corresp
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2006
OR
( ) 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    
 
 


Table of Contents

Securities registered pursuant to Section 12(b) of the Act:1
 
Each of the following classes or series of securities registered pursuant to Section 12(b) of the Act is listed on the New York Stock Exchange.
 
         
Title of each class
     
Registrant
 
Common Stock, $5 par value
  The Southern Company
     
Mandatorily redeemable
preferred securities, $25 liquidation amount
   
7.125% Trust Preferred Securities2
   
 
     
Class A preferred, cumulative, $25 stated capital
  Alabama Power Company
5.20% Series
  5.83% Series    
5.30% Series
       
         
Senior Notes
       
55/8% Series AA
  5.875% Series II    
57/8% Series GG
  6.375% Series JJ    
 
     
Class A Preferred Stock, non-cumulative,
par value $25 per share
  Georgia Power Company
61/8% Series
       
         
Senior Notes
       
5.90% Series O
  6% Series R   5.70% Series X
5.75% Series T
  6% Series W   5.75% Series G5
     
Mandatorily redeemable preferred securities,
$25 liquidation amount
   
71/8% Trust Preferred Securities3
       
57/8% Trust Preferred Securities4
       
 
         
Senior Notes
      Gulf Power Company
5.25% Series H
  5.75% Series I    
5.875% Series J
       
 
 
 
1 As of December 31, 2006.
2 Issued by Southern Company Capital Trust VI and guaranteed by The Southern Company.
3 Issued by Georgia Power Capital Trust V and guaranteed by Georgia Power Company.
4 Issued by Georgia Power Capital Trust VII and guaranteed by Georgia Power Company.
5 Assumed by Georgia Power Company in connection with its merger with Savannah Electric and Power Company, effective July 1, 2006.


Table of Contents

         
Senior Notes
      Mississippi Power Company
55/8% Series E
       
Depositary preferred shares, each representing one-fourth
of a share of preferred stock, cumulative, $100 par value
   
5.25% Series
       
Mandatorily redeemable preferred securities,
$25 liquidation amount
   
7.20% Trust Originated Preferred Securities6    
 
 
Securities registered pursuant to Section 12(g) of the Act:7
 
             
Title of each class
         
Registrant
 
Preferred stock, cumulative, $100 par value
      Alabama Power Company
4.20% Series   4.60% Series   4.72% Series    
4.52% Series
  4.64% Series   4.92% Series    
     
Class A Preferred Stock, cumulative, $100,000 stated capital    
Flexible Money Market (Series 2003A)    
 
     
Preferred stock, cumulative, $100 par value   Mississippi Power Company
4.40% Series
  4.60% Series        
4.72% Series
           
 
 
 
 
6 Issued by Mississippi Power Capital Trust II and guaranteed by Mississippi Power Company.
7 As of December 31, 2006.


Table of Contents

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
             
Registrant     Yes     No
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 if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes    No X (Response applicable to all registrants.)
 
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No   
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)
 
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 Act). Yes    No X (Response applicable to all registrants.)


Table of Contents

Aggregate market value of The Southern Company’s common stock held by non-affiliates of The Southern Company at June 30, 2006: $23.8 billion. All of the common stock of the other registrants is held by The Southern Company. A description of each registrant’s common stock follows:
 
                 
    Description of
  Shares Outstanding
Registrant
 
Common Stock
 
at January 31, 2007
 
The Southern Company
  Par Value $5 Per Share   748,594,220
Alabama Power Company
  Par Value $40 Per Share   12,250,000
Georgia Power Company
  Without Par Value   9,261,500
Gulf Power Company
  Without Par Value   1,792,717
Mississippi Power Company
  Without Par Value   1,121,000
Southern Power Company
  Par Value $0.01 Per Share   1,000
 
Documents incorporated by reference: specified portions of The Southern Company’s Proxy Statement relating to the 2007 Annual Meeting of Stockholders are incorporated by reference into PART III. In addition, specified portions of the Information Statements of Alabama Power Company, Georgia Power Company and Mississippi Power Company relating to each of their respective 2007 Annual Meetings of Shareholders are incorporated by reference into PART III.
 
Southern Power Company meets the conditions set forth in General Instructions I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure format specified in General Instructions I(2)(b) and (c) of Form 10-K.
 
This combined Form 10-K is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company and Southern Power Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies.
 
 


 

 
Table of Contents
 
                 
       
Page
 
    PART I    
             
  Business   I-1
    The Southern Company System   I-2
    Construction Programs   I-3
    Financing Programs   I-3
    Fuel Supply   I-4
    Territory Served by the Utilities   I-5
    Competition   I-7
    Seasonality   I-8
    Regulation   I-8
    Rate Matters   I-10
    Employee Relations   I-12
  Risk Factors   I-12
  Unresolved Staff Comments   I-21
  Properties   I-22
  Legal Proceedings   I-24
  Submission of Matters to a Vote of Security Holders   I-25
    Executive Officers of Southern Company   I-26
    Executive Officers of Alabama Power   I-27
    Executive Officers of Georgia Power   I-28
    Executive Officers of Mississippi Power   I-29
             
    PART II    
             
  Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   II-1
  Selected Financial Data   II-2
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   II-2
  Quantitative and Qualitative Disclosures about Market Risk   II-2
  Financial Statements and Supplementary Data   II-3
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   II-4
  Controls and Procedures   II-5
  Other Information   II-5
             
    PART III    
             
  Directors, Executive Officers and Corporate Governance   III-1
  Executive Compensation   III-1
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   III-3
  Certain Relationships and Related Transactions and Director Independence   III-1
  Principal Accountant Fees and Services   III-4
             
    PART IV    
             
  Exhibits and Financial Statement Schedules   IV-1
    Signatures   IV-2


i


Table of Contents

DEFINITIONS
 
When used in Items 1 through 5 and Items 9A through 15, the following terms will have the meanings indicated.
 
     
Term
  Meaning
 
     
AEC
  Alabama Electric Cooperative, Inc.
AFUDC
  Allowance for Funds Used During Construction
Alabama Power
  Alabama Power Company
AMEA
  Alabama Municipal Electric Authority
Clean Air Act
  Clean Air Act Amendments of 1990
Dalton
  City of Dalton, Georgia
DOE
  United States Department of Energy
Duke Energy
  Duke Energy Corporation
Energy Act of 1992
  Energy Policy Act of 1992
Energy Act of 2005
  Energy Policy Act of 2005
Energy Solutions
  Southern Company Energy Solutions, Inc.
EPA
  United States Environmental Protection Agency
FASB
  Financial Accounting Standards Board
FERC
  Federal Energy Regulatory Commission
FMPA
  Florida Municipal Power Agency
FP&L
  Florida Power & Light Company
Gas South
  Gas South, LLC, an affiliate of Cobb Electric Membership Corporation
Georgia Power
  Georgia Power Company
Gulf Power
  Gulf Power Company
Hampton
  City of Hampton, Georgia
Holding Company Act
  Public Utility Holding Company Act of 1935, as amended
IBEW
  International Brotherhood of Electrical Workers
IIC
  Intercompany Interchange Contract
IPP
  Independent power producer
IRP
  Integrated Resource Plan
IRS
  Internal Revenue Service
JEA
  Jacksonville Electric Authority
KUA
  Kissimmee Utility Authority
MEAG
  Municipal Electric Authority of Georgia
Mirant
  Mirant Corporation
Mississippi Power
  Mississippi Power Company
Moody’s
  Moody’s Investors Service
NRC
  Nuclear Regulatory Commission
OPC
  Oglethorpe Power Corporation
OUC
  Orlando Utilities Commission
PPA
  Power Purchase Agreement
Progress Energy Carolinas
  Carolina Power & Light Company, d/b/a Progress Energy Carolinas, Inc.
Progress Energy Florida
  Florida Power Corporation, d/b/a Progress Energy Florida, Inc.
PSC
  Public Service Commission
registrants
  The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company and Southern Power Company


ii


Table of Contents

 
DEFINITIONS
(continued)

     
RFP
  Request for Proposal
RTO
  Regional Transmission Organization
RUS
  Rural Utility Service (formerly Rural Electrification Administration)
S&P
  Standard and Poor’s, a division of The McGraw-Hill Companies
Savannah Electric
  Savannah Electric and Power Company (merged into Georgia Power on July 1, 2006)
SCS
  Southern Company Services, Inc. (the system service company)
SEC
  Securities and Exchange Commission
SEGCO
  Southern Electric Generating Company
SEPA
  Southeastern Power Administration
SERC
  Southeastern Electric Reliability Council
SMEPA
  South Mississippi Electric Power Association
Southern Company
  The Southern Company
Southern Company Gas
  Southern Company Gas LLC
Southern Company system
  Southern Company, the traditional operating companies, Southern Power, SEGCO, Southern Nuclear, SCS, SouthernLINC Wireless and other subsidiaries
Southern Holdings
  Southern Company Holdings, Inc.
SouthernLINC Wireless
  Southern Communications Services, Inc.
Southern Nuclear
  Southern Nuclear Operating Company, Inc.
Southern Power
  Southern Power Company
Southern Telecom
  Southern Telecom, Inc.
traditional operating companies
  Alabama Power Company, Georgia Power Company, Gulf Power Company and Mississippi Power Company
TVA
  Tennessee Valley Authority


iii


Table of Contents

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
 
This Annual Report on Form 10-K contains forward-looking statements. Forward-looking statements include, among other things, statements concerning the strategic goals for Southern Company’s wholesale business, retail sales growth, customer growth, storm damage cost recovery and repairs, fuel cost recovery, environmental regulations and expenditures, earnings growth, dividend payout ratios, access to sources of capital, projections for postretirement benefit trust contributions, synthetic fuel investments, financing activities, completion of construction projects, impacts of the adoption of new accounting rules, 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 Act of 2005, and also changes in environmental, tax and other laws and regulations to which Southern Company and its subsidiaries are subject, as well as changes in application of existing laws and regulations;
•   current and future litigation, regulatory investigations, proceedings or inquiries, including the pending EPA civil actions against certain Southern Company subsidiaries, 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 fiscal year 2007;
•   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, pandemic health events such as an avian influenza, 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.
 
The registrants expressly disclaim any obligation to update any forward-looking statements.


iv


Table of Contents

 
PART I
 
Item 1.  BUSINESS
 
Southern Company was incorporated under the laws of Delaware on November 9, 1945. Southern Company is domesticated under the laws of Georgia and is qualified to do business as a foreign corporation under the laws of Alabama. Southern Company owns all the outstanding common stock of Alabama Power, Georgia Power, Gulf Power and Mississippi Power, each of which is an operating public utility company. The traditional operating companies supply electric service in the states of Alabama, Georgia, Florida and Mississippi. More particular information relating to each of the traditional operating companies is as follows:
 
Alabama Power is a corporation organized under the laws of the State of Alabama on November 10, 1927, by the consolidation of a predecessor Alabama Power Company, Gulf Electric Company and Houston Power Company. The predecessor Alabama Power Company had been in continuous existence since its incorporation in 1906.
 
Georgia Power was incorporated under the laws of the State of Georgia on June 26, 1930, and admitted to do business in Alabama on September 15, 1948. Effective July 1, 2006, Savannah Electric, formerly a wholly-owned subsidiary of Southern Company, was merged with and into Georgia Power.
 
Gulf Power is a Florida corporation that has had a continuous existence since it was originally organized under the laws of the State of Maine on November 2, 1925. Gulf Power was admitted to do business in Florida on January 15, 1926, in Mississippi on October 25, 1976, and in Georgia on November 20, 1984. Gulf Power became a Florida corporation after being domesticated under the laws of the State of Florida on November 2, 2005.
 
Mississippi Power was incorporated under the laws of the State of Mississippi on July 12, 1972, was admitted to do business in Alabama on November 28, 1972, and effective December 21, 1972, by the merger into it of the predecessor Mississippi Power Company, succeeded to the business and properties of the latter company. The predecessor Mississippi Power Company was incorporated under the laws of the State of Maine on November 24, 1924, and was admitted to do business in Mississippi on December 23, 1924, and in Alabama on December 7, 1962.
 
In addition, Southern Company owns all of the common stock of Southern Power, which is also an operating public utility company. Southern Power constructs, acquires and manages generation assets and sells electricity at market-based rates in the wholesale market. Southern Power is a corporation organized under the laws of Delaware on January 8, 2001 and was admitted to do business in the States of Alabama, Florida and Georgia on January 10, 2001 and in the State of Mississippi on January 30, 2001.
 
Southern Company also owns all the outstanding common stock or membership interests of SouthernLINC Wireless, Southern Company Gas, Southern Nuclear, SCS, Southern Telecom, Southern Holdings and other direct and indirect subsidiaries. SouthernLINC Wireless provides digital wireless communications services to the traditional operating companies and also markets these services to the public within the Southeast. Southern Nuclear provides services to Alabama Power’s and Georgia Power’s nuclear plants. SCS is the system service company providing, at cost, specialized services to Southern Company and its subsidiary companies. Southern Telecom provides wholesale fiber optic solutions to telecommunication providers in the Southeast. Southern Holdings is an intermediate holding subsidiary for Southern Company’s investments in synthetic fuels and leveraged leases and various other energy-related businesses.
 
Alabama Power and Georgia Power each own 50% of the outstanding common stock of SEGCO. SEGCO is an operating public utility company that owns electric generating units with an aggregate capacity of 1,019,680 kilowatts at Plant Gaston on the Coosa River near Wilsonville, Alabama. Alabama Power and Georgia Power are each entitled to one-half of SEGCO’s capacity and energy. Alabama Power acts as SEGCO’s agent in the operation of SEGCO’s units and furnishes coal to SEGCO as fuel for its units. SEGCO also owns three 230,000 volt transmission lines extending from Plant Gaston to the Georgia state line at which point connection is made with the Georgia Power transmission line system.
 
See Note 10 to the financial statements of Southern Company in Item 8 herein for additional information regarding Southern Company’s segment and related information.
 
The registrants’ Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are made available on Southern Company’s website, free of charge, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Southern Company’s internet address is www.southerncompany.com.


I-1


Table of Contents

 
The Southern Company System
 
Traditional operating companies
 
The transmission facilities of each of the traditional operating companies are connected to the respective company’s own generating plants and other sources of power and are interconnected with the transmission facilities of the other traditional operating companies and SEGCO by means of heavy-duty high voltage lines. For information on Georgia Power’s integrated transmission system, see “Territory Served by the Utilities” herein for additional information.
 
Operating contracts covering arrangements in effect with principal neighboring utility systems provide for capacity exchanges, capacity purchases and sales, transfers of economy energy and other similar transactions. Additionally, the traditional operating companies have entered into voluntary reliability agreements with the subsidiaries of Entergy Corporation, Florida Electric Power Coordinating Group and TVA and with Progress Energy Carolinas, Duke Energy, South Carolina Electric & Gas Company and Virginia Electric and Power Company, each of which provides for the establishment and periodic review of principles and procedures for planning and operation of generation and transmission facilities, maintenance schedules, load retention programs, emergency operations and other matters affecting the reliability of bulk power supply. The traditional operating companies have joined with other utilities in the Southeast (including those referred to above) to form the SERC to augment further the reliability and adequacy of bulk power supply. Through the SERC, the traditional operating companies are represented on the National Electric Reliability Council.
 
The IIC provides for coordinating operations of the power producing facilities of the traditional operating companies and Southern Power and the capacities available to such companies from non-affiliated sources and for the pooling of surplus energy available for interchange. Coordinated operation of the entire interconnected system is conducted through a central power supply coordination office maintained by SCS. The available sources of energy are allocated to the traditional operating companies and Southern Power to provide the most economical sources of power consistent with reliable operation. The resulting benefits and savings are apportioned among each of the companies. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Intercompany Interchange Contract” of each of the registrants in Item 7 herein and Note 3 to the financial statements of Southern Company, each of the traditional operating companies and Southern Power, all under “FERC Matters – Intercompany Interchange Contract” in Item 8 herein for information on the settlement of the FERC proceeding related to the IIC.
 
Southern Company, each traditional operating company, Southern Power, Southern Nuclear, SEGCO and other subsidiaries have contracted with SCS to furnish, at direct or allocated cost and upon request, the following services: general and design engineering, purchasing, accounting and statistical analysis, finance and treasury, tax, information resources, marketing, auditing, insurance and pension administration, human resources, systems and procedures and other services with respect to business and operations and power pool transactions. Southern Power, SouthernLINC Wireless and Southern Telecom have also secured from the traditional operating companies certain services which are furnished at cost.
 
Alabama Power and Georgia Power each have a contract with Southern Nuclear to operate Plant Farley and Plants Hatch and Vogtle, respectively. See “Regulation – Atomic Energy Act of 1954” herein for additional information.
 
Southern Power
 
Southern Power is an electric wholesale generation subsidiary with market-based rate authority from the FERC. Southern Power constructs, acquires and manages generating facilities and sells the output under long-term, fixed-price capacity contracts both to unaffiliated wholesale purchasers as well as to the traditional operating companies (under PPAs approved by the respective state PSCs). Southern Power’s business activities are not subject to traditional state regulation of utilities but are subject to regulation by the FERC. Southern Power has attempted to insulate itself from significant fuel supply, fuel transportation and electric transmission risks by making such risks the responsibility of the counterparties to the PPAs. However, Southern Power’s overall profit will depend on the parameters of the wholesale market and its efficient operation of its wholesale generating assets. At December 31, 2006, Southern Power had 6,733 megawatts of nameplate capacity in commercial operation.
 
Other Business
 
In January 2006, Southern Company Gas sold substantially all of its assets, including natural gas inventory, accounts receivable and customer list to Gas South. See Note 3 to the financial statements of Southern Company under “Southern Company Gas Sale” in Item 8 herein for additional information.
 
Southern Holdings is an intermediate holding subsidiary for Southern Company’s investments in synthetic fuels and leveraged leases and various other energy-related businesses. Southern Company’s interest in


I-2


Table of Contents

one of the synthetic fuel entities was terminated in 2006. Synthetic fuel tax credits will no longer be available after December 31, 2007.
 
SouthernLINC Wireless serves Southern Company’s traditional operating companies and markets its services to non-affiliates within the Southeast. SouthernLINC Wireless delivers multiple wireless communication options including push to talk, cellular service, text messaging, wireless internet access and wireless data. Its system covers approximately 128,000 square miles in the Southeast.
 
These continuing efforts to invest in and develop new business opportunities offer potential returns exceeding those of rate-regulated operations. However, these activities also involve a higher degree of risk.
 
Construction Programs
 
The subsidiary companies of Southern Company are engaged in continuous construction programs to accommodate existing and estimated future loads on their respective systems. For estimated construction and environmental expenditures for the periods 2007 through 2009, see Note 7 to the financial statements of Southern Company, each traditional operating company and Southern Power all under “Construction Program” in Item 8 herein.
 
Estimated construction costs in 2007 are expected to be apportioned approximately as follows: (in millions)
                                                 
 
    Southern
                   
    Company
  Alabama
  Georgia
  Gulf
  Mississippi
  Southern
    System*   Power   Power   Power   Power   Power
     
 
New generation
  $ 172     $ -     $ -     $ -     $ -     $ 172  
Environmental
    1,661       505       955       171       21       -  
Other generating facilities, including associated plant substations
    441       175       167       30       21       47  
New business
    406       159       201       29       17       -  
Transmission
    447       104       293       11       28       -  
Joint line and substation
    5       -       -       5       -       -  
Distribution
    321       143       136       13       30       -  
Nuclear fuel
    116       48       68       -       -       -  
General plant
    342       84       103       19       29       22  
     
     
    $ 3,911     $ 1,218     $ 1,923     $ 278     $ 146     $ 241  
     
     
 
*These amounts include the traditional operating companies and Southern Power (as detailed in the table above) as well as the amounts for the other subsidiaries. See “Other Business” herein for additional information.
 
The construction programs are subject to periodic review and revision, and actual construction costs may vary from the above estimates because of numerous factors. These factors include: changes in business conditions; acquisition of additional generating assets; revised load growth estimates; changes in environmental regulations; changes in existing nuclear plants to meet new regulatory requirements; changes in FERC rules and regulations; increasing costs of labor, equipment and materials; and cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.
 
Under Georgia law, Georgia Power is required to file an IRP for approval by the Georgia PSC. Through the IRP process, the Georgia PSC must pre-certify the construction of new power plants and new PPAs. See “Rate Matters – Integrated Resource Planning” herein for additional information.
 
See “Regulation – Environmental Statutes and Regulations” herein for additional information with respect to certain existing and proposed environmental requirements and PROPERTIES – “Jointly-Owned Facilities” in Item 2 herein for additional information concerning Alabama Power’s, Georgia Power’s and Southern Power’s joint ownership of certain generating units and related facilities with certain non-affiliated utilities.
 
Financing Programs
 
See each of the registrant’s MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY in Item 7 herein and Note 6 to the financial statements of Southern Company, each traditional operating company and Southern Power in Item 8 herein for information concerning financing programs.


I-3


Table of Contents

 
Fuel Supply
 
The traditional operating companies’ and SEGCO’s supply of electricity is derived predominantly from coal. Southern Power’s supply of electricity is primarily fueled by natural gas. The sources of generation for the years 2004 through 2006 are shown below:
 
                                         
    Coal
    Nuclear
    Hydro
    Gas
    Oil
 
    %     %     %     %     %  
     
 
Alabama Power
2004
    65       19       6       10       *  
2005
    67       19       6       8       *  
2006
    68       19       4       9       *  
Georgia Power
2004
    76       22       2       *       *  
2005
    75       18       2       4       1  
2006
    75       18       1       6       *  
Gulf Power
2004
    84       **       **       16       *  
2005
    86       **       **       14       *  
2006
    87       **       **       13       *  
Mississippi Power
2004
    69       **       **       31       *  
2005
    70       **       **       30       *  
2006
    71       **       **       29       *  
SEGCO
2004
    100       **       **       *       *  
2005
    100       **       **       *       *  
2006
    100       **       **       *       *  
Southern Power
2004
    **       **       **       100       *  
2005
    **       **       **       100       *  
2006
    **       **       **       100       *  
Southern Company system – weighted average
2004
    69       16       3       12       *  
2005
    71       15       3       11       *  
2006
    70       15       2       13       *  
 
 
* Less than 0.5%.** Not applicable.
 
For the traditional operating companies and SEGCO, the average costs of fuel in cents per net kilowatt-hour generated for 2004 through 2006 are shown below:
 
             
    2004   2005   2006
     
 
Alabama Power
  1.69   2.02   2.27
Georgia Power
  1.58   2.12   2.39
Gulf Power
  2.32   2.77   3.27
Mississippi Power
  2.50   3.11   3.34
SEGCO
  1.60   1.69   2.12
Southern Company system – weighted average
  1.89   2.39   2.64
 
 
 
The traditional operating companies have long-term agreements in place from which they expect to receive approximately 89% of their coal burn requirements in 2007. These agreements cover remaining terms up to nine years. In 2006, the weighted average sulfur content of all coal burned by the traditional operating companies was 0.86% sulfur. This sulfur level, along with banked and purchased sulfur dioxide allowances, allowed the traditional operating companies to remain within limits set by the Phase II acid rain requirements of the Clean Air Act. In 2006, Southern Company purchased approximately $50.8 million of sulfur dioxide and nitrogen oxide emission allowances to be used in current and future periods. As additional environmental regulations are proposed that impact the utilization of coal, the traditional operating companies’ fuel mix will be monitored to ensure that the traditional operating companies remain in compliance with applicable laws and regulations. Additionally, Southern Company and the traditional operating companies will continue to evaluate the need to purchase additional emission allowances and the timing of capital expenditures for emission control equipment. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations” of Southern Company and each of the traditional operating companies in Item 7 herein for information on the Clean Air Act.
 
The Southern Company system has long-term agreements in place for its natural gas burn requirements. For 2007, the Southern Company system has contracted for 176 billion cubic feet of natural gas supply. These agreements cover remaining terms up to 12 years. In addition to gas supply, the Southern Company system has contracts in place for both firm gas transportation and storage. Management believes that these contracts provide sufficient natural gas supplies, transportation and storage to ensure normal operations of the Southern Company system’s natural gas generating units.
 
Changes in fuel prices to the traditional operating companies are generally reflected in fuel adjustment


I-4


Table of Contents

clauses contained in rate schedules. See “Rate Matters – Rate Structure” herein for additional information. Southern Power’s PPAs generally provide that the counterparty is responsible for substantially all of the cost of fuel.
 
Alabama Power and Georgia Power have numerous contracts covering a portion of their nuclear fuel needs for uranium, conversion services, enrichment services and fuel fabrication. These contracts have varying expiration dates and most are short to medium term (less than 10 years). Management believes that sufficient capacity for nuclear fuel supplies and processing exists to preclude the impairment of normal operations of the Southern Company system’s nuclear generating units.
 
Alabama Power and Georgia Power have contracts with the DOE that provide for the permanent disposal of spent nuclear fuel. The DOE failed to begin disposing of spent fuel in 1998, as required by the contracts, and Alabama Power and Georgia Power are pursuing legal remedies against the government for breach of contract. At Plants Farley and Hatch, on-site dry storage facilities are operational and can be expanded to accommodate spent fuel through the life of each plant. Sufficient pool storage capacity for spent fuel is available at Plant Vogtle to maintain full-core discharge capability for both units into 2014. Construction of an on-site dry storage facility at Plant Vogtle is expected to begin in sufficient time to maintain pool full-core discharge capability.
 
The Energy Act of 1992 established a Uranium Enrichment Decontamination and Decommissioning Fund, which is funded in part by a special assessment on utilities with nuclear plants, including Alabama Power and Georgia Power. This assessment was paid over a 15-year period that ended in 2006. This fund will be used by the DOE for the decontamination and decommissioning of its nuclear fuel enrichment facilities. The law provides that utilities will recover these payments in the same manner as any other fuel expense. See Note 1 to the financial statements of Southern Company, Alabama Power and Georgia Power under “Nuclear Fuel Disposal Costs” in Item 8 herein for additional information.
 
Territory Served by the Utilities
 
The territory in which the traditional operating companies provide electric service comprises most of the states of Alabama and Georgia together with the northwestern portion of Florida and southeastern Mississippi. In this territory there are non-affiliated electric distribution systems which obtain some or all of their power requirements either directly or indirectly from the traditional operating companies. The territory has an area of approximately 120,000 square miles and an estimated population of approximately 11 million.
 
Alabama Power is engaged, within the State of Alabama, in the generation and purchase of electricity and the distribution and sale of such electricity at retail in over 1,000 communities (including Anniston, Birmingham, Gadsden, Mobile, Montgomery and Tuscaloosa) and at wholesale to 15 municipally-owned electric distribution systems, 11 of which are served indirectly through sales to AMEA, and two rural distributing cooperative associations. Alabama Power also supplies steam service in downtown Birmingham. Alabama Power owns coal reserves near its Plant Gorgas and uses the output of coal from the reserves in its generating plants. Alabama Power also sells, and cooperates with dealers in promoting the sale of, electric appliances.
 
Georgia Power is engaged in the generation and purchase of electricity and the transmission, distribution and sale of such electricity within the State of Georgia at retail in over 600 communities (including Athens, Atlanta, Augusta, Columbus, Macon and Rome), as well as in rural areas, and at wholesale currently to OPC, MEAG, Dalton and Hampton. This territory also includes the five-county area in eastern Georgia formerly served by Savannah Electric. See Note 3 to the financial statements of Georgia Power under “Merger” in Item 8 herein for information on the merger of Savannah Electric with and into Georgia Power.
 
Gulf Power is engaged, within the northwestern portion of Florida, in the generation and purchase of electricity and the distribution and sale of such electricity at retail in 71 communities (including Pensacola, Panama City and Fort Walton Beach), as well as in rural areas, and at wholesale to a non-affiliated utility and a municipality.
 
Mississippi Power is engaged in the generation and purchase of electricity and the distribution and sale of such energy within the 23 counties of southeastern Mississippi, at retail in 123 communities (including Biloxi, Gulfport, Hattiesburg, Laurel, Meridian and Pascagoula), as well as in rural areas, and at wholesale to one municipality, six rural electric distribution cooperative associations and one generating and transmitting cooperative.
 
For information relating to kilowatt-hour sales by classification for the traditional operating companies, see MANAGEMENT’S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS of each of the traditional operating companies in Item 7 herein. Also, for information relating to the sources of revenues for the Southern Company system, each of the traditional operating companies and Southern Power, reference is made to Item 6 herein.


I-5


Table of Contents

 
A portion of the area served by the traditional operating companies adjoins the area served by TVA and its municipal and cooperative distributors. An Act of Congress limits the distribution of TVA power, unless otherwise authorized by Congress, to specified areas or customers which generally were those served on July 1, 1957.
 
The RUS has authority to make loans to cooperative associations or corporations to enable them to provide electric service to customers in rural sections of the country. There are 71 electric cooperative organizations operating in the territory in which the traditional operating companies provide electric service at retail or wholesale.
 
One of these organizations, AEC, is a generating and transmitting cooperative selling power to several distributing cooperatives, municipal systems and other customers in south Alabama and northwest Florida. AEC owns generating units with approximately 1,776 megawatts of nameplate capacity, including an undivided 8.16% ownership interest in Alabama Power’s Plant Miller Units 1 and 2. AEC’s facilities were financed with RUS loans secured by long-term contracts requiring distributing cooperatives to take their requirements from AEC to the extent such energy is available.
 
Four electric cooperative associations, financed by the RUS, operate within Gulf Power’s service area. These cooperatives purchase their full requirements from AEC and SEPA (a federal power marketing agency). A non-affiliated utility also operates within Gulf Power’s service area and purchases its full requirements from Gulf Power.
 
Alabama Power and Gulf Power have entered into separate agreements with AEC involving interconnection between their respective systems. The delivery of capacity and energy from AEC to certain distributing cooperatives in the service areas of Alabama Power and Gulf Power is governed by the Southern Company/AEC Network Transmission Service Agreement. The rates for this service to AEC are on file with the FERC. See PROPERTIES – “Jointly-Owned Facilities” in Item 2 herein for details of Alabama Power’s joint-ownership with AEC of a portion of Plant Miller.
 
Mississippi Power has an interchange agreement with SMEPA, a generating and transmitting cooperative, pursuant to which various services are provided, including the furnishing of protective capacity by Mississippi Power to SMEPA.
 
There are 43 electric cooperative organizations operating in, or in areas adjoining, territory in the State of Georgia in which Georgia Power provides electric service at retail or wholesale. Three of these organizations obtain their power from TVA, one from Southern Power under a 15-year agreement which began in January 2005 and one from other sources. OPC has a wholesale power contract with the remaining 38 of these cooperative organizations. OPC and these cooperative organizations utilize self-owned generation, some of which is acquired and jointly-owned with Georgia Power, megawatt capacity purchases from Georgia Power under power supply agreements and other arrangements to meet their power supply obligations. Georgia Power, OPC and Georgia Systems Operations Corporation entered into a new control area compact agreement effective March 2005 which replaced previous coordination service agreements.
 
In April 2006, AEC began purchasing 250 megawatts of capacity from Georgia Power for a 10-year term. In January 2005, 29 electric cooperative organizations served by OPC and one served by Southern Power began purchasing a total of 700 megawatts of capacity from Georgia Power under individual contracts for 10-year terms. Also, in January 2005, the electric cooperative served by Southern Power began purchasing 25 megawatts of peaking capacity from Georgia Power under a 10-year contract. This electric cooperative began purchasing 50 megawatts of coal-fired capacity from Georgia Power beginning on April 1, 2006 and ending on December 31, 2014 and will purchase another 75 megawatts of coal-fired capacity from Georgia Power beginning June 1, 2010 and ending December 31, 2019. See PROPERTIES – “Jointly-Owned Facilities” in Item 2 herein for additional information.
 
There are 65 municipally-owned electric distribution systems operating in the territory in which the traditional operating companies provide electric service at retail or wholesale.
 
AMEA was organized under an act of the Alabama legislature and is comprised of 11 municipalities. In December 2001, Alabama Power entered into a power sales agreement with AMEA which began on January 1, 2006. Under this contract, AMEA supplies 70 to 95 megawatts of power from its combustion turbine plant and Alabama Power serves the remainder of its member needs through 2010. Beginning in 2011, the amount of power supplied to AMEA by Alabama Power is fixed at 2010 levels and AMEA has the option to seek other suppliers for its incremental growth needs through 2015, at which time the contract terminates.
 
Forty-eight municipally-owned electric distribution systems and one county-owned system receive their requirements through MEAG, which was established by a Georgia state statute in 1975. MEAG serves these requirements from self-owned generation facilities, some of which are acquired and jointly-owned with Georgia Power, power purchased from Georgia Power and purchases from other resources. In 1997, a pseudo scheduling and services agreement was implemented


I-6


Table of Contents

between Georgia Power and MEAG. Since 1977, Dalton has filled its requirements from self-owned generation facilities, some of which are acquired and jointly-owned with Georgia Power, and through purchases from Georgia Power pursuant to their partial requirements tariff. Beginning January 1, 2003, Dalton entered into a power supply agreement with Georgia Power and Southern Power pursuant to which it will purchase 134 megawatts from Georgia Power and the balance of its requirements, net of self-owned generation, from Southern Power for a 15-year term. In addition, Georgia Power serves the full requirements of Hampton’s electric distribution system under a market-based contract. See PROPERTIES – “Jointly-Owned Facilities” in Item 2 herein for additional information.
 
Georgia Power has entered into substantially similar agreements with Georgia Transmission Corporation (formerly OPC’s transmission division), MEAG and Dalton providing for the establishment of an integrated transmission system to carry the power and energy of each. The agreements require an investment by each party in the integrated transmission system in proportion to its respective share of the aggregate system load. See PROPERTIES – “Jointly-Owned Facilities” in Item 2 herein for additional information.
 
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Power Sales Agreements” of Southern Power in Item 7 herein for information concerning its PPAs.
 
SCS, acting on behalf of the traditional operating companies, also has a contract with SEPA providing for the use of the traditional operating companies’ facilities at government expense to deliver to certain cooperatives and municipalities, entitled by federal statute to preference in the purchase of power from SEPA, quantities of power equivalent to the amounts of power allocated to them by SEPA from certain United States government hydroelectric projects.
 
The retail service rights of all electric suppliers in the State of Georgia are regulated by the 1973 State Territorial Electric Service Act. Pursuant to the provisions of this Act, all areas within existing municipal limits were assigned to the primary electric supplier therein (451 municipalities, including Atlanta, Columbus, Macon, Augusta, Athens, Rome and Valdosta, to Georgia Power; 115 to electric cooperatives; and 50 to publicly-owned systems). Areas outside of such municipal limits were either to be assigned or to be declared open for customer choice of supplier by action of the Georgia PSC pursuant to standards set forth in this Act. Consistent with such standards, the Georgia PSC has assigned substantially all of the land area in the state to a supplier. Notwithstanding such assignments, this Act provides that any new customer locating outside of 1973 municipal limits and having a connected load of at least 900 kilowatts may receive electric service from the supplier of its choice. See “Competition” herein for additional information.
 
Under the provisions of its franchises and concessions and the 1973 State Territorial Electric Service Act, and pursuant to the merger with Savannah Electric, Georgia Power now has the full but nonexclusive right to serve the City of Savannah, the Towns of Bloomingdale, Pooler, Garden City, Guyton, Newington, Oliver, Port Wentworth, Rincon, Tybee Island, Springfield, Thunderbolt and Vernonburg, and in conjunction with a secondary supplier, the Town of Richmond Hill. In addition, Savannah Electric was assigned certain unincorporated areas in Chatham, Effingham, Bryan, Bulloch and Screven Counties by the Georgia PSC. In connection with the merger of Savannah Electric with and into Georgia Power, the Georgia PSC approved the transfer of Savannah Electric’s service territory to Georgia Power at the effective time of merger. See “Competition” herein for additional information.
 
Pursuant to the 1956 Utility Act, the Mississippi PSC issued “Grandfather Certificates” of public convenience and necessity to Mississippi Power and to six distribution rural cooperatives operating in southeastern Mississippi, then served in whole or in part by Mississippi Power, authorizing them to distribute electricity in certain specified geographically described areas of the state. The six cooperatives serve approximately 375,000 retail customers in a certificated area of approximately 10,300 square miles. In areas included in a “Grandfather Certificate,” the utility holding such certificate may, without further certification, extend its lines up to five miles; other extensions within that area by such utility, or by other utilities, may not be made except upon a showing of, and a grant of a certificate of, public convenience and necessity. Areas included in such a certificate which are subsequently annexed to municipalities may continue to be served by the holder of the certificate, irrespective of whether it has a franchise in the annexing municipality. On the other hand, the holder of the municipal franchise may not extend service into such newly annexed area without authorization by the Mississippi PSC.
 
Competition
 
The electric utility industry in the United States is continuing to evolve as a result of regulatory and competitive factors. Among the early primary agents of change was the Energy Act of 1992. The Energy Act of 1992 allowed IPPs to access a utility’s transmission network in order to sell electricity to other utilities.
 
Alabama Power currently has cogeneration contracts in effect with 10 industrial customers. Under the terms of these contracts, Alabama Power purchases excess


I-7


Table of Contents

generation of such companies. During 2006, Alabama Power purchased approximately 78 million kilowatt-hours from such companies at a cost of $3.9 million.
 
Georgia Power currently has contracts in effect with 10 small power producers whereby Georgia Power purchases their excess generation. During 2006, Georgia Power purchased 11 million kilowatt-hours from such companies at a cost of $2.4 million. Georgia Power has PPAs for electricity with two cogeneration facilities. Payments are subject to reductions for failure to meet minimum capacity output. During 2006, Georgia Power purchased 356 million kilowatt-hours at a cost of $70.6 million from these facilities.
 
Also during 2006, pursuant to the merger with Savannah Electric, Georgia Power purchased energy from seven customer-owned generating facilities. Six of the seven customers provide only energy to Georgia Power. These six customers make no capacity commitment and are not dispatched by Georgia Power. Georgia Power does have a contract with the remaining customer for eight megawatts of dispatchable capacity and energy. During 2006, Georgia Power purchased a total of 48.6 million kilowatt-hours from the seven suppliers at a cost of approximately $1.9 million.
 
Gulf Power currently has agreements in effect with various industrial, commercial and qualifying facilities pursuant to which Gulf Power purchases “as available” energy from customer-owned generation. During 2006, Gulf Power purchased 9.3 million kilowatt-hours from such companies for approximately $0.5 million.
 
Mississippi Power currently has a cogeneration agreement in effect with one of its industrial customers. Under the terms of this contract, Mississippi Power purchases any excess generation. During 2006, this customer had no excess generation.
 
The competition for retail energy sales among competing suppliers of energy is influenced by various factors, including price, availability, technological advancements and reliability. These factors are, in turn, affected by, among other influences, regulatory, political and environmental considerations, taxation and supply.
 
Generally, the traditional operating companies have experienced, and expect to continue to experience, competition in their respective retail service territories in varying degrees as the result of self-generation (as described above) and fuel switching by customers and other factors. See also “Territory Served by the Utilities” herein for additional information concerning suppliers of electricity operating within or near the areas served at retail by the traditional operating companies.
 
Southern Power competes with investor owned utilities, IPPs and others for wholesale energy sales in the Southeastern United States wholesale market. The needs of this market are driven by the demands of end users in the Southeast and the generation available. Southern Power’s success in wholesale energy sales is influenced by various factors including reliability and availability of Southern Power’s plants, availability of transmission to serve the demand, price and Southern Power’s ability to contain costs.
 
Seasonality
 
Electric power generation is a seasonal business. At the traditional operating companies and Southern Power, the demand for power peaks during the hot summer months, with market prices also peaking at that time. Power demand peaks can also be recorded during the winter. As a result, the overall operating results of Southern Company, the traditional operating companies and Southern Power in the future may fluctuate substantially on a seasonal basis. In addition, Southern Company, the traditional operating companies and Southern Power have historically sold less power, and consequently earned less income, when weather conditions are milder.
 
Regulation
 
State Commissions
 
The traditional operating companies are subject to the jurisdiction of their respective state PSCs, which have broad powers of supervision and regulation over public utilities operating in the respective states, including their rates, service regulations, sales of securities (except for the Mississippi PSC) and, in the cases of the Georgia PSC and the Mississippi PSC, in part, retail service territories. See “Territory Served by the Utilities” and “Rate Matters” herein for additional information.
 
Federal Power Act
 
In July 2005, the U.S. Congress passed the Energy Act of 2005 which repealed the Holding Company Act effective February 8, 2006. The traditional operating companies, Southern Power and its generation subsidiaries and SEGCO are all public utilities engaged in wholesale sales of energy in interstate commerce and therefore remain subject to the rate, financial and accounting jurisdiction of the FERC under the Federal Power Act. Certain financing approvals which would have been obtained from the SEC under the repealed Holding Company Act now must be obtained from the FERC. In implementing repeal of the Holding Company Act, the FERC sought to minimize unnecessary administrative burdens and decided to retain an “at cost standard” for services rendered by system service companies such as SCS, to permit certain existing financing authorizations to remain effective without further action by the FERC and to reduce reporting requirements. In addition to its repeal of the Holding


I-8


Table of Contents

Company Act, the Energy Act of 2005 authorized the FERC to establish regional reliability organizations authorized to enforce reliability standards, established a process for the FERC to address impediments to the construction of transmission and established clear responsibility for the FERC to prohibit manipulative energy trading practices.
 
Alabama Power and Georgia Power are also subject to the provisions of the Federal Power Act or the earlier Federal Water Power Act applicable to licensees with respect to their hydroelectric developments. Among the hydroelectric projects subject to licensing by the FERC are 14 existing Alabama Power generating stations having an aggregate installed capacity of 1,662,400 kilowatts and 18 existing Georgia Power generating stations having an aggregate installed capacity of 1,074,696 kilowatts.
 
In 2003, Georgia Power started the relicensing process for the Morgan Falls project which is located on the Chattahoochee River near Atlanta, Georgia and submitted the final license application for this facility to the FERC in February 2007. The current license for the Morgan Falls project expires in 2009. In 2007, Georgia Power expects to begin the relicensing process for Bartlett’s Ferry which is located on the Chattahoochee River near Columbus, Georgia. The current Bartlett’s Ferry license expires in 2014 and the application for a new license is expected to be submitted to the FERC in 2012. In July 2005, Alabama Power filed two applications with the FERC for new 50-year licenses for its seven hydroelectric developments on the Coosa River (Weiss, Henry, Logan Martin, Lay, Mitchell, Jordan and Bouldin) and for the Lewis Smith and Bankhead developments on the Warrior River. The FERC licenses for all of these nine developments expire in July and August of 2007. In 2006, Alabama Power initiated the process of developing an application to relicense the Martin hydroelectric project located on the Tallapoosa River. The current Martin license will expire in 2013 and the application for a new license is expected to be filed with the FERC in 2011. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Hydro Relicensing” of Alabama Power in Item 7 herein for additional information.
 
Georgia Power and OPC also have a license, expiring in 2027, for the Rocky Mountain Plant, a pure pumped storage facility of 847,800 kilowatt capacity. See PROPERTIES – “Jointly-Owned Facilities” in Item 2 herein for additional information.
 
Licenses for all projects, excluding those discussed above, expire in the period 2013-2033 in the case of Alabama Power’s projects and in the period 2014-2039 in the case of Georgia Power’s projects.
 
Upon or after the expiration of each license, the United States Government, by act of Congress, may take over the project or the FERC may relicense the project either to the original licensee or to a new licensee. In the event of takeover or relicensing to another, the original licensee is to be compensated in accordance with the provisions of the Federal Power Act, such compensation to reflect the net investment of the licensee in the project, not in excess of the fair value of the property taken, plus reasonable damages to other property of the licensee resulting from the severance therefrom of the property taken. If the FERC does not act on the new license application prior to the expiration of the existing license, the FERC is required to issue annual licenses, under the same terms and conditions of the existing license, until a new license is issued.
 
Atomic Energy Act of 1954
 
Alabama Power, Georgia Power and Southern Nuclear are subject to the provisions of the Atomic Energy Act of 1954, as amended, which vests jurisdiction in the NRC over the construction and operation of nuclear reactors, particularly with regard to certain public health and safety and antitrust matters. The National Environmental Policy Act has been construed to expand the jurisdiction of the NRC to consider the environmental impact of a facility licensed under the Atomic Energy Act of 1954, as amended.
 
The NRC operating licenses for Plant Vogtle units 1 and 2 currently expire in January 2027 and February 2029, respectively. In January 2002, the NRC granted Georgia Power a 20-year extension of the licenses for both units at Plant Hatch which permits the operation of units 1 and 2 until 2034 and 2038, respectively. Georgia Power plans to file an application with the NRC in June 2007 to extend the licenses for Plant Vogtle units 1 and 2 for an additional 20 years. In May 2005, the NRC granted Alabama Power a 20-year extension of the licenses for both units at Plant Farley which permits operation of units 1 and 2 until 2037 and 2041, respectively.
 
See Notes 1 and 9 to the financial statements of Southern Company, Alabama Power and Georgia Power in Item 8 herein for information on nuclear decommissioning costs and nuclear insurance.
 
FERC Matters
 
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters” of each of the registrants in Item 7 herein for information on matters regarding the FERC.


I-9


Table of Contents

 
Environmental Statutes and Regulations
 
Southern Company’s operations are subject to extensive regulation by state and federal environmental agencies under a variety of statutes and regulations governing environmental media, including air, water and land resources. Compliance with these environmental requirements involves significant capital and operating costs, a major portion of which is expected to be recovered through existing ratemaking provisions. There is no assurance, however, that all such costs will be recovered.
 
Compliance with the federal Clean Air Act and resulting regulations has been, and will continue to be, a significant focus for Southern Company, each traditional operating company and SEGCO. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Southern Company and each of the traditional operating companies in Item 7 herein for additional information about the Clean Air Act and other environmental issues, including the litigation brought by the EPA under the New Source Review provisions of the Clean Air Act.
 
Additionally, each traditional operating company and SEGCO has incurred costs for environmental remediation of various sites. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulation – Environmental Remediation” of Southern Company and each of the traditional operating companies in Item 7 herein for information regarding environmental remediation efforts. Also, see Note 3 to the financial statements of Southern Company, Georgia Power, Gulf Power and Mississippi Power under “Environmental Matters – Environmental Remediation” in Item 8 herein for information regarding the identification of sites that may require environmental remediation.
 
The traditional operating companies, Southern Power and SEGCO are unable to predict at this time what additional steps they may be required to take as a result of the implementation of existing or future quality control requirements for air, water and hazardous or toxic materials, but such steps could adversely affect system operations and result in substantial additional costs.
 
The outcome of the matters mentioned above under “Regulation” cannot now be determined, except that these developments may result in delays in obtaining appropriate licenses for generating facilities, increased construction and operating costs or reduced generation, the nature and extent of which, while not determinable at this time, could be substantial.
 
Rate Matters
 
Rate Structure
 
The rates and service regulations of the traditional operating companies are uniform for each class of service throughout their respective service areas. Rates for residential electric service are generally of the block type based upon kilowatt-hours used and include minimum charges. Residential and other rates contain separate customer charges. Rates for commercial service are presently of the block type and, for large customers, the billing demand is generally used to determine capacity and minimum bill charges. These large customers’ rates are generally based upon usage by the customer and include rates with special features to encourage off-peak usage. Additionally, Alabama Power, Gulf Power and Mississippi Power are generally allowed by their respective state PSCs to negotiate the terms and cost of service to large customers. Such terms and cost of service, however, are subject to final state PSC approval.
 
Fuel and net purchased energy costs are recovered through specific fuel cost recovery provisions at the traditional operating companies. These fuel cost recovery provisions are adjusted to reflect increases or decreases in such costs as needed. Gulf Power’s and Mississippi Power’s fuel cost recovery provisions are adjusted annually to reflect increases or decreases in such costs. Georgia Power is currently required to file for an adjustment to its fuel cost recovery rate no later than March 1, 2008. Alabama Power’s fuel clause is adjusted as required. Revenues are adjusted for differences between recoverable costs and amounts actually recovered in current rates.
 
Approved environmental compliance and storm damage costs are recovered at Alabama Power, Gulf Power and Mississippi Power through cost recovery provisions approved by their respective state PSCs. Within limits approved by their respective PSCs, these rates are adjusted to reflect increases or decreases in such costs as required. Alabama Power recovers the cost of new plant and Gulf Power recovers purchased power capacity and conservation costs through cost recovery provisions which are adjusted as required to reflect increases or decreases in such costs as needed. Georgia Power continues to recover environmental compliance, storm damage and new plant costs through its base rates. Revenues are adjusted for differences between recoverable costs and amounts actually recovered in current rates.
 
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters” of Southern Company and each of the


I-10


Table of Contents

traditional operating companies in Item 7 herein and Note 3 to the financial statements of Southern Company under “Alabama Power Retail Regulatory Matters” and “Georgia Power Retail Regulatory Matters” and Note 3 to the financial statements of each of the traditional operating companies under “Retail Regulatory Matters” in Item 8 herein for a discussion of rate matters. Also, see Note 1 to the financial statements of Southern Company and each of the traditional operating companies in Item 8 herein for a discussion of recovery of fuel costs and environmental compliance costs through rates.
 
Southern Power is authorized by the FERC to sell power to non-affiliates at market-based prices and to make short-term opportunity sales at market rates. Special FERC approval must be obtained with respect to a market-based contract with an affiliate. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Market-Based Rate Authority” of Southern Power in Item 7 herein and Note 3 to the financial statements of Southern Power under “FERC Matters – Market-Based Rate Authority” in Item 8 herein for a discussion of rate matters.
 
Integrated Resource Planning
 
Georgia Power must file an IRP with the Georgia PSC that specifies how it intends to meet the future electrical needs of its customers through a combination of demand-side and supply-side resources. The Georgia PSC must certify any new demand-side or supply-side resources. Once certified, the lesser of actual or certified construction costs and purchased power costs will be recoverable through rates.
 
In December 2002, the Georgia PSC certified a PPA between Duke Energy and Georgia Power for 620 megawatts for seven years that began in June 2005. K-Gen Power, LLC has replaced Duke Energy as a party to this contract.
 
In May 2004, the Georgia PSC ordered Georgia Power and Savannah Electric to purchase the McIntosh combined cycle generating facility from Southern Power and place it into their respective rate bases. The McIntosh resource was previously certified as a PPA by the Georgia PSC in the supply-side certification conducted in 2002 and, at the same time, the Georgia PSC also approved the de-certification of Savannah Electric’s Plant Riverside, units 4 through 8, effective in May 2005. The McIntosh units produce a combined 1,240 megawatts and have been available since June 2005. Pursuant to the merger with Savannah Electric, Georgia Power now has 100% ownership of the McIntosh units. See Note 3 to the financial statements of Georgia Power under “Retail Regulatory Matters – Rate Plans” in Item 8 herein for additional information.
 
Following the Georgia PSC’s approval of the 2004 IRP, Georgia Power de-certified the Atkinson combustion turbine units 5A and 5B totaling approximately 80 megawatts of capacity and extended the life of the Kraft combustion turbine unit until such time as its retirement is warranted.
 
Georgia Power received certification of its RFP for approximately 1,000 megawatts to meet its future supply-side capacity needs for 2009 and beyond.
 
In January 2006, Georgia Power filed an application with the Georgia PSC to approve an amendment to Georgia Power’s IRP in connection with the merger to add Savannah Electric customers and generating assets. In June 2006, the Georgia PSC approved the merger between Georgia Power and Savannah Electric. Also, the Georgia PSC approved the transfer of territory, customers, power plants and demand-side programs from Savannah Electric to Georgia Power.
 
In March 2006, Georgia Power issued RFPs for approximately 2,100 and 1,400 megawatts, respectively, to meet its 2010 and 2011 supply-side needs. For the 2011 RFP, Georgia Power submitted self-build proposals that compare to the market. Additionally, Georgia Power will continue a residential load management program which was certified by the Georgia PSC for up to 40 megawatts of equivalent supply-side capacity. Georgia Power will continue to utilize approximately eight megawatts of capacity from existing qualifying facilities under firm contracts and continue to add additional resources as ordered by the Georgia PSC.
 
On January 31, 2007, Georgia Power filed its 2007 IRP with the Georgia PSC. With the 2007 IRP and subsequent filings, Georgia Power proposes to: (1) retire the coal units at Plant McDonough and replace them with combined-cycle natural gas units; (2) gain approval for five new energy efficiency pilot programs and request that certified demand-side management programs receive similar financial treatment as supply-side options; (3) pursue up to three new renewable generation projects with a Georgia Power ownership interest; (4) establish new nuclear units as a preferred option to meet demand in the 2015/2016 timeframe; and (5) establish policy that baseload generating plants should be built by Georgia Power and should not be subject to the competitive bid process. The Georgia PSC decision on this 2007 IRP filing is expected in July 2007.
 
Environmental Cost Recovery Plans
 
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Alabama Power” and “PSC Matters – Retail Rate Adjustments,” respectively, of Southern Company and Alabama Power in Item 7 herein and Note 3


I-11


Table of Contents

to the financial statements of Southern Company and Alabama Power, under “Alabama Power Retail Regulatory Matters” and “Retail Regulatory Matters,” respectively, in Item 8 herein for a discussion on Alabama PSC rate matters.
 
See Note 3 to the financial statements of Gulf Power under “Retail Regulatory Matters – Environmental Cost Recovery” in Item 8 herein for information on Gulf Power’s environmental cost recovery.
 
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Environmental Compliance Overview Plan” of Mississippi Power in Item 7 herein and Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters – Environmental Compliance Overview Plan” in Item 8 herein for information on Mississippi Power’s environmental cost recovery.
 
Storm Damage Cost Recovery
 
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Storm Damage Cost Recovery” of Southern Company, Gulf Power and Mississippi Power and “PSC Matters – Natural Disaster Cost Recovery” of Alabama Power in Item 7 herein and Note 3 to the financial statements of Southern Company, Alabama Power, Gulf Power and Mississippi Power under “Storm Damage Cost Recovery,” “Retail Regulatory Matters – Natural Disaster Cost Recovery,” “Retail Regulatory Matters – Storm Damage Cost Recovery” and “Retail Regulatory Matters – Storm Damage Cost Recovery,” respectively, in Item 8 herein for a discussion of the impacts and recovery of storm damage costs related to Hurricanes Ivan, Dennis and Katrina.
 
Employee Relations
 
The Southern Company system had a total of 26,091 employees on its payroll at December 31, 2006.
 
         
 
    Employees
    at
    December 31, 2006
 
Alabama Power
  6,796
Georgia Power
  9,278
Gulf Power
  1,321
Mississippi Power
  1,270
SCS
  3,737
Southern Holdings*
  4
Southern Nuclear
  3,216
Southern Power
  **
Other
  469
 
 
Total
  26,091
 
 
 
*  One of Southern Holdings’ subsidiaries has 4 employees. Southern Holdings has agreements with SCS whereby all other employee services are rendered at cost.
 
** Southern Power has no employees. Southern Power has agreements with SCS and the traditional operating companies whereby employee services are rendered at cost.
 
The traditional operating companies have separate agreements with local unions of the IBEW generally covering wages, working conditions and procedures for handling grievances and arbitration. These agreements apply with certain exceptions to operating, maintenance and construction employees.
 
Alabama Power has agreements with the IBEW on a five-year contract extending to August 15, 2009. Upon notice given at least 60 days prior to that date, negotiations may be initiated with respect to agreement terms to be effective after such date.
 
Georgia Power has an agreement with the IBEW covering wages and working conditions, which is in effect through June 30, 2008.
 
Gulf Power has an agreement with the IBEW covering wages and working conditions, which is in effect through October 14, 2009.
 
Mississippi Power has an agreement with the IBEW extending the previous contract for one year to August 16, 2007. Negotiations are expected to begin in July 2007 on a new four-year agreement.
 
Southern Nuclear has agreements with the IBEW on a three-year contract extending to June 30, 2008 for Plants Hatch and Vogtle and a three-year contract which is in effect through August 15, 2009 for Plant Farley. Upon notice given at least 60 days prior to these dates, negotiations may be initiated with respect to agreement terms to be effective after such dates.
 
The agreements also subject the terms of the pension plans for the companies discussed above to collective bargaining with the unions at either a five-year or a 10-year cycle, depending upon union and company actions.
 
Item 1A.  RISK FACTORS
 
In addition to the other information in this Form 10-K, including MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL in Item 7 of each registrant, and other documents filed by Southern Company and/or its subsidiaries with the SEC from time to time, the following factors should be carefully considered in evaluating Southern Company and its subsidiaries. Such factors could affect actual results and cause results to differ materially from


I-12


Table of Contents

those expressed in any forward-looking statements made by, or on behalf of, Southern Company and/or its subsidiaries.
 
Risks Related to the Energy Industry
 
Southern Company and its subsidiaries are subject to substantial governmental regulation. Compliance with current and future regulatory requirements and procurement of necessary approvals, permits and certificates may result in substantial costs to Southern Company and its subsidiaries.
 
Southern Company and its subsidiaries, including the traditional operating companies and Southern Power, are subject to substantial regulation from federal, state and local regulatory agencies. Southern Company and its subsidiaries are required to comply with numerous laws and regulations and to obtain numerous permits, approvals and certificates from the governmental agencies that regulate various aspects of their businesses, including customer rates, service regulations, retail service territories, sales of securities, asset acquisitions and sales, accounting policies and practices and the operation of fossil-fuel, hydroelectric and nuclear generating facilities. For example, the rates charged to wholesale customers by the traditional operating companies and by Southern Power must be approved by the FERC. In addition, the respective state PSCs must approve the traditional operating companies’ rates for retail customers. While the retail rates approved by the respective state PSCs are designed to provide for recovery of costs and a return on invested capital, there can be no assurance that a state PSC will not deem certain costs to be imprudently incurred and not subject to recovery.
 
Southern Company and its subsidiaries believe the necessary permits, approvals and certificates have been obtained for its existing operations and that their respective businesses are conducted in accordance with applicable laws; however, the impact of any future revision or changes in interpretations of existing regulations or the adoption of new laws and regulations applicable to Southern Company or any of its subsidiaries cannot now be predicted. Changes in regulation or the imposition of additional regulations could influence the operating environment of Southern Company and its subsidiaries and may result in substantial costs.
 
General Risks Related to Operation of Southern Company’s Utility Subsidiaries
 
The regional power market in which Southern Company and its utility subsidiaries compete may have changing transmission regulatory structures, which could affect the ownership of these assets and related revenues and expenses.
 
The traditional operating companies currently own and operate transmission facilities as part of a vertically integrated utility. Transmission revenues are not separated from generation and distribution revenues in their approved retail rates. Since 1999, when the FERC issued final rules on RTOs, there have been a number of proceedings at FERC designed to encourage further voluntary formation of RTOs or to mandate their formation. Under this new transmission regulatory structure, the traditional operating companies could transfer functional control (but not ownership) of their transmission facilities to an independent third party. While there are no active proceedings at FERC that would require Southern Company to participate in a RTO, current FERC efforts that may potentially change the regulatory and/or operational structure of transmission include rules related to the standardization of generation interconnection, as well as an inquiry into, among other things, market power by vertically integrated utilities. The financial condition, net income and cash flows of Southern Company and its utility subsidiaries could be adversely affected by future changes in the federal regulatory or operational structure of transmission.
 
Certain events in the energy markets that are beyond the control of Southern Company and its subsidiaries have increased the level of public and regulatory scrutiny in the energy industry and in the capital markets. The reaction to these events may result in new laws or regulations related to the business operations or the accounting treatment of the existing operations of Southern Company and its subsidiaries which could have a negative impact on the net income or access to capital of Southern Company and its subsidiaries.
 
As a result of the energy crisis in California during the summer of 2001, the Enron Corporation bankruptcy, investigations by governmental authorities into energy trading activities and the August 2003 power outage in the Northeast, companies in regulated and unregulated electric utility businesses have been under an increased amount of public and regulatory scrutiny with respect to, among other things, accounting practices, financial disclosures and relationships with independent auditors. This increased scrutiny has led to substantial changes in laws and regulations affecting Southern Company and its subsidiaries, including, among others, enhanced internal control and auditor independence requirements, financial statement certification requirements, more frequent SEC reviews of financial statements and accelerated and additional SEC filing requirements. New accounting and disclosure requirements have changed the way Southern Company and its subsidiaries are required to record revenues, expenses, assets and liabilities. Southern Company expects continued regulatory focus on accounting and financial reporting issues. Future


I-13


Table of Contents

disruptions in the industry such as those described above and any additional resulting regulations may have a negative impact on the net income or access to capital of Southern Company and its subsidiaries.
 
Deregulation or restructuring in the electric industry may result in increased competition and unrecovered costs which could negatively impact the net income of Southern Company and the traditional operating companies and the value of their respective assets.
 
Increased competition, which may result from restructuring efforts, could have a significant adverse financial impact on Southern Company and its traditional operating companies. Increased competition could result in increased pressure to lower the cost of electricity. Any adoption in the territories served by the traditional operating companies of retail competition and the unbundling of regulated energy service could have a significant adverse financial impact on Southern Company and the traditional operating companies due to an impairment of assets, a loss of retail customers, lower profit margins, an inability to recover reasonable costs or increased costs of capital. Southern Company and the traditional operating companies cannot predict if or when they may be subject to changes in legislation or regulation, nor can Southern Company and the traditional operating companies predict the impact of these changes.
 
Additionally, the electric utility industry has experienced a substantial increase in competition at the wholesale level. As a result of changes in federal law and regulatory policy, competition in the wholesale electricity market has greatly increased due to a greater participation by traditional electricity suppliers, non-utility generators, IPPs, wholesale power marketers and brokers and due to the trading of energy futures contracts on various commodities exchanges. In addition, FERC rules on transmission service are designed to facilitate competition in the wholesale market on a nationwide basis by providing greater flexibility and more choices to wholesale power customers.
 
Potential changes to the criteria used by the FERC for approval of market-based contracts may negatively impact the traditional operating companies’ and Southern Power’s ability to charge market-based rates.
 
Each of the traditional operating companies and Southern Power have authorization from the FERC to sell power to nonaffiliates, including short-term opportunity sales, at market-based prices. Specific FERC approval must be obtained with respect to a market-based sale to an affiliate. In December 2004, the FERC initiated a proceeding to assess Southern Company’s generation dominance within its retail service territory. The ability to charge market-based rates in other markets is not an issue in that proceeding. Any new market-based rate sales by any subsidiary of Southern Company in Southern Company’s retail service territory entered into during a 15-month refund period beginning February 27, 2005 could 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 refund period were approximately $19.7 million for the Southern Company system. In the event that FERC’s default mitigation measures for entities that are found to have market power are ultimately applied, the traditional 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.
 
In addition, in May 2005 the FERC started an investigation to determine whether Southern Company satisfies the other three parts of 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 sales involving any Southern Company subsidiary could be subject to refund to the extent the FERC orders lower rates as a result of this new investigation. Such sales through October 19, 2006, the end of the refund period, were approximately $55.4 million for the Southern Company system, of which $15.5 million relates to sales inside the retail service territory discussed above.
 
Risks Related to Environmental Regulation
 
Southern Company’s and the traditional operating companies’ costs of compliance with environmental laws are significant. The costs of compliance with future environmental laws and the incurrence of environmental liabilities could negatively impact the net income and cash flows of Southern Company, the traditional operating companies or Southern Power.
 
Southern Company and the traditional operating companies are subject to extensive federal, state and local environmental requirements which, among other things, regulate air emissions, water discharges and the management of hazardous and solid waste in order to adequately protect the environment. Compliance with these legal requirements requires Southern Company and the traditional operating companies to commit significant expenditures for installation of pollution control equipment, environmental monitoring, emissions fees and permits at all of their respective facilities. These expenditures are significant and Southern Company and the traditional operating companies expect that they will increase in the future. Through 2006, Southern Company had invested approximately $3.1 billion in capital projects


I-14


Table of Contents

to comply with these requirements, with annual totals of $661 million, $423 million and $300 million for 2006, 2005 and 2004, respectively. Southern Company expects that capital expenditures to assure compliance with existing and new regulations will be an additional $1.66 billion, $1.65 billion and $1.27 billion for 2007, 2008 and 2009, respectively. Because Southern Company’s compliance strategy is impacted by changes to existing environmental laws and regulations, the cost, availability, and existing inventory of emission allowances, and Southern Company’s fuel mix, the ultimate outcome cannot be determined at this time.
 
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.
 
If Southern Company, the traditional operating companies or Southern Power fail to comply with environmental laws and regulations, even if caused by factors beyond their control, that failure may result in the assessment of civil or criminal penalties and fines. The EPA has filed civil actions against Alabama Power and Georgia Power alleging violations of the new source review provisions of the Clean Air Act. Southern Company is a party to suits alleging its emissions of carbon dioxide, a greenhouse gas, contribute to global warming. An adverse outcome in any one of these cases could require substantial capital expenditures that cannot be determined at this time and could possibly require the payment of substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates.
 
Existing environmental laws and regulations may be revised or new laws and regulations related to global climate change, air quality or other environmental and health concerns may be adopted or become applicable to Southern Company, the traditional operating companies and Southern Power. Revised or additional laws and regulations could result in significant additional expense and operating restrictions on the facilities of the traditional operating companies or Southern Power or increased compliance costs which may not be fully recoverable from customers and would therefore reduce the net income of Southern Company, the traditional operating companies or Southern Power. The cost impact of such legislation would depend upon the specific requirements enacted and cannot be determined at this time.
 
Risks Related to Southern Company and its Business
 
Southern Company may be unable to meet its ongoing and future financial obligations and to pay dividends on its common stock if its subsidiaries are unable to pay upstream dividends or repay funds to Southern Company.
 
Southern Company is a holding company and, as such, Southern Company has no operations of its own. Substantially all of Southern Company’s consolidated assets are held by subsidiaries. Southern Company’s ability to meet its financial obligations and to pay dividends on its common stock at the current rate is primarily dependent on the net income and cash flows of its subsidiaries and their ability to pay upstream dividends or to repay funds to Southern Company. Prior to funding Southern Company, Southern Company’s subsidiaries have financial obligations that must be satisfied, including among others, debt service and preferred and preference stock dividends. Southern Company’s subsidiaries are separate legal entities and have no obligation to provide Southern Company with funds for its payment obligations.
 
The financial performance of Southern Company and its subsidiaries may be adversely affected if its subsidiaries are unable to successfully operate their facilities.
 
Southern Company’s financial performance depends on the successful operation of its subsidiaries’ electric generating, transmission and distribution facilities. Operating these facilities involves many risks, including:
 
  •   operator error and breakdown or failure of equipment or processes;
  •   operating limitations that may be imposed by environmental or other regulatory requirements;
  •   labor disputes;
  •   terrorist attacks;
  •   fuel or material supply interruptions;
  •   compliance with mandatory reliability standards if adopted; and
  •   catastrophic events such as fires, earthquakes, explosions, floods, hurricanes, pandemic health events such as an avian influenza or other similar occurrences.
 
A decrease or elimination of revenues from power produced by the electric generating facilities or an increase in the cost of operating the facilities would reduce the net income and cash flows and could adversely impact the financial condition of the affected traditional operating company or Southern Power and of Southern Company.
 
The revenues of Southern Company, the traditional operating companies and Southern Power depend in


I-15


Table of Contents

part on sales under PPAs. The failure of a counterparty to one of these PPAs to perform its obligations, or the failure to renew the PPAs, could have a negative impact on the net income and cash flows of the affected traditional operating company or Southern Power and of Southern Company.
 
Most of Southern Power’s generating capacity has been sold to purchasers under PPAs having initial terms of five to 15 years. In addition, the traditional operating companies enter into PPAs with non-affiliated parties. Revenues are dependent on the continued performance by the purchasers of their obligations under these PPAs. Even though Southern Power and the traditional operating companies have a rigorous credit evaluation, the failure of one of the purchasers to perform its obligations could have a negative impact on the net income and cash flows of the affected traditional operating company or Southern Power and of Southern Company. Although these credit evaluations take into account the possibility of default by a purchaser, actual exposure to a default by a purchaser may be greater than the credit evaluation predicts. Neither Southern Power nor the traditional operating companies can predict whether the PPAs will be renewed at the end of their respective terms or on what terms any renewals may be made. If a PPA is not renewed, a replacement PPA cannot be assured.
 
Southern Company, the traditional operating companies and Southern Power may incur additional costs or delays in the construction of new plants or environmental facilities and may not be able to recover their investment. The facilities of Southern Company, the traditional operating companies and Southern Power require ongoing capital expenditures.
 
Certain of the traditional operating companies and Southern Power are in the process of constructing new generating facilities and adding environmental controls equipment at existing generating facilities. Southern Company intends to continue its strategy of developing and constructing other new facilities, expanding existing facilities and adding environmental control equipment. The completion of these types of projects without delays or cost overruns is subject to substantial risks, including:
 
  •   shortages and inconsistent quality of equipment, materials and labor;
  •   work stoppages;
  •   permits, approvals and other regulatory matters;
  •   adverse weather conditions;
  •   unforeseen engineering problems;
  •   environmental and geological conditions;
  •   delays or increased costs to interconnect its facilities to transmission grids;
  •   unanticipated cost increases; and
  •   attention to other projects.
 
Tightening labor markets in the Southeast and increasing costs of materials have resulted in increasing cost estimates for Southern Company’s subsidiaries’ construction projects. If a traditional operating company or Southern Power is unable to complete the development or construction of a facility or decides to delay or cancel construction of a facility, it may not be able to recover its investment in that facility. In addition, construction delays and contractor performance shortfalls can result in the loss of revenues and may, in turn, adversely affect the net income and financial position of a traditional operating company or Southern Power and of Southern Company. Furthermore, if construction projects are not completed according to specification, a traditional operating company or Southern Power and Southern Company may incur liabilities and suffer reduced plant efficiency, higher operating costs and reduced net income.
 
Once facilities come into commercial operation, ongoing capital expenditures are required to maintain reliable levels of operation. Significant portions of the traditional operating companies’ existing facilities were constructed many years ago. Older generation equipment, even if maintained in accordance with good engineering practices, may require significant capital expenditures to maintain efficiency, to comply with changing environmental requirements or to provide reliable operations.
 
Changes in technology may make Southern Company’s electric generating facilities owned by the traditional operating companies and Southern Power less competitive.
 
A key element of the business model of Southern Company, the traditional operating companies and Southern Power is that generating power at central power plants achieves economies of scale and produces power at relatively low cost. There are other technologies that produce power, most notably fuel cells, microturbines, windmills and solar cells. It is possible that advances in technology will reduce the cost of alternative methods of producing power to a level that is competitive with that of most central power station electric production. If this were to happen and if these technologies achieved economies of scale, the market share of Southern Company, the traditional operating companies and Southern Power could be eroded, and the value of their respective electric generating facilities could be reduced. Changes in technology could also alter the channels through which retail electric customers buy or utilize power, which could reduce the revenues or increase the expenses of Southern Company, the traditional operating companies or Southern Power.
 
Operation of nuclear facilities involves inherent risks, including environmental, health, regulatory, terrorism and financial risks that could result in fines or the


I-16


Table of Contents

closure of Southern Company’s nuclear units owned by Alabama Power or Georgia Power, and which may present potential exposures in excess of insurance coverage.
 
Alabama Power owns two nuclear units and Georgia Power holds undivided interests in, and contracts for operation of, four nuclear units. These six units are operated by Southern Nuclear and represent approximately 3,680 megawatts, or 9.1%, of Southern Company’s generation capacity as of December 31, 2006. These nuclear facilities are subject to environmental, health and financial risks such as on-site storage of spent nuclear fuel, the ability to dispose of such spent nuclear fuel, the ability to maintain adequate reserves for decommissioning, potential liabilities arising out of the operation of these facilities and the threat of a possible terrorist attack. Alabama Power and Georgia Power maintain decommissioning trusts and external insurance coverage to minimize the financial exposure to these risks; however, it is possible that damages could exceed the amount of insurance coverage.
 
The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. In the event of non-compliance, the NRC has the authority to impose fines or shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. NRC orders or new regulations related to increased security measures and any future safety requirements promulgated by the NRC could require Alabama Power and Georgia Power to make substantial operating and capital expenditures at their nuclear plants. In addition, although Alabama Power, Georgia Power and Southern Company have no reason to anticipate a serious nuclear incident at their plants, if an incident did occur, it could result in substantial costs to Alabama Power or Georgia Power and Southern Company. A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit.
 
In addition, potential terrorist threats and increased public scrutiny of utilities could result in increased nuclear licensing or compliance costs that are difficult or impossible to predict.
 
The generation and energy marketing operations of Southern Company, the traditional operating companies and Southern Power are subject to risks, many of which are beyond their control, including changes in power prices and fuel costs, that may reduce Southern Company’s, the traditional operating companies’ and Southern Power’s revenues and increase costs.
 
The generation and energy marketing operations of Southern Company, the traditional operating companies and Southern Power are subject to changes in power prices or fuel costs, which could increase the cost of producing power or decrease the amount Southern Company, the traditional operating companies and Southern Power receive from the sale of power. The market prices for these commodities may fluctuate over relatively short periods of time. Southern Company, the traditional operating companies and Southern Power attempt to mitigate risks associated with fluctuating fuel costs by passing these costs on to customers through the traditional operating companies’ fuel cost recovery clauses or through PPAs. Among the factors that could influence power prices and fuel costs are:
 
  •   prevailing market prices for coal, natural gas, uranium, fuel oil and other fuels used in the generation facilities of the traditional operating companies and Southern Power including associated transportation costs, and supplies of such commodities;
  •   demand for energy and the extent of additional supplies of energy available from current or new competitors;
  •   liquidity in the general wholesale electricity market;
  •   weather conditions impacting demand for electricity;
  •   seasonality;
  •   transmission or transportation constraints or inefficiencies;
  •   availability of competitively priced alternative energy sources;
  •   forced or unscheduled plant outages for the Southern Company system, its competitors or third party providers;
  •   the financial condition of market participants;
  •   the economy in the service territory and in general, including the impact of economic conditions on industrial and commercial demand for electricity;
  •   natural disasters, wars, embargos, acts of terrorism and other catastrophic events; and
  •   federal, state and foreign energy and environmental regulation and legislation.
 
Certain of these factors could increase the expenses of the traditional operating companies or Southern Power and Southern Company. For the traditional operating companies, such increases may not be fully recoverable through rates. Other of these factors could reduce the revenues of the traditional operating companies or Southern Power and Southern Company.
 
As a result of increasing fuel costs, the traditional operating companies have accrued significant


I-17


Table of Contents

underrecovered fuel cost balances. In addition, Gulf Power and Mississippi Power have significant deficit balances in their storm cost recovery reserves as a result of Hurricanes Ivan, Dennis and Katrina. The traditional operating companies may experience similar deficit balances following future storms. While the traditional operating companies are generally authorized to recover underrecovered fuel costs through fuel cost recovery clauses and storm recovery costs through special rate provisions administered by the respective PSCs, recovery may be denied if costs are deemed to be imprudently incurred and delays in the authorization of such recovery could negatively impact the cash flows of the affected traditional operating companies and Southern Company.
 
The use of derivative contracts by Southern Company and its subsidiaries in the normal course of business could result in financial losses that negatively impact the net income of Southern Company and its subsidiaries.
 
Southern Company and its subsidiaries, including the traditional operating companies and Southern Power, use derivative instruments, such as swaps, options, futures and forwards, to manage their commodity and financial market risks and, to a lesser extent, engage in limited trading activities. Southern Company and its subsidiaries could recognize financial losses as a result of volatility in the market values of these contracts or if a counterparty fails to perform. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these financial instruments can involve management’s judgment or use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the value of the reported fair value of these contracts.
 
The traditional operating companies and Southern Power may not be able to obtain adequate fuel supplies, which could limit their ability to operate their facilities.
 
The traditional operating companies and Southern Power purchase fuel, including coal, natural gas, uranium and fuel oil, from a number of suppliers. Disruption in the delivery of fuel, including disruptions as a result of, among other things, transportation delays, weather, labor relations, force majuere events or environmental regulations affecting any of these fuel suppliers, could limit the ability of the traditional operating companies and Southern Power to operate their respective facilities, and thus reduce the net income of the affected traditional operating company or Southern Power and Southern Company.
 
The traditional operating companies are dependent on coal for much of their electric generating capacity. Each traditional operating company has coal supply contracts in place; however, there can be no assurance that the counterparties to these agreements will fulfill their obligations to supply coal to the traditional operating companies. The suppliers under these agreements may experience financial or technical problems which inhibit their ability to fulfill their obligations to the traditional operating companies. In addition, the suppliers under these agreements may not be required to supply coal to the traditional operating companies under certain circumstances, such as in the event of a natural disaster. If the traditional operating companies are unable to obtain their coal requirements under these contracts, the traditional operating companies may be required to purchase their coal requirements at higher prices, which may not be fully recoverable through rates.
 
In addition, Southern Power in particular, and the traditional operating companies to a lesser extent, are dependent on natural gas for a portion of their electric generating capacity. Natural gas supplies can be subject to disruption in the event production or distribution is curtailed. For example, in connection with the 2005 hurricanes in the Gulf of Mexico, production and distribution of natural gas was limited for a period of time, resulting in shortages and significant increases in the price of natural gas. In addition, world market conditions for fuels, including the policies of the Organization of Petroleum Exporting Countries, can impact the price and availability of natural gas.
 
Demand for power could exceed supply capacity, resulting in increased costs for purchasing capacity in the open market or building additional generation capabilities.
 
Through the traditional operating companies and Southern Power, Southern Company is currently obligated to supply power to retail customers and wholesale customers under long-term PPAs. At peak times, the demand for power required to meet this obligation could exceed Southern Company’s available generation capacity. Market or competitive forces may require that the traditional operating companies or Southern Power purchase capacity on the open market or build additional generation capabilities. Because regulators may not permit the traditional operating companies to pass all of these purchase or construction costs on to their customers, the traditional operating companies may not be able to recover any of these costs or may have exposure to regulatory lag associated with the time between the incurrence of costs of purchased or constructed capacity and the traditional operating companies’ recovery in customers’ rates. Under Southern Power’s long-term fixed price PPAs, Southern Power would not have the ability to recover any of these costs. These situations could have negative impacts on net income and cash flows for the


I-18


Table of Contents

affected traditional operating company or Southern Power and Southern Company.
 
The operating results of Southern Company, the traditional operating companies and Southern Power are affected by weather conditions and may fluctuate on a seasonal and quarterly basis.
 
Electric power generation is generally a seasonal business. In many parts of the country, demand for power peaks during the hot summer months, with market prices also peaking at that time. In other areas, power demand peaks during the winter. As a result, the overall operating results of Southern Company, the traditional operating companies and Southern Power in the future may fluctuate substantially on a seasonal basis. In addition, Southern Company, the traditional operating companies and Southern Power have historically sold less power, and consequently earned less income, when weather conditions are milder. Unusually mild weather in the future could reduce the revenues, net income, available cash and borrowing ability of Southern Company, the traditional operating companies and Southern Power.
 
Mirant and The Official Committee of Unsecured Creditors of Mirant Corporation have filed a claim against Southern Company seeking substantial monetary damages in connection with transfers made by Mirant to Southern Company prior to the Mirant spin-off.
 
In July 2003, Mirant filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code. In January 2006, Mirant’s plan of reorganization became effective, and Mirant emerged from bankruptcy.
 
In 2005, Mirant, as debtor in possession, and The Official Committee of Unsecured Creditors of Mirant Corporation filed a complaint against Southern Company in the U.S. Bankruptcy Court for the Northern District of Texas, which was amended in July 2005, February 2006 and May 2006. The third amended complaint (the complaint) alleges that Southern Company caused Mirant to engage in certain fraudulent transfers and to pay illegal dividends to Southern Company prior to the spin-off. The complaint also seeks to recharacterize certain advances from Southern Company to Mirant for investments in energy facilities from debt to equity. The complaint further alleges that Southern Company is liable to Mirant’s creditors for the full amount of Mirant’s liability and that Southern Company breached its fiduciary duties to Mirant and its creditors, caused Mirant to breach fiduciary duties to its creditors, and aided and abetted breaches of fiduciary duties by Mirant’s directors and officers. The complaint also seeks recoveries under theories of restitution, unjust enrichment, and alter ego. The complaint seeks monetary damages in excess of $2 billion plus interest, punitive damages, attorneys’ fees, and costs. Finally, the complaint includes an objection to Southern Company’s pending claims against Mirant in the Bankruptcy Court (which relate to reimbursement under the separation agreements of payments such as income taxes, interest, legal fees, and other guarantees described in Note 7 to the financial statements of Southern Company in Item 8 herein) and seeks equitable subordination of Southern Company’s claims to the claims of all other creditors. Southern Company served an answer to the complaint in June 2006.
 
On January 10, 2006, the U.S. District Court for the Northern District of Texas granted Southern Company’s motion to withdraw this action from the Bankruptcy Court and, on February 15, 2006, granted Southern Company’s motion to transfer the case to the U.S. District Court for the Northern District of Georgia. On May 19, 2006, Southern Company filed a motion for summary judgment seeking entry of judgment against the plaintiff as to all counts of the complaint. On December 11, 2006, the U.S. District Court for the Northern District of Georgia granted in part and denied in part the motion. As a result, certain breach of fiduciary duty claims are barred; all other claims in the complaint may proceed. Southern Company believes there is no meritorious basis for the claims in the complaint and is vigorously defending itself in this action. However, the final outcome of this matter cannot now be determined.
 
IRS challenges to Southern Company’s income tax deductions taken in connection with four international leveraged lease transactions could result in the payment of substantial additional interest and penalties and could materially impact Southern Company’s cash flow and net income.
 
Southern Company participates in four international leveraged lease transactions and receives federal income tax deductions for depreciation and amortization, as well as interest on related debt. In connection with its audit of Southern Company’s tax returns for 1996 through 2001, the IRS proposed to disallow Southern Company’s tax losses related to one international leveraged lease (a lease-in-lease-out, or LILO) transaction. In February 2005, Southern Company reached a negotiated settlement with the IRS relating to this matter, which is now final.
 
In connection with its audit of 2000 and 2001, the IRS also challenged Southern Company’s deductions related to three other international lease (sale-in-lease-out, or SILO) transactions. In the third quarter 2006, Southern Company paid the full amount of the disputed tax and the applicable interest on the SILO issue for tax years 2000-2001 and filed a claim for refund which has been denied by the IRS. The disputed tax amount is $79 million and the related interest is approximately $24 million for these tax years. This payment, and the subsequent IRS disallowance of the refund claim, closed the issue with


I-19


Table of Contents

the IRS and Southern Company plans to proceed with litigation. The IRS has also raised the SILO issues for tax years 2002 and 2003. The estimated amount of disputed tax and interest for these years is approximately $83 million and $15 million, respectively. The tax and interest for these tax years was paid to the IRS in the fourth quarter 2006. Southern Company has accounted for both payments in 2006 as deposits, as management believes no additional tax or interest liabilities have been incurred.
 
Although the payment of the tax liability did not affect Southern Company’s results of operations under accounting standards in effect through December 31, 2006, it did impact cash flow. For tax years 2000 through 2006, Southern Company has claimed $284 million in tax benefits related to these SILO transactions challenged by the IRS. Southern Company believes these transactions are valid leases for U.S. tax purposes and thus the related deductions are allowable. Southern Company will continue to defend this position through administrative appeals or litigation. The ultimate outcome of these matters cannot now be determined.
 
In July 2006, the FASB released new interpretations for the accounting for both leveraged leases and uncertain tax positions that were adopted January 1, 2007. For the LILO transaction settled with the IRS in February 2005, the leveraged leases accounting interpretation requires that Southern Company recognize a cumulative effect reduction to beginning 2007 retained earnings of approximately $17 million at adoption and change the timing of income recognized under the lease.
 
For the SILO transactions which are the subject of pending litigation, Southern Company is continuing to evaluate the impact of the new interpretations but estimates that the reduction to retained earnings in 2007 could be approximately $115 million to $135 million. The impact on Southern Company’s net income of these accounting interpretations would also be dependent on the outcome of the pending litigation or changes in assumptions related to uncertain tax positions but could be significant and potentially material.
 
Risks Related to Market and Economic Volatility
 
The business of Southern Company, the traditional operating companies and Southern Power is dependent on their ability to successfully access capital markets. The inability of Southern Company, any traditional operating company or Southern Power to access capital may limit its ability to execute its business plan or pursue improvements and make acquisitions that Southern Company, the traditional operating companies or Southern Power may otherwise rely on for future growth.
 
Southern Company, the traditional operating companies and Southern Power rely on access to both short-term money markets and longer-term capital markets as a significant source of liquidity for capital requirements not satisfied by the cash flow from their respective operations. If Southern Company, any traditional operating company or Southern Power is not able to access capital at competitive rates, its ability to implement its business plan or pursue improvements and make acquisitions that Southern Company, the traditional operating companies or Southern Power may otherwise rely on for future growth will be limited. Each of Southern Company, the traditional operating companies and Southern Power believes that it will maintain sufficient access to these financial markets based upon current credit ratings. However, certain market disruptions or a downgrade of the credit rating of Southern Company, any traditional operating company or Southern Power may increase its cost of borrowing or adversely affect its ability to raise capital through the issuance of securities or other borrowing arrangements. Such disruptions could include:
 
  •   an economic downturn;
  •   the bankruptcy of an unrelated energy company;
  •   capital market conditions generally;
  •   market prices for electricity and gas;
  •   terrorist attacks or threatened attacks on Southern Company’s facilities or unrelated energy companies;
  •   war or threat of war; or
  •   the overall health of the utility industry.
 
Southern Company, the traditional operating companies and Southern Power are subject to risks associated with a changing economic environment, including their ability to obtain insurance, the financial stability of their respective customers and their ability to raise capital.
 
The threat of terrorism and the related military action by the United States continue to affect the nation’s economy and financial markets. The insurance industry has also been disrupted by these events as well as recent hurricane activity on the Gulf Coast. The availability of insurance covering risks Southern Company, the traditional operating companies, Southern Power and their respective competitors typically insure against may decrease, and the insurance that Southern Company, the traditional operating companies and Southern Power are able to obtain may have higher deductibles, higher premiums and more restrictive policy terms. Any economic downturn or disruption of financial markets could constrain the capital available to Southern Company’s, the traditional operating companies’ and Southern Power’s industry and could reduce access to funding for the respective operations of Southern


I-20


Table of Contents

Company, the traditional operating companies and Southern Power, as well as the financial stability of their respective customers and counterparties. These factors could adversely affect Southern Company’s subsidiaries’ ability to achieve energy sales growth, thereby decreasing Southern Company’s level of future net income.
 
Certain of the traditional operating companies have substantial investments in the Gulf Coast region which can be subject to major storm activity. The ability of the traditional operating companies to recover costs and replenish reserves in the event of a major storm, other natural disaster, terrorist attack or other catastrophic event generally will require regulatory action. Additionally, storm damage may affect the availability and cost of insurance to these traditional operating companies.
 
Each traditional operating company maintains a reserve for property damage to cover the cost of damages from major storms to its transmission and distribution lines and the cost of uninsured damages to its generating facilities and other property. In September 2004, Hurricane Ivan hit the Gulf coast of Florida and Alabama, causing significant damage to the service areas of Alabama Power and Gulf Power. In July and August 2005, Hurricanes Dennis and Katrina, respectively, hit the Gulf coast of the United States and caused significant damage in the service areas of Gulf Power, Alabama Power and Mississippi Power. In each case, costs to the respective traditional operating companies exceeded their respective storm cost reserves and insurance coverage and were subsequently approved for recovery by their respective state PSCs. In the event a traditional operating company experiences a natural disaster, terrorist attack or other catastrophic event, recovery of costs in excess of reserves and insurance coverage is subject to the approval of its state PSC. While the traditional operating companies generally are entitled to recover prudently incurred costs incurred in connection with such an event, any denial by the applicable state PSC or delay in recovery of any portion of such costs could have a material negative impact on a traditional operating company’s results of operations and/or cash flows.
 
Item 1B. UNRESOLVED STAFF COMMENTS.
 
None.


I-21


Table of Contents

Item 2.  PROPERTIES
 
Electric Properties – The Electric Utilities
 
The traditional operating companies, Southern Power and SEGCO, at December 31, 2006, owned and/or operated 34 hydroelectric generating stations, 34 fossil fuel generating stations, three nuclear generating stations and 12 combined cycle/cogeneration stations. The amounts of capacity for each company are shown in the table below.
 
             
 
        Nameplate
Generating Station   Location   Capacity (1)
 
        (Kilowatts)
 
FOSSIL STEAM
           
Gadsden
  Gadsden, AL     120,000  
Gorgas
  Jasper, AL     1,221,250  
Barry
  Mobile, AL     1,525,000  
Greene County
  Demopolis, AL     300,000  (2)
Gaston Unit 5
  Wilsonville, AL     880,000  
Miller
  Birmingham, AL     2,532,288  (3)
             
Alabama Power Total
    6,578,538  
         
             
Bowen
  Cartersville, GA     3,160,000  
Branch
  Milledgeville, GA     1,539,700  
Hammond
  Rome, GA     800,000  
Kraft
  Port Wentworth, GA     281,136  
McDonough
  Atlanta, GA     490,000  
McIntosh
  Effingham County, GA     163,117  
McManus
  Brunswick, GA     115,000  
Mitchell
  Albany, GA     125,000  
Scherer
  Macon, GA     750,924  (4)
Wansley
  Carrollton, GA     925,550  (5)
Yates
  Newnan, GA     1,250,000  
             
Georgia Power Total
    9,600,427  
         
             
Crist
  Pensacola, FL     970,000  
Daniel
  Pascagoula, MS     500,000  (6)
Lansing Smith
  Panama City, FL     305,000  
Scholz
  Chattahoochee, FL     80,000  
Scherer Unit 3
  Macon, GA     204,500  (4)
             
Gulf Power Total
    2,059,500  
         
             
Daniel
  Pascagoula, MS     500,000  (6)
Eaton
  Hattiesburg, MS     67,500  
Greene County
  Demopolis, AL     200,000  (2)
Sweatt
  Meridian, MS     80,000  
Watson
  Gulfport, MS     1,012,000  
             
Mississippi Power Total
    1,859,500  
         
             
Gaston Units 1-4
  Wilsonville, AL        
SEGCO Total
        1,000,000  (7)
             
Total Fossil Steam
        21,097,965  
             
NUCLEAR STEAM
       
Farley
  Dothan, AL        
Alabama Power Total
    1,720,000  
         
             
Hatch
  Baxley, GA     899,612  (8)
Vogtle
  Augusta, GA     1,060,240  (9)
             
Georgia Power Total
    1,959,852  
         
Total Nuclear Steam
        3,679,852  
             
         
COMBUSTION TURBINES
       
Greene County
  Demopolis, AL        
Alabama Power Total
    720,000  
         
             
Boulevard
  Savannah, GA     59,100  
Bowen
  Cartersville, GA     39,400  
Intercession City
  Intercession City, FL     47,667  (10)
Kraft
  Port Wentworth, GA     22,000  
McDonough
  Atlanta, GA     78,800  
McIntosh Units 1 through 8
  Effingham County, GA     640,000  
McManus
  Brunswick, GA     481,700  
Mitchell
  Albany, GA     118,200  
Robins
  Warner Robins, GA     158,400  
Wansley
  Carrollton, GA     26,322  
Wilson
  Augusta, GA     354,100  
             
Georgia Power Total
    2,025,689  
         
             
Lansing Smith
Unit A
  Panama City, FL     39,400  
Pea Ridge
Units 1-3
  Pea Ridge, FL     15,000  
             
Gulf Power Total
    54,400  
         
Chevron Cogenerating Station
  Pascagoula, MS     147,292  (11)
Sweatt
  Meridian, MS     39,400  
Watson
  Gulfport, MS     39,360  
             
Mississippi Power Total
    226,052  
         
             
Dahlberg
  Jackson County, GA     756,000  
DeSoto
  Arcadia, FL     343,760  
Oleander
  Cocoa, FL     628,400  
Rowan
  Salisbury, NC     455,250  
             
Southern Power Total
    2,183,410  
         
             
Gaston (SEGCO)
  Wilsonville, AL     19,680  (7)
             
Total Combustion Turbines
    5,229,231  
         
             
COGENERATION
           
Washington County
  Washington County, AL     123,428  
GE Plastics Project
  Burkeville, AL     104,800  
Theodore
  Theodore, AL     236,418  
             
Alabama Power Total
    464,646  
         
         
COMBINED CYCLE
       
Barry
  Mobile, AL        
Alabama Power Total
    1,070,424  
         
             
McIntosh Units 10&11
  Effingham County, GA        
Georgia Power Total
    1,318,920  
         
             
Smith
  Lynn Haven, FL        
Gulf Power Total
    545,500  
         
Daniel (Leased)
  Pascagoula, MS        
Mississippi Power Total
    1,070,424  
         


I-22


Table of Contents

             
 
        Nameplate
Generating Station   Location   Capacity (1)
 
        (Kilowatts)
 
Franklin
  Smiths, AL     1,198,360  
Harris
  Autaugaville, AL     1,318,920  
Rowan
  Salisbury, NC     530,550  
Stanton Unit A
  Orlando, FL     428,649  (12)
Wansley
  Carrollton, GA     1,073,000  
             
Southern Power Total
    4,549,479  
         
Total Combined Cycle
    8,554,747  
         
         
HYDROELECTRIC FACILITIES
       
Bankhead
  Holt, AL     53,985  
Bouldin
  Wetumpka, AL     225,000  
Harris
  Wedowee, AL     132,000  
Henry
  Ohatchee, AL     72,900  
Holt
  Holt, AL     46,944  
Jordan
  Wetumpka, AL     100,000  
Lay
  Clanton, AL     177,000  
Lewis Smith
  Jasper, AL     157,500  
Logan Martin
  Vincent, AL     135,000  
Martin
  Dadeville, AL     182,000  
Mitchell
  Verbena, AL     170,000  
Thurlow
  Tallassee, AL     81,000  
Weiss
  Leesburg, AL     87,750  
Yates
  Tallassee, AL     47,000  
             
Alabama Power Total
    1,668,079  
         
             
Barnett Shoals (Leased)
  Athens, GA     2,800  
Bartletts Ferry
  Columbus, GA     173,000  
Goat Rock
  Columbus, GA     38,600  
Lloyd Shoals
  Jackson, GA     14,400  
Morgan Falls
  Atlanta, GA     16,800  
North Highlands
  Columbus, GA     29,600  
Oliver Dam
  Columbus, GA     60,000  
Rocky Mountain
  Rome, GA     215,256  (13)
Sinclair Dam
  Milledgeville, GA     45,000  
Tallulah Falls
  Clayton, GA     72,000  
Terrora
  Clayton, GA     16,000  
Tugalo
  Clayton, GA     45,000  
Wallace Dam
  Eatonton, GA     321,300  
Yonah
  Toccoa, GA     22,500  
6 Other Plants
        18,080  
             
Georgia Power Total
    1,090,336  
         
Total Hydroelectric Facilities
    2,758,415  
         
         
Total Generating Capacity
    41,784,856  
         
Notes:
(1) See “Jointly-Owned Facilities” herein for additional information.
(2) Owned by Alabama Power and Mississippi Power as tenants in common in the proportions of 60% and 40%, respectively.
(3) Capacity shown is Alabama Power’s portion (91.84%) of total plant capacity.
(4) Capacity shown for Georgia Power is 8.4% of Units 1 and 2 and 75% of Unit 3. Capacity shown for Gulf Power is 25% of Unit 3.
(5) Capacity shown is Georgia Power’s portion (53.5%) of total plant capacity.
(6) Represents 50% of the plant which is owned as tenants in common by Gulf Power and Mississippi Power.
(7) SEGCO is jointly-owned by Alabama Power and Georgia Power. See BUSINESS in Item 1 herein for additional information.
(8) Capacity shown is Georgia Power’s portion (50.1%) of total plant capacity.
(9) Capacity shown is Georgia Power’s portion (45.7%) of total plant capacity.
(10) Capacity shown represents 331/3% of total plant capacity. Georgia Power owns a 1/3 interest in the unit with 100% use of the unit from June through September. Progress Energy Florida operates the unit.
(11) Generation is dedicated to a single industrial customer.
(12) Capacity shown is Southern Power’s portion (65%) of total plant capacity.
(13) Capacity shown is Georgia Power’s portion (25.4%) of total plant capacity. OPC operates the plant.
 
Except as discussed below under “Titles to Property,” the principal plants and other important units of the traditional operating companies, Southern Power and SEGCO are owned in fee by the respective companies. It is the opinion of management of each such company that its operating properties are adequately maintained and are substantially in good operating condition.
 
Mississippi Power owns a 79-mile length of 500-kilovolt transmission line which is leased to Entergy Gulf States. The line, completed in 1984, extends from Plant Daniel to the Louisiana state line. Entergy Gulf States is paying a use fee over a 40-year period covering all expenses and the amortization of the original $57 million cost of the line. At December 31, 2006, the unamortized portion of this cost was approximately $26.2 million.
 
The all-time maximum demand on the traditional operating companies, Southern Power and SEGCO was 35,889,900 kilowatts and occurred on August 7, 2006. This amount excludes demand served by capacity retained by MEAG, OPC and SEPA. The reserve margin for the traditional operating companies, Southern Power and SEGCO at that time was 17.1%. See SELECTED FINANCIAL DATA in Item 6 herein for additional information on peak demands.

I-23


Table of Contents

Jointly-Owned Facilities
 
Alabama Power, Georgia Power and Southern Power have undivided interests in certain generating plants and other related facilities to or from non-affiliated parties. The percentages of ownership are as follows:
 
                                                                                                 
        Percentage Ownership
                                Progress
               
    Total
  Alabama
      Georgia
              Energy
  Southern
           
    Capacity   Power   AEC   Power   OPC   MEAG   DALTON   Florida   Power   OUC   FMPA   KUA
     
    (Megawatts)                                            
 
Plant Miller Units 1 and 2
    1,320       91.8 %     8.2 %     %     %     %     %     %     %     %     %     %
Plant Hatch
    1,796                   50.1       30.0       17.7       2.2                                
Plant Vogtle
    2,320                   45.7       30.0       22.7       1.6                                
Plant Scherer Units 1 and 2
    1,636                   8.4       60.0       30.2       1.4                                
Plant Wansley
    1,779                   53.5       30.0       15.1       1.4                                
Rocky Mountain
    848                   25.4       74.6                                            
Intercession City, FL
    143                   33.3                         66.7                          
Plant Stanton A
    660                                                 65 %     28 %     3.5 %     3.5 %
 
 
 
Alabama Power and Georgia Power have contracted to operate and maintain the respective units in which each has an interest (other than Rocky Mountain and Intercession City) as agent for the joint owners. SCS provides operation and maintenance services for Plant Stanton A.
 
In addition, Georgia Power has commitments regarding a portion of a five percent interest in Plant Vogtle owned by MEAG that are in effect until the later of retirement of the plant or the latest stated maturity date of MEAG’s bonds issued to finance such ownership interest. The payments for capacity are required whether any capacity is available. The energy cost is a function of each unit’s variable operating costs. Except for the portion of the capacity payments related to the Georgia PSC’s disallowances of Plant Vogtle costs, the cost of such capacity and energy is included in purchased power from non-affiliates in Georgia Power’s statements of income in Item 8 herein.
 
Titles to Property
 
The traditional operating companies’, Southern Power’s and SEGCO’s interests in the principal plants (other than certain pollution control facilities, one small hydroelectric generating station leased by Georgia Power, combined cycle units at Plant Daniel leased by Mississippi Power and the land on which five combustion turbine generators of Mississippi Power are located, which is held by easement) and other important units of the respective companies are owned in fee by such companies, subject only to the liens pursuant to pollution control bonds of Alabama Power and Gulf Power and to excepted encumbrances as defined therein. At December 31, 2006, Gulf Power’s interest in its principal plants was subject to a lien under a mortgage indenture. The mortgage indenture and the lien were discharged effective January 26, 2007. See Note 6 to the financial statements of Southern Company, Alabama Power and Gulf Power under “Assets Subject to Lien” and Note 7 to the financial statements of Mississippi Power under “Operating Leases – Plant Daniel Combined Cycle Generating Units” in Item 8 herein for additional information. The traditional operating companies own the fee interests in certain of their principal plants as tenants in common. See “Jointly-Owned Facilities” herein for additional information. Properties such as electric transmission and distribution lines and steam heating mains are constructed principally on rights-of-way which are maintained under franchise or are held by easement only. A substantial portion of lands submerged by reservoirs is held under flood right easements.
 
Item 3.  LEGAL PROCEEDINGS
 
(1) United States of America v. Alabama Power
(United States District Court for the Northern District of Alabama)
 
United States of America v. Georgia Power and Savannah Electric
(United States District Court for the Northern District of Georgia)
 
See “Environmental Matters – New Source Review Actions” in Note 3 to Southern Company’s and each traditional operating company’s financial statements in Item 8 herein for information.
 
(2) Environmental Remediation
 
See “Environmental Matters – Environmental Remediation” in Note 3 to the financial statements of Southern Company, Georgia Power and Mississippi Power and “Retail Regulatory Matters – Environmental Remediation” in Note 3 to the financial statements of Gulf Power in Item 8 herein for information related to environmental remediation.
 
(3) In re: Mirant Corporation, et al.
(United States Bankruptcy Court for the Northern District of Texas)


I-24


Table of Contents

 
See “Mirant Matters – Mirant Bankruptcy” in Note 3 to Southern Company’s financial statements in Item 8 herein for information.
 
(4) MC Asset Recovery, LLC v. Southern Company
(United States District Court for the Northern District of Georgia) (formerly styled In re: Mirant Corporation, et al. in the United States Bankruptcy Court for the Northern District of Texas)
 
See “Mirant Matters – MC Asset Recovery Litigation” in Note 3 to Southern Company’s financial statements in Item 8 herein for information.
 
(5) In re: Mirant Corporation Securities Litigation
(United States District Court for the Northern District of Georgia)
 
See “Mirant Matters – Mirant Securities Litigation” in Note 3 to Southern Company’s financial statements in Item 8 herein for information.
 
(6) In re: Mirant Corporation ERISA Litigation
(United States District Court for the Northern District of Georgia)
 
See “Mirant Matters – Southern Company Employee Savings Plan Litigation” in Note 3 to Southern Company’s financial statements in Item 8 herein for information.
 
(7) Sierra Club, et al. v. Georgia Power
(United States District Court for the Northern District of Georgia)
 
See “Plant Wansley Environmental Litigation” in Note 3 to Southern Company’s and Georgia Power’s financial statements in Item 8 herein for information.
 
(8) Right of Way Litigation
 
See “Right of Way Litigation” in Note 3 to Southern Company’s, Georgia Power’s, Gulf Power’s and Mississippi Power’s financial statements in Item 8 herein for information.
 
See Note 3 to each registrant’s financial statements in Item 8 herein for descriptions of additional legal and administrative proceedings discussed therein.
 
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Southern Power
 
None.


I-25


Table of Contents

EXECUTIVE OFFICERS OF
SOUTHERN COMPANY
 
(Identification of executive officers of Southern Company is inserted in Part I in accordance with Regulation S-K, Item 401(b), Instruction 3.) The ages of the officers set forth below are as of December 31, 2006.
 
David M. Ratcliffe
Chairman, President, Chief Executive Officer and Director
Age 58
Elected in 1999. President since April 2004; Chairman and Chief Executive Officer since July 2004. Previously served as Chief Executive Officer of Georgia Power from June 1999 to April 2004; and President of Georgia Power from June 1999 to December 2003.
 
Andrew J. Dearman, III
Executive Vice President
Age 53
Elected in 2005. Executive Vice President since December 2005. Previously served as Senior Vice President from December 2000 until December 2005.
 
Dwight H. Evans
Executive Vice President
Age 58
Elected in 2001. Executive Vice President since May 2001.
 
Thomas A. Fanning
Executive Vice President, Chief Financial Officer and Treasurer
Age 49
Elected in 2003. Executive Vice President, Chief Financial Officer and Treasurer since April 2003. Previously served as President, Chief Executive Officer and Director of Gulf Power from 2002 to April 2003; and Executive Vice President, Treasurer and Chief Financial Officer of Georgia Power from 1999 to 2002.
 
Michael D. Garrett
Executive Vice President
Age 57
Elected in 2004. Executive Vice President since January 1, 2004. He also serves as President and Director of Georgia Power since January 1, 2004 and Chief Executive Officer of Georgia Power since April 2004. Previously served as President, Chief Executive Officer and Director of Mississippi Power from 2001 to 2003.
 
G. Edison Holland, Jr.
Executive Vice President, General Counsel and Secretary
Age 54
Elected in 2001. Executive Vice President and General Counsel since 2001.
 
Anthony R. James
Executive Vice President
Age 56
Elected in 2005. Executive Vice President of Southern Company since December 2005. Previously served as Chairman of Savannah Electric from December 2005 through January 2006 and President and Chief Executive Officer of Savannah Electric from April 2001 to December 2005.
 
Charles D. McCrary
Executive Vice President
Age 55
Elected in 1998. Executive Vice President of Southern Company since February 2002; President and Chief Executive Officer of Alabama Power since October 2001.
 
W. Paul Bowers
Executive Vice President of SCS
Age 50
Elected in 2001. Executive Vice President of SCS since May 2001 and previously served as President and Chief Executive Officer of Southern Power from May 2001 to March 2005.
 
J. Barnie Beasley
President and Chief Executive Officer of Southern Nuclear
Age 55
Elected in 2004. President and Chief Executive Officer of Southern Nuclear since September 2004. Previously served as Executive Vice President of Southern Nuclear from January 2004 to September 2004; and Vice President from July 1998 through December 2003.
 
The officers of Southern Company were elected for a term running from the first meeting of the directors following the last annual meeting (May 24, 2006) for one year until the first board meeting after the next annual meeting or until their successors are elected and have qualified.


I-26


Table of Contents

 
EXECUTIVE OFFICERS OF
ALABAMA POWER
 
(Identification of executive officers of Alabama Power is inserted in Part I in accordance with Regulation S-K, Item 401(b), Instruction 3.) The ages of the officers set forth below are as of December 31, 2006.
 
Charles D. McCrary
President, Chief Executive Officer and Director
Age 55
Elected in 2001. President, Chief Executive Officer and Director since October 2001; Executive Vice President of Southern Company since February 2002.
 
Art P. Beattie
Executive Vice President, Chief Financial Officer and Treasurer
Age 52
Elected in 2004. Executive Vice President, Chief Financial Officer and Treasurer since February 2005. Previously served as Vice President and Comptroller of Alabama Power from 1998 through January 2005.
 
C. Alan Martin
Executive Vice President
Age 58
Elected in 1999. Executive Vice President of the Customer Service Organization since 2001.
 
Steven R. Spencer
Executive Vice President
Age 51
Elected in 2001. Executive Vice President of External Affairs since 2001.
 
Jerry L. Stewart
Senior Vice President
Age 57
Elected in 1999. Senior Vice President of Fossil and Hydro Generation since 1999.
 
The officers of Alabama Power were elected for a term running from the last annual organizational meeting of the directors (April 28, 2006) for one year until the next annual meeting or until their successors are elected and have qualified.


I-27


Table of Contents

 
EXECUTIVE OFFICERS OF
GEORGIA POWER
 
(Identification of executive officers of Georgia Power is inserted in Part I in accordance with Regulation S-K, Item 401(b), Instruction 3.) The ages of the officers set forth below are as of December 31, 2006.
 
Michael D. Garrett
President, Chief Executive Officer and Director
Age 57
Elected in 2003. President and Chief Executive Officer of Georgia Power since April 2004. Previously served as President of Georgia Power from January 2004 to April 2004; President and Chief Executive Officer and Director of Mississippi Power from May 2001 to December 2003.
 
Mickey A. Brown
Executive Vice President
Age 59
Elected in 2001. Executive Vice President of the Customer Service Organization since January 2005. Previously served as Senior Vice President of Distribution from May 2001 to December 2005.
 
Cliff S. Thrasher
Executive Vice President, Chief Financial Officer and Treasurer
Age 56
Elected in 2005. Executive Vice President, Chief Financial Officer and Treasurer since March 2005. Previously served as Senior Vice President, Comptroller and Chief Financial Officer of Southern Power from November 2002 to March 2005 and Vice President of SCS from June 2002 to March 2005; and Vice President, Comptroller and Chief Accounting Officer of Georgia Power from September 1995 to June 2002.
 
Christopher C. Womack
Executive Vice President
Age 48
Elected in 2001. Executive Vice President of External Affairs since March 2006. Previously served as Senior Vice President of Fossil and Hydro Generation and Senior Production Officer from December 2001 to February 2006.
 
Judy M. Anderson
Senior Vice President
Age 58
Elected in 2001. Senior Vice President of Charitable Giving since 2001.
 
Douglas E. Jones
Senior Vice President
Age 48
Elected in 2005. Senior Vice President of Fossil and Hydro Generation since March 2006. Previously served as Senior Vice President of Customer Service and Sales from January 2005 to February 2006; Executive Vice President of Southern Power from January 2004 to January 2005; Senior Vice President of SCS from December 2001 to January 2004.
 
James H. Miller, III
Senior Vice President and General Counsel
Age 57
Elected in 2004. Senior Vice President and General Counsel since March 2004. Previously served as Vice President and Associate General Counsel for SCS and Senior Vice President, General Counsel and Assistant Secretary of Southern Power from 2001 to 2004.
 
Each of the above is currently an executive officer of Georgia Power, serving a term running from the last annual organizational meeting of the directors (May 17, 2006) for one year until the next annual meeting or until their successors are elected and qualified.


I-28


Table of Contents

 
EXECUTIVE OFFICERS OF
MISSISSIPPI POWER
 
(Identification of executive officers of Mississippi Power is inserted in Part I in accordance with Regulation S-K, Item 401(b), Instruction 3.) The ages of the officers set forth below are as of December 31, 2006.
 
Anthony J. Topazi
President, Chief Executive Officer and Director
Age 56
Elected in 2003. President, Chief Executive Officer and Director since January 1, 2004. Previously served as Executive Vice President of Southern Company Generation and Energy Marketing from November 2000 to December 2003; Senior Vice President of Southern Power from November 2002 to December 2003; and Vice President of Southern Power from 2001 until November 2002.
 
John W. Atherton
Vice President
Age 46
Elected in 2004. Vice President of External Affairs since January 2005. Previously served as the Director of Economic Development from September 2003 to January 2005; Manager, Sales and Marketing Services from April 2002 to August 2003; and Manager, State Legislative Affairs from August 1996 to April 2002.
 
Kimberly D. Flowers
Vice President
Age 42
Elected in 2005. Vice President and Senior Production Officer since March 2005. Previously served as Plant Manager, Plant Bowen, Georgia Power from November 2000 until March 2005.
 
Donald R. Horsley
Vice President
Age 52
Elected in 2006. Vice President of Customer Services and Retail Marketing since April 2006. Previously served as Vice President of Transmission at Alabama Power from March 2005 to March 2006 and Manager, Transmission Lines at Alabama Power from February 2001 to March 2005.
 
Frances V. Turnage
Vice President, Treasurer and
Chief Financial Officer
Age 58
Elected in 2005. Vice President, Treasurer and Chief Financial Officer since March 2005. Previously served as Comptroller from 1993 to March 2005.
 
The officers of Mississippi Power were elected for a term running from the last annual organizational meeting of the directors (April 12, 2006) for one year until the next annual meeting or until their successors are elected and have qualified.


I-29


Table of Contents

PART II
 
Item 5. MARKET FOR REGISTRANTS’ COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
(a)(1) The common stock of Southern Company is listed and traded on the New York Stock Exchange. The common stock is also traded on regional exchanges across the United States. The high and low stock prices for each quarter of the past two years were as follows:
 
                 
 
    High   Low
 
2006
               
First Quarter
  $ 35.89     $ 32.34  
Second Quarter
    33.25       30.48  
Third Quarter
    35.00       32.01  
Fourth Quarter
    37.40       34.49  
                 
2005
               
First Quarter
  $ 34.34     $ 31.14  
Second Quarter
    35.00       31.60  
Third Quarter
    36.47       33.24  
Fourth Quarter
    36.33       32.76  
 
 
 
There is no market for the other registrants’ common stock, all of which is owned by Southern Company.
 
(2) Number of Southern Company’s common stockholders of record at December 31, 2006:
       110,259
 
Each of the other registrants have one common stockholder, Southern Company.
 
(3) Dividends on each registrant’s common stock are payable at the discretion of their respective board of directors. The dividends on common stock declared by Southern Company and the traditional operating companies to their stockholder(s) for the past two years were as follows:
 
                     
 
Registrant   Quarter   2006   2005
 
        (in thousands)
 
                     
Southern   First   $ 276,442     $ 265,958  
Company
  Second     287,704       277,679  
    Third     287,845       277,625  
    Fourth     288,440       276,306  
                     
Alabama Power   First     110,150       102,475  
    Second     110,150       102,475  
    Third     110,150       102,475  
    Fourth     110,150       102,475  
                     
Georgia Power   First     157,500       145,700  
    Second     157,500       145,700  
    Third     157,500       145,700  
    Fourth     157,500       145,700  
                     
Gulf Power   First     17,575       17,100  
    Second     17,575       17,100  
    Third     17,575       17,100  
    Fourth     17,575       17,100  
                     
Mississippi   First     16,300       15,500  
Power
  Second     16,300       15,500  
    Third     16,300       15,500  
    Fourth     16,300       15,500  
 
 
 
In 2005 and 2006, Southern Power paid dividends to Southern Company as follows:
 
                     
 
Registrant   Quarter   2006   2005
 
        (in millions)
 
Southern Power   First   $ -     $ -  
    Second     38.9       -  
    Third     19.4       36.2  
    Fourth     19.4       36.2  
 
 
 
The dividend paid per share of Southern Company’s common stock was 35.75¢ for first quarter of 2005 and 37.25¢ for the remaining quarters of 2005 and the first quarter of 2006. For the second, third and fourth quarters of


II-1


Table of Contents

2006, the dividend paid per share of Southern Company’s common stock was 38.75¢.
 
Southern Power’s credit facility contains potential limitations on the payment of common stock dividends. At December 31, 2006, Southern Power was in compliance with the conditions of this credit facility and thus had no restrictions on its ability to pay common stock dividends. See Note 8 to the financial statements of Southern Company under “Common Stock Dividend Restrictions” and Note 6 to the financial statements of Southern Power under “Dividend Restriction” in Item 8 herein for additional information regarding these restrictions.
 
(4) Securities authorized for issuance under equity compensation plans.
 
See Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters under the heading “Equity Compensation Plan Information” herein.
 
(b) Use of Proceeds
 
Not applicable.
 
(c) Issuer Purchases of Equity Securities
 
None.
 
Item 6. SELECTED FINANCIAL DATA
 
Southern Company. See “SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA,” contained herein at pages II-80 and II-81.
 
Alabama Power. See “SELECTED FINANCIAL AND OPERATING DATA,” contained herein at pages II-136 and II-137.
 
Georgia Power. See “SELECTED FINANCIAL AND OPERATING DATA,” contained herein at pages II-192 and II-193.
 
Gulf Power. See “SELECTED FINANCIAL AND OPERATING DATA,” contained herein at pages II-242 and II-243.
 
Mississippi Power. See “SELECTED FINANCIAL AND OPERATING DATA,” contained herein at pages II-295 and II-296.
 
Southern Power. See “SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA,” contained herein at page II-327.
 
Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Southern Company. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” contained herein at pages II-10 through II-37.
 
Alabama Power. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” contained herein at pages II-84 through II-103.
 
Georgia Power. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” contained herein at pages II-140 through II-159.
 
Gulf Power. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” contained herein at pages II-196 through II-214.
 
Mississippi Power. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” contained herein at pages II-246 through II-266.
 
Southern Power. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” contained herein at pages II-299 through II-312.
 
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
See MANAGEMENT’S DISCUSSION AND ANALYSIS - FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of each of the registrants in Item 7 herein and Note 1 of each of the registrant’s financial statements under “Financial Instruments” in Item 8 herein. See also Note 6 to the financial statements of Southern Company, each traditional operating company and Southern Power under “Financial Instruments” in Item 8 herein.


II-2


Table of Contents

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
INDEX TO 2006 FINANCIAL STATEMENTS
 
         
    Page
 
   
  II-7
   
  II-8
  II-9
  II-38
  II-39
  II-40
  II-42
  II-44
  II-44
  II-45
       
   
  II-83
  II-104
  II-105
  II-106
  II-108
  II-110
  II-110
  II-111
       
   
  II-139
  II-160
  II-161
  II-162
  II-164
  II-165
  II-165
  II-166
       
   
  II-195
  II-215
  II-216
  II-217
  II-219


II-3


Table of Contents

         
    Page
 
  II-220
  II-220
  II-221
       
   
  II-245
  II-267
  II-268
  II-269
  II-271
  II-272
  II-272
  II-273
       
   
  II-298
  II-313
  II-314
  II-315
  II-317
  II-317
  II-318
 
Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.


II-4


Table of Contents

 
Item 9A.  CONTROLS AND PROCEDURES
 
Disclosure Controls And Procedures.
 
As of the end of the period covered by this annual report, Southern Company, the traditional operating companies and Southern Power conducted separate evaluations under the supervision and with the participation of each company’s management, including the Chief Executive Officer and 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.
 
Internal Control Over Financial Reporting.
 
(a)       Management’s Annual Report on Internal Control Over Financial Reporting.
 
(1)       Southern Company
 
Southern Company’s Management’s Report on Internal Control Over Financial Reporting is included on page II-7 of this Form 10-K.
 
(2)       Traditional operating companies and Southern Power
 
Not applicable because these companies are not accelerated filers.
 
(b)       Attestation Report of the Registered Public Accounting Firm.
 
(1)       Southern Company
 
The report of Deloitte & Touche LLP, Southern Company’s independent registered public accounting firm, regarding management’s assessment of Southern Company’s internal control over financial reporting and the effectiveness of Southern Company’s internal control over financial reporting is included on page II-8 of this Form 10-K.
 
(2)       Traditional operating companies and Southern Power
 
Not applicable because these companies are not accelerated filers.
 
(c)       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 fourth quarter 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.
 
Item 9B.  OTHER INFORMATION
 
None.


II-5


Table of Contents

THE SOUTHERN COMPANY
AND SUBSIDIARY COMPANIES
 
FINANCIAL SECTION
 


II-6


Table of Contents

 
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Southern Company and Subsidiary Companies 2006 Annual Report
 
 
Southern Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting as required by the Sarbanes-Oxley Act of 2002 and as defined in Exchange Act Rule 13a-15(f). A control system can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
 
Under management’s supervision, an evaluation of the design and effectiveness of Southern Company’s internal control over financial reporting was conducted based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that Southern Company’s internal control over financial reporting was effective as of December 31, 2006.
 
Deloitte & Touche LLP, an independent registered public accounting firm, as auditors of Southern Company’s financial statements, has issued an attestation report on management’s assessment of the effectiveness of Southern Company’s internal control over financial reporting as of December 31, 2006. Deloitte & Touche LLP’s report, which expresses unqualified opinions on management’s assessment and on the effectiveness of Southern Company’s internal control over financial reporting, is included herein.
 
/s/  David M. Ratcliffe
 
David M. Ratcliffe
Chairman, President, and Chief Executive Officer
 
/s/  Thomas A. Fanning
 
Thomas A. Fanning
Executive Vice President, Chief Financial Officer,
and Treasurer
 
February 26, 2007


II-7


Table of Contents

 
Internal Control Over Financial Reporting
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
Southern Company
 
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (page II-7), that Southern Company (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2006 of the Company and our report dated February 26, 2007 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding a change in the method of accounting for the funded status of defined benefit pension and other postretirement plans.
 
 
/s/ Deloitte & Touche LLP
 
Atlanta, Georgia
February 26, 2007
 


II-8


Table of Contents

Consolidated Financial Statements
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
Southern Company
 
We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Southern Company and Subsidiary Companies (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of income, comprehensive income, common stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements (pages II-38 to II-79) present fairly, in all material respects, the financial position of Southern Company and Subsidiary Companies at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
 
As discussed in Note 2 to the financial statements, in 2006 the Company changed its method of accounting for the funded status of defined benefit pension and other postretirement plans.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/ Deloitte & Touche LLP
 
Atlanta, Georgia
February 26, 2007


II-9


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southern Company and Subsidiary Companies 2006 Annual Report
 
OVERVIEW
 
Business Activities
 
The primary business of Southern Company (the Company) is electricity sales in the Southeast by the traditional operating companies – Alabama Power, Georgia Power, Gulf Power, and Mississippi Power – and Southern Power. Savannah Electric and Power Company (Savannah Electric) was also a traditional operating company subsidiary of Southern Company until being merged with and into Georgia Power effective July 1, 2006. Southern Power constructs, acquires, and manages generation assets and sells electricity at market-based rates in the wholesale market.
 
Many factors affect the opportunities, challenges, and risks of Southern Company’s electricity business. These factors include the traditional operating companies’ ability to maintain a stable regulatory environment, to achieve energy sales growth, and to effectively manage and secure timely recovery of rising costs. These costs include those related to growing demand, increasingly stringent environmental standards, fuel prices, and storm restoration following multiple hurricanes. Since the beginning of 2004, each of the traditional operating companies completed successful retail base rate proceedings. These regulatory actions have provided earnings stability and enabled the recovery of substantial capital investments to facilitate the continued reliability of the transmission and distribution network and to continue environmental improvements at the generating plants. During 2005 and 2006, each of the traditional operating companies completed proceedings as necessary to address fuel and storm damage cost recovery. Appropriately balancing environmental expenditures with customer prices will continue to challenge the Company for the foreseeable future.
 
Another major factor is the profitability of the competitive market-based wholesale generating business and federal regulatory policy, which may impact Southern Company’s level of participation in this market. Southern Power continued executing its regional strategy in 2006 through the acquisition of power plants in North Carolina and Florida. Consistent with prior acquisitions, the newly acquired plants have associated power purchase agreements (PPAs) in place. The Company continues to face regulatory challenges related to transmission and market power issues at the national level.
 
Southern Company’s other business activities include an investment in a synthetic fuel producing entity (which claims federal income tax credits designed to offset its operating losses), leveraged lease projects, telecommunications, and energy-related services. Management continues to evaluate the contribution of each of these activities to total shareholder return and may pursue acquisitions and dispositions accordingly. The synthetic fuel tax credits will no longer be available after December 31, 2007. In January 2006, the sale of the Company’s natural gas marketing business was completed.
 
Key Performance Indicators
 
In striving to maximize shareholder value while providing cost-effective energy to more than four million customers, Southern Company continues to focus on several key indicators. These indicators include customer satisfaction, plant availability, system reliability, and earnings per share (EPS), excluding earnings from synthetic fuel investments. Southern Company’s financial success is directly tied to the satisfaction of its customers. Key elements of ensuring customer satisfaction include outstanding service, high reliability, and competitive prices. Management uses customer satisfaction surveys and reliability indicators to evaluate the Company’s results.
 
Peak season equivalent forced outage rate (Peak Season EFOR) is an indicator of fossil/hydro plant availability and efficient generation fleet operations during the months when generation needs are greatest. The rate is calculated by dividing the number of hours of forced outages by total generation hours. The 2006 Peak Season EFOR of 1.11 percent is better than the target and a significant improvement over 2005 Peak Season EFOR. Transmission and distribution system reliability performance is measured by the frequency and duration of outages. Performance targets for reliability are set internally based on historical performance, expected weather conditions, and expected capital expenditures. The performance for 2006 exceeded most targets on these reliability measures.
 
Southern Company’s synthetic fuel investments generate tax credits as a result of synthetic fuel production. Due to higher oil prices in 2006, these tax credits were partially phased out and one synfuel investment was terminated. As a result, Southern Company’s synthetic fuel investments did not contribute significantly to earnings and EPS during 2006. These tax credits will no longer be available after December 31, 2007. Southern Company management uses EPS, excluding synfuel earnings, to evaluate the performance


II-10


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

of Southern Company’s ongoing business activities. Southern Company believes the presentation of earnings and EPS excluding the results of the synthetic fuel investments also is useful for investors because it provides investors with additional information for purposes of comparing Southern Company’s performance for such periods. The presentation of this additional information is not meant to be considered a substitute for financial measures prepared in accordance with generally accepted accounting principles.
 
Southern Company’s 2006 results compared with its targets for some of these key indicators are reflected in the following chart:
 
             
Key
Performance
Indicator
    2006 Target
Performance
    2006 Actual
Performance
Customer Satisfaction
    Top quartile in
customer surveys
    Top quartile
Peak Season EFOR
    2.75% or less     1.11%
Basic EPS
    $2.15 – $2.20     $2.12
EPS, excluding synfuel earnings
    $2.03 – $2.08     $2.10
             
 
See RESULTS OF OPERATIONS herein for additional information on the Company’s financial performance. The financial performance achieved in 2006 reflects the continued emphasis that management places on these indicators as well as the commitment shown by employees in achieving or exceeding management’s expectations.
 
Earnings
 
Southern Company’s net income was $1.57 billion in 2006, a decrease of 1.1 percent from the prior year. The lower earnings compared with the prior year were primarily the result of a reduction of tax credits related to the production of synthetic fuels. This decrease was largely offset by continued economic strength and a growing customer base. Net income was $1.59 billion in 2005 and $1.53 billion in 2004, reflecting increases over the prior year of 3.8 percent and 4.0 percent, respectively. Basic EPS, including discontinued operations, was $2.12 in 2006, $2.14 in 2005, and $2.07 in 2004. Diluted EPS, which factors in additional shares related to stock options, was 2 cents lower than basic EPS for 2006 and 1 cent lower for each of 2005 and 2004.
 
Dividends
 
Southern Company has paid dividends on its common stock since 1948. Dividends paid per share of common stock were $1.535 in 2006, $1.475 in 2005, and $1.415 in 2004. In January 2007, Southern Company declared a quarterly dividend of 38.75 cents per share. This is the 237th consecutive quarter that Southern Company has paid a dividend equal to or higher than the previous quarter. The Company targets a dividend payout ratio of approximately 70 to 75 percent of net income, excluding earnings from synthetic fuel businesses. For 2006, the actual payout ratio was 73 percent, excluding synthetic fuel earnings, and 72.5 percent overall.
 
RESULTS OF OPERATIONS
 
Electricity Businesses
 
Southern Company’s electric utilities generate and sell electricity to retail and wholesale customers in the Southeast. A condensed income statement for the electricity business is as follows:
 
                                 
        Increase (Decrease)
    Amount   from Prior Year
 
    2006          2006          2005          2004
 
 
  (in millions)
Electric operating revenues
  $ 14,088     $ 810     $ 1,813     $ 718  
 
 
Fuel
    5,143       655       1,089       400  
Purchased power
    543       (188 )     88       170  
Other operations and maintenance
    3,290       70       215       148  
Depreciation and amortization
    1,164       27       229       (64 )
Taxes other than income taxes
    715       39       52       40  
 
 
Total electric operating expenses
    10,855       603       1,673       694  
 
 
Operating income
    3,233       207       140       24  
Other income, net
    53       (9 )     38       22  
Interest expenses
    751       75       62       19  
Income taxes
    949       50       24       30  
Net income
  $ 1,586     $ 73     $ 92     $ (3 )
 
 


II-11


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

Revenues
 
Details of electric operating revenues are as follows:
 
                         
    2006          2005          2004       
 
    (in millions)
 
Retail – prior year
  $ 11,165     $ 9,732     $ 8,875  
Change in –
                       
Base rates
    72       236       41  
Sales growth
    40       184       216  
Weather
    35       34       48  
Fuel and other cost recovery clauses
    489       979       552  
 
 
Retail – current year
    11,801       11,165       9,732  
 
 
Sales for resale
    1,822       1,667       1,341  
Other electric operating revenues
    465       446       392  
 
 
Electric operating revenues
  $ 14,088     $ 13,278     $ 11,465  
 
 
Percent change
    6.1 %     15.8 %     6.7 %
 
 
 
Retail revenues increased $636 million, $1.4 billion, and $857 million in 2006, 2005, and 2004, respectively. The significant factors driving these changes are shown in the preceding table. The increase in base rates in 2005 is primarily due to approval by the Georgia Public Service Commission (PSC) of a retail base rate increase at Georgia Power. Electric rates for the traditional operating companies include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the fuel component of purchased power, and do not affect net income. Certain of the traditional operating companies also have clauses to recover other costs, such as environmental, storm damage, new plants, and PPAs.
 
Sales for resale revenues consist of PPAs with investor-owned utilities and electric cooperatives, short-term opportunity sales, and unit power sales contracts. Southern Company’s average wholesale contract extends more than 10 years and, as a result, the Company has significantly limited its remarketing risk. Short-term opportunity sales are made at market-based rates that generally provide a margin above the Company’s variable cost to produce the energy. Revenues associated with PPAs and opportunity sales were as follows:
 
                         
    2006          2005          2004       
 
    (in millions)
 
Other power sales –
                       
Capacity and other
  $ 499     $ 430     $ 308  
Energy
    841       799       635  
 
 
Total
  $ 1,340     $ 1,229     $ 943  
 
 
 
Capacity revenues under unit power sales contracts, principally sales to Florida utilities, reflect the recovery of fixed costs and a return on investment, and energy is generally sold at variable cost. Unit power kilowatt-hour (KWH) sales increased 0.2 percent, 1.7 percent, and 1.9 percent in 2006, 2005, and 2004, respectively. Fluctuations in oil and natural gas prices, which are the primary fuel sources for unit power sales customers, influence changes in these sales. However, because the energy is generally sold at variable cost, these fluctuations have a minimal effect on earnings. The capacity and energy components of the unit power sales contracts were as follows:
 
                         
    2006          2005          2004       
 
    (in millions)
 
Unit power –
                       
Capacity
  $ 208     $ 201     $ 185  
Energy
    274       237       213  
 
 
Total
  $ 482     $ 438     $ 398  
 
 
 
In 2006, sales for resale revenues increased $155 million as a result of a 10.5 percent increase in the average cost of fuel per net KWH generated, as well as revenues resulting from new PPAs in 2006. In addition, Southern Company assumed four PPAs through the acquisitions of Plants DeSoto and Rowan in June and September 2006, respectively. The 2006 increase was partially offset by a decrease in opportunity sales.
 
In 2005, sales for resale revenues increased $326 million primarily due to a 26.5 percent increase in the average cost of fuel per net KWH generated. In addition, Southern Company entered into new PPAs with 30 electric membership cooperatives (EMCs) and Flint EMC, both beginning in January 2005, and assumed two PPAs in June 2005 in connection with the acquisition of Plant Oleander.
 
In 2004, sales for resale revenues decreased $17 million primarily due to a lower price differential between market prices and the Company’s marginal cost that reduced the availability of short-term opportunity sales. Milder summer weather throughout the Southeast also reduced demand.


II-12


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

 
Energy Sales
 
Changes in revenues are influenced heavily by the volume of energy sold each year. KWH sales for 2006 and the percent change by year were as follows:
 
                               
    KWH   Percent Change
    2006   2006   2005   2004
 
    (in billions)          
 
Residential
    52.4     2.5 %     2.8 %     3.9 %
Commercial
    53.0     2.2       3.6       3.4  
Industrial
    55.0     (0.2 )     (2.2 )     3.6  
Other
    0.9     (7.6 )     (0.9 )     0.8  
 
 
Total retail
    161.3     1.4       1.2       3.6  
Sales for resale
    40.1     6.1       7.3       (13.0 )
 
 
Total
    201.4     2.3       2.3       0.1  
 
 
 
Retail energy sales in 2006 increased 2.3 billion KWH as a result of customer growth of 1.7 percent, sustained economic growth primarily in the residential and commercial customer classes, and warmer weather in 2006 when compared to 2005. Retail energy sales in 2005 increased 1.9 billion KWH as a result of sustained economic growth and customer growth of 1.2 percent. Hurricane Katrina dampened customer growth from previous years and was the primary contributor to the decrease in industrial sales in 2005. In addition, in 2005, some Georgia Power industrial customers were reclassified from industrial to commercial to be consistent with the rate structure approved by the Georgia PSC resulting in higher commercial sales and lower industrial sales in 2005 when compared with 2004. Retail energy sales in 2004 were strong across all customer classes as a result of an improved economy in the Southeast and customer growth of 1.5 percent.
 
Energy sales for resale increased by 2.3 billion KWH in 2006, increased by 2.6 billion KWH in 2005, and decreased by 5.3 billion KWH in 2004. The increases in sales for resale in 2006 and 2005 are related primarily to the new PPAs discussed above. The decrease in 2004 compared with 2003 is primarily due to a lower price differential between market prices and the Company’s marginal cost that reduced the availability of short-term opportunity sales. Milder summer weather throughout the Southeast also reduced demand.
 
Fuel and Purchased Power Expenses
 
Fuel costs constitute the single largest expense for the electric utilities. The mix of fuel sources for generation of electricity is determined primarily by demand, the unit cost of fuel consumed, and the availability of generating units. Details of Southern Company’s generation, fuel, and purchased power are as follows:
 
                         
    2006   2005   2004
 
 
Total generation
(billions of KWH)
    201       195       188  
Total purchased power
(billions of KWH)
    10       11       15  
 
 
Sources of generation
(percent) –
                       
Coal
    70 %     71 %     69 %
Nuclear
    15       15       16  
Gas
    13       11       12  
Hydro
    2       3       3  
 
 
Cost of fuel, generated
(cents per net KWH) –
                       
Coal
    2.40       1.93       1.75  
Nuclear
    0.47       0.47       0.46  
Gas
    6.63       8.52       4.90  
 
 
Average cost of fuel, generated
  (cents per net KWH)
    2.64       2.39       1.89  
Average cost of purchased power
  (cents per net KWH)
    5.64       7.14       4.48  
 
 
 
Fuel and purchased power expenses were $5.7 billion in 2006, an increase of $467 million or 8.9 percent above the prior year costs. This increase was the result of a $319 million increase in the cost of fuel and purchased power and $148 million related to an increase in total KWH generated and purchased.
 
In 2005, fuel and purchased power expenses were $5.2 billion, an increase of $1.2 billion or 29.1 percent above 2004 costs. This increase was the result of a $1.2 billion increase in the cost of fuel and purchased power, partially offset by $47 million related to a decrease in total KWH generated and purchased.
 
Fuel and purchased power expenses were $4.0 billion in 2004, an increase of $570 million or 16.4 percent above 2003 costs. This increase was the result of a $473 million increase in the cost of fuel and purchased power and $97 million related to an increase in total KWH generated and purchased.
 
While prices have moderated somewhat in 2006, a significant upward trend in the cost of coal and natural gas has emerged since 2003, and volatility in these markets is expected to continue. Increased coal prices have been influenced by a worldwide increase in demand as a result of rapid economic growth in China, as well as by increases in mining and fuel transportation costs. Higher natural gas prices in the United States are the result of increased demand and slightly lower gas supplies despite increased drilling activity. Natural gas production


II-13


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

and supply interruptions, such as those caused by the 2004 and 2005 hurricanes, result in an immediate market response; however, the long-term impact of this price volatility may be reduced by imports of liquefied natural gas if new liquefied gas facilities are built. Fuel expenses generally do not affect net income, since they are offset by fuel revenues under the traditional operating companies’ fuel cost recovery provisions. Likewise, Southern Power’s PPAs generally provide that the purchasers are responsible for substantially all of the cost of fuel.
 
Other Operations and Maintenance Expenses
 
Other operations and maintenance expenses were $3.3 billion, $3.2 billion, and $3.0 billion, increasing $70 million, $215 million, and $148 million in 2006, 2005, and 2004, respectively. Other production expenses at fossil, hydro, and nuclear plants increased $3 million, $58 million, and $53 million in 2006, 2005, and 2004, respectively. Production expenses fluctuate from year to year due to variations in outage schedules, flexible spending projects, and normal increases in costs.
 
Administrative and general expenses increased $29 million in 2006 as a result of a $17 million increase in salaries and wages and a $24 million increase in pension expense, partially offset by a $16 million reduction in medical expenses. Administrative and general expenses increased $73 million in 2005 related to a $33 million increase in employee benefits; a $22 million increase in shared service expenses, primarily increases in Sarbanes-Oxley Act compliance costs, legal costs, and other corporate expenses; and a $9 million increase in property damage. Administrative and general expenses increased $106 million in 2004 primarily related to a $41 million increase in employee benefits, a $23 million increase in shared service expenses, primarily nuclear security, and a $13 million increase in property insurance.
 
Transmission and distribution expenses increased $30 million, $60 million, and $49 million in 2006, 2005, and 2004, respectively. Transmission and distribution expenses increased in 2006 primarily due to expenses associated with recovery of prior year storm costs through natural disaster recovery clauses and additional investment in distribution to meet customer growth. Transmission and distribution expenses increased in 2005 primarily as a result of $48 million of expenses recorded by Alabama Power in accordance with an accounting order approved by the Alabama PSC primarily 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 income taxes to its retail customers; therefore, the combined effect of the accounting order had no impact on net income. See Note 3 to the financial statements under “Storm Damage Cost Recovery” for additional information. Transmission and distribution expenses fluctuate from year to year due to variations in maintenance schedules, flexible spending projects, and normal increases in costs and are the primary basis for the 2004 increase.
 
The 2004 increase in other operations and maintenance expenses was partially offset by a $60 million regulatory liability related to Plant Daniel that was expensed in 2003.
 
Depreciation and Amortization Expenses
 
Depreciation and amortization expenses increased $27 million in 2006 as a result of the acquisitions of Plants DeSoto, Rowan, and Oleander in June 2006, September 2006, and June 2005, respectively, and a reduction in the amortization of the Plant Daniel regulatory liability. An increase in depreciation rates at Southern Power associated with adoption of a new depreciation study also contributed to the 2006 increase. Partially offsetting the 2006 increase was the amortization of a Georgia Power regulatory liability related to the levelization of certain purchased power capacity costs as ordered by the Georgia PSC under the terms of the retail rate order effective January 1, 2005. See Note 3 to the financial statements under “Georgia Power Retail Regulatory Matters” for additional information.
 
Depreciation and amortization expenses increased $229 million in 2005 as a result of additional plant in service and from the expiration in 2004 of certain provisions in Georgia Power’s retail rate plan for the three years ended December 31, 2004 (2001 Retail Rate Plan). In accordance with the 2001 Retail Rate Plan, Georgia Power amortized an accelerated cost recovery liability as a credit to amortization expense and recognized new Georgia PSC-certified purchased power capacity costs in rates evenly over the three years ended December 31, 2004. See Note 3 to the financial statements under “Georgia Power Retail Regulatory Matters” for additional information.
 
Depreciation and amortization expenses declined by $64 million in 2004 primarily as a result of amortization of the Plant Daniel regulatory liability and a Georgia Power regulatory liability related to the levelization of certain purchased power capacity costs that reduced amortization expense by $17 million and $90 million, respectively, from the prior year. See FUTURE EARNINGS POTENTIAL – “PSC Matters – Mississippi Power” herein and Note 3 to the financial statements


II-14


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

under “Georgia Power Retail Regulatory Matters” for more information on these regulatory adjustments. These reductions were partially offset by a higher depreciable plant base.
 
Taxes Other Than Income Taxes
 
Taxes other than income taxes increased by $39 million in 2006 primarily as a result of increases in franchise and municipal gross receipts taxes associated with increases in revenues from energy sales as well as increases in property taxes associated with additional plant in service. Taxes other than income taxes increased by $52 million in 2005 primarily as a result of increases in franchise and municipal gross receipts taxes associated with increases in revenues from energy sales. In 2004, taxes other than income taxes increased by $40 million primarily as a result of additional plant in service and a higher property tax base.
 
Interest Expenses
 
Total interest charges and other financing costs increased by $75 million in 2006 due to a $78 million increase associated with $708 million in additional debt outstanding at December 31, 2006 compared to December 31, 2005 and a $7 million increase associated with an increase in average interest rates on variable rate debt, partially offset by a $6 million increase in capitalized interest associated with construction projects and a $3 million reduction in other interest costs. Total interest charges and other financing costs increased by $62 million in 2005 associated with an additional $863 million in debt outstanding at December 31, 2005 as compared to December 31, 2004 and an increase in average interest rates on variable rate debt. Variable rates on pollution control bonds are highly correlated with the Bond Market Association (BMA) Municipal Swap Index, which averaged 2.5 percent in 2005 and 1.2 percent in 2004. Variable rates on commercial paper and senior notes are highly correlated with the one-month London Interbank Offer Rate (LIBOR), which averaged 3.4 percent in 2005 and 1.5 percent in 2004. An additional $17 million increase in 2005 was the result of a lower percentage of interest costs capitalized as construction projects reached completion. The $19 million increase in interest charges and other financing costs in 2004 was also the result of a lower percentage of interest costs capitalized as construction projects reached completion.
 
Other Business Activities
 
Southern Company’s other business activities include the parent company (which does not allocate operating expenses to business units), investments in synthetic fuels and leveraged lease projects, telecommunications, and energy-related services. These businesses are classified in general categories and may comprise one or more of the following subsidiaries: Southern Company Holdings invests in various energy-related projects, including synthetic fuels and leveraged lease projects that receive tax benefits, which contribute significantly to the economic results of these investments; SouthernLINC Wireless provides digital wireless communications services to the traditional operating companies and also markets these services to the public within the Southeast; Southern Telecom provides fiber optics services in the Southeast; and Southern Company Gas was a retail gas marketer serving customers in the State of Georgia. On January 4, 2006, Southern Company Gas completed the sale of substantially all of its assets and is reflected in the condensed income statement below as discontinued operations. See Note 3 to the financial statements under “Southern Company Gas Sale” for additional information. A condensed income statement for Southern Company’s other business activities follows:
 
                                 
        Increase (Decrease)
    Amount   from Prior Year
 
    2006   2006   2005   2004
 
    (in millions)
 
Operating revenues
  $ 268     $ (8 )   $ 12     $ (7 )
 
 
Other operations and maintenance
    238       (59 )     12       28  
Depreciation and amortization
    36       (3 )     (2 )     (9 )
Taxes other than income taxes
    3       (1 )     1       1  
 
 
Total operating expenses
    277       (63 )     11       20  
 
 
Operating income/(loss)
    (9 )     55       1       (27 )
Equity in losses of unconsolidated subsidiaries
    (60 )     62       (25 )     3  
Leveraged lease income
    69       (5 )     4       4  
Other income, net
    (31 )     (18 )     (6 )     (15 )
Interest expenses
    149       48       18       (21 )
Income taxes
    (168 )     136       (14 )     (63 )
Discontinued operations, net of tax
    (1 )     (1 )     (3 )     12  
 
 
Net income/(loss)
  $ (13 )   $ (91 )   $ (33 )   $ 61  
 
 
 
Southern Company’s non-electric operating revenues decreased $8 million in 2006 primarily as a result of a $21 million decrease in revenues at SouthernLINC Wireless related to lower average revenue per subscriber and lower equipment and accessory sales. The 2006 decrease was partially offset by a $12 million increase in


II-15


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

fuel procurement service revenues. Higher production and increased fees in the synthetic fuel business contributed to the $12 million increase in 2005. The $7 million decrease in 2004 was primarily due to lower operating revenues in one of the Company’s energy-related services businesses, partially offset by an increase in SouthernLINC Wireless revenues as a result of increased wireless subscribers.
 
Other operations and maintenance expenses for these other businesses declined $59 million in 2006 primarily as a result of $32 million of lower production expenses related to the termination of Southern Company’s membership interest in one of the synthetic fuel entities, $13 million attributed to the wind-down of one of the Company’s energy-related services businesses, and $7 million of lower expenses resulting from the March 2006 sale of a subsidiary that provided rail car maintenance services. Other operations and maintenance expenses increased by $12 million in 2005 as a result of $9 million of higher losses for property damage, $2 million in higher network costs at SouthernLINC Wireless, and an $11 million increase in shared service expenses, partially offset by the $12.5 million bad debt reserve in 2004 discussed below. Other operations and maintenance expenses increased $28 million in 2004 primarily due to a $3 million increase in advertising, a $5 million increase in shared services expenses, and a $12.5 million bad debt reserve related to additional federal income taxes and interest Southern Company paid on behalf of Mirant Corporation (Mirant). See FUTURE EARNINGS POTENTIAL – “Mirant Matters” herein and Note 3 to the financial statements under “Mirant Matters – Mirant Bankruptcy” for additional information.
 
The 2006 and 2005 decreases in depreciation and amortization expenses when compared to the prior years were not material. Depreciation and amortization expenses decreased $9 million in 2004 primarily as a result of $10 million of expenses associated with the repurchase of debt at Southern Company Holdings in 2003.
 
Southern Company made investments in two synthetic fuel 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 decrease in equity in losses of unconsolidated subsidiaries in 2006 reflects the result of terminating Southern Company’s membership interest in one of the synthetic fuel entities which reduced the amount of Southern Company’s share of the losses and, therefore, the funding obligation for the year. The decrease also resulted from lower operating expenses while the production facilities at the other synthetic fuel entity were idled from May to September 2006 due to higher oil prices. The increase in equity in losses of unconsolidated subsidiaries in 2005 reflects the results of additional production expenses at the synthetic fuel production facilities. The 2004 decrease in equity in losses of unconsolidated subsidiaries when compared to the prior year was not material. The federal income tax credits resulting from these investments totaled $65 million in 2006, $177 million in 2005, and $146 million in 2004. In 2004, a $37 million reserve related to these tax credits was reversed following the settlement of an Internal Revenue Service (IRS) audit. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Synthetic Fuel Tax Credits” herein for further information.
 
The $18 million decrease in other income in 2006 as compared with 2005 resulted from a $25 million decrease related to changes in the value of derivative transactions in the synthetic fuel business and a $16 million decrease related to the impairment of investments in the synthetic fuel entities, partially offset by the release of $6 million in certain contractual obligations associated with these investments. The 2005 decrease in other income when compared to the prior year was not material. The decrease in other income in 2004 as compared with 2003 reflects a $15 million gain for a Southern Telecom contract settlement during 2003.
 
Total interest charges and other financing costs increased by $48 million in 2006 due to a $19 million increase associated with $149 million in additional debt outstanding at December 31, 2006 as compared to December 31, 2005, a $12 million increase associated with an increase in average interest rates on variable rate debt, a $6 million loss on the early redemption of long-term debt payable to affiliated trusts in January 2006, and a $16 million loss on the repayment of long-term debt payable to affiliated trusts in December 2006. The 2006 increase is partially offset by a $4 million reduction in other interest costs. Interest expense increased by $18 million in 2005 associated with an additional $283 million in debt outstanding and a 164 basis point increase in average interest rates on variable rate debt. Interest expense decreased $21 million in 2004 as a result of the parent company’s redemption of preferred securities in 2003. This decrease was partially offset by an increase in outstanding long-term debt in 2004.
 
The $136 million increase in income taxes in 2006 as compared with 2005 resulted from an $80 million decrease in synthetic fuel tax credits as a result of terminating the Company’s membership interest in one of the synthetic fuel entities and curtailing production at the other synthetic fuel entity from May to September 2006. In addition, $32 million of tax credit reserves were


II-16


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

recorded in 2006 due to an anticipated phase-out of synthetic fuel tax credits due to higher oil prices. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Synthetic Fuel Tax Credits” herein for further information. The 2005 decrease in income taxes when compared to the prior year was not material. The $63 million decrease in income taxes in 2004 as compared with 2003 resulted from a $19 million increase in synthetic fuel tax credits as a result of increased production and a $44 million change in a reserve recorded related to these tax credits.
 
Effects of Inflation
 
The traditional operating companies and Southern Power are subject to rate regulation and party to long-term contracts that are generally based on the recovery of historical costs. When historical costs are included, or when inflation exceeds projected costs used in rate regulation, the effects of inflation can create an economic loss since the recovery of costs could be in dollars that have less purchasing power. In addition, the income tax laws are based on historical costs. While the inflation rate has been relatively low in recent years, it continues to have an adverse effect on Southern Company because of the large investment in utility plant with long economic lives. Conventional accounting for historical cost does not recognize this economic loss nor the partially offsetting gain that arises through financing facilities with fixed-money obligations such as long-term debt and preferred securities. Any recognition of inflation by regulatory authorities is reflected in the rate of return allowed in the traditional operating companies’ approved electric rates.
 
FUTURE EARNINGS POTENTIAL
 
General
 
The four traditional operating companies operate as vertically integrated utilities providing electricity to customers within their service areas in the southeastern United States. Prices for electricity provided to retail customers are set by state PSCs under cost-based regulatory principles. Retail rates and earnings are reviewed and may be adjusted periodically within certain limitations. Southern Power continues to focus on long-term capacity contracts, optimized by limited energy trading activities. The level of future earnings depends on numerous factors including the Federal Energy Regulatory Commission’s (FERC) market-based rate investigation, creditworthiness of customers, total generating capacity available in the Southeast, and the successful remarketing of capacity as current contracts expire. See ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates – Electric Utility Regulation” herein and Note 3 to the financial statements for additional information about regulatory matters.
 
The results of operations for the past three years are not necessarily indicative of future earnings potential. The level of Southern Company’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Company’s primary business of selling electricity. These factors include the traditional operating companies’ ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. Another major factor is the profitability of the competitive market-based wholesale generating business and federal regulatory policy, which may impact Southern Company’s level of participation in this market. Future earnings for the electricity business in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in the service area.
 
Southern Company system generating capacity increased 1,276 megawatts in 2006. The acquisition by Southern Power of Plants DeSoto and Rowan added 1,330 megawatts to the fleet while generating capacity was reduced by 54 megawatts due to the retirement of two fossil units and the re-rating of one hydro unit. In general, Southern Company has constructed or acquired new generating capacity only after entering into long-term capacity contracts for the new facilities or to meet requirements of Southern Company’s regulated retail markets, both of which are optimized by limited energy trading activities.
 
To adapt to a less regulated, more competitive environment, Southern Company continues to evaluate and consider a wide array of potential business strategies. These strategies may include business combinations, acquisitions involving other utility or non-utility businesses or properties, internal restructuring, disposition of certain assets, or some combination thereof. Furthermore, Southern Company may engage in new business ventures that arise from competitive and regulatory changes in the utility industry. Pursuit of any of the above strategies, or any combination thereof, may significantly affect the business operations and financial condition of Southern Company.


II-17


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

 
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. Environmental compliance spending over the next several years may exceed amounts estimated. Some of the factors driving the potential for such an 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 Note 3 to the financial statements under “Environmental Matters” for additional information.
 
New Source Review Actions
 
In November 1999, the Environmental Protection Agency (EPA) brought a civil action in the U.S. District Court for the Northern District of Georgia against certain Southern Company subsidiaries, including Alabama Power and Georgia Power, alleging that these subsidiaries had violated the New Source Review (NSR) provisions of the Clean Air Act and related state laws at certain coal-fired generating facilities. Through subsequent amendments and other legal procedures, the EPA filed a separate action in January 2001 against Alabama Power in the U.S. District Court for the Northern District of Alabama after Alabama Power was dismissed from the original action. In these lawsuits, the EPA alleged that NSR violations occurred at eight coal-fired generating facilities operated by Alabama Power and Georgia Power (including a facility formerly owned by Savannah Electric). The civil actions request penalties and injunctive relief, including an order requiring the installation of the best available control technology at the affected units.
 
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 the alleged NSR violations at Plant Miller. The consent decree required Alabama Power to pay $100,000 to resolve the government’s claim for a civil penalty and to donate $4.9 million of sulfur dioxide emission allowances to a nonprofit charitable organization and formalized specific emissions reductions to be accomplished by Alabama Power, consistent with other Clean Air Act programs that require emissions reductions. On August 14, 2006, the district court in Alabama granted Alabama Power’s motion for summary judgment and entered final judgment in favor of Alabama Power on the EPA’s claims related to Plants Barry, Gaston, Gorgas, and Greene County. The plaintiffs have appealed this decision to the U.S. Court of Appeals for the Eleventh Circuit and, on November 14, 2006, the Eleventh Circuit granted plaintiffs’ request to stay the appeal, pending the U.S. Supreme Court’s ruling in a similar NSR case filed by the EPA against Duke Energy. The action against Georgia Power has been administratively closed since the spring of 2001, and none of the parties has sought to reopen the case.
 
Southern Company believes that the traditional operating companies complied with applicable laws and the EPA regulations and interpretations in effect at the time the work in question took place. The Clean Air Act authorizes maximum civil penalties of $25,000 to $32,500 per day, per violation at each generating unit, depending on the date of the alleged violation. An adverse outcome in any one of these cases could require substantial capital expenditures that cannot be determined at this time and could possibly require payment of substantial penalties. Such expenditures could affect future results of operations, cash flows, and financial condition if such costs are not recovered through regulated rates.
 
The EPA has issued a series of proposed and final revisions to its NSR regulations under the Clean Air Act, many of which have been subject to legal challenges by environmental groups and states. On June 24, 2005, the U.S. Court of Appeals for the District of Columbia Circuit upheld, in part, the EPA’s revisions to NSR regulations that were issued in December 2002 but vacated portions of those revisions addressing the exclusion of certain pollution control projects. These regulatory revisions have been adopted by each of the states within Southern Company’s service territory. On March 17, 2006, the U.S. Court of Appeals for the District of Columbia Circuit also vacated an EPA rule which sought to clarify the scope of the existing Routine Maintenance, Repair, and Replacement exclusion. In October 2005 and September 2006, the EPA also published proposed rules clarifying the test for determining when an emissions increase subject to the NSR permitting requirements has occurred. The impact of these proposed rules will depend on adoption of the final rules by the EPA and the individual state implementation of such rules, as well as the outcome of any additional legal challenges, and, therefore, cannot be determined at this time.
 
Carbon Dioxide Litigation
 
In July 2004, attorneys general from eight states, each outside of Southern Company’s service territory, and the corporation counsel for New York City filed a complaint in the U.S. District Court for the Southern District of New York against Southern Company and four other electric power companies. A nearly identical complaint was filed


II-18


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

by three environmental groups in the same court. The complaints allege that the companies’ emissions of carbon dioxide, a greenhouse gas, contribute to global warming, which the plaintiffs assert is a public nuisance. Under common law public and private nuisance theories, the plaintiffs seek a judicial order (1) holding each defendant jointly and severally liable for creating, contributing to, and/or maintaining global warming and (2) requiring each of the defendants to cap its emissions of carbon dioxide and then reduce those emissions by a specified percentage each year for at least a decade. Plaintiffs have not, however, requested that damages be awarded in connection with their claims. Southern Company believes these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. In September 2005, the U.S. District Court for the Southern District of New York granted Southern Company’s and the other defendants’ motions to dismiss these cases. The plaintiffs filed an appeal to the U.S. Court of Appeals for the Second Circuit in October 2005. The ultimate outcome of these matters cannot be determined at this time.
 
Plant Wansley Environmental Litigation
 
In December 2002, the Sierra Club, Physicians for Social Responsibility, Georgia Forestwatch, and one individual filed a civil suit in the U.S. District Court for the Northern District of Georgia against Georgia Power for alleged violations of the Clean Air Act at four of the units at Plant Wansley. The civil action requested injunctive and declaratory relief, civil penalties, a supplemental environmental project, and attorneys’ fees. In January 2007, following the March 2006 reversal and remand by the U.S. Court of Appeals for the Eleventh Circuit, the district court ruled for Georgia Power on all remaining allegations in this case. The only issue remaining for resolution by the district court is the appropriate remedy for two isolated, short-term, technical violations of the plant’s Clean Air Act operating permit. The court has asked the parties to submit a joint proposed remedy or individual proposals in the event the parties cannot agree. Although the ultimate outcome of this matter cannot currently be determined, the resulting liability associated with the two events is not expected to have a material impact on the Company’s financial statements.
 
Environmental Statutes and Regulations
 
General
 
Southern Company’s operations are subject to extensive regulation by state and federal environmental agencies under a variety of statutes and regulations governing environmental media, including air, water, and land resources. Applicable statutes include the Clean Air Act; the Clean Water Act; the Comprehensive Environmental Response, Compensation, and Liability Act; the Resource Conservation and Recovery Act; the Toxic Substances Control Act; the Emergency Planning & Community Right-to-Know Act; and the Endangered Species Act. Compliance with these environmental requirements involves significant capital and operating costs, a major portion of which is expected to be recovered through existing ratemaking provisions. Through 2006, Southern Company had invested approximately $3.1 billion in capital projects to comply with these requirements, with annual totals of $661 million, $423 million, and $300 million for 2006, 2005, and 2004, respectively. The Company expects that capital expenditures to assure compliance with existing and new regulations will be an additional $1.66 billion, $1.65 billion, and $1.27 billion for 2007, 2008, and 2009, respectively. Because the Company’s compliance strategy is impacted by changes to existing environmental laws and regulations, the cost, availability, and existing inventory of emission allowances, and the Company’s fuel mix, the ultimate outcome cannot be determined at this time. Environmental costs that are known and estimable at this time are included in capital expenditures discussed under FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” herein.
 
Compliance with possible additional federal or state legislation or regulations related to global climate change, air quality, or other environmental and health concerns could also significantly affect Southern Company. New environmental legislation or regulations, or changes to existing statutes or regulations, could affect many areas of Southern Company’s operations; however, the full impact of any such changes cannot be determined at this time.
 
Air Quality
 
Compliance with the Clean Air Act and resulting regulations has been and will continue to be a significant focus for Southern Company. Through 2006, the Company had spent approximately $2.5 billion in reducing sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions and in monitoring emissions pursuant to the Clean Air Act. Additional controls have been announced and are currently being installed at several plants to further reduce SO2, NOx, and mercury emissions, maintain compliance with existing regulations, and meet new requirements.
 
Approximately $1.3 billion of the expenditures related to reducing NOx emissions pursuant to state and federal requirements were in connection with the EPA’s


II-19


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

one-hour ozone air quality standard and the 1998 regional NOx reduction rules. In addition, in 2006, Gulf Power completed implementation of the terms of a 2002 agreement with the State of Florida to help ensure attainment of the ozone standard in the Pensacola, Florida area. The conditions of the agreement, which required installing additional controls on certain units and retiring three older units at a plant near Pensacola, totaled approximately $133.8 million, and have been approved under Gulf Power’s environmental cost recovery clause.
 
In 2005, the EPA revoked the one-hour ozone air quality standard and published the second of two sets of final rules for implementation of the new, more stringent eight-hour ozone standard. Areas within Southern Company’s service area that were designated as nonattainment under the eight-hour ozone standard included Macon (Georgia), Jefferson and Shelby Counties, near and including Birmingham (Alabama), and a 20-county area within metropolitan Atlanta. Macon is in the process of seeking redesignation by the EPA as an attainment area and is preparing a maintenance plan for approval. The Birmingham area was redesignated to attainment with the eight-hour ozone standard by the EPA on June 12, 2006, and the EPA subsequently approved a maintenance plan for the area to address future exceedances of the standard. On December 22, 2006, the U.S. Court of Appeals for the District of Columbia Circuit vacated the first set of implementation rules adopted in 2004 and remanded the rules to the EPA for further refinement. The impact of this decision, if any, cannot be determined at this time and will depend on subsequent legal action and/or rulemaking activity. State implementation plans, including new emission control regulations necessary to bring ozone nonattainment areas into attainment, are currently required for most areas by June 2007. These state implementation plans could require further reductions in NOx emissions from power plants.
 
During 2005, the EPA’s fine particulate matter nonattainment designations became effective for several areas within Southern Company’s service area in Alabama and Georgia, and the EPA proposed a rule for the implementation of the fine particulate matter standard. The EPA is expected to publish its final rule for implementation of the existing fine particulate matter standard in early 2007. State plans for addressing the nonattainment designations under the existing standard are required by April 2008 and could require further reductions in SO2 and NOx emissions from power plants. On September 21, 2006, the EPA published a final rule lowering the 24-hour fine particulate matter air quality standard even further and plans to designate nonattainment areas based on the new standard by December 2009. The final outcome of this matter cannot be determined at this time.
 
The EPA issued the final Clean Air Interstate Rule in March 2005. This cap-and-trade rule addresses power plant SO2 and NOx emissions that were found to contribute to nonattainment of the eight-hour ozone and fine particulate matter standards in downwind states. Twenty-eight eastern states, including each of the states within Southern Company’s service area, are subject to the requirements of the rule. The rule calls for additional reductions of NOx and/or SO2 to be achieved in two phases, 2009/2010 and 2015. These reductions will be accomplished by the installation of additional emission controls at Southern Company’s coal-fired facilities or by the purchase of emission allowances from a cap-and-trade program.
 
The Clean Air Visibility Rule (formerly called the Regional Haze Rule) was finalized in July 2005. The goal of this rule is to restore natural visibility conditions in certain areas (primarily national parks and wilderness areas) by 2064. The rule involves (1) the application of Best Available Retrofit Technology (BART) to certain sources built between 1962 and 1977 and (2) the application of any additional emissions reductions which may be deemed necessary for each designated area to achieve reasonable progress toward the natural conditions goal by 2018. Thereafter, for each 10-year planning period, additional emissions reductions will be required to continue to demonstrate reasonable progress in each area during that period. For power plants, the Clean Air Visibility Rule allows states to determine that the Clean Air Interstate Rule satisfies BART requirements for SO2 and NOx. However, additional BART requirements for particulate matter could be imposed, and the reasonable progress provisions could result in requirements for additional SO2 controls. By December 17, 2007, states must submit implementation plans that contain strategies for BART and any other control measures required to achieve the first phase of reasonable progress.
 
In March 2005, the EPA published the final Clean Air Mercury Rule, a cap-and-trade program for the reduction of mercury emissions from coal-fired power plants. The rule sets caps on mercury emissions to be implemented in two phases, 2010 and 2018, and provides for an emission allowance trading market. The Company anticipates that emission controls installed to achieve compliance with the Clean Air Interstate Rule and the eight-hour ozone and fine-particulate air quality standards will also result in mercury emission reductions. However, the long-term capability of emission control equipment to reduce mercury emissions is still being evaluated, and the


II-20


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

installation of additional control technologies may be required.
 
The impacts of the eight-hour ozone and the fine particulate matter nonattainment designations, the Clean Air Interstate Rule, the Clean Air Visibility Rule, and the Clean Air Mercury Rule on the Company will depend on the development and implementation of rules at the state level. States implementing the Clean Air Mercury Rule and the Clean Air Interstate Rule, in particular, have the option not to participate in the national cap-and-trade programs and could require reductions greater than those mandated by the federal rules. Impacts will also depend on resolution of pending legal challenges to these rules. Therefore, the full effects of these regulations on the Company cannot be determined at this time. The Company has developed and continually updates a comprehensive environmental compliance strategy to comply with the continuing and new environmental requirements discussed above. As part of this strategy, the Company plans to install additional SO2, NOx, and mercury emission controls within the next several years to assure continued compliance with applicable air quality requirements.
 
Water Quality
 
In July 2004, the EPA published its final technology-based regulations under the Clean Water Act for the purpose of reducing impingement and entrainment of fish, shellfish, and other forms of aquatic life at existing power plant cooling water intake structures. The rules require baseline biological information and, perhaps, installation of fish protection technology near some intake structures at existing power plants. On January 25, 2007, the U.S. Court of Appeals for the Second Circuit overturned and remanded several provisions of the rule to the EPA for revisions. Among other things, the court rejected the EPA’s use of “cost-benefit” analysis and suggested some ways to incorporate cost considerations. The full impact of these regulations will depend on subsequent legal proceedings, further rulemaking by the EPA, the results of studies and analyses performed as part of the rules’ implementation, and the actual requirements established by state regulatory agencies and, therefore, cannot now be determined.
 
Georgia Power is retrofitting a closed-loop recirculating cooling tower at one facility under the Clean Water Act to cool water prior to discharge and is considering undertaking similar work at an additional facility. The total estimated capital cost for this project is $96 million. Southern Company is also considering similar projects at other facilities.
 
Environmental Remediation
 
Southern Company must comply with other environmental laws and regulations that cover the handling and disposal of waste and release of hazardous substances. Under these various laws and regulations, the traditional operating companies could incur substantial costs to clean up properties. The traditional operating companies conduct studies to determine the extent of any required cleanup and have recognized in their respective financial statements the costs to clean up known sites. Amounts for cleanup and ongoing monitoring costs were not material for any year presented. The traditional operating companies may be liable for some or all required cleanup costs for additional sites that may require environmental remediation. See Note 3 to the financial statements under “Environmental Matters – Environmental Remediation” for additional information.
 
Global Climate Issues
 
Domestic efforts to limit greenhouse gas emissions have been spurred by international negotiations under the Framework Convention on Climate Change and specifically the Kyoto Protocol, which proposes a binding limitation on the emissions of greenhouse gases for industrialized countries. The Bush Administration has not supported U.S. ratification of the Kyoto Protocol or other mandatory carbon dioxide reduction legislation; however, in 2002, it did announce a goal to reduce the greenhouse gas intensity of the U.S. economy, the ratio of greenhouse gas emissions to the value of U.S. economic output, by 18 percent by 2012. Southern Company is participating in the voluntary electric utility sector climate change initiative, known as Power Partners, under the Bush Administration’s Climate VISION program. The utility sector pledged to reduce its greenhouse gas emissions rate by 3 percent to 5 percent by 2010-2012. The Company continues to evaluate future energy and emission profiles relative to the Power Partners program and is participating in voluntary programs to support the industry initiative. In addition, the Company is participating in the Bush Administration’s Asia Pacific Partnership on Clean Development and Climate, a public/private partnership to work together to meet goals for energy security, national air pollution reduction, and climate change in ways that promote sustainable economic growth and poverty reduction. Legislative proposals that would impose mandatory restrictions on carbon dioxide emissions continue to be considered in Congress. The ultimate outcome cannot be determined at this time; however, mandatory restrictions on the Company’s carbon dioxide emissions could result in significant additional compliance costs that could affect future results of operations, cash


II-21


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

flows, and financial condition if such costs are not recovered through regulated rates.
 
FERC Matters
 
Market-Based Rate Authority
 
Each of the traditional operating companies and Southern Power has authorization from the FERC to sell power to non-affiliates, including short-term opportunity sales, at market-based prices. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate.
 
In December 2004, the FERC initiated a proceeding to assess Southern Company’s generation dominance within its retail service territory. The ability to charge market-based rates in other markets is not an issue in that proceeding. Any new market-based rate sales by any subsidiary of Southern Company in Southern Company’s retail service territory entered into during a 15-month refund period beginning February 27, 2005 could 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 refund period, were approximately $19.7 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 traditional 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 started 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 sales involving any Southern Company subsidiary could be subject to refund to the extent the FERC orders lower rates as a result of this new investigation. Such sales through October 19, 2006, the end of the refund period, were approximately $55.4 million for the Southern Company system, of which $15.5 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 Intercompany Interchange Contract (IIC) discussed below. On January 3, 2007, the FERC issued an order noting settlement of the IIC proceeding and seeking comment identifying any remaining issues and the proper procedure for addressing any such issues.
 
Southern Company and its subsidiaries believe that there is no meritorious basis for these proceedings 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 these proceedings, cannot now be determined.
 
Intercompany Interchange Contract
 
The Company’s generation fleet in its retail service territory is operated under the IIC, as approved by the FERC. 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 Southern Company Services, Inc. (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.
 
On October 5, 2006, the FERC issued an order accepting a settlement resolving the proceeding subject to Southern Company’s agreement to accept certain modifications to the settlement’s terms. On October 20, 2006, Southern Company notified the FERC that it accepted the modifications. The modifications largely involve functional separation and information restrictions related to marketing activities conducted on behalf of Southern Power. Southern Company filed with the FERC on November 6, 2006 an implementation plan to comply with the modifications set forth in the order. The impact of the modifications is not expected to have a material impact on Southern Company’s financial statements.
 
Generation Interconnection Agreements
 
In July 2003, the FERC issued its final rule on the standardization of generation interconnection agreements and procedures (Order 2003). Order 2003 shifts much of the financial burden of new transmission investment from


II-22


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

the generator to the transmission provider. The FERC has indicated that Order 2003, which was effective January 20, 2004, is to be applied prospectively to new generating facilities interconnecting to a transmission system. Order 2003 was affirmed by the U.S. Court of Appeals for the District of Columbia Circuit on January 12, 2007. The cost impact resulting from Order 2003 will vary on a case-by-case basis for each new generator interconnecting to the transmission system.
 
On November 22, 2004, generator company subsidiaries of Tenaska, Inc. (Tenaska), as counterparties to three previously executed interconnection agreements with subsidiaries of Southern Company, filed complaints at the FERC requesting that the FERC modify the agreements and that those Southern Company subsidiaries refund a total of $19 million previously paid for interconnection facilities, with interest. Southern Company has also received requests for similar modifications from other entities, though no other complaints are pending with the FERC. On January 19, 2007, the FERC issued an order granting Tenaska’s requested relief. Although the FERC’s order requires the modification of Tenaska’s interconnection agreements, the order reduces the amount of the refund that had been requested by Tenaska. As a result, Southern Company estimates indicate that no refund is due Tenaska. Southern Company has requested rehearing of the FERC’s order. The final outcome of this matter cannot now be determined.
 
Transmission
 
In December 1999, the FERC issued its final rule on Regional Transmission Organizations (RTOs). Since that time, there have been a number of additional proceedings at the FERC designed to encourage further voluntary formation of RTOs or to mandate their formation. However, at the current time, there are no active proceedings that would require Southern Company to participate in an RTO. Current FERC efforts that may potentially change the regulatory and/or operational structure of transmission include rules related to the standardization of generation interconnection, as well as an inquiry into, among other things, market power by vertically integrated utilities. See “Market-Based Rate Authority” and “Generation Interconnection Agreements” above for additional information. The final outcome of these proceedings cannot now be determined. However, Southern Company’s financial condition, results of operations, and cash flows could be adversely affected by future changes in the federal regulatory or operational structure of transmission.
 
PSC Matters
 
Alabama Power
 
In October 2005, the Alabama PSC approved a revision to the Rate Stabilization and Equalization Plan (Rate RSE) requested by Alabama Power. Effective January 2007, Rate RSE adjustments are based on forward-looking information for the applicable upcoming calendar year. Rate adjustments for any two-year period, when averaged together, cannot exceed 4 percent per year and any annual adjustment is limited to 5 percent. Rates remain unchanged when the projected return on common equity (ROE) ranges between 13 percent and 14.5 percent. If Alabama Power’s actual retail ROE is above the allowed equity return range, customer refunds will be required; however, there is no provision for additional customer billings should the actual retail return on common equity fall below the allowed equity return range. Alabama Power made its initial submission of projected data for calendar year 2007 on December 1, 2006. The Rate RSE increase for 2007 is 4.76 percent, or $193 million annually and, became effective in January 2007. See Note 3 to the financial statements under “Alabama Power Retail Regulatory Matters” for further information.
 
Georgia Power
 
In December 2004, the Georgia PSC approved the three-year retail rate plan ending December 31, 2007 (2004 Retail Rate Plan) for Georgia Power. Under the terms of the 2004 Retail Rate Plan, Georgia Power’s earnings are evaluated against a retail ROE range of 10.25 percent to 12.25 percent. Two-thirds of any earnings above 12.25 percent are applied to rate refunds, with the remaining one-third retained by Georgia Power. Retail rates and customer fees were increased by approximately $203 million in January 2005 to cover the higher costs of purchased power, operations and maintenance expenses, environmental compliance, and continued investment in new generation, transmission, and distribution facilities to support growth and ensure reliability.
 
Georgia Power is required to file a general rate case on or about July 1, 2007, in response to which the Georgia PSC would be expected to determine whether the 2004 Retail Rate Plan should be continued, modified, or discontinued. See Note 3 to the financial statements under “Georgia Power Retail Regulatory Matters” for additional information.
 
Effective July 1, 2006, Savannah Electric was merged into Georgia Power. See “Fuel Cost Recovery” herein for additional information.


II-23


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

 
Mississippi Power
 
 
In February 2007, Mississippi Power filed with the Mississippi PSC its annual Environmental Compliance Overview (ECO) Plan evaluation for 2007. Mississippi Power requested an 86 cent per 1,000 KWH increase for retail customers. This increase represents approximately $7.5 million per year in annual revenues for Mississippi Power. Hearings with the Mississippi PSC are expected to be held in April 2007. The outcome of the 2007 filing cannot now be determined. In April 2006, the Mississippi PSC approved Mississippi Power’s 2006 ECO Plan, which included a 12 cent per 1,000 KWH reduction for retail customers. This decrease represented a reduction of approximately $1.3 million per year in annual revenues for Mississippi Power. The new rates were effective in April 2006.
 
In December 2006, Mississippi Power submitted its annual Performance Evaluation Plan (PEP) filing for 2007, which resulted in no rate change. Pursuant to the rate schedule, an order is not required from the Mississippi PSC for Mississippi Power to continue to bill the filed rate in effect. In March 2006, the Mississippi PSC approved Mississippi Power’s 2006 PEP filing, which included an annual retail base rate increase of 5 percent, or $32 million that was effective in April 2006. Ordinarily, PEP limits annual rate increases to 4 percent; however, Mississippi Power had 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.
 
In May 2004, the Mississippi PSC approved Mississippi Power’s request to reclassify to jurisdictional cost of service the 266 megawatts of Plant Daniel unit 3 and 4 capacity, effective January 1, 2004. The Mississippi PSC authorized Mississippi Power to include the related costs and revenue credits in jurisdictional rate base, cost of service, and revenue requirement calculations for purposes of retail rate recovery. Mississippi Power is amortizing the regulatory liability established pursuant to the Mississippi PSC’s order to earnings as follows: $16.5 million in 2004, $25.1 million in 2005, $13.0 million in 2006, and $5.7 million in 2007, resulting in expense reductions in each of those years.
 
Fuel Cost Recovery
 
The traditional operating companies each have established fuel cost recovery rates approved by their respective state PSCs. Over the past two years, the traditional operating companies have continued to experience higher than expected fuel costs for coal, natural gas, and uranium. These higher fuel costs have increased the under recovered fuel costs included in the balance sheets to $1.3 billion at December 31, 2006. The traditional operating companies continuously monitor the under recovered fuel cost balance in light of these higher fuel costs. Each of the traditional operating companies received approval in 2005 and/or 2006 to increase its fuel cost recovery factors to recover existing under recovered amounts as well as projected future costs.
 
Alabama Power fuel costs are recovered under Rate ECR (Energy Cost Recovery), which provides for the addition of a fuel and energy cost factor to base rates. In December 2005, the Alabama PSC approved an increase that allows for the recovery of approximately $227 million in existing under recovered fuel costs over a two-year period. As of December 31, 2006, Alabama Power had an under recovered fuel balance of approximately $301 million.
 
In March 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, the effective date of the merger of Savannah Electric into Georgia Power. 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 Georgia PSC order provided for a combined ongoing fuel forecast but reduced the requested increase related to such forecast by $200 million. The order also required Georgia Power to file for a new fuel cost recovery rate on a semi-annual basis, beginning in September 2006. Accordingly, on September 15, 2006, Georgia Power filed a request to recover fuel costs incurred through August 2006 by increasing the fuel cost recovery rate.
 
On November 13, 2006, under an agreement with the Georgia PSC staff, Georgia Power filed a supplementary request reflecting a forecast of annual fuel costs, as well as updated information for previously incurred fuel costs. On February 6, 2007, the Georgia PSC ruled on the request and approved an increase in Georgia Power’s total annual billings of approximately $383 million. The Georgia PSC order reduced Georgia Power’s requested increase in the forecast of annual fuel costs by $40 million and disallowed $4 million of previously incurred fuel costs. The order also requires Georgia Power to file for a


II-24


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

new fuel cost recovery rate no later than March 1, 2008. The new rates will become effective on March 1, 2007. Estimated under recovered fuel costs are to be recovered through May 2009 for customers in the former Georgia Power territory and through November 2009 for customers in the former Savannah Electric territory. As of December 31, 2006, Georgia Power had an under recovered fuel balance of approximately $898 million.
 
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, changing the billing factor has no significant effect on the Company’s revenues or net income, but does impact annual cash flow. Based on their respective state PSC orders, a portion of the under recovered regulatory clause revenues for Alabama Power and Georgia Power was reclassified from current assets to deferred charges and other assets in the balance sheet. See Note 1 to the financial statements under “Revenues” and Note 3 to the financial statements under “Alabama Power Retail Regulatory Matters” and “Georgia Power Retail Regulatory Matters” for additional information.
 
Storm Damage Cost Recovery
 
In July 2005 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 the service areas of Gulf Power, Alabama Power, and Mississippi Power. In addition, 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 traditional 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 December 31, 2006, the under recovered balance in Southern Company’s storm damage reserve accounts totaled approximately $89 million, of which approximately $57 million and $32 million, respectively, are included in the balance sheets herein under “Other Current Assets” and “Other Regulatory Assets.”
 
In June 2006, the Mississippi PSC issued 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 which was net of insurance proceeds of approximately $77 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 directed Mississippi Power to file an application with the Mississippi Development Authority (MDA) for a Community Development Block Grant (CDBG). Mississippi Power filed the CDBG application with the MDA in September 2006. On October 30, 2006, Mississippi Power received from the MDA a CDBG in the amount of $276.4 million. Mississippi Power has appropriately allocated and applied these CDBG proceeds to both retail and wholesale storm restoration cost recovery.
 
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. On October 27, 2006, the Mississippi PSC issued a financing order that authorizes the issuance of $121.2 million of system restoration bonds. This amount includes $25.2 million for the retail storm recovery costs not covered by the CDBG, $60 million for a property damage reserve, and $36 million for the retail portion of the construction of the storm operations facility. The bonds will be issued by the Mississippi Development Bank on behalf of the State of Mississippi and will be reported as liabilities by the State of Mississippi. Periodic true-up mechanisms will be structured to comply with terms and requirements of the legislation. Details regarding the issuance of the bonds have not been finalized. The final outcome of this matter cannot now be determined.
 
As of December 31, 2006, Mississippi Power’s under recovered balance in the property damage reserve account totaled approximately $4.7 million which is included in the balance sheets herein under “Current Assets.”
 
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 and the replenishment of Gulf Power’s property damage reserve. 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. 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


II-25


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

reserve for recovery of the storm-recovery costs of $52.6 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. Gulf Power made discretionary accruals to the reserve of $3 million, $6 million, and $15 million in 2006, 2005, and 2004, respectively. As part of a 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 percent 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.
 
As of December 31, 2006, Gulf Power’s unrecovered balance in the property damage reserve totaled approximately $45.7 million, of which approximately $28.8 million and $16.9 million, respectively, are included in the balance sheets herein under “Current Assets” and “Deferred Charges and Other Assets.”
 
At Alabama Power, operation and maintenance expenses associated with Hurricane Ivan were $57.8 million. In 2005, Alabama Power received Alabama PSC approvals to return certain regulatory liabilities to the retail customers. These orders also allowed Alabama Power to simultaneously recover from customers accruals of approximately $48 million primarily to offset the costs of Hurricane Ivan and restore a positive balance in the natural disaster reserve. The combined effect of these orders had no impact on net income in 2005.
 
In December 2005, the Alabama PSC approved a separate rate rider to recover Alabama Power’s $51 million of deferred Hurricane Dennis and Katrina operation and maintenance costs over a two-year period and to replenish its reserve to a target balance of $75 million over a five-year period.
 
As of December 31, 2006, Alabama Power had recovered $49.5 million of the costs allowed for storm-recovery activities, of which $34.5 million was a reduction in the deficit balance in the natural disaster reserve account related to costs deferred from previous storms. The remaining under recovered balance in the property damage reserve account totaled approximately $16.8 million at December 31, 2006 and is included in the balance sheets herein under “Current Assets.” The remaining $15.0 million collected was used to establish the target reserve for future storms. The balance in the target reserve, reduced for current year activity, was $13.2 million at December 31, 2006 and is included in the balance sheets herein under “Other Regulatory Liabilities.”
 
See Notes 1 and 3 to the financial statements under “Storm Damage Reserves” and “Storm Damage Cost Recovery,” respectively, for additional information on these reserves. The final outcome of these matters cannot now be determined.
 
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 and certain of its affiliates filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code. In January 2006, Mirant’s plan of reorganization became effective, and Mirant emerged from bankruptcy. As part of the plan, Mirant transferred substantially all of its assets and its restructured debt to a new corporation that adopted the name Mirant Corporation (Reorganized Mirant). Southern Company has certain contingent liabilities associated with guarantees of contractual commitments made by Mirant’s subsidiaries discussed in Note 7 to the financial statements under “Guarantees” and with various lawsuits discussed in Note 3 to the financial statements under “Mirant Matters.”


II-26


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

 
In December 2004, as a result of concluding an IRS audit for the tax years 2000 and 2001, Southern Company paid $39 million in additional tax and interest for issues related to Mirant tax items. Under the terms of the separation agreements entered into in connection with the spin-off, Mirant agreed to indemnify Southern Company for costs associated with these tax items and additional IRS assessments. However, as a result of Mirant’s bankruptcy, Southern Company sought reimbursement as an unsecured creditor in the Chapter 11 proceeding. Based on management’s assessment of the collectibility of the $39 million receivable, Southern Company has reserved approximately $13.7 million. In December 2006, Southern Company received approximately $23 million in tax refunds from the IRS related to Mirant tax items. Additional refunds are expected. The amount of any unsecured claim ultimately allowed with respect to Mirant tax items is expected to be reduced dollar-for-dollar by the amount of all refunds received from the IRS by Southern Company.
 
If Southern Company is ultimately required to make any additional payments either with respect to the IRS audit or its contingent obligations under guarantees of Mirant subsidiaries, Mirant’s indemnification obligation to Southern Company for these additional payments, if allowed, would constitute unsecured claims against Mirant, entitled to stock in Reorganized Mirant. See Note 3 to the financial statements under “Mirant Matters – Mirant Bankruptcy.”
 
In June 2005, Mirant, as a debtor in possession, and The Official Committee of Unsecured Creditors of Mirant Corporation filed a complaint against Southern Company in the U.S. Bankruptcy Court for the Northern District of Texas, which was amended in July 2005, February 2006, and May 2006. The third amended complaint (the complaint) alleges that Southern Company caused Mirant to engage in certain fraudulent transfers and to pay illegal dividends to Southern Company prior to the spin-off. The complaint also seeks to recharacterize certain advances from Southern Company to Mirant for investments in energy facilities from debt to equity. The complaint further alleges that Southern Company is liable to Mirant’s creditors for the full amount of Mirant’s liability and that Southern Company breached its fiduciary duties to Mirant and its creditors, caused Mirant to breach fiduciary duties to its creditors, and aided and abetted breaches of fiduciary duties by Mirant’s directors and officers. The complaint also seeks recoveries under theories of restitution, unjust enrichment, and alter ego. The complaint seeks monetary damages in excess of $2 billion plus interest, punitive damages, attorneys’ fees, and costs. Finally, the complaint includes an objection to Southern Company’s pending claims against Mirant in the Bankruptcy Court (which relate to reimbursement under the separation agreements of payments such as income taxes, interest, legal fees, and other guarantees described in Note 7 to the financial statements) and seeks equitable subordination of Southern Company’s claims to the claims of all other creditors. Southern Company served an answer to the complaint in June 2006.
 
In January 2006, MC Asset Recovery, a special purpose subsidiary of Reorganized Mirant, was substituted as plaintiff. In February 2006, the Company’s motion to transfer the case to the U.S. District Court for the Northern District of Georgia was granted. On May 19, 2006, Southern Company filed a motion for summary judgment seeking entry of judgment against the plaintiff as to all counts in the complaint. On December 11, 2006, the U.S. District Court for the Northern District of Georgia granted in part and denied in part the motion. As a result, certain breach of fiduciary duty claims were barred; all other claims in the complaint may proceed. Southern Company believes there is no meritorious basis for the claims in the complaint and is vigorously defending itself in this action. See Note 3 to the financial statements under “Mirant Matters – MC Asset Recovery Litigation” for additional information. The ultimate outcome of these matters cannot be determined at this time.
 
Income Tax Matters
 
Leveraged Lease Transactions
 
Southern Company undergoes audits by the IRS for each of its tax years. The IRS has completed its audits of Southern Company’s consolidated federal income tax returns for all years through 2003. Southern Company participates in four international leveraged lease transactions and receives federal income tax deductions for depreciation and amortization, as well as interest on related debt. The IRS proposed to disallow the tax losses for one of these leases (a lease-in-lease-out, or LILO) in connection with its audit of 1997 through 2001. In October 2004, Southern Company submitted the issue to the IRS appeals division and in February 2005 reached a negotiated settlement with the IRS, which is now final.
 
In connection with its audit of 2000 and 2001, the IRS also challenged Southern Company’s deductions related to three other international lease (sale-in-lease-out, or SILO) transactions. In the third quarter 2006, Southern Company paid the full amount of the disputed tax and the applicable interest on the SILO issue for tax years 2000-2001 and filed a claim for refund which has been denied by the IRS. The disputed tax amount is $79 million


II-27


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

and the related interest is approximately $24 million for these tax years. This payment, and the subsequent IRS disallowance of the refund claim, closed the issue with the IRS and Southern Company plans to proceed with litigation. The IRS has also raised the SILO issues for tax years 2002 and 2003. The estimated amount of disputed tax and interest for these years is approximately $83 million and $15 million, respectively. The tax and interest for these tax years was paid to the IRS in the fourth quarter 2006. Southern Company has accounted for both payments in 2006 as deposits, as management believes no additional tax or interest liabilities have been incurred.
 
Although the payment of the tax liability did not affect Southern Company’s results of operations under accounting standards in effect through December 31, 2006, it did impact cash flow. For tax years 2000 through 2006, Southern Company has claimed $284 million in tax benefits related to these SILO transactions challenged by the IRS. See Note 1 to the financial statements under “Leveraged Leases” for additional information. Southern Company believes these transactions are valid leases for U.S. tax purposes and thus the related deductions are allowable. The Company will continue to defend this position through administrative appeals or litigation. The ultimate outcome of these matters cannot now be determined.
 
In July 2006, the Financial Accounting Standards Board (FASB) released new interpretations for the accounting for both leveraged leases and uncertain tax positions that were adopted January 1, 2007. For the LILO transaction settled with the IRS in February 2005, the leveraged leases accounting interpretation requires that Southern Company recognize a cumulative effect reduction to beginning 2007 retained earnings of approximately $17 million at adoption and change the timing of income recognized under the lease.
 
For the SILO transactions which are the subject of pending litigation, Southern Company is continuing to evaluate the impact of the new interpretations but estimates that the reduction to retained earnings in 2007 could be approximately $115 million to $135 million. The impact on Southern Company’s net income of these accounting interpretations would also be dependent on the outcome of the pending litigation or changes in assumptions related to uncertain tax positions but could be significant, and potentially material.
 
Synthetic Fuel Tax Credits
 
Southern Company had investments in two entities that produce synthetic fuel and receive tax credits under Section 45K (formerly Section 29) of the Internal Revenue Code of 1986, as amended (Internal Revenue Code). During 2006, as discussed below, Southern Company’s interest in one of the synthetic fuel entities was terminated. In accordance with Section 45K of the Internal Revenue Code, these tax credits are subject to limitation as the annual average price of oil (as determined by the U.S. Department of Energy (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 $32 million were recorded in 2006 due to projected phase-outs of the credits in 2006 as a result of higher oil prices. Synthetic fuel tax credits will end December 31, 2007.
 
In May 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, during 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. These derivative transactions were marked to market 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 $16 million was written off and is reflected in the line item “Impairment loss on equity method investments” on the statements of income herein. In September 2006, due to reduced oil prices in the third quarter, production was restarted at the synthetic fuel facility in which Southern Company still has an ownership interest. In October 2006, Southern Company entered into additional derivative transactions to reduce its exposure to the potential phase-out of these income tax credits in 2007. Subsequent to December 31, 2006, the Company entered into additional derivative transactions to further reduce its exposure to potential phase-out of tax credits in 2007. See Note 6 to the financial statements under “Financial Instruments” for additional information regarding the impact of these derivatives. The final outcome of these matters cannot now be determined.


II-28


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

 
Construction Projects
 
Integrated Coal Gasification Combined Cycle
 
In December 2005, Southern Power and the Orlando Utilities Commission (OUC) executed definitive agreements for development of an integrated coal gasification combined cycle (IGCC) 285-megawatt project in Orlando, Florida. The definitive agreements provide that Southern Power will own at least 65 percent of the gasifier portion of the IGCC project. OUC will own the remainder of the gasifier portion and 100 percent of the combined cycle portion of the IGCC project. OUC will purchase all of the gasifier capacity from Southern Power once the plant is in commercial operation. Southern Power will construct the project and manage its operation after construction is completed. In February 2006, Southern Power signed a cooperative agreement with the DOE that provides up to $235 million in grant funding for the gasification portion of this project. The IGCC project is subject to National Environmental Policy Act review as well as state environmental review, requires certain regulatory approvals, and is expected to begin commercial operation in 2010. The total cost related to the IGCC project is currently being reviewed, and may be higher than earlier estimates due to increases in commodity costs and increased market demand for labor. Southern Power had spent $7.8 million as of December 31, 2006. Southern Power has the option under the agreements to end its participation in the IGCC project at the end of the project definition phase which is expected to be during 2007.
 
In June 2006, Mississippi Power filed an application with the DOE for certain tax credits available to projects using clean coal technologies under the Energy Policy Act of 2005. The proposed project is an advanced coal gasification facility located in Kemper County, Mississippi that would use locally mined lignite coal. The proposed 693 megawatt plant, excluding the mine cost, is expected to require an approximate investment of $1.5 billion and is expected to be completed in 2013. The DOE subsequently certified the project and in November 2006 the IRS allocated Internal Revenue Code Section 48A tax credits to Mississippi Power of $133 million. The utilization of these credits is dependent upon meeting the certification requirements for the project under the Internal Revenue Code. The plant would use an air-blown IGCC technology that generates power from low-rank coals and coals with high moisture or high ash content. These coals, which include lignite, make up half the proven U.S. and worldwide coal reserves. Mississippi Power is still undergoing a feasibility assessment of the project which could take up to two years. Approval by various regulatory agencies, including the Mississippi PSC, will also be required if the project proceeds.
 
The final outcome of these matters cannot now be determined.
 
Nuclear
 
On August 15, 2006, as part of a potential expansion of Plant Vogtle, Georgia Power and Southern Nuclear Operating Company, Inc. (SNC) filed an application with the Nuclear Regulatory Commission (NRC) for an early site permit (ESP) on behalf of the owners of Plant Vogtle. In addition, Georgia Power and SNC notified the NRC of their intent to apply for a combined construction and operating license (COL) in 2008. Ownership agreements have been signed with each of the existing Plant Vogtle co-owners. See Note 4 to the financial statements for additional information on these co-owners. In June 2006, the Georgia PSC approved Georgia Power’s request 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. 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.
 
On March 16, 2006, a subsidiary of Southern Company entered into a development agreement with Duke Energy Corporation (Duke Energy) 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 Unit 1, representing approximately 500 megawatts. Duke Energy will be the developer and licensed operator of any plant built at the site.
 
Southern Company also is participating in NuStart Energy Development, LLC (NuStart Energy), a broad-based nuclear industry consortium formed to share the cost of developing a COL and the related NRC review. NuStart Energy plans to complete detailed engineering design work and to prepare COL applications for two advanced reactor designs, then to choose one of the applications and file it for NRC review and approval. The COL ultimately is expected to be transferred to one or more of the consortium companies; however, at this time, none of them have committed to build a new nuclear plant.
 
Southern Company is also exploring other possibilities relating to nuclear power projects, both on its own or in partnership with other utilities. The final outcome of these matters cannot now be determined.


II-29


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

 
Other Matters
 
Southern Company is involved in various other matters being litigated, regulatory matters, and certain tax-related issues that could affect future earnings. See Note 3 to the financial statements for information regarding material issues.
 
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. 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. Senior management has discussed the development and selection of the critical accounting policies and estimates described below with the Audit Committee of Southern Company’s Board of Directors.
 
Electric Utility Regulation
 
Southern Company’s traditional operating companies, which comprise approximately 93 percent of Southern Company’s total earnings for 2006, are subject to retail regulation by their respective state PSCs and wholesale regulation by the FERC. These regulatory agencies set the rates the traditional operating companies are permitted to charge customers based on allowable costs. As a result, the traditional operating companies apply FASB Statement No. 71, “Accounting for the Effects of Certain Types of Regulation” (SFAS No. 71), which requires the financial statements to reflect the effects of rate regulation. Through the ratemaking process, the regulators may require the inclusion of costs or revenues in periods different than when they would be recognized by a non-regulated company. This treatment may result in the deferral of expenses and the recording of related regulatory assets based on anticipated future recovery through rates or the deferral of gains or creation of liabilities and the recording of related regulatory liabilities. The application of SFAS No. 71 has a further effect on the Company’s financial statements as a result of the estimates of allowable costs used in the ratemaking process. These estimates may differ from those actually incurred by the traditional operating companies; therefore, the accounting estimates inherent in specific costs such as depreciation, nuclear decommissioning, and pension and postretirement benefits have less of a direct impact on the Company’s results of operations than they would on a non-regulated company.
 
As reflected in Note 1 to the financial statements, significant regulatory assets and liabilities have been recorded. Management reviews the ultimate recoverability of these regulatory assets and liabilities based on applicable regulatory guidelines and accounting principles generally accepted in the United States. However, adverse legislative, judicial, or regulatory actions could materially impact the amounts of such regulatory assets and liabilities and could adversely impact the Company’s financial statements.
 
Contingent Obligations
 
Southern Company and its subsidiaries are subject to a number of federal and state laws and regulations, as well as other factors and conditions that potentially subject them to environmental, litigation, income tax, and other risks. See FUTURE EARNINGS POTENTIAL herein and Note 3 to the financial statements for more information regarding certain of these contingencies. Southern Company periodically evaluates its exposure to such risks and records reserves for those matters where a loss is considered probable and reasonably estimable in accordance with generally accepted accounting principles. The adequacy of reserves can be significantly affected by external events or conditions that can be unpredictable; thus, the ultimate outcome of such matters could materially affect Southern Company’s financial statements. These events or conditions include the following:
 
•  Changes in existing state or federal regulation by governmental authorities having jurisdiction over air quality, water quality, control of toxic substances, hazardous and solid wastes, and other environmental matters.
 
•  Changes in existing income tax regulations or changes in IRS or state revenue department interpretations of existing regulations.
 
•  Identification of additional sites that require environmental remediation or the filing of other complaints in which Southern Company or its subsidiaries may be asserted to be a potentially responsible party.
 
•  Identification and evaluation of other potential lawsuits or complaints in which Southern Company or its subsidiaries may be named as a defendant.


II-30


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

 
•  Resolution or progression of existing matters through the legislative process, the court systems, the IRS, or the EPA.
 
Unbilled Revenues
 
Revenues related to the sale of electricity are recorded when electricity is delivered to customers. However, the determination of KWH sales to individual customers is based on the reading of their meters, which is performed on a systematic basis throughout the month. At the end of each month, amounts of electricity delivered to customers, but not yet metered and billed, are estimated. Components of the unbilled revenue estimates include total KWH territorial supply, total KWH billed, estimated total electricity lost in delivery, and customer usage. These components can fluctuate as a result of a number of factors including weather, generation patterns, and power delivery volume and other operational constraints. These factors can be unpredictable and can vary from historical trends. As a result, the overall estimate of unbilled revenues could be significantly affected, which could have a material impact on the Company’s results of operations.
 
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 financial statements. That cost is 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 the Company’s financial statements are similar to the pro forma disclosures included in Note 1 to the financial statements under “Stock Options.”
 
Pensions and Other Postretirement Plans
 
On December 31, 2006, Southern Company adopted FASB Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS No. 158), which requires recognition of the funded status of its defined benefit postretirement plans in its balance sheet. With the adoption of SFAS No. 158, Southern Company recorded an additional prepaid pension asset of $520 million with respect to its overfunded defined benefit plan and additional liabilities of $45 million and $553 million, respectively, related to its underfunded non-qualified pension plans and retiree benefit plans. Additionally, SFAS No. 158 will require Southern Company to change the measurement date for its defined benefit postretirement plan assets and obligations from September 30 to December 31 beginning with the year ending December 31, 2008. See Note 2 to the financial statements for additional information.
 
Guidance on Considering the Materiality of Misstatements
 
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB 108 requires companies to quantify misstatements using both a balance sheet and an income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the effect of initial adoption is material, companies will record the effect as a cumulative effect adjustment to beginning of year retained earnings. The provisions of SAB 108 were effective for the Southern Company for the year ended December 31, 2006. The adoption of SAB 108 did not have a material impact on Southern Company’s financial statements.
 
Income Taxes
 
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). This interpretation requires that tax benefits must be “more likely than not” of being sustained in order to be recognized. Southern Company adopted FIN 48 effective January 1, 2007. The impact on Southern Company’s financial statements is estimated to be a reduction to retained earnings of $15 million to $25 million.
 
Leveraged Leases
 
In July 2006, the FASB issued FASB Staff Position No. FAS 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” (FSP 13-2). This staff position amends FASB Statement 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 adopted FSP 13-2 effective January 1, 2007. This adoption required Southern Company to recognize a cumulative effect of an approximate $17 million decrease


II-31


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

to retained earnings related to the LILO transaction settled with the IRS in February 2005. The estimated impact of the adoption related to the SILO transactions is a reduction to retained earnings of approximately $100 million to $115 million. See FUTURE EARNINGS POTENTIAL — “Income Tax Matters — Leveraged Lease Transactions” above and Note 3 to the financial statements under “Income Tax Matters” herein for further details about the effect of FSP 13-2.
 
Fair Value Measurement
 
The FASB issued FASB Statement No. 157, “Fair Value Measurements” (SFAS No. 157) in September 2006. SFAS No. 157 provides guidance on how to measure fair value where it is permitted or required under other accounting pronouncements. SFAS No. 157 also requires additional disclosures about fair value measurements. Southern Company plans to adopt SFAS No. 157 on January 1, 2008 and is currently assessing its impact.
 
Fair Value Option
 
In February 2007, the FASB issued FASB Statement No. 159, “Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (SFAS No. 159). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Southern Company plans to adopt SFAS No. 159 on January 1, 2008 and is currently assessing its impact.
 
FINANCIAL CONDITION AND LIQUIDITY
 
Overview
 
Southern Company’s financial condition remained stable at December 31, 2006. Net cash flow from operations increased from 2005 by $290 million. The increase was primarily the result of decreases in under recovered fuel cost receivables due to higher allowed fuel recovery rates, decreases in under recovered storm restoration costs, and decreases in accounts payable from year-end 2005 amounts that included substantial hurricane-related expenditures, partially offset by increases in fossil fuel inventory. The $165 million decrease from 2005 to 2004 resulted primarily from higher fuel costs at the traditional operating companies, partially offset by increases in base rates and fuel recovery rates. See FUTURE EARNINGS POTENTIAL — “PSC Matters — Fuel Cost Recovery” and “Storm Damage Cost Recovery” for additional information.
 
Significant balance sheet changes include an increase in notes payable of $683 million primarily to meet Southern Company’s short-term financing needs until longer term financing is secured, an increase in securities due within one year of $517 million for debt maturing within the next year, and an increase in property, plant, and equipment of $1.6 billion. The majority of funds needed for property additions were provided from operating activities. The implementation of SFAS No. 158 resulted in significant balance sheet changes and accounts for a large portion of the increases in prepaid pension assets of $527 million, other regulatory assets of $417 million, employee benefit obligations of $637 million, and other regulatory liabilities of $471 million.
 
At the close of 2006, the closing price of Southern Company’s common stock was $36.86 per share, compared with book value of $15.24 per share. The market-to-book value ratio was 242 percent at the end of 2006, compared with 240 percent at year-end 2005.
 
Southern Company, each of the traditional operating companies, and Southern Power, have received investment grade ratings from the major rating agencies with respect to debt, preferred securities, preferred stock, and/or preference stock. SCS has an investment grade corporate credit rating.
 
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 the Company’s stock plans, private placements, or public offerings. The amount and timing of additional equity capital to be raised in 2007, as well as in subsequent years, will be contingent on Southern Company’s investment opportunities. The Company does not currently anticipate any equity offerings in 2007 outside of its existing stock option plan, the employee savings plan, and the Southern Investment Plan.
 
The traditional operating companies and Southern Power plan to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from operating cash flows, security issuances, term loans, and short-term borrowings. See Note 3 to the financial statements under “Storm Damage Cost Recovery” for information regarding additional options that Mississippi Power may pursue for recovering storm damage costs. However, the type and timing of any financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. The issuance of securities by the traditional operating companies is generally subject to the approval of the applicable state PSC. In addition, the issuance of all securities by Mississippi Power and Southern Power


II-32


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

and short-term securities by Georgia Power is generally subject to regulatory approval by the FERC. Additionally, with respect to the public offering of securities, Southern Company and certain of its subsidiaries file registration statements with the SEC under the Securities Act of 1933, as amended (1933 Act). The amounts of securities authorized by the appropriate regulatory authorities, as well as the amounts, if any, registered under the 1933 Act, are continuously monitored and appropriate filings are made to ensure flexibility in the capital markets.
 
Southern Company, each traditional operating company, and Southern Power obtain financing separately without credit support from any affiliate. See Note 6 to the financial statements under “Bank Credit Arrangements” for additional information. The Southern Company system does not maintain a centralized cash or money pool. Therefore, funds of each company are not commingled with funds of any other company.
 
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, Southern Company has substantial cash flow from operating activities and access to the capital markets, including commercial paper programs, to meet liquidity needs.
 
At December 31, 2006, Southern Company and its subsidiaries had approximately $167 million of cash and cash equivalents and $3.3 billion of unused credit arrangements with banks, of which $656 million expire in 2007 and $2.7 billion expire in 2008 and beyond. Of the $2.7 billion expiring in 2008 and beyond, $2.4 billion does not expire until 2011. Approximately $79 million of the credit facilities expiring in 2007 allow for the execution of term loans for an additional two-year period, and $343 million allow for the execution of one-year term loans. Most of these arrangements contain covenants that limit debt levels and typically contain cross default provisions that are restricted only to the indebtedness of the individual company. Southern Company and its subsidiaries are currently in compliance with all such covenants. See Note 6 to the financial statements under “Bank Credit Arrangements” for additional information.
 
Financing Activities
 
During 2006, Southern Company and its subsidiaries issued $1.4 billion of senior notes, $154 million of obligations related to pollution control revenue bonds, and $150 million of preference stock. Interest rate hedges of $1.1 billion notional amount were settled at a gain of $2.7 million related to the issuances. The security issuances were used to redeem or extinguish $1.2 billion of long-term debt, to redeem $169 million of obligations related to pollution control revenue bonds, to redeem $15 million of preferred stock, to fund Southern Company’s ongoing construction program, and for general corporate purposes. In the second and fourth quarters of 2006, Alabama Power issued to Southern Company a total of 3 million shares of Alabama Power common stock at $40.00 per share. The proceeds of $120 million were used by Alabama Power to repay short-term indebtedness and for other general corporate purposes.
 
Subsequent to December 31, 2006, Southern Company issued $500 million of senior notes. The proceeds from the sale of the senior notes were used by the Company to repay a portion of its outstanding short-term indebtedness, a portion of which was incurred to extinguish the 8.19% and 8.14% Southern Company Capital Funding Junior Subordinated Notes, and for other general corporate purposes. Also subsequent to December 31, 2006, Georgia Power entered into interest rate swap transactions with a notional amount of $375 million, in order to reduce exposure to interest rate risk. The transactions will be settled over the next two years as the underlying debt is issued, and any resulting gain or loss will be amortized over a 10-year period.
 
On January 19, 2007, Gulf Power issued to Southern Company 800,000 shares of Gulf Power’s common stock, without par value, for $80 million. The proceeds were used by Gulf Power to repay short-term indebtedness and for other general corporate purposes. On February 6, 2007, Alabama Power issued $200 million in senior notes. The proceeds from the sale of the senior notes were used to repay a portion of Alabama Power’s outstanding short-term debt and for other general corporate purposes.
 
Off-Balance Sheet Financing Arrangements
 
In 2001, Mississippi Power began the initial 10-year term of a lease agreement for a combined cycle generating facility built at Plant Daniel for approximately $370 million. In 2003, the generating facility was acquired by Juniper Capital L.P. (Juniper), a limited partnership whose investors are unaffiliated with Mississippi Power. Simultaneously, Juniper entered into a restructured lease agreement with Mississippi Power. Juniper has also entered into leases with other parties unrelated to Mississippi Power. The assets leased by Mississippi Power comprise less than 50 percent of Juniper’s assets. Mississippi Power is not required to consolidate the leased assets and related liabilities, and the lease with Juniper is considered an operating lease. The lease also provides for a residual value guarantee, approximately 73 percent of the acquisition cost, by


II-33


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

Mississippi Power that is due upon termination of the lease in the event that Mississippi Power does not renew the lease or purchase the assets and that the fair market value is less than the unamortized cost of the assets. See Note 7 to the financial statements under “Operating Leases” for additional information.
 
Credit Rating Risk
 
Southern Company does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- or Baa3 or below. These contracts are primarily for physical electricity purchases and sales. At December 31, 2006, the maximum potential collateral requirements at a BBB- or Baa3 rating were approximately $291 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $711 million. Generally, collateral may be provided by a 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 and power price risk management activities. At December 31, 2006, Southern Company’s total exposure to these types of agreements was approximately $27.4 million.
 
Market Price Risk
 
Southern Company is exposed to market risks, primarily commodity price risk and interest rate risk. To manage the volatility attributable to these exposures, the Company nets the exposures to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to the Company’s policies in areas such as counterparty exposure and risk management practices. Company policy is that derivatives are to be used primarily for hedging purposes and mandates strict adherence to all applicable risk management policies. Derivative positions are monitored using techniques including, but not limited to, market valuation, value at risk, stress testing, and sensitivity analysis.
 
To mitigate future exposure to change in interest rates, the Company enters into forward starting interest rate swaps that have been designated as hedges. The swaps outstanding at December 31, 2006 have a notional amount of $725 million and are related to anticipated debt issuances over the next year. The weighted average interest rate on $1.7 billion of long-term variable interest rate exposure that has not been hedged at January 1, 2007 was 5.1 percent. If Southern Company sustained a 100 basis point change in interest rates for all unhedged variable rate long-term debt, the change would affect annualized interest expense by approximately $17.9 million at January 1, 2007. For further information, see Notes 1 and 6 to the financial statements under “Financial Instruments.”
 
Due to cost-based rate regulations, the traditional 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 generally shift substantially all fuel cost responsibility to the purchaser. To mitigate residual risks relative to movements in electricity prices, the traditional operating companies and Southern Power enter into fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, into similar contracts for natural gas purchases. The traditional operating companies have implemented fuel-hedging programs at the instruction of their respective state PSCs.
 
The changes in fair value of energy-related derivative contracts and year-end valuations were as follows at December 31:
 
                 
    Changes in Fair Value
 
    2006          2005       
 
    (in millions)
 
Contracts beginning of year
  $ 101     $ 11  
Contracts realized or settled
    93       (106 )
New contracts at inception
           
Changes in valuation techniques
           
Current period changes(a)
    (276 )     196  
 
 
Contracts end of year
  $ (82 )   $ 101  
 
 
 
  (a)   Current period changes also include the changes in fair value of new contracts entered into during the period.
 
                         
Source of 2006 Year-End Valuation Prices
 
    Total   Maturity
 
    Fair Value   2007   2008-2009
 
    (in millions)
 
Actively quoted
  $ (86 )   $ (79 )   $ (7 )
External sources
    4       4        
Models and other
                 
 
 
Contracts end of year
  $ (82 )   $ (75 )   $ (7 )
 
 


II-34


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to the traditional 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 traditional 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 statements of income as incurred. At December 31, 2006, the fair value gains/(losses) of energy-related derivative contracts was reflected in the financial statements as follows:
 
         
    Amounts
 
    (in millions)
 
Regulatory assets, net
  $ (85 )
Accumulated other comprehensive income
    3  
Net income
     
 
 
Total fair value
  $ (82 )
 
 
 
Unrealized pre-tax gains and losses from energy-related derivative contracts recognized in income were not material for any year presented.
 
Southern Company is exposed to market price risk in the event of nonperformance by counterparties to the energy-related derivative contracts. Southern Company’s policy is to enter into agreements with counterparties that have investment grade credit ratings by Moody’s and Standard & Poor’s or with counterparties who have posted collateral to cover potential credit exposure. Therefore, Southern Company does not anticipate market risk exposure from nonperformance by the counterparties. For additional information, see Notes 1 and 6 to the financial statements under “Financial Instruments.”
 
To reduce Southern Company’s exposure to changes in the value of synthetic fuel tax credits, which are impacted by changes in oil prices, the Company has entered into derivative transactions indexed to oil prices. Because these transactions are not designated as hedges, the gains and losses are recognized in the statements of income as incurred. For 2006 and 2005, the fair value losses recognized in income to mark the transactions to market were $32 million and $7 million, respectively. In January 2007, Southern Company entered into additional derivative transactions with net initial premiums paid of $3 million to further reduce its exposure to the potential phase-out of these income tax credits in 2007. For further information, see Notes 1 and 6 to the financial statements under “Financial Instruments.”
 
Capital Requirements and Contractual Obligations
 
The construction program of Southern Company is currently estimated to be $3.9 billion for 2007, $4.5 billion for 2008, and $4.8 billion for 2009. Environmental expenditures included in these amounts are $1.66 billion, $1.65 billion, and $1.27 billion for 2007, 2008, and 2009, respectively. Actual construction costs may vary from this estimate because of changes in such factors as: business conditions; environmental regulations; nuclear plant regulations; FERC rules and regulations; load projections; the cost and efficiency of construction labor, equipment, and materials; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.
 
As a result of NRC requirements, Alabama Power and Georgia Power have external trust funds for nuclear decommissioning costs; however, Alabama Power currently has no additional funding requirements. For additional information, see Note 1 to the financial statements under “Nuclear Decommissioning.”
 
In addition, as discussed in Note 2 to the financial statements, Southern Company provides postretirement benefits to substantially all employees and funds trusts to the extent required by the traditional operating companies’ respective regulatory commissions.
 
Other funding requirements related to obligations associated with scheduled maturities of long-term debt and preferred securities, as well as the related interest, derivative obligations, preferred and preference stock dividends, leases, and other purchase commitments are as follows. See Notes 1, 6, and 7 to the financial statements for additional information.


II-35


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

Contractual Obligations
 
                                         
        2008-
  2010-
  After
   
    2007   2009   2011   2011   Total
 
    (in millions)
 
Long-term debt(a) –
                                       
Principal
  $ 1,418     $ 1,103     $ 615     $ 10,803     $ 13,939  
Interest
    738       1,307       1,205       10,572       13,822  
Other derivative obligations(b) –
                                       
Commodity
    119       10       -       -       129  
Interest
    6       -       -       -       6  
Preferred and preference stock dividends(c)
    41       81       81       -       203  
Operating leases
    135       224       160       186       705  
Purchase commitments(d) –
                                       
Capital(e)
    3,790       9,050       -       -       12,840  
Coal
    3,294       4,329       1,644       2,221       11,488  
Nuclear fuel
    120       231       305       236       892  
Natural gas(f)
    1,347       1,902       809       2,740       6,798  
Purchased power
    173       374       351       890       1,788  
Long-term service agreements
    74       156       193       1,231       1,654  
Trusts –
                                       
Nuclear decommissioning
    7       14       14       110       145  
Postretirement benefits(g)
    41       91       -       -       132  
 
 
Total
  $ 11,303     $ 18,872     $ 5,377     $ 28,989     $ 64,541  
 
 
 
(a) All amounts are reflected based on final maturity dates. On February 1, 2007, $400 million aggregate principal amount of long-term debt matured. The maturity was funded with short-term borrowings. Southern Company and its subsidiaries plan to continue to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit. Variable rate interest obligations are estimated based on rates as of January 1, 2007, as reflected in the statements of capitalization. Fixed rates include, where applicable, the effects of interest rate derivatives employed to manage interest rate risk.
 
(b) For additional information, see Notes 1 and 6 to the financial statements.
 
(c) Preferred and preference stock do not mature; therefore, amounts are provided for the next five years only.
 
(d) Southern Company generally does not enter into non-cancelable commitments for other operations and maintenance expenditures. Total other operations and maintenance expenses for 2006, 2005, and 2004 were $3.5 billion, $3.5 billion, and $3.3 billion, respectively.
 
(e) Southern Company forecasts capital expenditures over a three-year period. Amounts represent current estimates of total expenditures excluding those amounts related to contractual purchase commitments for uranium and nuclear fuel conversion, enrichment, and fabrication services. At December 31, 2006, significant purchase commitments were outstanding in connection with the construction program.
 
(f) Natural gas purchase commitments are based on various indices at the time of delivery. Amounts reflected have been estimated based on the New York Mercantile Exchange future prices at December 31, 2006.
 
(g) Southern Company forecasts postretirement trust contributions over a three-year period. No contributions related to Southern Company’s pension trust are currently expected during this period. See Note 2 to the financial statements for additional information related to the pension and postretirement plans, including estimated benefit payments. Certain benefit payments will be made through the related trusts. Other benefit payments will be made from Southern Company’s corporate assets.


II-36


Table of Contents

 
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2006 Annual Report

Cautionary Statement Regarding Forward-Looking Statements
 
Southern Company’s 2006 Annual Report contains forward-looking statements. Forward-looking statements include, among other things, statements concerning the strategic goals for the wholesale business, retail sales growth, customer growth, storm damage cost recovery and repairs, fuel cost recovery, environmental regulations and expenditures, earnings growth, dividend payout ratios, access to sources of capital, projections for postretirement benefit trust contributions, synthetic fuel investments, financing activities, completion of construction projects, impacts of adoption of new accounting rules, 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, 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 fiscal year 2007;
 
•   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, pandemic health events such as an avian influenza, 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 (including the Form 10-K) filed by the Company from time to time with the SEC.
 
Southern Company expressly disclaims any obligation to update any forward-looking statements.


II-37


Table of Contents

 
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2006, 2005, and 2004
Southern Company and Subsidiary Companies 2006 Annual Report
 
<
                         
 
    2006   2005   2004
 
    (in millions)
 
Operating Revenues:
                       
Retail revenues
  $ 11,801     $ 11,165     $ 9,732  
Sales for resale
    1,822       1,667       1,341  
Other electric revenues
    465       446       392  
Other revenues
    268       276       264  
 
 
Total operating revenues
    14,356       13,554       11,729  
 
 
Operating Expenses:
                       
Fuel
    5,152       4,495       3,399  
Purchased power
    543       731       643  
Other operations
    2,423       2,394       2,263  
Maintenance
    1,096       1,116       1,027  
Depreciation and amortization
    1,200       1,176       949  
Taxes other than income taxes
    718       680       627  
 
 
Total operating expenses
    11,132       10,592       8,908  
 
 
Operating Income
    3,224       2,962       2,821  
Other Income and (Expense):
                       
Allowance for equity funds used during construction
    50       51       47  
Interest income
    41       36       27  
Equity in losses of unconsolidated subsidiaries
    (57 )     (119 )     (95 )
Leveraged lease income
    69       74       70  
Impairment loss on equity method investments
    (16 )     -       -  
Interest expense, net of amounts capitalized
    (744 )     (619 )     (540 )
Interest expense to affiliate trusts
    (122 )     (128 )     (100 )
Distributions on mandatorily redeemable preferred securities
    -       -       (27 )
Preferred and preference dividends of subsidiaries
    (34 )     (30 )     (30 )
Other income (expense), net
    (56 )     (41 )     (59 )
 
 
Total other income and (expense)
    (869 )     (776 )     (707 )
 
 
Earnings From Continuing Operations Before Income Taxes
    2,355       2,186       2,114  
Income taxes
    781       595       585  
 
 
Earnings From Continuing Operations
    1,574       1,591       1,529  
Earnings from discontinued operations, net of income taxes of $(1), $-, and $2 for 2006, 2005, and 2004, respectively
    (1 )     -       3