 shares of Georgia Power common stock, no par value per share. In addition, at the time of the merger, each outstanding share of Savannah Electric’s preferred stock was cancelled and converted into the right to receive one share of Georgia Power 6 1/8% Series Class A Preferred Stock, Non-Cumulative, Par Value $25 Per Share.
	Following completion of the merger, the outstanding capital stock of Georgia Power consists of 9,261,500 shares of common stock, all of which are held by Southern Company, and 1,800,000 shares of preferred stock. In connection with the merger, Georgia Power also assumed all of Savannah Electric’s obligations under five series of senior notes outstanding at July 1, 2006, totaling $195 million, and the obligations of three series related to pollution control revenue bonds, totaling $18 million. In addition, Georgia Power assumed Savannah Electric’s commercial paper and extendible commercial note obligations of $84 million.

120

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

	Savannah Electric’s separate SEC reporting obligations were terminated following the merger and its results of operations and cash flows for the three and six months ended June 30, 2006 and 2005 and assets and liabilities as of June 30, 2006 and December 31, 2005 are included in the Southern Company condensed consolidated financial statements herein. Georgia Power will account for the merger in a manner similar to a pooling of interests, and Georgia Power’s financial statements will reflect the merger effective July 1, 2006.
	In March 2006, Georgia Power and Savannah Electric filed a combined request with the Georgia PSC to change the fuel cost recovery rate effective July 1, 2006. On June 15, 2006, the Georgia PSC ruled on the request and approved an increase in Georgia Power’s total annual fuel billings of approximately $400 million. The order provides for a combined ongoing fuel forecast, but reduced the requested increase related to such forecast by $200 million. The Georgia PSC order included no disallowances of previously incurred fuel costs. Estimated under recovered fuel costs as of June 30, 2006 are to be recovered over 35 months for customers in the former Georgia Power territory and over 41 months for customers in the former Savannah Electric territory. In accordance with the order, approximately $358 million has been reclassified from current assets to deferred charges and other assets on the balance sheet. As of June 30, 2006, the under recovered fuel balances of Georgia Power and Savannah Electric totaled approximately $850 million and $82 million, respectively. Such balances exceed the estimates used to determine the rates approved in the order for customers in the former Georgia Power territory and former Savannah Electric territory by $130 million and $4 million, respectively. The order also requires Georgia Power to file for a new fuel cost recovery rate, which would include a true-up of these balances, on a semi-annual basis, beginning September 30, 2006.
	Fuel cost recovery revenues as recorded on the financial statements are adjusted for differences in actual recoverable costs and amounts billed in current regulated rates. Accordingly, any increase in the billing factor will have no significant effect on Georgia Power’s revenues or net income but will increase cash flow.
	The order also set a Merger Transition Adjustment (MTA) applicable to customers in the former Savannah Electric service territory so that the new fuel rate plus the MTA equals the applicable fuel rate paid by such customer as of June 30, 2006. Amounts collected under the MTA are being credited to customers in the former Georgia Power service territory through a Merger Transition Credit (MTC). The MTA and the MTC will be in effect until December 31, 2007, when Georgia Power’s base rates are scheduled to be adjusted.
(I)	See Note 1 to the financial statements of Southern Company and Mississippi Power under “Storm Damage Reserves” and “Provision for Property Damage,” respectively, and Note 3 to the financial statements of Southern Company and Mississippi Power under “Storm Damage Cost Recovery” in Item 8 of the Form 10-K for information on how Mississippi Power maintains a reserve for property damage to cover the cost of damages from major storms to its transmission and distribution lines and the cost of uninsured damages to its generation facilities and other property, as well as the specific impact of Hurricane Katrina on that reserve.
	On June 28, 2006, the Mississippi PSC approved an order based upon a stipulation between Mississippi Power and the Mississippi Public Utilities Staff. The stipulation and the associated order certified actual storm restoration costs relating to Hurricane Katrina through April 30, 2006 of $267.9 million and affirmed estimated additional costs through December 31, 2007 of $34.5 million, for total storm restoration costs of $302.4 million, without offset for the property damage reserve of $3.0 million. Of the total amount, $292.8 million applies to Mississippi Power’s retail jurisdiction. The order directs Mississippi Power to file an application with the Mississippi Development Authority (MDA) for Community Development Block Grants (CDBG). The MDA has indicated that $360 million of CDBG will be available to utilities within the State of Mississippi impacted by Hurricane Katrina. All CDBG proceeds received by Mississippi Power will be applied to both retail and wholesale storm restoration

121

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

	costs. The retail portion of any certified restoration costs not covered by the CDBG program are expected to be funded through the state bond program previously approved by the State of Mississippi legislature. The Mississippi PSC order also indicated that the state bond program would be appropriate funding for all or a portion of a new storm operations center if approved and for an appropriate storm reserve, both of which require additional Mississippi PSC action. If state bonds are used for any portion of the Hurricane Katrina restoration costs, periodic true-up mechanisms will be structured to comply with terms and requirements from the legislation.
	The Mississippi PSC order also granted continuing authority to record a regulatory asset in an amount equal to the retail portion of the recorded Hurricane Katrina restoration costs. The balance in the regulatory asset account at June 30, 2006 is $248.4 million, which is net of insurance proceeds of $80.1 million. These costs include approximately $142 million of capital additions and $106 million of operation and maintenance expenditures. For any future event causing damage to property beyond the balance in the reserve, the order also granted Mississippi Power the authority to record a regulatory asset. Mississippi Power would then apply to the Mississippi PSC for recovery of such amounts or for authority to otherwise dispose of the regulatory asset.
	Mississippi Power expects to file the CDBG application with the MDA in the third quarter 2006, at which time the MDA is expected to assess applications and award grants. Mississippi Power filed an application for a financing order with the Mississippi PSC on July 3, 2006 for restoration costs under the state bond program, including the property damage reserve funding and the construction of the storm operations center. The final outcome of these matters cannot now be determined.
(J)	See Note 5 to the financial statements of Southern Company and Alabama Power in Item 8 of the Form 10-K for information on each company’s effective income tax rate. In accordance with an Alabama PSC-approved accounting order to restore the natural disaster reserve, Alabama Power returned approximately $27.7 million of excess deferred income taxes to its retail customers in 2005. The impact of this entry was a significantly lower effective income tax rate for the six months ended June 30, 2005 when compared to the six months ended June 30, 2006 for Alabama Power and Southern Company. For additional information on Alabama Power’s accounting order, see Note 3 to the financial statements of Southern Company and Alabama Power under “Storm Damage Recovery” and “Natural Disaster Cost Recovery,” respectively, in Item 8 of the Form 10-K.
	Southern Company has recorded reserves associated with a potential phase out of its synthetic fuel tax credits of $39.7 million in 2006. The impact of these reserves is an increase in Southern Company’s effective tax rate for the six months ended June 30, 2006 as compared to the same period in 2005.
(K)	See Note 1 to the financial statements of Southern Company and Gulf Power under “Storm Damage Reserves” and “Property Damage Reserve,” respectively, and Note 3 to the financial statements of Southern Company and Gulf Power under “Storm Damage Cost Recovery” and “Retail Regulatory Matters – Storm Damage Cost Recovery,” respectively, in Item 8 of the Form 10-K for information on how Gulf Power maintains a reserve for property damage to cover the cost of damages from major storms to its transmission and distribution facilities and the cost of uninsured damages to its generation facilities and other property, and the impact of recent hurricanes on that reserve. In September 2004, Hurricane Ivan hit the Gulf Coast of Florida and Alabama and caused significant damage to Gulf Power’s service area. In July and August 2005, Hurricanes Dennis and Katrina, respectively, hit the Gulf Coast of the United States also causing significant damage within Gulf Power’s service area. As a result, Gulf Power has a deficit balance in the reserve at June 30, 2006 of $41.2 million.
	In July 2006, the Florida PSC issued its order approving a stipulation and settlement between Gulf Power and several consumer groups that resolved all matters relating to Gulf Power’s request for recovery of incurred costs for storm recovery activities, the replenishment of Gulf Power’s property damage reserve, and the related request for permission to issue $87.2 million in securitized storm recovery bonds. The

122

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

	order provides for an extension of the storm recovery surcharge currently being collected by Gulf Power for an additional 27 months, expiring in June 2009, in lieu of the requested issuance of storm recovery bonds.
	According to the stipulation, the funds resulting from the extension of the current surcharge will first be credited to the unrecovered balance of storm recovery costs associated with Hurricane Ivan until these costs have been fully recovered. The funds will then be credited to the property reserve for recovery of the storm recovery costs of $53.3 million associated with Hurricanes Dennis and Katrina that were previously charged to the reserve. Should revenues collected by Gulf Power through the extension of the storm recovery surcharge exceed the storm recovery costs associated with Hurricanes Dennis and Katrina, the excess revenues will be credited to the reserve.
	The annual accrual to the reserve of $3.5 million and Gulf Power’s limited discretionary authority to make additional accruals to the reserve will continue as previously approved by the Florida PSC. As part of the March 2005 agreement regarding Hurricane Ivan costs that established the existing surcharge, Gulf Power agreed that it would not seek any additional increase in its base rates and charges to become effective on or before March 1, 2007. The terms of the stipulation do not alter or affect that portion of the prior agreement.
	According to the order, in the case of future storms, if Gulf Power incurs cumulative costs for storm recovery activities in excess of $10 million during any calendar year, Gulf Power will be permitted to file a streamlined formal request for an interim surcharge. Any interim surcharge would provide for the recovery, subject to refund, of up to 80% of the claimed costs for storm recovery activities. Gulf Power would then petition the Florida PSC for full recovery through an additional surcharge or other cost recovery mechanism.
(L)	See Note 3 to the financial statements of Southern Company under “Plant Franklin Construction Project” and Note 2 to the financial statements of Southern Power under “Plant Franklin Unit 3 Construction Project” in Item 8 of the Form 10-K for information on the suspension of construction activities. On May 6, 2006, Southern Power signed a PPA with Progress Ventures, Inc. for 621 MW of capacity from Plant Franklin. The PPA term is from 2009 through 2015. To provide this capacity, Southern Power expects to complete construction of Franklin Unit 3 at a total cost of approximately $351 million, of which $172 million has been spent as of June 30, 2006. Construction is expected to be complete in 2008.
	On May 31, 2006, Southern Power acquired all of the outstanding membership interests of DeSoto County Generating Company, LLC (DeSoto) from Progress Genco Ventures LLC, a subsidiary of Progress Energy, Inc. The results of DeSoto’s operations have been included in Southern Power’s consolidated financial statements since that date. Southern Power’s acquisition of the membership interests in DeSoto was pursuant to an agreement dated May 8, 2006 for an aggregate purchase price of $79.2 million. The total purchase price was allocated to property, plant, and equipment and materials and supplies based on a preliminary assessment. Southern Power is in the process of obtaining third-party valuations of certain intangible assets; thus, the allocation of the purchase price is subject to future refinement. The impact of these refinements is not known at this time. DeSoto owns a dual-fired generating plant near Arcadia, Florida with a nameplate capacity of 340 MW. The plant’s capacity and associated energy is sold under PPAs with Florida Power & Light Company that expire in 2007. This acquisition is in accordance with Southern Power’s overall regional growth strategy.
	Southern Power revised its depreciation rates in March 2006. This change in estimate arises from changes in useful life assumptions of certain components of plant in service based on an engineering study completed in the first quarter of 2006. Depreciation rates by generating facility increased from a range of 2.5% to 2.9% to a range of 2.7% to 3.8%. These changes increase depreciation expense and reduce net income. As a result of these changes, net income was decreased by $0.9 million and $1.2 million for the second quarter and year-to-date 2006, respectively. The expected total impact on Southern Power’s net income for 2006 is a decrease of $3.2 million.

123

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

(M) Southern Company’s reportable business segment is the sale of electricity in the Southeast by the retail operating companies and Southern Power. Net income and total assets for discontinued operations are included in the “Reconciling Eliminations” column. 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, and energy-related services. Southern Power’s revenues from sales to the retail operating companies were $130 million and $217 million for the three months and six months ended June 30, 2006, respectively, and $110 million and $222 million for the three months and six months ended June 30, 2005, respectively. All other intersegment revenues are not material. Financial data for business segments and products and services are as follows:

	Electric Utilities
	Retail
	Operating		Southern							All			Reconciling
	Companies		Power		Eliminations			Total		Other			Eliminations			Consolidated
								(in millions)
Three Months Ended June 30, 2006:
Operating revenues	$	3,489	$	193	$	(155	)	$	3,527	$	103		$	(38	)	$	3,592
Segment net income (loss)		362		32		—			394		(7	)		(2	)		385
Six Months Ended June 30, 2006:
Operating revenues	$	6,453	$	333	$	(262	)	$	6,524	$	207		$	(76	)	$	6,655
Segment net income (loss)		601		52		—			653		(6	)		—			647
Total assets at June 30, 2006	$	37,082	$	2,369	$	(128	)	$	39,323	$	1,989			(511	)	$	40,801
Three Months Ended June 30, 2005:
Operating revenues	$	3,026	$	149	$	(126	)	$	3,049	$	102		$	(31	)	$	3,120
Segment net income (loss)		332		25		—			357		29			1			387
Six Months Ended June 30, 2005:
Operating revenues	$	5,723	$	302	$	(259	)	$	5,766	$	198		$	(57	)	$	5,907
Segment net income (loss)		598		48		—			646		61			3			710
Total assets at December 31, 2005	$	36,335	$	2,303	$	(179	)	$	38,459	$	1,751			(333	)	$	39,877

Products and Services

	Electric Utilities Revenues
Period	Retail		Wholesale		Other		Total
	(in millions)
Three Months Ended June 30, 2006	$	2,971	$	440	$	116	$	3,527
Three Months Ended June 30, 2005		2,555		385		109		3,049
Six Months Ended June 30, 2006	$	5,442	$	855	$	227	$	6,524
Six Months Ended June 30, 2005		4,824		732		210		5,766

124

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 1A. Risk Factors.

See Item 1A. RISK FACTORS in Part 1 of the Form 10-K for the year ended December 31, 2005 for a discussion of the risk factors of Southern Company and the subsidiary registrants. For the quarter ended June 30, 2006, there have been no material changes to these risk factors.

Item 4. Submission of Matters to a Vote of Security Holders.

Southern Company

Southern Company held its annual meeting of shareholders on May 24, 2006. 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 Withheld
Juanita Powell Baranco		552,588,106		10,799,892
Dorrit J. Bern		553,345,486		10,042,512
Francis S. Blake		547,359,073		16,028,925
Thomas F. Chapman		535,100,191		28,287,807
Donald M. James		529,771,092		33,616,906
Zack T. Pate		553,654,462		9,733,536
J. Neal Purcell		553,624,682		9,763,316
David M. Ratcliffe		551,492,644		11,895,354
William G. Smith, Jr.		551,787,664		11,600,334
Gerald J. St. Pé		549,575,443		13,812,555

In addition, at the annual meeting, shareholders were asked to vote for the ratification of the appointment of auditors. The vote tabulation was 552,349,715 shares for, 5,319,789 shares against, and 5,718,494 shares abstaining. As a result of this vote, the audit appointment was ratified. Shareholders were also asked to vote to approve the 2006 Omnibus Incentive Compensation Plan. The vote tabulation was 343,902,796 shares for, 45,697,372 shares against, and 11,891,033 shares abstaining. As a result of this vote, the 2006 Omnibus Incentive Compensation Plan was approved.

125

Item 4. Submission of Matters to a Vote of Security Holders. (Continued)

Alabama Power

Alabama Power held its annual meeting of common shareholders and preferred shareholders on April 28, 2006, and the following persons were elected to serve as directors of Alabama Power:

Whit Armstrong	Robert D. Powers
David J. Cooper, Sr.	David M. Ratcliffe
John D. Johns	C. Dowd Ritter
Patricia M. King	James H. Sanford
James K. Lowder	John C. Webb, IV
Charles D. McCrary	James W. Wright
Malcolm Portera

All 9,250,000 of the shares of Alabama Power’s common stock outstanding on the record date were 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.

In addition, at the annual meeting, shareholders were asked to vote for a proposed amendment to Alabama Power’s Articles of Incorporation, which would increase the authorized common stock from 15,000,000 shares to 25,000,000 shares, and would create a new class of securities to be issued by Alabama Power to be called preference stock. The vote tabulation was 9,250,000 shares for, 0 shares against, and 0 shares abstaining. As a result of this vote, the amendment was approved.

Georgia Power

By written consent, in lieu of the annual meeting of the sole shareholder of Georgia Power, effective May 17, 2006, the following persons were elected to serve as directors of Georgia Power:

Gus H. Bell, III	David M. Ratcliffe
Robert L. Brown, Jr.	D. Gary Thompson
Ronald D. Brown	Richard W. Ussery
Anna R. Cablik	William Jerry Vereen
Michael D. Garrett	E. Jenner Wood, III

By written consent, in lieu of a special meeting of the sole shareholder of Georgia Power, effective May 22, 2006, the sole shareholder approved (1) an amendment to the Charter of Georgia Power to amend and restate the terms of the Charter and establish a new series of Class A preferred stock designated as the “6 1/8% Series Class A Preferred Stock, Non-Cumulative, Par Value $25 Per Share” and (2) the merger agreement between Georgia Power and Savannah Electric and the merger of Savannah Electric into Georgia Power pursuant to the merger agreement.

All of the 7,761,500 outstanding shares of Georgia Power’s common stock were owned by Southern Company and were voted in favor of the nominees for directors, the amendment to the Charter, and the merger agreement and merger.

126

Item 4. Submission of Matters to a Vote of Security Holders. (Continued)

Gulf Power

By written consent, in lieu of the annual meeting of stockholders of Gulf Power, effective June 27, 2006, 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 preference stock were entitled to vote.

Mississippi Power

Mississippi Power held its annual meeting of common shareholders and preferred shareholders on May 17, 2006, and the following persons were elected to serve as directors of Mississippi Power:

Tommy E. Dulaney	George A. Schloegel
Warren A. Hood, Jr.	Philip J. Terrell
Robert C. Khayat	Anthony J. Topazi
Aubrey B. Patterson, Jr.

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.

Southern Power

By written consent, in lieu of the annual meeting of stockholders of Southern Power, effective April 12, 2006, the number of directors constituting the board of directors was set at four and the following persons were elected to serve as directors of Southern Power:

William P. Bowers	G. Edison Holland, Jr.
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 5. Other Information.

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

On May 24, 2006, at Southern Company’s annual meeting of shareholders, Southern Company’s shareholders approved the Southern Company 2006 Omnibus Incentive Compensation Plan (Plan). See Item 4 above. Executive officers of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power will be eligible to participate in the Plan. A summary of the material terms of the Plan is included on pages 13 through 17 of Southern Company’s Definitive Proxy Statement on Schedule 14A, filed with the SEC on April 13, 2006, and is incorporated by reference herein. The full text of the Plan is attached hereto as Exhibits 10(a)1, 10(b)1, 10(c)1, 10(d)1, and 10(e)1, and is incorporated by reference herein.

127

Item 6. Exhibits.

(3) Articles of Incorporation and By-Laws

Georgia Power

(c)1 — Amendment to Charter of Georgia Power, dated June 27, 2006, which amended and restated the terms of the Charter and established the Georgia Power 6 1/8% Series Class A Preferred Stock. (Designated in Form 8-K dated June 27, 2006, File No. 1-6468, as Exhibit 3.1.)

(4) Instruments Describing Rights of Security Holders, Including Indentures

Alabama Power

(b)1 — Thirty-Sixth Supplemental Indenture to Senior Note Indenture dated as of June 14, 2006. (Designated in Form 8-K dated June 7, 2006, File No. 1-3436, as Exhibit 4.2.)

Georgia Power

(c)1	—	Senior Note Indenture dated as of March 1, 1998 between Savannah Electric and The Bank of New York, as Trustee, and indentures supplemental thereto through December 9, 2004 (Designated in Form 8-K of Savannah Electric dated March 9, 1998, File No. 1-5072, as Exhibits 4.1 and 4.2, in Form 8-K of Savannah Electric dated May 8, 2001, File No. 1-5072, as Exhibits 4.2(a) and 4.2(b), in Form 8-K of Savannah Electric dated March 4, 2002, File No. 1-5072, as Exhibit 4.2, in Form 8-K of Savannah Electric dated November 4, 2002, File No. 1-5072, as Exhibit 4.2, in Form 8-K of Savannah Electric dated December 10, 2003, File No. 1-5072, as Exhibits 4.1 and 4.2 and in Form 8-K of Savannah Electric dated December 2, 2004, File No. 1-5072, as Exhibit 4.1).
(c)2	—	Eighth Supplemental Indenture, dated as of June 30, 2006, and effective as of July 1, 2006, between Georgia Power and The Bank of New York, as Trustee. (Designated in Form 8-K dated June 27, 2006, File No. 1-6468, as Exhibit 4.2.)

(10) Material Contracts

Southern Company

(a)1	—	Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006.
(a)2	—	Form of Award Agreement under Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006.

Alabama Power

(b)1	—	Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006. See Exhibit 10(a)1 herein.
(b)2	—	Form of Award Agreement under Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006. See Exhibit 10(a)2 herein.

128

Item 6. Exhibits. (continued)

Georgia Power

(c)1	—	Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006. See Exhibit 10(a)1 herein.
(c)2	—	Form of Award Agreement under Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006. See Exhibit 10(a)2 herein.
(c)3	—	1997 Deferred Compensation Plan for Directors of Savannah Electric, Amended and Restated effective October 26, 2000 (Designated in Savannah Electric’s Form 10-K for the year ended December 31, 2000, File No. 1-5072, as Exhibit 10(f)18).
Gulf Power
(d)1	—	Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006. See Exhibit 10(a)1 herein.
(d)2	—	Form of Award Agreement under Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006. See Exhibit 10(a)2 herein.
Mississippi Power
(e)1	—	Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006. See Exhibit 10(a)1 herein.
(e)2	—	Form of Award Agreement under Southern Company 2006 Omnibus Incentive Compensation Plan, effective January 1, 2006. See Exhibit 10(a)2 herein.
Southern Power
(f)1#	—	Multi-Year Credit Agreement dated as of July 7, 2006 by and among Southern Power, the Lenders (as defined therein), Citibank, N.A., as Administrative Agent, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as Initial Issuing Bank.
(f)2*#	—	Purchase and Sale Agreement by and between Progress Genco Ventures, LLC and Southern Power Company – DeSoto LLC dated May 8, 2006. (Designated in Form 8-K dated May 31, 2006, File No. 333-98553, as Exhibit 2.1.)
(f)3	—	Assignment and Assumption Agreement between Southern Power Company – Desoto LLC and Southern Power effective May 24, 2006. (Designated in Form 8-K dated May 31, 2006, File No. 333-98553, as Exhibit 2.2.)
(f)4*#	—	Purchase and Sale Agreement by and between Progress Genco Ventures, LLC and Southern Power Company – Rowan LLC dated May 8, 2006.
(f)5	—	Assignment and Assumption Agreement between Southern Power Company – Rowan LLC and Southern Power effective May 24, 2006.

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Item 6. Exhibits. (continued)

(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, 2005, 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, 2005, 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, 2005, 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, 2005, 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, 2005, File No. 001-11229 as Exhibit 24(e) and incorporated herein by reference.)
Southern Power
(f)1	—	Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2005, 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.

130

Item 6. Exhibits. (continued)

Georgia Power

(c)1	—	Certificate of Georgia Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
(c)2	—	Certificate of Georgia Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
Gulf Power
(d)1	—	Certificate of Gulf Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
(d)2	—	Certificate of Gulf Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
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.
Southern Power
(f)1	—	Certificate of Southern Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
(f)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.

131

Item 6. Exhibits. (continued)

Gulf Power

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

Notes:
*	Southern Power has requested confidential treatment for certain portions of this document pursuant to an application for confidential treatment sent to the SEC. Southern Power has omitted such portions from this filing and filed them separately with the SEC.
#	Omits schedules and exhibits. Southern Power agrees to provide supplementally the omitted schedules and exhibits to the SEC upon request.

132

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, President and Chief Executive Officer
	(Principal Executive Officer)
By	Thomas A. Fanning
	Executive Vice President, Chief Financial Officer and Treasurer
	(Principal Financial Officer)
By	/s/ Wayne Boston
	(Wayne Boston, Attorney-in-fact)
		Date: August 3, 2006

133

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	Art P. Beattie
	Executive Vice President, Chief Financial Officer and Treasurer
	(Principal Financial Officer)
By	/s/ Wayne Boston
	(Wayne Boston, Attorney-in-fact)
		Date: August 3, 2006

134

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	Cliff S. Thrasher
	Executive Vice President, Chief Financial Officer and Treasurer
	(Principal Financial Officer)
By	/s/ Wayne Boston
	(Wayne Boston, Attorney-in-fact)
		Date: August 3, 2006

135

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 and Chief Financial Officer
	(Principal Financial Officer)
By	/s/ Wayne Boston
	(Wayne Boston, Attorney-in-fact)
		Date: August 3, 2006

136

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	Frances V. Turnage
	Vice President, Treasurer and Chief Financial Officer
	(Principal Financial Officer)
By	/s/ Wayne Boston
	(Wayne Boston, Attorney-in-fact)
		Date: August 3, 2006

137

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	Ronnie L. Bates
	President and Chief Executive Officer (Principal Executive Officer)
By	Michael W. Southern
	Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)
By	/s/ Wayne Boston
	(Wayne Boston, Attorney-in-fact)
		Date: August 3, 2006

138