SOUTHERN COMPANY
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
         
Commission   Registrant, State of Incorporation,   I.R.S. Employer
File Number   Address and Telephone Number   Identification No.
1-3526
  The Southern Company   58-0690070
 
  (A Delaware Corporation)    
 
  30 Ivan Allen Jr. Boulevard, N.W.    
 
  Atlanta, Georgia 30308    
 
  (404) 506-5000    
 
       
1-3164
  Alabama Power Company   63-0004250
 
  (An Alabama Corporation)    
 
  600 North 18th Street    
 
  Birmingham, Alabama 35291    
 
  (205) 257-1000    
 
       
1-6468
  Georgia Power Company   58-0257110
 
  (A Georgia Corporation)    
 
  241 Ralph McGill Boulevard, N.E.    
 
  Atlanta, Georgia 30308    
 
  (404) 506-6526    
 
       
0-2429
  Gulf Power Company   59-0276810
 
  (A Florida Corporation)    
 
  One Energy Place    
 
  Pensacola, Florida 32520    
 
  (850) 444-6111    
 
       
001-11229
  Mississippi Power Company   64-0205820
 
  (A Mississippi Corporation)    
 
  2992 West Beach    
 
  Gulfport, Mississippi 39501    
 
  (228) 864-1211    
 
       
333-98553
  Southern Power Company   58-2598670
 
  (A Delaware Corporation)    
 
  30 Ivan Allen Jr. Boulevard, N.W.    
 
  Atlanta, Georgia 30308    
 
  (404) 506-5000    

 


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     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 þ No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
             
    Large        
    Accelerated   Accelerated   Non-accelerated
Registrant   Filer   Filer   Filer
The Southern Company
  X        
Alabama Power Company
          X
Georgia Power Company
          X
Gulf Power Company
          X
Mississippi Power Company
          X
Southern Power Company
          X
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No þ(Response applicable to all registrants.)
             
    Description of   Shares Outstanding  
Registrant   Common Stock   at March 31, 2007  
The Southern Company
  Par Value $5 Per Share     751,808,611  
Alabama Power Company
  Par Value $40 Per Share     14,000,000  
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  
     This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, and Southern Power Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.

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INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2007
           
        Page
        Number
DEFINITIONS     5
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION     6
 
PART I — FINANCIAL INFORMATION
     
 
Item 1.  
Financial Statements (Unaudited)
     
Item 2.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
     
         
        8
        9
        10
        12
        13
         
        29
        29
        30
        31
        33
         
        44
        44
        45
        46
        48
         
        60
        60
        61
        62
        64
         
        74
        74
        75
        76
        78
         
        89
        89
        90
        91
        93
        102
Item 3.       27
Item 4.       27

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INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2007
           
        Page
        Number
PART II — OTHER INFORMATION
     
   
 
     
Item 1.       112
Item 1A.       112
Item 2.  
Unregistered Sales of Equity Securities and Use of Proceeds
  Inapplicable
Item 3.  
Defaults Upon Senior Securities
  Inapplicable
Item 4.  
Submission of Matters to a Vote of Security Holders
  Inapplicable
Item 5.  
Other Information
  Inapplicable
Item 6.       113
        118

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DEFINITIONS
     
TERM   MEANING
Alabama Power
  Alabama Power Company
ALJ
  Administrative law judge
BMA
  Bond Market Association
Clean Air Act
  Clean Air Act Amendments of 1990
DOE
  U.S. Department of Energy
Duke Energy
  Duke Energy Corporation
ECO Plan
  Environmental Compliance Overview Plan
EPA
  U.S. Environmental Protection Agency
ERISA
  Employee Retirement Income Security Act of 1974, as amended
FASB
  Financial Accounting Standards Board
FERC
  Federal Energy Regulatory Commission
Form 10-K
  Combined Annual Report on Form 10-K of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power for the year ended December 31, 2006 and, with respect to Gulf Power, Amendment No. 1 thereto
Georgia Power
  Georgia Power Company
Gulf Power
  Gulf Power Company
IIC
  Intercompany Interchange Contract
IRC
  Internal Revenue Code of 1986, as amended
IRS
  Internal Revenue Service
KWH
  Kilowatt-hour
LIBOR
  London Interbank Offered Rate
Mirant
  Mirant Corporation
Mississippi Power
  Mississippi Power Company
MW
  Megawatt
NRC
  Nuclear Regulatory Commission
NSR
  New Source Review
PEP
  Performance Evaluation Plan
Power Pool
  The operating arrangement whereby the integrated generating resources of the traditional operating companies and Southern Power are subject to joint commitment and dispatch in order to serve their combined load obligations
PPA
  Power Purchase Agreement
PSC
  Public Service Commission
Rate CNP
  Alabama Power’s certified new plant rate mechanism
Rate ECR
  Alabama Power’s energy cost recovery rate mechanism
Rate RSE
  Alabama Power’s rate stabilization and equalization rate mechanism
Savannah Electric
  Savannah Electric and Power Company (merged into Georgia Power on July 1, 2006)
SCS
  Southern Company Services, Inc.
SEC
  Securities and Exchange Commission
Southern Company
  The Southern Company
Southern Company system
  Southern Company, the traditional operating companies, Southern Power, and other subsidiaries
Southern Nuclear
  Southern Nuclear Operating Company, Inc.
Southern Power
  Southern Power Company
traditional operating companies
  Alabama Power, Georgia Power, Gulf Power, and Mississippi Power
wholesale revenues
  revenues generated from sales for resale

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
     This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, statements concerning the strategic goals for the wholesale business, retail sales growth, customer growth, storm damage cost recovery and repairs, fuel cost recovery, environmental regulations and expenditures, access to sources of capital, projections for postretirement benefit trust contributions, synthetic fuel investments, financing activities, completion or termination of construction projects, impacts of adoption of new accounting rules, PPA revenues, 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 registrants from time to time with the SEC.
Each registrant expressly disclaims any obligation to update any forward-looking statements.

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THE SOUTHERN COMPANY AND
SUBSIDIARY COMPANIES

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Operating Revenues:
               
Retail revenues
  $ 2,743,811     $ 2,471,413  
Wholesale revenues
    480,699       414,869  
Other electric revenues
    121,294       110,990  
Other revenues
    62,865       65,988  
 
           
Total operating revenues
    3,408,669       3,063,260  
 
           
Operating Expenses:
               
Fuel
    1,316,519       1,048,545  
Purchased power
    64,073       104,411  
Other operations
    565,372       562,452  
Maintenance
    281,995       283,630  
Depreciation and amortization
    306,344       298,926  
Taxes other than income taxes
    183,039       175,003  
 
           
Total operating expenses
    2,717,342       2,472,967  
 
           
Operating Income
    691,327       590,293  
Other Income and (Expense):
               
Allowance for equity funds used during construction
    20,174       11,527  
Interest income
    10,555       6,672  
Equity in losses of unconsolidated subsidiaries
    (6,735 )     (32,575 )
Leveraged lease income
    9,862       18,103  
Interest expense, net of amounts capitalized
    (194,023 )     (176,375 )
Interest expense to affiliate trusts
    (23,827 )     (30,629 )
Preferred and preference dividends of subsidiaries
    (10,129 )     (9,015 )
Other income (expense), net
    (2,931 )     (8,430 )
 
           
Total other income and (expense)
    (197,054 )     (220,722 )
 
           
Earnings Before Income Taxes
    494,273       369,571  
Income taxes
    155,584       107,964  
 
           
Consolidated Net Income
  $ 338,689     $ 261,607  
 
           
Common Stock Data:
               
Earnings per share-
               
Basic
  $ 0.45     $ 0.35  
Diluted
  $ 0.45     $ 0.35  
Average number of basic shares of common stock outstanding (in thousands)
    750,259       742,195  
Average number of diluted shares of common stock outstanding (in thousands)
    755,352       747,039  
Cash dividends paid per share of common stock
  $ 0.3875     $ 0.3725  
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Operating Activities:
               
Consolidated net income
  $ 338,689     $ 261,607  
Adjustments to reconcile consolidated net income to net cash provided from operating activities —
               
Depreciation and amortization
    363,903       351,946  
Deferred income taxes and investment tax credits
    53,433       (39,650 )
Allowance for equity funds used during construction
    (20,174 )     (11,527 )
Equity in losses of unconsolidated subsidiaries
    6,735       32,575  
Leveraged lease income
    (9,862 )     (18,103 )
Pension, postretirement, and other employee benefits
    19,992       18,448  
Stock option expense
    20,554       19,104  
Hedge settlements
    (3,923 )     18,006  
Other, net
    (15,990 )     (2,608 )
Changes in certain current assets and liabilities —
               
Receivables
    161,960       236,127  
Fossil fuel stock
    (63,438 )     (78,471 )
Materials and supplies
    (7,077 )     (11,089 )
Other current assets
    (63,751 )     (41,642 )
Accounts payable
    (92,238 )     (310,962 )
Accrued taxes
    (100,356 )     (9,425 )
Accrued compensation
    (325,500 )     (337,600 )
Other current liabilities
    (1,107 )     (18,331 )
 
           
Net cash provided from operating activities
    261,850       58,405  
 
           
Investing Activities:
               
Property additions
    (742,384 )     (546,261 )
Nuclear decommissioning trust fund purchases
    (167,193 )     (172,551 )
Nuclear decommissioning trust fund sales
    160,313       165,671  
Proceeds from property sales
    3,922       150,521  
Investment in unconsolidated subsidiaries
    (11,423 )     (38,364 )
Cost of removal, net of salvage
    (22,870 )     (31,230 )
Other
    (8,237 )     (32,696 )
 
           
Net cash used for investing activities
    (787,872 )     (504,910 )
 
           
Financing Activities:
               
Increase (decrease) in notes payable, net
    (299,583 )     433,101  
Proceeds —
               
Long-term debt
    1,350,000       800,000  
Common stock
    167,509       13,875  
Redemptions —
               
Long-term debt
    (405,210 )     (322,839 )
Long-term debt to affiliate trusts
          (67,457 )
Preferred and preference stock
          (14,569 )
Common stock repurchased
          (117 )
Payment of common stock dividends
    (290,292 )     (276,442 )
Other
    (1,759 )     (20,372 )
 
           
Net cash provided from financing activities
    520,665       545,180  
 
           
Net Change in Cash and Cash Equivalents
    (5,357 )     98,675  
Cash and Cash Equivalents at Beginning of Period
    166,846       202,111  
 
           
Cash and Cash Equivalents at End of Period
  $ 161,489     $ 300,786  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $12,259 and $4,942 capitalized for 2007 and 2006, respectively)
  $ 181,712     $ 198,762  
Income taxes (net of refunds)
  $ (19,257 )   $ 919  
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2007     2006  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 161,489     $ 166,846  
Receivables —
               
Customer accounts receivable
    883,716       942,821  
Unbilled revenues
    264,383       283,275  
Under recovered regulatory clause revenues
    527,206       516,441  
Other accounts and notes receivable
    286,491       329,619  
Accumulated provision for uncollectible accounts
    (30,117 )     (34,901 )
Fossil fuel stock, at average cost
    736,970       674,902  
Materials and supplies, at average cost
    653,734       648,127  
Vacation pay
    122,709       121,246  
Prepaid expenses
    227,147       127,908  
Other
    190,610       242,735  
 
           
Total current assets
    4,024,338       4,019,019  
 
           
Property, Plant, and Equipment:
               
In service
    45,777,616       45,484,895  
Less accumulated depreciation
    16,808,693       16,581,886  
 
           
 
    28,968,923       28,903,009  
Nuclear fuel, at amortized cost
    323,727       317,429  
Construction work in progress
    2,230,033       1,871,538  
 
           
Total property, plant, and equipment
    31,522,683       31,091,976  
 
           
Other Property and Investments:
               
Nuclear decommissioning trusts, at fair value
    1,086,250       1,057,534  
Leveraged leases
    955,788       1,138,730  
Other
    291,153       296,484  
 
           
Total other property and investments
    2,333,191       2,492,748  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    916,888       895,446  
Prepaid pension costs
    1,558,673       1,548,983  
Unamortized debt issuance expense
    176,515       171,758  
Unamortized loss on reacquired debt
    287,516       293,016  
Deferred under recovered regulatory clause revenues
    797,151       845,201  
Other regulatory assets
    921,549       935,804  
Other
    566,930       564,498  
 
           
Total deferred charges and other assets
    5,225,222       5,254,706  
 
           
 
               
Total Assets
  $ 43,105,434     $ 42,858,449  
 
           
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Liabilities and Stockholders’ Equity   2007     2006  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 1,505,952     $ 1,416,898  
Notes payable
    1,641,217       1,940,801  
Accounts payable
    983,918       1,081,256  
Customer deposits
    257,609       248,781  
Accrued taxes —
               
Income taxes
    128,526       110,009  
Other
    215,410       390,716  
Accrued interest
    205,122       183,918  
Accrued vacation pay
    151,372       151,113  
Accrued compensation
    119,777       443,610  
Other
    286,924       385,858  
 
           
Total current liabilities
    5,495,827       6,352,960  
 
           
Long-term Debt
    12,288,193       10,942,025  
 
           
Long-term Debt Payable to Affiliated Trusts
    1,071,667       1,561,358  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    5,863,088       5,989,063  
Deferred credits related to income taxes
    287,072       291,474  
Accumulated deferred investment tax credits
    497,231       503,217  
Employee benefit obligations
    1,580,291       1,566,591  
Asset retirement obligations
    1,150,708       1,136,982  
Other cost of removal obligations
    1,303,503       1,300,461  
Other regulatory liabilities
    804,844       793,869  
Other
    536,300       305,255  
 
           
Total deferred credits and other liabilities
    12,023,037       11,886,912  
 
           
Total Liabilities
    30,878,724       30,743,255  
 
           
Preferred and Preference Stock of Subsidiaries
    743,938       744,065  
 
           
Common Stockholders’ Equity:
               
Common stock, par value $5 per share —
               
Authorized — 1 billion shares
               
Issued — March 31, 2007: 752,163,794 Shares;
               
— December 31, 2006: 751,863,854 Shares
               
Treasury — March 31, 2007: 355,183 Shares;
               
— December 31, 2006: 5,593,691 Shares
               
Par value
    3,760,819       3,759,319  
Paid-in capital
    1,114,045       1,096,387  
Treasury, at cost
    (9,509 )     (192,309 )
Retained earnings
    6,673,423       6,765,219  
Accumulated other comprehensive loss
    (56,006 )     (57,487 )
 
           
Total Common Stockholders’ Equity
    11,482,772       11,371,129  
 
           
Total Liabilities and Stockholders’ Equity
  $ 43,105,434     $ 42,858,449  
 
           
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Consolidated Net Income
  $ 338,689     $ 261,607  
Other comprehensive income (loss):
               
Qualifying hedges:
               
Changes in fair value of qualifying hedges, net of tax of $(1,567) and $7,130, respectively
    (2,468 )     11,392  
Reclassification adjustment for amounts included in net income, net of tax of $1,259 and $241, respectively
    2,204       290  
Marketable securities:
               
Change in fair value of marketable securities, net of tax of $818 and $1,609, respectively
    1,307       2,521  
Pension and other post retirement benefit plans:
               
Reclassification adjustment for amounts included in net income, net of tax of $246 and $-, respectively
    438        
 
           
Total other comprehensive income
    1,481       14,203  
 
           
COMPREHENSIVE INCOME
  $ 340,170     $ 275,810  
 
           
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2007 vs. FIRST QUARTER 2006
OVERVIEW
Discussion of the results of operations is focused on Southern Company’s primary business of electricity sales in the Southeast by the traditional operating companies – Alabama Power, Georgia Power, Gulf Power, and Mississippi Power – and Southern Power. Southern Power is an electric wholesale generation subsidiary with market-based rate authority. Southern Company’s other business activities include investments in synthetic fuels and leveraged lease projects, telecommunications, and energy-related services. For additional information on these businesses, see BUSINESS – The Southern Company System – “Traditional operating companies,” “Southern Power,” and “Other Business” in Item 1 of the Form 10-K. For information regarding the synthetic fuel investment, see Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein.
Southern Company continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and earnings per share. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Southern Company in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$77.1
  29.5
 
Southern Company’s first quarter 2007 earnings were $338.7 million ($0.45 per share) compared to $261.6 million ($0.35 per share) for first quarter 2006. The increase in earnings for the first quarter 2007 when compared to the same period in 2006 resulted primarily from higher revenues due to sustained economic strength and customer growth in the Southern Company service area, higher earnings in the synthetic fuel business, and a retail base rate increase at Alabama Power. The increase to earnings was partially offset by higher interest expense and a decrease in revenues associated with lower market-based rates to large commercial and industrial customers when compared to the same period in 2006.
Retail Revenues
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$272.4
  11.0
 
In the first quarter 2007, retail revenues were $2.74 billion compared to $2.47 billion in the same period in 2006. Details of the change to retail revenues follow:
                 
    First Quarter
    2007
    (in millions)   % change
Retail – prior year
  $ 2,471.4          
Change in —
               
Rates and pricing
    32.7       1.3  
Sales growth
    26.3       1.1  
Weather
    19.8       0.8  
Fuel cost recovery
    193.6       7.8  
 
Retail – current year
  $ 2,743.8       11.0 %
 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues associated with changes in rates and pricing increased in the first quarter of 2007 when compared to the same period in 2006 primarily as a result of an increase in retail base rates at Alabama Power, partially offset by a decrease in revenues associated with lower market-based rates to large commercial and industrial customers.
Revenues attributable to changes in sales growth increased in the first quarter of 2007 when compared to the same period in 2006 due to a 3.3% increase in retail KWH sales, resulting from continued customer growth and sustained economic strength in the Southeast. The number of retail customers increased by 1.7% as of March 2007 compared to March 2006.
Revenues resulting from changes in weather increased because of normal weather in the first quarter of 2007 compared to mild weather in the first quarter of 2006.
Fuel revenues increased $193.6 million in the first quarter of 2007 when compared to the same period in 2006. 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 costs, and do not affect net income.
Wholesale Revenues
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$65.8
  15.9
 
In the first quarter 2007, wholesale revenues were $480.7 million compared to $414.9 million in the same period in 2006. The increase was primarily a result of a rise in fuel revenues due to a 13.8% increase in the average unit cost of fuel per net KWH generated. Short-term opportunity sales also contributed to the increase over the same period in 2006 due to favorable weather compared to neighboring territories and a favorable price differential between market prices and Southern Company’s marginal cost. Short-term opportunity sales are made at market-based rates that generally provide a margin above Southern Company’s variable cost to produce the energy.
Other Electric Revenues
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$10.3
  9.3
 
In the first quarter 2007, other electric revenues were $121.3 million compared to $111.0 million in the same period in 2006. The increase was primarily a result of an increase in transmission revenues of $6.8 million, an increase in outdoor lighting revenues of $1.5 million, and an increase in customer fees of $1.5 million. Transmission revenues are generally offset by related expenses and do not significantly affect net income.
Fuel and Purchased Power Expenses
                 
First Quarter 2007 vs. First Quarter 2006
    (change in millions)   % change
Fuel
  $ 268.0       25.6  
Purchased power
    (40.3 )     (38.6 )
         
Total fuel and purchased power expenses
  $ 227.7          
         

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and purchased power expenses for the first quarter 2007 were $1.38 billion compared to $1.15 billion for the corresponding period in 2006. The increase in fuel and purchased power expenses was due to a $145.4 million increase in the average cost of fuel and purchased power as well as an $82.3 million increase related to total KWH generated and purchased when compared to the same period in 2006. Details of Southern Company’s cost of generation and purchased power are as follows:
                         
    First Quarter   First Quarter    
Average Cost   2007   2006   % change
    (cents per net KWH)        
Fuel
    2.80       2.46       13.8  
Purchased power
    3.88       4.85       (20.0 )
 
Increases in fuel expense at the traditional operating companies are generally offset by fuel revenues and do not affect net income. See FUTURE EARNINGS POTENTIAL – “FERC and State PSC Matters – Retail Fuel Cost Recovery” herein for additional information. Fuel expenses incurred under Southern Power’s PPAs are generally the responsibility of the counterparties and do not significantly affect net income.
Allowance for Equity Funds Used During Construction
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$8.6
  75.0
 
In the first quarter 2007, allowance for equity funds used during construction was $20.2 million compared to $11.6 million in the same period in 2006. The increase was a result of additional investment in environmental projects, primarily at Georgia Power.
Equity in Losses of Unconsolidated Subsidiaries
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$(25.8)
  (79.3)
 
In the first quarter 2007, equity in losses of unconsolidated subsidiaries was $6.8 million compared to $32.6 million for the same period in 2006. 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 the first quarter when compared with the same period in 2006 was primarily the result of terminating Southern Company’s membership interest in one of the synthetic fuel entities in 2006 which eliminated the funding obligation and Southern Company’s share of losses for the first quarter 2007. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Synthetic Fuel Tax Credits” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein for further information.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Leveraged Lease Income
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$(8.2)
  (45.5)
 
Leveraged lease income for the first quarter 2007 was $9.9 million compared to $18.1 million for the corresponding period in 2006. Southern Company has several leveraged lease agreements which relate to international and domestic energy generation, distribution, and transportation assets. Southern Company receives federal income tax deductions for depreciation and amortization, as well as interest on long-term debt related to these investments. The adoption of FASB Staff Position No. FAS 13-2 (FSP 13-2), “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” resulted in a $6.5 million decrease to leveraged lease pre-tax income in the first quarter of 2007 when compared to the same period in 2006. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Leveraged Lease Transactions” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Leveraged Lease Transactions” herein for further information.
Interest Expense, Net of Amounts Capitalized
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$17.6
  10.0
 
Interest expense, net of amounts capitalized for the first quarter 2007 was $194.0 million compared to $176.4 million for the corresponding period in 2006. The increase was a result of a $13.6 million increase associated with $1.02 billion in additional debt outstanding at March 31, 2007 compared to March 31, 2006 and a $10.0 million increase associated with an increase in average interest rates on variable rate debt. These increases were partially offset by $7.3 million associated with capitalized interest and allowance for debt funds used during construction. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Financing Activities” of Southern Company in Item 7 of the Form 10-K and herein for additional information.
Interest Expense to Affiliate Trusts
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$(6.8)
  (22.2)
 
Interest expense to affiliate trusts for the first quarter 2007 was $23.8 million compared to $30.6 million for the corresponding period in 2006. The decrease was a result of the redemption of long-term debt payable to affiliated trusts in January and December 2006.
Other Income (Expense), Net
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$5.5
  65.2
 
In the first quarter 2007, other income (expense), net was $(2.9) million compared to $(8.4) million for the same period in 2006 primarily as a result of Alabama Power’s recognition of $5.0 million associated with the consent decree entered in the NSR litigation in 2006. See Note 3 to the financial statements of Southern Company under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K and Note (B) to the

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Condensed Financial Statements under “NEW SOURCE REVIEW LITIGATION” herein for further information.
Income Taxes
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$47.6
  44.1
 
Income taxes for the first quarter 2007 were $155.6 million compared to $108.0 million for the corresponding period in 2006. The increase was due to higher pre-tax earnings and a $23.1 million decrease in synthetic fuel tax credits as a result of terminating the membership interest in one of the synthetic fuel entities in 2006. The increase in income tax expense was partially offset by a $17.3 million reduction to tax credit reserves in the first quarter of 2007 compared to the first quarter 2006 as a result of reduced credits and a lower projected phase-out. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Synthetic Fuel Tax Credits” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein for further information.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Southern Company’s 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. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be fully recovered in rates on a timely basis. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters” in Item 8 of the Form 10-K for additional information.
New Source Review Litigation
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – New Source Review Actions” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding a civil action brought by the EPA alleging that Alabama Power had violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of its coal-fired generating facilities. The plaintiffs’ appeal against Alabama Power was stayed by the U.S. Court of Appeals for the Eleventh Circuit pending the U.S. Supreme Court’s decision in a similar case

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
against Duke Energy. On April 2, 2007, the U.S. Supreme Court issued an opinion in the Duke Energy case. On April 11, 2007, Alabama Power filed a motion to lift the stay and to reset the briefing schedule. The plaintiffs have opposed the motion and have moved to vacate the district court’s decision and remand for further proceedings consistent with the Duke Energy decision. The final resolution of these claims is dependent on these appeals and possible further court action and, therefore, cannot be determined at this time.
Fine Particulate Matter Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS - FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Southern Company in Item 7 of the Form 10-K for additional information regarding nonattainment designations for the fine particulate matter air quality standard. In March 2007, the EPA finalized its fine particulate matter implementation rule, requiring submittal of state plans for addressing the nonattainment designations by April 2008. The ultimate outcome of this matter cannot be determined at this time.
Plant Wansley Environmental Litigation
See MANAGEMENT’S DISCUSSION AND ANALYSIS - FUTURE EARNINGS POTENTIAL – “Environmental Matters – Plant Wansley Environmental Litigation” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters — Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K for additional information on litigation involving alleged violations of the Clean Air Act at four of the units at Plant Wansley. On March 30, 2007, the parties filed a joint motion seeking entry of a proposed consent decree resolving all remaining issues in the case. If the consent decree is approved as proposed, the resolution of this case will not have a material impact on Southern Company’s financial statements.
FERC and State PSC Matters
Intercompany Interchange Contract
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Intercompany Interchange Contract” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for information regarding the proceeding initiated by the FERC in May 2005 to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the Power Pool 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.
On April 19, 2007, the FERC approved, with certain modifications, the compliance filing submitted by Southern Company on November 6, 2006. The compliance plan largely involves functional separation and information restrictions related to marketing activities conducted on behalf of Southern Power. The implementation of the plan is not expected to have a material impact on Southern Company’s financial statements. However, the ultimate outcome of this matter cannot now be determined.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Fuel Cost Recovery
The traditional operating companies each have established fuel cost recovery rates approved by their respective state PSCs. Over the past several years, the traditional operating companies have experienced higher than expected fuel costs for coal, natural gas, and uranium. These higher fuel costs have resulted in under recovered fuel costs included in the balance sheets of approximately $1.3 billion at March 31, 2007. Operating revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes to the billing factors will have no significant effect on Southern Company’s revenues or net income but will affect cash flow. The traditional operating companies will continue to monitor the under recovered fuel cost balance in light of these higher fuel costs. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters - Fuel Cost Recovery” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Alabama Power Retail Regulatory Matters” and “Georgia Power Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information.
Mirant Matters
Mirant was an energy company with businesses that included independent power projects and energy trading and risk management companies in the U.S. and selected other countries. It was a wholly-owned subsidiary of Southern Company until its initial public offering in October 2000. In April 2001, Southern Company completed a spin-off to its shareholders of its remaining ownership, and Mirant became an independent corporate entity. In July 2003, Mirant filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code. See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Bankruptcy” in Item 8 of the Form 10-K for information regarding Southern Company’s contingent liabilities associated with Mirant, including guarantees of contractual commitments, litigation, and joint and several liabilities in connection with the consolidated federal income tax return.
Mirant Securities Litigation
See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Securities Litigation” in Item 8 of the Form 10-K for information regarding a class action lawsuit that several Mirant shareholders (plaintiffs) originally filed against Mirant and certain Mirant officers in May 2002. In November 2002, Southern Company, certain former and current senior officers of Southern Company, and 12 underwriters of Mirant’s initial public offering were added as defendants. On March 24, 2006, the plaintiffs filed a motion for reconsideration requesting that the court vacate that portion of its July 14, 2003 order dismissing the plaintiffs’ claims based upon Mirant’s alleged improper energy trading and marketing activities involving the California energy market. On March 6, 2007, the court granted plaintiffs’ motion for reconsideration, reinstated the California energy market claims, and granted in part and denied in part defendants’ motion to compel certain class certification discovery. On March 21, 2007, defendants filed renewed motions to dismiss the California energy claims on grounds originally set forth in their 2003 motions to dismiss, but which were not addressed by the court. The ultimate outcome of this matter cannot be determined at this time.
MC Asset Recovery Litigation
See Note 3 to the financial statements of Southern Company under “Mirant Matters – MC Asset Recovery Litigation” in Item 8 of the Form 10-K for information regarding a suit between MC Asset Recovery, a special purpose subsidiary of Reorganized Mirant, and Southern Company. On March 28, 2007, MC Asset Recovery filed a Fourth Amended Complaint. Among other things, the Fourth Amended Complaint adds a claim under the Federal Debt Collection Procedure Act (FDCPA) to avoid certain transfers from Mirant to Southern Company and withdraws the breach of fiduciary duty claim the court struck as a result of Southern Company’s

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
motion for summary judgment. MC Asset Recovery claims to have standing to assert violations of the FDCPA and to recover property on behalf of the Mirant debtors’ estates. The ultimate outcome of this matter cannot be determined at this time.
Income Tax Matters
Leveraged Lease Transactions
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Leveraged Lease Transactions” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Income Tax Matters” in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Leveraged Lease Transactions” herein for information regarding IRS challenges to Southern Company’s transactions related to international leveraged leases that could have material impacts on Southern Company’s financial statements. Effective January 1, 2007, Southern Company adopted FSP 13-2, which amends FASB Statement No. 13, “Accounting for Leases” requiring 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 with recognition of the resulting gain or loss in the year of the revision. FSP 13-2 also requires that all recognized tax positions in a leveraged lease must be measured in accordance with the criteria in FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” and any changes resulting from FIN 48 must be reflected as a change in important lease assumptions as of the date of adoption. The cumulative effect of initially adopting FSP 13-2 was recorded as an adjustment to beginning retained earnings. For the lease-in-lease-out (LILO) transaction settled with the IRS in February 2005, the cumulative effect of adopting FSP 13-2 was a $17 million reduction in retained earnings. With respect to Southern Company’s sale-in-lease-out (SILO) transactions, the adoption of FSP 13-2 reduced retained earnings by $108 million. The adoption of FSP 13-2 also resulted in a reduction to net income in the first quarter 2007 of approximately $4 million. The adjustments to retained earnings are non-cash charges and will be recognized as income over the remaining terms of the affected leases. Any future changes in the projected or actual income tax cash flows will result in an additional recalculation of the net investment in the leases and will be recorded currently in income. The ultimate impact on Southern Company’s net income will be dependent on the outcome of pending litigation, but could be significant, and potentially material. Southern Company believes these transactions are valid leases for U.S. tax purposes and the related deductions are allowable. Southern Company is continuing to pursue resolution of these matters through administrative appeals and litigation; however, the ultimate outcome of these matters cannot now be determined.
Synthetic Fuel Tax Credits
As discussed in MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Synthetic Fuel Tax Credits” of Southern Company in Item 7 of the Form 10-K, Southern Company has an investment in an entity that produces synthetic fuel and receives tax credits under Section 45K (formerly Section 29) of the IRC. In accordance with Section 45K of the IRC, these tax credits are subject to limitation as the annual average price of oil (as determined by the DOE) increases over a specified, inflation-adjusted dollar amount published in the spring of the subsequent year. Southern Company, along with its partners in this investment, has continued to monitor oil prices. Reserves against tax credits earned in 2007 of $2.8 million have been recorded in the first three months of 2007 due to projected phase-outs of the credits in 2007 as a result of current and projected future oil prices.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Construction Projects
Integrated Gasification Combined Cycle (IGCC) Project
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Construction Projects – Integrated Gasification Combined Cycle” of Southern Company in Item 7 of the Form 10-K for information regarding the development by Southern Power and the Orlando Utilities Commission (OUC) of an IGCC project in Orlando, Florida at OUC’s Stanton Energy site. Since the definitive agreements relating to the development of the project were executed in December 2005, the estimated costs of the gasifier portion have increased due primarily to increases in commodity costs and increased market demand for labor. Southern Power had the option under the original agreements to end its participation in the gasifier portion of the project at the end of the project definition phase, which has been completed. On March 29, 2007, Southern Power’s Board of Directors approved the continuation and the completion of the design, engineering, and construction of the gasifier portion of the project. This approval is contingent on the approval of a request for additional funding from the DOE of $58.75 million and OUC’s approval of amended agreements to share the remaining cost increases between Southern Power and OUC. Southern Power and OUC will share 65% and 35% of the estimated cost increase, respectively, under the proposed amended agreements. In April 2007, OUC approved its portion of the cost increase, subject to the DOE’s approval of the additional funding. The ultimate outcome of this matter cannot now be determined.
Nuclear
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Construction Projects – Nuclear” of Southern Company in Item 7 of the Form 10-K for information regarding a development agreement between Southern Nuclear and Duke Energy to evaluate the potential construction of a new two-unit nuclear plant at a jointly owned site in Cherokee County, South Carolina. In March 2007, the Southern Nuclear Board of Directors voted to withdraw from any further development of this project. A notice of withdrawal from the project has been provided to Duke Energy. Adjustments to the carrying value of the related assets were recorded in the first quarter 2007 and were not material to the financial statements. If Duke Energy chooses to continue the project independently, no additional adjustments are anticipated. Management does not expect the final outcome of this matter to have a material adverse effect on Southern Company’s financial statements. However, the ultimate outcome of this matter cannot now be determined.
Other Matters
Southern Company is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Southern Company’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements such as opacity and other air quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such pending or potential litigation against Southern Company and its subsidiaries cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Southern Company in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Southern Company’s financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Southern Company in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Company’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES - “Application of Critical Accounting Policies and Estimates” of Southern Company in Item 7 of the Form 10-K for a complete discussion of Southern Company’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.
New Accounting Standards
Income Taxes
On January 1, 2007, Southern Company adopted FIN 48, which requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement, and classification of income tax uncertainties, along with any related interest and penalties. The provisions of FIN 48 were applied to all tax positions beginning January 1, 2007. The impact on Southern Company’s financial statements was a reduction to beginning 2007 retained earnings of approximately $15 million related to Southern Company’s SILO transactions. See Note (I) to the Condensed Financial Statements herein for details regarding the financial statement impact of the adoption.
Leveraged Leases
Effective January 1, 2007, Southern Company adopted FSP 13-2. The cumulative effect of initially adopting FSP 13-2 was recorded as an adjustment to beginning retained earnings. For the LILO transaction settled with the IRS in February 2005, the cumulative effect of adopting FSP 13-2 was a $17 million reduction in retained earnings. With respect to Southern Company’s SILO transactions, the adoption of FSP 13-2 reduced retained earnings by $108 million. The adoption of FSP 13-2 also resulted in a reduction to net income in the first quarter 2007 of approximately $4 million. The adjustments to retained earnings are non-cash charges and will be recognized as income over the remaining terms of the affected leases. Any future changes in the projected or actual income tax cash flows will result in an additional recalculation of the net investment in the leases and will be recorded currently in income. See FUTURE EARNINGS POTENTIAL — “Income Tax Matters – Leveraged Lease Transactions” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Leveraged Lease Transactions” herein for further details about the effect of FSP 13-2.
Fair Value Measurement
The FASB issued FASB Statement No. 157 (SFAS No. 157), “Fair Value Measurements” in September 2006. This standard 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 the impact of this standard.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fair Value Option
In February 2007, the FASB issued FASB Statement No. 159 (SFAS No. 159), “Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115.” 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 March 31, 2007. Net cash provided from operating activities totaled $262 million for the first three months of 2007, compared to $58 million for the corresponding period in 2006. The $204 million increase is primarily due to the increase in net income as previously discussed and a reduction in the outflow of cash for accounts payable, primarily related to gas purchases. Gross property additions to utility plant were $770 million in the first three months of 2007.
Significant balance sheet changes for the first three months of the year include an $857 million increase in long-term debt, which was used primarily for the repayment of short-term debt, construction expenditures, and general corporate purposes. Total property, plant, and equipment, net of depreciation, increased $431 million during the first three months of 2007 primarily from the purchase and installation of environmental equipment and transmission and distribution construction.
The market price of Southern Company’s common stock at March 31, 2007 was $36.65 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $15.27 per share, representing a market-to-book ratio of 240%, compared to $36.86, $15.24, and 242%, respectively, at the end of 2006. The dividend for the first quarter 2007 was $0.3875 per share compared to $0.3725 per share in the first quarter 2006. In April 2007, the dividend was increased to $0.4025 for the dividend payable in June 2007.
Capital Requirements and Contractual Obligations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Southern Company in Item 7 of the Form 10-K for a description of Southern Company’s capital requirements for its construction program and other funding requirements associated with scheduled maturities of long-term debt, as well as the related interest, preferred and preference stock dividends, leases, trust funding requirements, and other purchase commitments. Approximately $1.5 billion will be required by March 31, 2008 for redemptions and maturities of long-term debt.
Sources of Capital
Southern Company intends to meet its future capital needs through internal cash flow and external security issuances. Equity capital can be provided from any combination of Southern Company’s stock plans, private placements, or public offerings. The amount and timing of additional equity capital to be raised will be contingent on Southern Company’s investment opportunities. Southern 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, short-term borrowings, and equity contributions from Southern Company. However, the amount, type, and timing of any financings, if needed, will depend upon

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
prevailing market conditions, regulatory approval, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Southern Company in Item 7 of the Form 10-K for additional information.
Southern Company’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet cash needs as well as scheduled maturities of long-term debt. To meet short-term cash needs and contingencies, Southern Company has substantial cash flow from operating activities and access to capital markets, including commercial paper programs. At March 31, 2007, Southern Company and its subsidiaries had approximately $161.5 million of cash and cash equivalents and approximately $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 facilities 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 contain provisions allowing one-year term loans. See Note 6 to the financial statements of Southern Company under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. The traditional operating companies may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of each of the traditional operating companies. At March 31, 2007, the Southern Company system had outstanding commercial paper of $1.4 billion, bank notes of $150 million, and extendible commercial notes of $44.8 million. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.
Off-Balance Sheet Financing Arrangements
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Off-Balance Sheet Financing Arrangements” of Southern Company in Item 7 and Note 7 to the financial statements of Southern Company under “Operating Leases” in Item 8 of the Form 10-K for information related to Mississippi Power’s lease of a combined cycle generating facility at Plant Daniel.
Credit Rating Risk
Southern Company does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB and Baa2, or BBB- or Baa3 or below. These contracts are primarily for physical electricity purchases and sales. At March 31, 2007, the maximum potential collateral requirements at a BBB and Baa2 rating were approximately $9 million and at a BBB- or Baa3 rating were approximately $246 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $658 million. Subsequent to March 31, 2007, certain Southern Company subsidiaries entered into certain contracts for electric capacity and energy. These contracts also contain provisions that could require collateral, but not accelerated payment, in the event of a change in credit rating. Under these contracts, the maximum potential collateral requirement at a rating of BBB- is $33 million. The maximum potential collateral requirement at rating below BBB- is $201 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 March 31, 2007, Southern Company’s total exposure to these types of agreements was not material.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Market Price Risk
Southern Company’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2006 reporting period. In addition, Southern Company is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulations, the 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 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 physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, into financial hedge contracts for natural gas purchases. The traditional operating companies have implemented fuel-hedging programs at the instruction of their respective state PSCs.
The fair value of derivative energy contracts at March 31, 2007 was as follows:
         
    First Quarter
    2007
    Changes
    Fair Value
    (in millions)
Contracts beginning of period
  $ (82 )
Contracts realized or settled
    28  
New contracts at inception
     
Changes in valuation techniques
     
Current period changes (a)
    65  
 
Contracts at March 31, 2007
  $ 11  
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
                         
    Source of March 31, 2007
    Valuation Prices
    Total   Maturity
    Fair Value   Year 1   1-3 Years
    (in millions)
Actively quoted
  $ 11     $ (1 )   $ 12  
External sources
                 
Models and other methods
                 
 
Contracts at March 31, 2007
  $ 11     $ (1 )   $ 12  
 
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

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
income as incurred. At March 31, 2007, the fair value gain/(loss) of derivative energy contracts was reflected in the financial statements as follows:
         
    Amounts
    (in millions)
Regulatory liabilities, net
  $ 11.0  
Accumulated other comprehensive income
    (0.2 )
Net income
    0.1  
 
Total fair value
  $ 10.9  
 
Unrealized pre-tax gains and losses recognized in income were not material for any period presented.
To reduce Southern Company’s exposure to changes in the value of synthetic fuel tax credits, which are impacted by changes in oil prices, Southern 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. In the first quarter of 2007, the fair value gains recognized in income to mark the transactions to market were $6.4 million.
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Southern Company in Item 7 and Notes 1 and 6 to the financial statements of Southern Company under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.
Financing Activities
In the first three months of 2007, Southern Company and its subsidiaries issued $1.4 billion of senior notes and issued $168 million of common stock, including treasury stock, through employee and director stock plans. Subsequent to March 31, 2007, Alabama Power issued $250 million of additional senior notes. The proceeds were primarily used to repay short-term indebtedness and to fund ongoing construction projects. See Southern Company’s Condensed Consolidated Statements of Cash Flows herein for further details on financing activities during the first three months of 2007. Southern Company and its subsidiaries also terminated interest rate derivatives related to these transactions at a cost of $3.9 million. These losses were deferred in other comprehensive income and will be amortized to income over a 10-year period. Also during the first three months of 2007, Southern Company and its subsidiaries redeemed $405.2 million in senior notes and other long-term debt. Subsequent to March 31, 2007, an additional $36.1 million in long-term debt was redeemed by Mississippi Power and $169 million of Alabama Power floating rate notes matured. Also subsequent to March 31, 2007, Georgia Power announced the planned redemption in June 2007 of $454 million of notes payable related to trust preferred securities.
During the first three months of 2007, Southern Company and its subsidiaries entered into additional derivative transactions designed to hedge interest rate risk of future debt issuances. The total notional amount of these derivatives was $740 million. Subsequent to March 31, 2007, Georgia Power entered into further derivative transactions designed to mitigate interest rate risk related to planned future debt issuances. The total notional amount of these derivatives was $300 million. See Note (F) to the Condensed Financial Statements herein for further details.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Company and its subsidiaries plan to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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PART I
Item 3.      Quantitative And Qualitative Disclosures About Market Risk.
See MANAGEMENT’S DISCUSSION AND ANALYSIS - FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” herein for each registrant, Notes 1 and 6 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power under “Financial Instruments” in Item 8 of the Form 10-K. Also, see Note (F) to the Condensed Financial Statements herein for information relating to derivative instruments.
Item 4.      Controls and Procedures.
     (a)    Evaluation of disclosure controls and procedures.
     As of the end of the period covered by this quarterly report, Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power conducted separate evaluations under the supervision and with the participation of each company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon these evaluations, the Chief Executive Officer and the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures are effective in alerting them in a timely manner to information relating to their company (including its consolidated subsidiaries, if any) required to be included in periodic filings with the SEC.
     (b)    Changes in internal controls.
     There have been no changes in Southern Company’s, Alabama Power’s, Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the first quarter of 2007 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.

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ALABAMA POWER COMPANY

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ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Operating Revenues:
               
Retail revenues
  $ 955,773     $ 802,209  
Wholesale revenues
               
Non-affiliates
    155,122       146,354  
Affiliates
    42,194       79,315  
Other revenues
    44,113       44,829  
 
           
Total operating revenues
    1,197,202       1,072,707  
 
           
Operating Expenses:
               
Fuel
    386,072       341,767  
Purchased power —
               
Non-affiliates
    4,638       22,086  
Affiliates
    72,714       56,665  
Other operations
    171,403       169,013  
Maintenance
    118,762       109,500  
Depreciation and amortization
    115,943       109,862  
Taxes other than income taxes
    72,718       65,657  
 
           
Total operating expenses
    942,250       874,550  
 
           
Operating Income
    254,952       198,157  
Other Income and (Expense):
               
Allowance for equity funds used during construction
    6,586       5,529  
Interest income
    4,394       4,174  
Interest expense, net of amounts capitalized
    (63,131 )     (53,219 )
Interest expense to affiliate trusts
    (4,059 )     (4,059 )
Other income (expense), net
    (2,924 )     (9,005 )
 
           
Total other income and (expense)
    (59,134 )     (56,580 )
 
           
Earnings Before Income Taxes
    195,818       141,577  
Income taxes
    72,702       53,363  
 
           
Net Income
    123,116       88,214  
Dividends on Preferred and Preference Stock
    8,182       6,072  
 
           
Net Income After Dividends on Preferred and Preference Stock
  $ 114,934     $ 82,142  
 
           
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Net Income After Dividends on Preferred and Preference Stock
  $ 114,934     $ 82,142  
Other comprehensive income (loss):
               
Changes in fair value of qualifying hedges, net of tax of $(102) and $1,473, respectively
    (168 )     2,423  
Reclassification adjustment for amounts included in net income, net of tax of $59 and $(1,006), respectively
    96       (1,654 )
 
           
COMPREHENSIVE INCOME
  $ 114,862     $ 82,911  
 
           
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Operating Activities:
               
Net income
  $ 123,116     $ 88,214  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    136,060       129,238  
Deferred income taxes and investment tax credits, net
    (889 )     (43,904 )
Deferred revenues
    (2,276 )     (559 )
Allowance for equity funds used during construction
    (6,586 )     (5,529 )
Pension, postretirement, and other employee benefits
    (2,439 )     (292 )
Stock option expense
    3,713       3,583  
Tax benefit of stock options
    286       111  
Hedge settlements
          18,006  
Other, net
    6,055       1,271  
Changes in certain current assets and liabilities —
               
Receivables
    43,143       111,212  
Fossil fuel stock
    (21,732 )     (32,192 )
Materials and supplies
    (2,288 )     7,161  
Other current assets
    (45,381 )     (21,978 )
Accounts payable
    (94,769 )     (152,217 )
Accrued taxes
    93,770       103,107  
Accrued compensation
    (61,830 )     (66,139 )
Other current liabilities
    7,811       25,325  
 
           
Net cash provided from operating activities
    175,764       164,418  
 
           
Investing Activities:
               
Property additions
    (263,712 )     (228,402 )
Nuclear decommissioning trust fund purchases
    (73,062 )     (72,384 )
Nuclear decommissioning trust fund sales
    73,062       72,384  
Cost of removal, net of salvage
    (10,012 )     (11,839 )
Other
    (1,863 )     (5,292 )
 
           
Net cash used for investing activities
    (275,587 )     (245,533 )
 
           
Financing Activities:
               
Decrease in notes payable, net
    (44,875 )     (315,278 )
Proceeds —
               
Common stock issued to parent
    70,000        
Senior notes
    200,000       800,000  
Gross excess tax benefit of stock options
    741       217  
Redemptions —
               
Senior notes
          (170,000 )
Payment of preferred and preference stock dividends
    (6,515 )     (6,070 )
Payment of common stock dividends
    (116,250 )     (110,150 )
Other
    (2,469 )     (16,505 )
 
           
Net cash provided from financing activities
    100,632       182,214  
 
           
Net Change in Cash and Cash Equivalents
    809       101,099  
Cash and Cash Equivalents at Beginning of Period
    15,539       22,472  
 
           
Cash and Cash Equivalents at End of Period
  $ 16,348     $ 123,571  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $3,346 and $2,423 capitalized for 2007 and 2006, respectively)
  $ 52,607     $ 35,993  
Income taxes (net of refunds)
  $ (3,250 )   $ (10,989 )
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2007     2006  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 16,348     $ 15,539  
Receivables —
               
Customer accounts receivable
    307,878       323,202  
Unbilled revenues
    88,890       90,596  
Under recovered regulatory clause revenues
    17,583       32,451  
Other accounts and notes receivable
    44,066       49,708  
Affiliated companies
    55,461       70,836  
Accumulated provision for uncollectible accounts
    (9,416 )     (7,091 )
Fossil fuel stock, at average cost
    173,051       153,120  
Materials and supplies, at average cost
    257,739       255,664  
Vacation pay
    46,415       46,465  
Prepaid expenses
    112,924       76,265  
Other
    31,387       66,663  
 
           
Total current assets
    1,142,326       1,173,418  
 
           
Property, Plant, and Equipment:
               
In service
    16,167,366       15,997,793  
Less accumulated provision for depreciation
    5,719,366       5,636,475  
 
           
 
    10,448,000       10,361,318  
Nuclear fuel, at amortized cost
    139,202       137,300  
Construction work in progress
    623,625       562,119  
 
           
Total property, plant, and equipment
    11,210,827       11,060,737  
 
           
Other Property and Investments:
               
Equity investments in unconsolidated subsidiaries
    48,589       47,486  
Nuclear decommissioning trusts, at fair value
    525,117       513,521  
Other
    35,647       35,980  
 
           
Total other property and investments
    609,353       596,987  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    373,025       354,225  
Prepaid pension costs
    731,311       722,287  
Deferred under recovered regulatory clause revenues
    311,686       301,048  
Other regulatory assets
    271,155       279,661  
Other
    157,745       166,927  
 
           
Total deferred charges and other assets
    1,844,922       1,824,148  
 
           
Total Assets
  $ 14,807,428     $ 14,655,290  
 
           
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Liabilities and Stockholder’s Equity   2007     2006  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 668,648     $ 668,646  
Notes payable
    74,794       119,670  
Accounts payable —
               
Affiliated
    129,618       162,951  
Other
    202,208       263,506  
Customer deposits
    62,735       62,978  
Accrued taxes —
               
Income taxes
    49,592       3,120  
Other
    49,795       29,696  
Accrued interest
    61,421       53,573  
Accrued vacation pay
    38,645       38,767  
Accrued compensation
    25,364       87,194  
Other
    56,581       79,907  
 
           
Total current liabilities
    1,419,401       1,570,008  
 
           
Long-term Debt
    4,038,399       3,838,906  
 
           
Long-term Debt Payable to Affiliated Trusts
    309,279       309,279  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    2,137,888       2,116,575  
Deferred credits related to income taxes
    97,999       98,941  
Accumulated deferred investment tax credits
    186,581       188,582  
Employee benefit obligations
    379,409       375,940  
Asset retirement obligations
    483,660       476,460  
Other cost of removal obligations
    601,049       600,278  
Other regulatory liabilities
    405,268       399,822  
Other
    30,742       35,805  
 
           
Total deferred credits and other liabilities
    4,322,596       4,292,403  
 
           
Total Liabilities
    10,089,675       10,010,596  
 
           
Preferred and Preference Stock
    612,271       612,407  
 
           
Common Stockholder’s Equity:
               
Common stock, par value $40 per share —
               
Authorized — 25,000,000 shares
               
Outstanding — March 31, 2007: 14,000,000 shares
               
— December 31, 2006: 12,250,000 shares
    560,000       490,000  
Paid-in capital
    2,033,544       2,028,963  
Retained earnings
    1,514,931       1,516,245  
Accumulated other comprehensive loss
    (2,993 )     (2,921 )
 
           
Total common stockholder’s equity
    4,105,482       4,032,287  
 
           
Total Liabilities and Stockholder’s Equity
  $ 14,807,428     $ 14,655,290  
 
           
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2007 vs. FIRST QUARTER 2006
OVERVIEW
Alabama Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the State of Alabama and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Alabama Power’s primary business of selling electricity. These factors include the 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 restoration following major storms.
Alabama Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Alabama Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$32.8   39.9
   
Alabama Power’s net income after dividends on preferred and preference stock for the first quarter 2007 was $114.9 million compared to $82.1 million for the corresponding period of 2006. The increase in earnings was primarily due to retail base rate increases resulting from an increase in rates under Rate RSE and Rate CNP for environmental costs (Rate CNP Environmental) that took effect January 1, 2007, as well as favorable weather conditions during the first quarter of 2007. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Rate Adjustments” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information on Alabama Power’s rates. These increases in revenues were partially offset by increases in maintenance expense related to scheduled work performed on overhead lines and scheduled plant outages, depreciation and amortization expense as a result of additional plant-in-service, and interest expense due to higher interest rates associated with the issuance of new long-term debt that replaced debt which matured in 2006.
Retail Revenues
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$153.6   19.1
   
In the first quarter 2007, retail revenues were $955.8 million compared to $802.2 million in same period in 2006.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of retail revenues are as follows:
                 
    First Quarter
    2007
    (in millions)   % change
Retail – prior year
  $ 802.2          
Change in —
               
Rates and pricing
    54.0       6.7  
Sales growth
    5.0       0.6  
Weather
    14.1       1.8  
Fuel and other cost recovery
    80.5       10.0  
 
Retail – current year
  $ 955.8       19.1 %
     
Revenues associated with changes in rates and pricing increased in the first quarter of 2007 when compared to the same period in 2006 primarily due to the Rate RSE and Rate CNP Environmental rate increases effective in January 2007. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Rate Adjustments” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters” in Item 8 of the Form 10-K.
Revenues attributable to changes in sales growth increased in the first quarter of 2007 when compared to the same period in 2006 due to a 0.6% overall increase in retail KWH energy sales, resulting primarily from continued residential and commercial customer and demand growth. The number of retail customers increased by 1.0% as of March 2007 compared to March 2006. This increase was offset by a decrease in KWH energy sales to industrial customers of 3.1% for the first quarter 2007 primarily as a result of decreased sales demand in the primary metals, chemicals, and forest products sectors.
Revenues resulting from changes in weather increased due to normal weather conditions in the first quarter of 2007 compared to mild weather in the first quarter of 2006 which resulted in increased KWH energy sales to residential and commercial customers of 3.5% and 1.2%, respectively.
Fuel and other cost recovery revenues increased in the first quarter of 2007 when compared to the same period in 2006. Electric rates for Alabama Power include provisions to recognize the full recovery of fuel costs, purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with the replenishment of Alabama Power’s natural disaster reserve. Under these provisions, fuel and other cost recovery revenues generally equal fuel and other cost recovery expenses and do not affect net income.
Wholesale Revenues – Non-Affiliates
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$8.8
  6.0
   
Wholesale energy sales to non-affiliates will vary depending on the market cost of available energy compared to the cost of Alabama Power and Southern Company system owned generation, demand for energy within the Southern Company service territory, and availability of Southern Company system generation. In the first quarter 2007, revenues from wholesale energy sales to non-affiliates were $155.1 million compared to $146.3 million in the same period in 2006. This increase was primarily due to a 12.5% increase in KWH sales to non-affiliates partially offset by a 5.8% decrease in price.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale Revenues – Affiliates
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$(37.1)   (46.8)
   
Wholesale energy sales to affiliated companies within the Southern Company system vary from period to period depending on demand and the availability and cost of generating resources at each company. These sales are made in accordance with the IIC, as approved by the FERC. In the first quarter 2007, revenues from wholesale energy sales to affiliates were $42.2 million compared to $79.3 million in the same period in 2006. This decrease was primarily due to a 30.7% decrease in KWH sales to affiliates as well as a 23.2% decrease in price. These transactions do not have a significant impact on earnings since the energy is generally sold at marginal cost.
Fuel and Purchased Power Expenses
                 
First Quarter 2007 vs. First Quarter 2006
    (change in millions)   % change
Fuel
  $ 44.3       13.0  
Purchased power-non-affiliates
    (17.4 )     (79.0 )
Purchased power-affiliates
    16.0       28.3  
           
Total fuel and purchased power expenses
  $ 42.9          
           
In the first quarter 2007, total fuel and purchased power expenses were $463.4 million compared to $420.5 million in the same period in 2006. The increase was due to a $48.4 million increase related to greater KWHs generated and purchased offset by a $5.5 million decrease in the cost of energy resulting from a decrease in the average cost of purchased power. Details of the individual components follow:
                         
    First Quarter   First Quarter    
Average Cost   2007   2006   % change
    (cents per net KWH)        
Fuel
    2.29       2.21       3.6  
Purchased power
    4.55       5.46       (16.7 )
       
In the first quarter 2007, fuel expense was $386.1 million compared to $341.8 million in the same period in 2006. This increase was due to a 4.9% increase in overall generation from Alabama Power-owned facilities and a 2.5% increase in the average cost of coal partially offset by a 12.3% decrease in natural gas prices. These transactions did not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Alabama Power’s energy cost recovery clause.
Energy purchases from non-affiliates will vary depending on market cost of available energy being lower than Southern Company system-generated energy, demand for energy within the system service territory, and availability of Southern Company system generation. In the first quarter 2007, purchased power from non-affiliates was $4.6 million compared to $22.0 million in the same period in 2006. This decrease was primarily due to a 52.1% decrease in the amount of energy purchased and a 51.9% decrease in price. These transactions did not have a significant impact on earnings since energy purchases are generally offset by energy revenues through Alabama Power’s energy cost recovery clause.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Energy purchases from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC, as approved by the FERC. In the first quarter 2007, purchased power from affiliates was $72.7 million compared to $56.7 million in the same period in 2006. This increase was due to a 90.3% increase in the amount of energy purchased partially offset by a 20.6% decrease in price. These transactions did not have a significant impact on earnings since energy purchases are generally offset by energy revenues through Alabama Power’s energy cost recovery clause.
Maintenance Expense
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$9.3
  8.5
   
In the first quarter 2007, maintenance expense was $118.8 million compared to $109.5 million in the same period in 2006. This increase was primarily due to a $4.3 million increase in distribution expense primarily related to scheduled work performed on overhead lines and a $3.3 million increase in steam power expense associated with scheduled outage maintenance cost at various coal-fired facilities.
Depreciation and Amortization
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$6.1   5.5
   
For the first quarter 2007, depreciation and amortization was $115.9 million compared to $109.8 million in the same period in 2006. This increase was due to an increase in property, plant, and equipment related to steam power and distribution capital projects when compared to the same period in 2006.
Taxes Other than Income Taxes
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$7.1   10.8
   
For the first quarter 2007, taxes other than income taxes were $72.7 million compared to $65.6 million in the same period in 2006. This increase was primarily due to increases in state and municipal public utility license taxes which are directly related to retail revenues.
Interest Expense, Net of Amounts Capitalized
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$9.9   18.6
   
For the first quarter 2007, interest expense, net of amounts capitalized was $63.1 million compared to $53.2 million in the same period in 2006. This increase was mainly due to higher interest rates associated with the issuance of new long-term debt that replaced debt which matured in 2006. For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY –

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
“Financing Activities” of Alabama Power in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY – “Financing Activities” herein.
Other Income (Expense), Net
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$6.1   67.5
   
Other income (expense), net in the first quarter 2007 was $(2.9) million compared to $(9.0) million in the same period in 2006. This increase in other income was mainly due to the recording of the $5.0 million settlement with the EPA in the NSR litigation in the first quarter of 2006. See FUTURE EARNINGS POTENTIAL – “Environmental Matters – New Source Review Litigation” and Note (B) to the Condensed Financial Statements under NEW SOURCE REVIEW LITIGATION herein for additional information.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Alabama Power’s future earnings potential. The level of Alabama Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Alabama Power’s primary business of selling electricity. These factors include Alabama Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Alabama Power’s service area. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Alabama Power in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be fully recovered in rates on a timely basis. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.
New Source Review Litigation
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – New Source Review Actions” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding a civil action brought by the EPA alleging that Alabama Power had violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of its coal-fired generating facilities. The plaintiffs’ appeal against Alabama Power was stayed by the U.S. Court of Appeals for the Eleventh Circuit pending the U.S. Supreme Court’s decision in a similar case against Duke Energy. On April 2, 2007, the U.S. Supreme Court issued an opinion in the Duke Energy case. On April 11, 2007, Alabama Power filed a motion to lift the stay and to reset the briefing schedule. The plaintiffs have opposed the motion and have moved to vacate the district court’s decision and remand for further proceedings

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
consistent with the Duke Energy decision. The final resolution of these claims is dependent on these appeals and possible further court action and, therefore, cannot be determined at this time.
Fine Particulate Matter Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters - Environmental Statutes and Regulations — Air Quality” of Alabama Power in Item 7 of the Form 10-K for additional information regarding nonattainment designations for the fine particulate matter air quality standard. In March 2007, the EPA finalized its fine particulate matter implementation rule, requiring submittal of state plans for addressing the nonattainment designations by April 2008. The ultimate outcome of this matter cannot be determined at this time.
FERC and Alabama PSC Matters
Intercompany Interchange Contract
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Intercompany Interchange Contract” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for information regarding the proceeding initiated by the FERC in May 2005 to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the Power Pool 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.
On April 19, 2007, the FERC approved, with certain modifications, the compliance filing submitted by Southern Company on November 6, 2006. The compliance plan largely involves functional separation and information restrictions related to marketing activities conducted on behalf of Southern Power. The implementation of the plan is not expected to have a material impact on Alabama Power’s financial statements. However, the ultimate outcome of this matter cannot now be determined.
Retail Fuel Cost Recovery
Alabama Power has established fuel cost recovery rates approved by the Alabama PSC. Alabama Power’s under recovered fuel costs as of March 31, 2007 totaled $312 million as compared to $301 million at December 31, 2006. As a result of Alabama Power’s level of recovery under the Alabama PSC’s most recent fuel recovery order, Alabama Power classified all $312 million of the under recovered regulatory clause revenues as deferred charges and other assets in the Condensed Balance Sheets as of March 31, 2007 herein. Alabama Power increased its fuel billing factor in January 2006 in accordance with Rate ECR with the expectation of fully recovering the under recovered fuel cost balance by the end of 2007. It now appears that the timing of the full recovery will not occur as originally anticipated. Alabama Power, along with the Alabama PSC, will continue to monitor the under recovered fuel cost balance to determine whether an additional adjustment to billing rates is required. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Fuel Cost Recovery” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters – Fuel Cost Recovery” in Item 8 of the Form 10-K for additional information.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Matters
Alabama Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Alabama Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements such as opacity and other air quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such pending or potential litigation against Alabama Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Alabama Power in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Alabama Power’s financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Alabama Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Alabama Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Alabama Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Alabama Power in Item 7 of the Form 10-K for a complete discussion of Alabama Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.
New Accounting Standards
Income Taxes
On January 1, 2007, Alabama Power adopted FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement, and classification of income tax uncertainties, along with any related interest and penalties. The provisions of FIN 48 were applied to all tax positions beginning January 1, 2007. The adoption of FIN 48 did not have a material impact on Alabama Power’s financial statements.
Fair Value Measurement
The FASB issued FASB Statement No. 157 (SFAS No. 157), “Fair Value Measurements” in September 2006. This standard 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. Alabama Power plans to adopt SFAS No. 157 on January 1, 2008 and is currently assessing the impact of this standard.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fair Value Option
In February 2007, the FASB issued FASB Statement No. 159 (SFAS No. 159), “Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Alabama Power plans to adopt SFAS No. 159 on January 1, 2008 and is currently assessing its impact.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Alabama Power’s financial condition remained stable at March 31, 2007. Net cash provided from operating activities totaled $175.7 million for the first quarter of 2007, compared to $164.4 million for the first quarter of 2006. The $11.3 million increase in cash provided from operating activities in the first quarter of 2007 is primarily due to the increase in net income as previously discussed and a decrease in cash outflow for accounts payable, partially offset by an increase in under recovered fuel costs. Property additions to utility plant were $263.7 million in the first three months of 2007 and are included in Alabama Power’s Condensed Balance Sheets herein. These additions were primarily related to construction of transmission and distribution facilities, purchases of nuclear fuel, and installation of equipment to comply with environmental standards.
Capital Requirements and Contractual Obligations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Alabama Power in Item 7 of the Form 10-K for a description of Alabama Power’s capital requirements for its construction program, scheduled maturities of long-term debt, as well as the related interest, preferred and preference stock dividends, lease obligations, purchase commitments, and trust funding requirements. Approximately $669 million will be required through March 31, 2008 for maturities of long-term debt.
Sources of Capital
Alabama Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Recently, Alabama Power has primarily utilized funds from operating cash flows, short-term debt, external security offerings, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Alabama Power in Item 7 of the Form 10-K for additional information.
Alabama Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt as well as cash needs which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Alabama Power had at March 31, 2007 approximately $16 million of cash and cash equivalents, unused committed lines of credit of approximately $965 million (including $563 million of such lines which are dedicated to funding purchase obligations related to variable rate pollution control bonds), and an extendible commercial note program. Of the unused credit facilities, $365 million will expire at various times in 2007 (of which $198 million allow for one-year term loans). The remaining $600 million of credit facilities expire in 2011. Alabama Power expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Alabama Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. Alabama Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the benefit of Alabama Power and other Southern Company subsidiaries. Alabama Power has regulatory authority for up to $1.4 billion of short-term borrowings. At March 31, 2007, Alabama Power had $75 million of commercial paper outstanding. There were no extendible commercial notes outstanding. Management believes that the need for working capital can be adequately met by issuing commercial paper or utilizing lines of credit without maintaining large cash balances.
Credit Rating Risk
Alabama Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. However, Alabama Power, along with all members of the Power Pool, is party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for it and/or Georgia Power. These agreements are primarily for natural gas and power price risk management activities. At March 31, 2007, Alabama Power’s total exposure to these types of agreements was not material.
Market Price Risk
Alabama Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2006 reporting period. In addition, Alabama Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulations, Alabama Power has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Alabama Power enters into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Alabama Power has also implemented a retail fuel hedging program at the instruction of the Alabama PSC.
The fair value of derivative energy contracts at March 31, 2007 was as follows:
         
    First Quarter
    2007
    Changes
    Fair Value
    (in thousands)
Contracts beginning of period
  $ (32,628 )
Contracts realized or settled
    12,826  
New contracts at inception
     
Changes in valuation techniques
     
Current period changes (a)
    19,441  
   
Contracts at March 31, 2007
  $ (361 )
   
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
                         
    Source of March 31, 2007
    Valuation Prices
    Total   Maturity
    Fair Value   Year 1   1-3 Years
    (in thousands)
Actively quoted
  $ (281 )   $ (3,829 )   $ 3,548  
External sources
    (80 )     (80 )      
Models and other methods
                 
       
Contracts at March 31, 2007
  $ (361 )   $ (3,909 )   $ 3,548  
       

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to Alabama Power’s fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through Alabama Power’s fuel cost recovery clause. Certain other energy related derivatives, designated as hedges, are deferred in other comprehensive income. Gains and losses on derivative contracts that are not designated as hedges are recognized in the statements of income as incurred. At March 31, 2007, the fair value gain/(loss) of derivative energy contracts was reflected in the financial statements as follows:
         
    Amounts
    (in thousands)
Regulatory assets, net
  $ (307 )
Accumulated other comprehensive income
    (57 )
Net income
    3  
 
Total fair value
  $ (361 )
   
Unrealized pre-tax gains and losses on energy contracts recognized in income were not material for any period presented.
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY “Market Price Risk” of Alabama Power in Item 7 and Notes 1 and 6 to the financial statements of Alabama Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.
Financing Activities
In February 2007, Alabama Power issued $200 million of Series 2007A 5.55% Senior Notes due February 1, 2017. The proceeds were used to repay a portion of Alabama Power’s outstanding short-term indebtedness and for other general corporate purposes, including Alabama Power’s continuing construction activities.
In March 2007, Alabama Power issued 1,750,000 shares of common stock to Southern Company at $40.00 a share ($70 million aggregate purchase price). On May 1, 2007, Alabama Power issued an additional 1,750,000 shares of common stock to Southern Company at $40.00 a share ($70 million aggregate purchase price). The proceeds from both sales were used by Alabama Power for general corporate purposes.
Subsequent to March 31, 2007, Alabama Power issued $250 million of Series 2007B 5.875% Senior Notes due April 1, 2047. The proceeds were used to repay a portion of Alabama Power’s outstanding short-term indebtedness and for other general corporate purposes, including Alabama Power’s continuing construction activities. Also subsequent to March 31, 2007, $169 million in aggregate principal amount of Series W Floating Rate Extendible Senior Notes matured.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Alabama Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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GEORGIA POWER COMPANY

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GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Operating Revenues:
               
Retail revenues
  $ 1,412,329     $ 1,358,523  
Wholesale revenues —
               
Non-affiliates
    143,767       134,658  
Affiliates
    41,788       37,203  
Other revenues
    59,286       53,637  
 
           
Total operating revenues
    1,657,170       1,584,021  
 
           
Operating Expenses:
               
Fuel
    593,894       460,724  
Purchased power —
               
Non-affiliates
    46,093       58,798  
Affiliates
    184,542       217,876  
Other operations
    230,748       235,184  
Maintenance
    124,442       128,551  
Depreciation and amortization
    126,149       123,825  
Taxes other than income taxes
    72,341       71,257  
 
           
Total operating expenses
    1,378,209       1,296,215  
 
           
Operating Income
    278,961       287,806  
Other Income and (Expense):
               
Allowance for equity funds used during construction
    13,179       5,981  
Interest income
    475       325  
Interest expense, net of amounts capitalized
    (70,587 )     (64,377 )
Interest expense to affiliate trusts
    (14,878 )     (14,878 )
Other income (expense), net
    (4,216 )     (1,332 )
 
           
Total other income and (expense)
    (76,027 )     (74,281 )
 
           
Earnings Before Income Taxes
    202,934       213,525  
Income taxes
    70,980       79,900  
 
           
Net Income
    131,954       133,625  
Dividends on Preferred Stock
    689       1,685  
 
           
Net Income After Dividends on Preferred Stock
  $ 131,265     $ 131,940  
 
           
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Net Income After Dividends on Preferred Stock
  $ 131,265     $ 131,940  
Other comprehensive income (loss):
               
Change in fair value of marketable securities, net of tax of $42 and $(97), respectively
    65       (155 )
Changes in fair value of qualifying hedges, net of tax of $(1,082) and $5,596, respectively
    (1,714 )     8,866  
Reclassification adjustment for amounts included in net income, net of tax of $(29) and $113, respectively
    (46 )     179  
 
           
COMPREHENSIVE INCOME
  $ 129,570     $ 140,830  
 
           
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

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GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Operating Activities:
               
Net income
  $ 131,954     $ 133,625  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    149,339       145,167  
Deferred income taxes and investment tax credits
    12,709       1,924  
Deferred expenses — affiliates
    21,524       19,937  
Allowance for equity funds used during construction
    (13,179 )     (5,981 )
Pension, postretirement, and other employee benefits
    5,289       846  
Stock option expense
    3,911       3,997  
Tax benefit of stock options
    794       202  
Other, net
    (12,848 )     1,153  
Changes in certain current assets and liabilities —
               
Receivables
    81,442       125,870  
Fossil fuel stock
    (14,009 )     (50,694 )
Materials and supplies
    (2,412 )     (18,240 )
Prepaid income taxes
    19,084       61,863  
Other current assets
    (5,635 )     (20,602 )
Accounts payable
    (86,459 )     (229,697 )
Accrued taxes
    (124,431 )     (77,501 )
Accrued compensation
    (111,026 )     (111,434 )
Other current liabilities
    35,473       5,021  
 
           
Net cash provided from (used for) operating activities
    91,520       (14,544 )
 
           
Investing Activities:
               
Property additions
    (352,475 )     (215,969 )
Nuclear decommissioning trust fund purchases
    (94,131 )     (100,167 )
Nuclear decommissioning trust fund sales
    87,251       93,287  
Cost of removal, net of salvage
    (8,937 )     (6,034 )
Change in construction payables, net of joint owner portion
    379       (24,192 )
Other
    (11,714 )     444  
 
           
Net cash used for investing activities
    (379,627 )     (252,631 )
 
           
Financing Activities:
               
Increase (decrease) in notes payable, net
    (58,951 )     333,852  
Proceeds —
               
Senior notes
    250,000        
Capital contributions from parent company
    269,949       261,000  
Gross excess tax benefit of stock options
    2,208       465  
Redemptions —
               
Senior notes
          (150,000 )
Capital leases
    (1,841 )      
Preferred stock
          (14,569 )
Payment of preferred stock dividends
    (832 )     (1,362 )
Payment of common stock dividends
    (172,475 )     (157,500 )
Other
    (3,768 )     151  
 
           
Net cash provided from financing activities
    284,290       272,037  
 
           
Net Change in Cash and Cash Equivalents
    (3,817 )     4,862  
Cash and Cash Equivalents at Beginning of Period
    16,850       11,138  
 
           
Cash and Cash Equivalents at End of Period
  $ 13,033     $ 16,000  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $5,251 and $2,512 capitalized for 2007 and 2006, respectively)
  $ 64,595     $ 81,610  
Income taxes (net of refunds)
  $ 6,585     $ (25,786 )
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

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GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2007     2006  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 13,033     $ 16,850  
Receivables —
               
Customer accounts receivable
    438,277       474,046  
Unbilled revenues
    117,771       130,585  
Under recovered regulatory clause revenues
    391,923       353,976  
Other accounts and notes receivable
    89,285       93,656  
Affiliated companies
    15,677       21,941  
Accumulated provision for uncollectible accounts
    (8,929 )     (10,030 )
Fossil fuel stock, at average cost
    406,019       392,011  
Materials and supplies, at average cost
    306,101       304,514  
Vacation pay
    61,835       61,907  
Prepaid expenses
    65,514       74,788  
Other
    32,590       72,041  
 
           
Total current assets
    1,929,096       1,986,285  
 
           
Property, Plant, and Equipment:
               
In service
    21,375,467       21,279,792  
Less accumulated provision for depreciation
    8,431,908       8,343,309  
 
           
 
    12,943,559       12,936,483  
Nuclear fuel, at amortized cost
    184,526       180,129  
Construction work in progress
    1,141,872       923,948  
 
           
Total property, plant, and equipment
    14,269,957       14,040,560  
 
           
Other Property and Investments:
               
Equity investments in unconsolidated subsidiaries
    73,632       70,879  
Nuclear decommissioning trusts, at fair value
    561,132       544,013  
Other
    58,251       58,848  
 
           
Total other property and investments
    693,015       673,740  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    513,238       510,531  
Prepaid pension costs
    695,535       688,671  
Deferred under recovered regulatory clause revenues
    485,465       544,152  
Other regulatory assets
    630,741       629,003  
Other
    224,660       235,788  
 
           
Total deferred charges and other assets
    2,549,639       2,608,145  
 
           
Total Assets
  $ 19,441,707     $ 19,308,730  
 
           
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

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GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Liabilities and Stockholder’s Equity   2007     2006  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 756,605     $ 303,906  
Notes payable
    674,330       733,281  
Accounts payable —
               
Affiliated
    164,839       238,093  
Other
    394,121       402,222  
Customer deposits
    162,308       155,763  
Accrued taxes —
               
Income taxes
    174,402       217,603  
Other
    121,055       275,098  
Dividends payable to parent
    172,475        
Accrued interest
    87,768       74,643  
Accrued vacation pay
    49,485       49,704  
Accrued compensation
    31,997       141,356  
Other
    102,263       125,494  
 
           
Total current liabilities
    2,891,648       2,717,163  
 
           
Long-term Debt
    4,489,726       4,242,839  
 
           
Long-term Debt Payable to Affiliated Trusts
    515,465       969,073  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    2,842,780       2,815,724  
Deferred credits related to income taxes
    154,775       157,297  
Accumulated deferred investment tax credits
    278,833       282,070  
Employee benefit obligations
    708,154       698,274  
Asset retirement obligations
    635,857       626,681  
Other cost of removal obligations
    434,367       436,137  
Other regulatory liabilities
    281,244       281,391  
Other
    146,133       80,839  
 
           
Total deferred credits and other liabilities
    5,482,143       5,378,413  
 
           
Total Liabilities
    13,378,982       13,307,488  
 
           
Preferred Stock
    45,000       44,991  
 
           
Common Stockholder’s Equity:
               
Common stock, without par value—
               
Authorized - 20,000,000 shares
               
Outstanding - 9,261,500 shares
    398,473       398,473  
Paid-in capital
    3,316,707       3,039,845  
Retained earnings
    2,316,133       2,529,826  
Accumulated other comprehensive loss
    (13,588 )     (11,893 )
 
           
Total common stockholder’s equity
    6,017,725       5,956,251  
 
           
Total Liabilities and Stockholder’s Equity
  $ 19,441,707     $ 19,308,730  
 
           
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2007 vs. FIRST QUARTER 2006
OVERVIEW
Georgia Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the State of Georgia and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Georgia Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth, and to effectively manage and secure timely recovery of rising costs. These costs include those related to growing demand and increasingly stringent environmental standards. These issues are expected to be addressed in a general rate case required to be filed by July 1, 2007. The rate case will determine whether the existing rate plan (2004 Retail Rate Plan) should be continued, modified, or discontinued. In addition, fuel costs rose significantly during 2005 and 2006. Georgia Power received a Georgia PSC order to increase its fuel recovery rate effective March 1, 2007, and continues to work with the Georgia PSC to enable the timely recovery of these costs.
Effective July 1, 2006, Savannah Electric was merged into Georgia Power. Georgia Power has accounted for the merger in a manner similar to a pooling of interests. See MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Business Activities” of Georgia Power in Item 7 of the Form 10-K for additional information.
Georgia Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Georgia Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$(0.7)   (0.5)
   
Georgia Power’s net income after dividends on preferred stock for the first quarter 2007 was $131.3 million compared to $131.9 million for the corresponding period in 2006. The decrease was primarily attributed to lower base retail revenues and increased interest expense due to additional long-term debt and generally higher short-term interest rates. These factors were partially offset by higher wholesale non-fuel revenues, lower non-fuel operations and maintenance expenses, and a slightly lower effective income tax rate.
Retail Revenues
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$53.8   4.0
   
In the first quarter 2007, retail revenues were $1.41 billion compared to $1.36 billion in the corresponding period in the prior year.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of retail revenues are as follows:
                 
    First Quarter 2007
    (in millions)   % change
Retail – prior year
  $ 1,358.5          
Change in —
               
Rates and pricing
    (27.9 )     (2.1 )
Sales growth
    12.1       0.9  
Weather
    (0.3 )      
Fuel cost recovery
    69.9       5.2  
     
Retail – current year
  $ 1,412.3       4.0  
     
Revenues associated with changes in rates and pricing decreased in the first quarter 2007 when compared to the corresponding period in 2006 due to lower market-driven rates for sales to large commercial and industrial customers.
Revenues attributable to sales growth increased in the first quarter 2007 when compared to the corresponding period for 2006. This increase was primarily due to a 3.0% increase in total retail KWH energy sales. The KWH increase was due to a 5.5% increase in sales to residential customers resulting from a 3.6% increase in residential customer usage and a 1.8% increase in residential customers.
Revenues attributable to changes in weather decreased slightly in the first quarter 2007 when compared to the corresponding period for 2006.
Fuel cost recovery revenues increased by $69.9 million in the first quarter 2007 when compared to the corresponding period for 2006. Georgia Power electric rates 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 costs, and do not affect net income.
Wholesale Revenues– Non-Affiliates
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$9.1
  6.8
   
Wholesale energy sales to non-affiliates will vary depending on the market cost of available energy compared to the cost of Georgia Power and Southern Company system owned generation, demand for energy within the Southern Company service territory, and availability of Southern Company system generation. In the first quarter 2007, revenue from wholesale – non-affiliates was $143.8 million compared to $134.7 million in the corresponding period in 2006. This increase was a result of a 21.8% increase in KWH sales volume primarily due to a new long-term contract with an electrical membership corporation that went into effect in April 2006.
Wholesale Revenues– Affiliates
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$4.6   12.3
   

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale energy sales to affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. These sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost. In the first quarter 2007, revenues from wholesale – affiliates were $41.8 million compared to $37.2 million for the corresponding period in 2006. The increase was a result of a 25% increase in KWH for short-term affiliate sales through the Power Pool due to the comparatively lower incremental cost of Georgia Power-owned generation. Also contributing to the wholesale – affiliate revenue increase was higher wholesale fuel revenues due to the higher cost of fuel.
Other Revenues
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$5.7   10.5
   
In the first quarter 2007, other revenues were $59.3 million compared to $53.6 million for the corresponding period in 2006. This increase was primarily due to increased transmission and outdoor lighting revenues. Transmission revenues increased $4.3 million compared to the same period in the prior year primarily due to a $3.9 million increase in tariff related revenues for transmission service. Outdoor lighting revenues also increased by $1.5 million primarily due to a 6.0% increase in customers.
Fuel and Purchased Power Expenses
                 
First Quarter 2007 vs. First Quarter 2006
    (change in millions)   % change
Fuel
  $ 133.2       28.9  
Purchased power-non-affiliates
    (12.7 )     (21.6 )
Purchased power-affiliates
    (33.4 )     (15.3 )
           
Total fuel and purchased power expenses
  $ 87.1          
           
In the first quarter 2007, total fuel and purchase power expenses were $824.5 million compared to $737.4 million for the corresponding period in 2006. The increase in fuel and purchase power expenses was due to a $63.6 million increase in the average cost of fuel and purchased power as well as a $23.5 million increase due to the KWH volume generated or purchased.
Details of Georgia Power’s cost of generation and purchased power are as follows:
                         
    First Quarter   First Quarter    
Average Cost   2007   2006   % change
    (cents per net KWH)        
Fuel
    2.64       2.33       13.3  
Purchased Power
    5.95       5.95        
       
In the first quarter 2007, fuel expense was $593.9 million compared to $460.7 for the corresponding period in 2006. This increase was the result of a 13.3% increase in the average cost of fuel per net KWH generated primarily due to higher coal prices. These expenses do not have a significant impact on earnings since fuel expenses are generally offset by fuel revenues through Georgia Power’s fuel cost recovery clause. See FUTURE EARNINGS POTENTIAL – “FERC and Georgia PSC Matters – Retail Fuel Cost Recovery” herein for additional information.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the first quarter 2007, purchased power expense — non-affiliates was $46.1 million compared to $58.8 million for the corresponding period in 2006. This decrease was primarily due to a 21.2% decrease in KWH volume purchased compared to the same period in 2006 due to a 4.9% increase in Georgia Power’s self-owned generation. Also contributing to the decrease was a slight decrease of 0.4% in the average cost of purchased power per net KWH compared to the corresponding period in 2006.
In the first quarter 2007, purchased power from affiliates was $184.5 million compared with $217.9 million for the corresponding period in 2006. The decrease was primarily the result of a 1.4% decrease in the average cost of purchased power per net KWH. This was offset by a 6.3% increase in KWH volume purchased compared to the same period in 2006.
Energy purchases from affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. These purchases are made in accordance with the IIC, as approved by the FERC. These transactions did not have a significant impact on earnings since the energy purchases are generally offset by energy revenues through Georgia Power’s fuel cost recovery clause.
These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Georgia Power’s fuel cost recovery clause.
Other Operations Expense
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$(4.5)
  (1.9)
   
In the first quarter 2007, other operations expense was $230.7 million compared with $235.2 million for the corresponding period in 2006. The decrease was primarily related to a $3.6 million decrease in employee benefits and a $0.7 million decrease in uncollectible account expense.
Maintenance Expense
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$(4.2)   (3.2)
   
In the first quarter 2007, maintenance expense was $124.4 million compared with $128.6 million for the corresponding period in 2006. The timing of maintenance outages at Georgia Power’s larger steam units resulted in $3.5 million of the decrease and $0.9 million resulted from the timing of transmission maintenance activities. These decreases were partially offset by a $1.7 million increase in distribution expense related to overhead line maintenance.
Allowance for Equity Funds Used During Construction
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$7.2   120.3
   

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the first quarter 2007, the allowance for equity funds used during construction was $13.2 million compared with $6.0 million for the corresponding period in 2006. This increase was primarily related to increases in expenditures related to new and ongoing construction activities.
Interest Expense, Net of Amounts Capitalized
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$6.2   9.6
   
In the first quarter 2007, interest expense, net of amounts capitalized was $70.6 million compared with $64.4 million for the corresponding period in 2006. This increase was primarily the result of generally higher interest rates on variable rate debt and commercial paper and the issuance of additional long-term debt.
Income Taxes
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$(8.9)   (11.2)
   
In the first quarter 2007, income taxes were $71.0 million compared with $79.9 million for the corresponding period in 2006. This was primarily the result of lower pre-tax net income, as well as a $3.5 million increase in state income tax credits. See Note (H) to the Condensed Financial Statements herein for additional information related to the tax impact of state income tax credits on Georgia Power’s effective tax rate.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Georgia Power’s future earnings potential. The level of Georgia Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Georgia Power’s business of selling electricity. These factors include Georgia Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon growth in energy sales which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Georgia Power’s service area. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Georgia Power in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be fully recovered in rates on a timely basis. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fine Particulate Matter Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations — Air Quality” of Georgia Power in Item 7 of the Form 10-K for additional information regarding nonattainment designations for the fine particulate matter air quality standard. In March 2007, the EPA finalized its fine particulate matter implementation rule, requiring submittal of state plans for addressing the nonattainment designations by April 2008. The ultimate outcome of this matter cannot be determined at this time.
Plant Wansley Environmental Litigation
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Plant Wansley Environmental Litigation” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Environmental Matters – Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K for additional information on litigation involving alleged violations of the Clean Air Act at four of the units at Plant Wansley. On March 30, 2007, the parties filed a joint motion seeking entry of a proposed consent decree resolving all remaining issues in the case. If the consent decree is approved as proposed, the resolution of this case will not have a material impact on Georgia Power’s financial statements.
FERC and Georgia PSC Matters
Intercompany Interchange Contract
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Intercompany Interchange Contract” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for information regarding the proceeding initiated by the FERC in May 2005 to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the Power Pool 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.
On April 19, 2007, the FERC approved, with certain modifications, the compliance filing submitted by Southern Company on November 6, 2006. The compliance plan largely involves functional separation and information restrictions related to marketing activities conducted on behalf of Southern Power. The implementation of the plan is not expected to have a material impact on Georgia Power’s financial statements. However, the ultimate outcome of this matter cannot now be determined.
Retail Fuel Cost Recovery
As of March 31, 2007, Georgia Power had an under recovered fuel balance of approximately $877.4 million. On February 6, 2007, the Georgia PSC approved an increase in Georgia Power’s total annual billings of approximately $383 million related to fuel cost recovery effective March 1, 2007. The order also requires Georgia Power to file for a new fuel cost recovery rate no later than March 1, 2008. Fuel cost recovery revenues as recorded on the financial statements are adjusted for differences in actual recoverable costs and amounts billed in current regulated rates. Accordingly, any changes in the billing factor will have no significant effect on Georgia Power’s revenues or net income, but will affect cash flow. See MANAGEMENT’S DISCUSSION

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Retail Regulatory Matters – Fuel Cost Recovery” in Item 8 of the Form 10-K for additional information.
Retail General Rate Recovery
As of March 31, 2007, work is continuing on the preparation of a rate case to be filed on or before July 1, 2007. The rate case will determine whether the existing 2004 Retail Rate Plan should be continued, modified, or discontinued.
Other Matters
See Note 3 to the financial statements of Georgia Power under “Property Tax Dispute” in Item 8 of the Form 10-K for information on the property tax dispute with Monroe County, Georgia (Monroe County). The administrative appeals and notices of arbitration have been expanded to include tax year 2006. The appeals remain stayed pending the outcome of the related litigation. On March 30, 2007, the Georgia Court of Appeals reversed the trial court and ruled that the Monroe County Board of Tax Assessors (Monroe Board) had exceeded its legal authority and remanded the case for entry of an injunction prohibiting the Monroe Board from collecting taxes based on its independent valuation of Plant Scherer. On April 16, 2007, the Monroe Board filed an appeal to the Georgia Supreme Court. Georgia Power intends to oppose that action. The suit could impact all co-owners. If Georgia Power is successful, the litigation will be concluded. Otherwise, Georgia Power could be subject to total taxes through March 31, 2007 of up to $20 million, plus penalties and interest. The ultimate outcome of this matter cannot currently be determined.
Georgia Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Georgia Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements such as opacity and other air quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such pending or potential litigation against Georgia Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Georgia Power in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Georgia Power’s financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Georgia Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Georgia Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Georgia Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. Also see MANAGEMENT’S DISCUSSION AND ANALYSIS — ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Georgia Power in Item 7 of the Form 10-K for a

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
complete discussion of Georgia Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.
New Accounting Standards
Income Taxes
On January 1, 2007, Georgia Power adopted FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement, and classification of income tax uncertainties, along with any related interest and penalties. The provisions of FIN 48 were applied to all tax positions beginning January 1, 2007. The adoption of FIN 48 did not have a material impact on Georgia Power’s financial statements. See Note (I) to the Condensed Financial Statements herein for additional information.
Fair Value Measurement
The FASB issued FASB Statement No. 157 (SFAS No. 157), “Fair Value Measurements” in September 2006. This standard 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. Georgia Power plans to adopt SFAS No. 157 on January 1, 2008 and is currently assessing the impact of this standard.
Fair Value Option
In February 2007, the FASB issued FASB Statement No. 159 (SFAS No. 159), “Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Georgia Power plans to adopt SFAS No. 159 on January 1, 2008 and is currently assessing its impact.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Georgia Power’s financial condition remained stable at March 31, 2007. Net cash provided from operating activities increased $106.1 million for the first quarter of 2007 compared to the same period in 2006. The increase in 2007 is primarily the result of $53.8 million of higher retail revenues and $52.5 million less cash used for fuel and materials. In first quarter 2007, gross property additions were $372.3 million. These additions were primarily related to the construction of transmission and distribution facilities, purchases of nuclear fuel, and purchases of equipment to comply with environmental standards. The majority of funds for these additions and other capital requirements were derived primarily from operating activities and capital contributions from Southern Company. See Georgia Power’s Condensed Statements of Cash Flows herein for further details.
Capital Requirements and Contractual Obligations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY “Capital Requirements and Contractual Obligations” of Georgia Power in Item 7 of the Form 10-K for a description of Georgia Power’s capital requirements for its construction program, scheduled maturities of long-term debt, as well as related interest, preferred stock dividends, lease obligations, purchase commitments, and trust funding requirements. Since December 31, 2006, Georgia Power has entered into four additional PPAs totaling approximately 1,863 MW annually. These contracts begin in 2009 and 2010 and are expected to result

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
in additional obligations of $1.3 million in 2008-2009, $191.4 million in 2010-2011, and $1.08 billion thereafter. Of the total capacity, approximately 561 MW will expire in 2017, 1,274 MW in 2025, and 28 MW in 2029. These contracts are subject to certification by the Georgia PSC. Two of the contracts are with Southern Power and are also subject to FERC approval. Approximately $756.6 million will be required through March 31, 2008 for redemptions and maturities of long-term debt.
Sources of Capital
Georgia Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Recently, Georgia Power has primarily utilized funds from operating cash flows, short-term debt, external security offerings, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Georgia Power in Item 7 of the Form 10-K for additional information.
Georgia Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt as well as cash needs which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Georgia Power had at March 31, 2007 approximately $13.0 million of cash and cash equivalents and $902 million of unused credit arrangements with banks. Of the unused credit arrangements, $40 million expire in 2007 and $862 million expire in 2011.
Of the facilities that expire in 2007, all contain provisions allowing two-year term loans executable at expiration. Georgia Power expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Georgia Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. These unused credit arrangements provide liquidity support to Georgia Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Georgia Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Georgia Power and other Southern Company subsidiaries. At March 31, 2007, Georgia Power had approximately $499 million of commercial paper, $25 million of extendible commercial notes, and $150 million of bank loans outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.
Credit Rating Risk
Georgia Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- or Baa3 or below. These contracts are primarily for physical electricity purchases and sales. At March 31, 2007, the maximum potential collateral requirements at a BBB- or Baa3 rating were approximately $8 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $251 million. Subsequent to March 31, 2007, Georgia Power entered into certain contracts for the purchase of electric capacity and energy. These contracts also contain provisions that could require collateral, but not accelerated payment, in the event of a change in credit rating. Under these contracts, the maximum potential collateral requirement at a rating of BBB- was not material. The maximum potential collateral requirement at rating below BBB- was $137 million. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit, or cash. Georgia Power, along with all members of the Power Pool, is also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for it and/or

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Alabama Power. These agreements are primarily for natural gas and power price risk management activities. At March 31, 2007, Georgia Power’s total exposure to these types of agreements was not material.
Market Price Risk
Georgia Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2006 reporting period. In addition, Georgia Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulations, Georgia Power has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Georgia Power enters into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Georgia Power continues to manage a fuel hedging program at the instruction of the Georgia PSC.
The fair value of derivative energy contracts at March 31, 2007 was as follows:
         
    First Quarter 2007
    Changes
    Fair Value
    (in thousands)
Contracts beginning of period
  $ (38,003 )
Contracts realized or settled
    12,498  
New contracts at inception
     
Changes in valuation techniques
     
Current period changes (a)
    29,276  
   
Contracts at March 31, 2007
  $ 3,771  
   
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
                         
    Source of March 31, 2007
    Valuation Prices
    Total   Maturity
    Fair Value   Year 1   1-3 Years
    (in thousands)
Actively quoted
  $ 3,876     $ (1,332 )   $ 5,208  
External sources
    (105 )     (105 )      
Models and other methods
                 
       
Contracts at March 31, 2007
  $ 3,771     $ (1,437 )   $ 5,208  
       
Unrealized gains and losses from mark to market adjustments on derivative contracts related to Georgia Power’s fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through Georgia Power’s fuel cost recovery mechanism. Gains and losses on derivative contracts that are not designated as hedges are recognized in the statements of income as incurred. At March 31, 2007, the fair value gain/(loss) of all derivative energy contracts was reflected in the financial statements as follows:
         
    Amounts
    (in thousands)
Regulatory liabilities, net
  $ 3,767  
Accumulated other comprehensive income
     
Net income
    4  
 
Total fair value
  $ 3,771  
   

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unrealized pre-tax gains and losses on energy contracts recognized in income were not material for any period presented.
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Georgia Power in Item 7 and Notes 1 and 6 to the financial statements of Georgia Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.
Financing Activities
In the first quarter of 2007, Georgia Power issued $250 million of Series 2007A 5.65% Senior Notes due March 1, 2037. The proceeds were used to repay a portion of Georgia Power’s outstanding short-term indebtedness and for other general corporate purposes, including Georgia Power’s continuing construction activities. At the same time, Georgia Power terminated derivative transactions related to the note issuance at a cost of $3.9 million. The loss will be amortized over a 10-year period. Also, in the first three months of 2007, Georgia Power entered into derivative transactions designed to mitigate interest rate risk related to planned future debt issuances. The total notional amount of these derivatives was $575 million. See Note (F) to the Condensed Financial Statements for further details. Subsequent to March 31, 2007, Georgia Power announced the planned redemption on June 21, 2007 of all $454 million of notes payable related to Georgia Power Capital Trust V 7-1/8% Trust Preferred Securities. Also, subsequent to March 31, 2007, Georgia Power entered into further derivative transactions designed to mitigate interest rate risk related to planned future debt issuances. The total notional amount of these derivatives was $300 million.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Georgia Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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GULF POWER COMPANY

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GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Operating Revenues:
               
Retail revenues
  $ 219,584     $ 179,317  
Wholesale revenues —
               
Non-affiliates
    23,400       20,838  
Affiliates
    40,080       52,608  
Other revenues
    13,169       10,279  
 
           
Total operating revenues
    296,233       263,042  
 
           
Operating Expenses:
               
Fuel
    146,474       121,241  
Purchased power —
               
Non-affiliates
    1,388       4,796  
Affiliates
    7,041       6,990  
Other operations
    46,050       43,490  
Maintenance
    13,202       14,572  
Depreciation and amortization
    21,097       21,985  
Taxes other than income taxes
    20,206       18,889  
 
           
Total operating expenses
    255,458       231,963  
 
           
Operating Income
    40,775       31,079  
Other Income and (Expense):
               
Interest income
    1,608       781  
Interest expense, net of amounts capitalized
    (10,576 )     (9,272 )
Interest expense to affiliate trusts
    (577 )     (1,148 )
Other income (expense), net
    (171 )     (550 )
 
           
Total other income and (expense)
    (9,716 )     (10,189 )
 
           
Earnings Before Income Taxes
    31,059       20,890  
Income taxes
    11,371       7,663  
 
           
Net Income
    19,688       13,227  
Dividends on Preference Stock
    825       825  
 
           
Net Income After Dividends on Preference Stock
  $ 18,863     $ 12,402  
 
           
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Net Income After Dividends on Preference Stock
  $ 18,863     $ 12,402  
Other comprehensive income (loss):
               
Changes in fair value of qualifying hedges, net of tax of $559 and $-, respectively
    890        
Reclassification adjustment for amounts included in net income, net of tax of $84 and $31, respectively
    133       50  
 
           
COMPREHENSIVE INCOME
  $ 19,886     $ 12,452  
 
           
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

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GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Operating Activities:
               
Net income
  $ 19,688     $ 13,227  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    22,384       23,488  
Deferred income taxes
    (3,997 )     (6,462 )
Pension, postretirement, and other employee benefits
    388       1,358  
Stock option expense
    721       599  
Tax benefit of stock options
    105       48  
Other, net
    (1,159 )     3,222  
Changes in certain current assets and liabilities —
               
Receivables
    1,208       26,332  
Fossil fuel stock
    (17,154 )     (7,852 )
Materials and supplies
    (105 )     (153 )
Prepaid income taxes
    7,306       295  
Property damage cost recovery
    5,325       5,116  
Other current assets
    945       556  
Accounts payable
    2,078       (3,142 )
Accrued taxes
    6,885       10,280  
Accrued compensation
    (12,345 )     (15,594 )
Other current liabilities
    1,089       5,889  
 
           
Net cash provided from operating activities
    33,362       57,207  
 
           
Investing Activities:
               
Property additions
    (43,526 )     (38,277 )
Cost of removal, net of salvage
    (2,755 )     (945 )
Construction payables
    (7,287 )     (3,747 )
Other
    (80 )     (19 )
 
           
Net cash used for investing activities
    (53,648 )     (42,988 )
 
           
Financing Activities:
               
Decrease in notes payable, net
    (42,232 )     (8,184 )
Proceeds —
               
Common stock issued to parent
    80,000        
Capital contributions from parent company
          21,000  
Gross excess tax benefit of stock options
    218       125  
Payment of preference stock dividends
    (825 )     (825 )
Payment of common stock dividends
    (18,525 )     (17,575 )
Other
    (122 )     (602 )
 
           
Net cash provided from (used for) financing activities
    18,514       (6,061 )
 
           
Net Change in Cash and Cash Equivalents
    (1,772 )     8,158  
Cash and Cash Equivalents at Beginning of Period
    7,526       3,847  
 
           
Cash and Cash Equivalents at End of Period
  $ 5,754     $ 12,005  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $167 and $7 capitalized for 2007 and 2006, respectively)
  $ 8,826     $ 9,261  
Income taxes (net of refunds)
  $ 264     $ 2,935  
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

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GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2007     2006  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 5,754     $ 7,526  
Receivables —
               
Customer accounts receivable
    57,995       56,489  
Unbilled revenues
    35,479       38,287  
Under recovered regulatory clause revenues
    77,217       79,235  
Other accounts and notes receivable
    8,998       9,015  
Affiliated companies
    17,264       15,302  
Accumulated provision for uncollectible accounts
    (973 )     (1,279 )
Fossil fuel stock, at average cost
    93,190       76,036  
Materials and supplies, at average cost
    35,411       35,306  
Property damage cost recovery
    29,048       28,771  
Other regulatory assets
    10,778       15,977  
Other
    8,388       14,259  
 
           
Total current assets
    378,549       374,924  
 
           
Property, Plant, and Equipment:
               
In service
    2,581,545       2,574,517  
Less accumulated provision for depreciation
    913,540       901,564  
 
           
 
    1,668,005       1,672,953  
Construction work in progress
    91,406       62,815  
 
           
Total property, plant, and equipment
    1,759,411       1,735,768  
 
           
Other Property and Investments
    16,558       14,846  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    17,169       17,148  
Prepaid pension costs
    70,278       69,895  
Other regulatory assets
    102,197       110,077  
Other
    21,033       17,831  
 
           
Total deferred charges and other assets
    210,677       214,951  
 
           
Total Assets
  $ 2,365,195     $ 2,340,489  
 
           
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

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GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Liabilities and Stockholder’s Equity   2007     2006  
    (in thousands)  
Current Liabilities:
               
Notes payable
  $ 78,214     $ 120,446  
Accounts payable —
               
Affiliated
    50,813       44,375  
Other
    36,971       49,979  
Customer deposits
    23,640       21,363  
Accrued taxes —
               
Income taxes
    35,602       29,771  
Other
    14,362       15,033  
Accrued interest
    8,946       7,645  
Accrued compensation
    4,587       16,932  
Other regulatory liabilities
    12,235       9,029  
Other
    21,716       30,975  
 
           
Total current liabilities
    287,086       345,548  
 
           
Long-term Debt
    654,956       654,860  
 
           
Long-term Debt Payable to Affiliated Trusts
    41,238       41,238  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    236,677       237,862  
Accumulated deferred investment tax credits
    14,259       14,721  
Employee benefit obligations
    74,518       73,922  
Other cost of removal obligations
    167,077       165,410  
Other regulatory liabilities
    48,443       46,485  
Other
    70,647       72,533  
 
           
Total deferred credits and other liabilities
    611,621       610,933  
 
           
Total Liabilities
    1,594,901       1,652,579  
 
           
Preference Stock
    53,887       53,887  
 
           
Common Stockholder’s Equity:
               
Common stock, without par value—
               
Authorized — 20,000,000 shares
               
Outstanding — March 31, 2007: 1,792,717 shares
               
— December 31, 2006: 992,717 shares
    118,060       38,060  
Paid-in capital
    429,615       428,592  
Retained earnings
    172,306       171,968  
Accumulated other comprehensive loss
    (3,574 )     (4,597 )
 
           
Total common stockholder’s equity
    716,407       634,023  
 
           
Total Liabilities and Stockholder’s Equity
  $ 2,365,195     $ 2,340,489  
 
           
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2007 vs. FIRST QUARTER 2006
OVERVIEW
Gulf Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located in northwest Florida and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Gulf Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth, 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 costs. Appropriately balancing environmental expenditures with customer prices will continue to challenge Gulf Power for the foreseeable future.
Gulf Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Gulf Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$6.5   52.1
 
Gulf Power’s net income after dividends on preference stock for the first quarter 2007 was $18.9 million compared to $12.4 million for the corresponding period in 2006. The increase in the first quarter 2007 over the corresponding period in 2006 was primarily due to more favorable weather and increased customer growth.
Retail Revenues
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$40.3   22.5
 
In the first quarter 2007, retail revenues were $219.6 million compared to $179.3 million in the corresponding period in 2006. Details of retail revenues are as follows:
                 
    First Quarter
    2007
    (in millions)   % change
Retail – prior year
  $ 179.3          
Change in —
               
Rates and pricing
    2.7       1.5  
Sales growth
    4.3       2.4  
Weather
    3.2       1.8  
Fuel cost recovery
    30.1       16.8  
 
Retail – current year
  $ 219.6       22.5  
 

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues associated with changes in rates and pricing increased in the first quarter 2007 when compared to the same period of 2006 primarily due to cost recovery provisions. These cost recovery provisions include energy conservation costs, purchased power capacity costs, and environmental compliance costs. Annually, Gulf Power petitions for recovery of projected costs including any true-up amount from prior periods, and approved rates are implemented each January. Cost recovery provisions also include revenues related to the recovery of storm damage restoration costs. The recovery provisions generally equal the related expenses and have no material effect on net income. See Note 1 to the financial statements of Gulf Power under “Revenues,” “Property Damage Reserve,” and “Environmental Remediation Cost Recovery” and Note 3 to the financial statements under “Retail Regulatory Matters – Environmental Cost Recovery” and “Storm Damage Cost Recovery” in Item 8 of the Form 10-K for additional information.
Revenues attributable to changes in sales growth increased in the first quarter 2007 when compared to the same period in 2006 due to a 10.2% increase, 7.4% increase, and 4.7% decrease in retail energy sales to residential, commercial, and industrial customers, respectively. Increased energy sales to residential and commercial customers were primarily due to increases in usage and customer additions. Decreased energy sales to industrial customers were primarily due to increased customer cogeneration due to lower cost of natural gas.
Revenues resulting from changes in weather improved because of cooler temperatures in the first quarter of 2007 compared to mild weather in the first quarter of 2006.
The increase in fuel cost recovery is primarily due to recovery provisions for fuel expenses and the energy component of purchased power costs. Annually, Gulf Power petitions for recovery of projected costs including any true-up amount from prior periods, and approved rates are implemented each January. The recovery provisions generally equal the related expenses and have no material effect on net income. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC and Florida PSC Matters – Retail Fuel Cost Recovery” herein and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Gulf Power in Item 7 and Note 1 to the financial statements of Gulf Power under “Revenues” in Item 8 of the Form 10-K for additional information.
Wholesale Revenues – Affiliates
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
($12.5)
  (23.8)
 
Wholesale revenues from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost.
In the first quarter 2007, wholesale revenues from affiliates were $40.1 million compared to $52.6 million in the corresponding period in 2006. The decrease was primarily a result of increased availability of lower cost affiliate generating units.

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Other Revenues
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$2.9   28.1
 
In the first quarter 2007, other revenues were $13.2 million compared to $10.3 million in the same period in 2006. The increase was primarily a result of other energy services and higher franchise fees, which have no impact on earnings. Franchise fees are generally proportional to sales revenue and are offset by franchise and gross receipt taxes. The increased revenues from other energy services did not have a material impact on earnings since they were offset by associated expenses.
Fuel and Purchased Power Expenses
                 
First Quarter 2007 vs. First Quarter 2006  
    (change in millions)     % change  
Fuel
  $ 25.2       20.8  
Purchased power-non-affiliates
    (3.4 )     (71.1 )
Purchased power-affiliates
    0.1       0.7  
         
Total fuel and purchased power expenses
  $ 21.9          
         
In the first quarter 2007, fuel expense was $146.4 million compared to $121.2 million in the same period in 2006. This increase was due to a $20.6 million increase in the average cost of fuel as well as a $4.6 million increase due to the KWH volume generated. See FUTURE EARNINGS POTENTIAL – “FERC and Florida PSC Matters – Retail Fuel Cost Recovery” herein for additional information. In the first quarter 2007, purchased power from non-affiliates was $1.4 million compared to $4.8 million in the same period in 2006. The decrease was due to a $0.1 million decrease in KWH purchases and a $3.3 million decrease resulting from lower average cost per net KWH. The quarterly change in purchased power affiliates is not material.
                         
    First Quarter   First Quarter    
Average Cost   2007   2006   % change
    (cents per net KWH)        
 
Fuel
    3.48       2.99       16.4  
Purchased power
    4.41       6.75       (34.7 )
 
Since energy expenses are generally offset by revenues through Gulf Power’s fuel cost recovery mechanism, these expenses do not have a significant impact on net income.
Other Operations Expense
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$2.6
  5.9
 
In the first quarter 2007, other operations expense was $46.1 million compared to $43.5 million in the same period in 2006. The increase was primarily due to other energy services and increased environmental compliance costs. The increased expenses from other energy services did not have a material impact on earnings since they were offset by associated revenues. These environmental costs are generally recovered as expended, so there is no significant impact on net income. See Note 3 to the financial statements of Gulf Power

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under “Retail Regulatory Matters – Environmental Cost Recovery” in Item 8 of the Form 10-K and FUTURE EARNINGS POTENTIAL – “Environmental Matters” herein for additional information.
Maintenance Expense
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
($1.4)   (9.4)
 
For the first quarter 2007, maintenance expense was $13.2 million compared to $14.6 million in the same period in 2006. This decrease was primarily due to a delay in scheduled maintenance.
Income Taxes
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$3.7   48.4
 
In the first quarter 2007, income tax expense was $11.4 million compared to $7.7 million when compared to the same period in 2006. This increase was primarily as a result of higher earnings before income taxes.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Gulf Power’s future earnings potential. The level of Gulf Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Gulf Power’s business of selling electricity. These factors include Gulf Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing environmental and fuel costs. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Gulf Power’s service area. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Gulf Power in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be fully recovered in rates on a timely basis. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.
Fine Particulate Matter Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Gulf Power in Item 7 of the Form 10-K for additional information regarding nonattainment designations for the fine particulate matter air quality standard. In March 2007, the EPA finalized its fine particulate matter implementation rule, requiring

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
submittal of state plans for addressing the nonattainment designations by April 2008. The ultimate outcome of this matter cannot be determined at this time.
FERC and Florida PSC Matters
Intercompany Interchange Contract
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Intercompany Interchange Contract” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for information regarding the proceeding initiated by the FERC in May 2005 to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the Power Pool 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.
On April 19, 2007, the FERC approved, with certain modifications, the compliance filing submitted by Southern Company on November 6, 2006. The compliance plan largely involves functional separation and information restrictions related to marketing activities conducted on behalf of Southern Power. The implementation of the plan is not expected to have a material impact on Gulf Power’s financial statements. However, the ultimate outcome of this matter cannot now be determined.
Retail Fuel Cost Recovery
Gulf Power has established fuel cost recovery rates approved by the Florida PSC. In recent years, Gulf Power has experienced higher than expected fuel costs for coal and natural gas. If the projected fuel revenue over or under recovery exceeds 10% of the projected fuel costs for the period, Gulf Power is required to notify the Florida PSC and to indicate if an adjustment to the fuel cost recovery factor is being requested. Under recovered fuel costs at March 31, 2007 totaled $75.6 million, and are included in under recovered regulatory clause revenues on Gulf Power’s Condensed Balance Sheets herein. Fuel cost recovery revenues, as recorded on the financial statements, are adjusted for differences in actual recoverable costs and amounts billed in current regulated rates. Accordingly, any change in the billing factor would have no significant effect on Gulf Power’s revenues or net income, but would affect cash flow. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Gulf Power in Item 7 and Note 1 to the financial statements of Gulf Power under “Revenues” in Item 8 of the Form 10-K for additional information.
Other Matters
See Note 3 to the financial statements of Gulf Power under “Property Tax Dispute” in Item 8 of the Form 10-K for information on the property tax dispute with Monroe County, Georgia (Monroe County). The administrative appeals and notices of arbitration have been expanded to include tax year 2006. The appeals remain stayed pending the outcome of the related litigation. On March 30, 2007, the Georgia Court of Appeals reversed the trial court and ruled that the Monroe County Board of Tax Assessors (Monroe Board) had exceeded its legal authority and remanded the case for entry of an injunction prohibiting the Monroe Board from collecting taxes based on its independent valuation of Plant Scherer. On April 16, 2007, the Monroe Board filed an appeal to the Georgia Supreme Court. Gulf Power and Georgia Power intend to oppose that action. The suit could impact all

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
co-owners. If Gulf Power and Georgia Power are successful, the litigation will be concluded. Otherwise, Gulf Power could be subject to total taxes through March 31, 2007 of up to $4.4 million, plus penalties and interest. In accordance with Gulf Power’s unit power sales contract for Plant Scherer, such property taxes would be recoverable from the customer. The ultimate outcome of this matter cannot currently be determined.
Gulf Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Gulf Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements such as opacity and other air quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such pending or potential litigation against Gulf Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Gulf Power in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Gulf Power’s financial statements.
See Note (B) to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Gulf Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Gulf Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Gulf Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Gulf Power in Item 7 of the Form 10-K for a complete discussion of Gulf Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.
New Accounting Standards
Income Taxes
On January 1, 2007, Gulf Power adopted FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement, and classification of income tax uncertainties, along with any related interest and penalties. The provisions of FIN 48 were applied to all tax positions beginning January 1, 2007. The adoption of FIN 48 did not have a material impact on Gulf Power’s financial statements.
Fair Value Measurement
The FASB issued FASB Statement No. 157 (SFAS No. 157), “Fair Value Measurements” in September 2006. This standard 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. Gulf Power plans to adopt SFAS No. 157 on January 1, 2008 and is currently assessing the impact of this standard.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fair Value Option
In February 2007, the FASB issued FASB Statement No. 159 (SFAS No. 159), “Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Gulf Power plans to adopt SFAS No. 159 on January 1, 2008 and is currently assessing its impact.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Gulf Power’s financial condition remained stable at March 31, 2007. Net cash provided from operating activities totaled $33.4 million for the first three months of 2007, compared to $57.2 million for the corresponding period in 2006. The $23.8 million decrease in 2007 resulted primarily from a decrease in cash flows from affiliated company and customer account receivables. Gross property additions to utility plant were $41.9 million in the first three months of 2007. Funds for Gulf Power’s property additions were provided by operating activities and other financing activities. See Gulf Power’s Condensed Statements of Cash Flows herein for further details.
Capital Requirements and Contractual Obligations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY “Capital Requirements and Contractual Obligations” of Gulf Power in Item 7 of the Form 10-K for a description of Gulf Power’s capital requirements for its construction program, lease obligations, preference stock dividends, purchase commitments, and trust funding requirements. Gulf Power has no maturities or redemptions of long-term debt required by March 31, 2008.
Sources of Capital
Gulf Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Recently, Gulf Power has primarily utilized funds from operating cash flows, short-term debt, external security offerings, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Gulf Power in Item 7 of the Form 10-K for additional information.
Gulf Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt as well as cash needs which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Gulf Power had at March 31, 2007 approximately $5.8 million of cash and cash equivalents and $120 million of unused committed lines of credit with banks. All credit agreements expire in 2007 and $100 million contain provisions allowing one-year term loans executable at expiration. Gulf Power expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Gulf Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. These credit arrangements provide liquidity support to Gulf Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Gulf Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Gulf Power and other Southern Company subsidiaries. At March 31, 2007, Gulf Power had outstanding

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$78.2 million in commercial paper. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.
Credit Rating Risk
Gulf Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- or Baa3, or below. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit, or cash. These contracts are primarily for physical electricity purchases and sales. At March 31, 2007, the maximum potential collateral requirements at a BBB- or Baa3 rating were approximately $23 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $46 million. Gulf Power, along with all members of the Power Pool, is also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas and power price risk management activities. At March 31, 2007, Gulf Power’s total exposure to these types of agreements was not material.
Market Price Risk
Gulf Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2006 reporting period. In addition, Gulf Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulation, Gulf Power has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Gulf Power enters into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Gulf Power has also implemented a fuel-hedging program with the approval of the Florida PSC.
The fair value of derivative energy contracts at March 31, 2007 was as follows:
         
    First Quarter
    2007
    Changes
    Fair Value
    (in thousands)
Contracts beginning of period
  $ (7,186 )
Contracts realized or settled
    3,089  
New contracts at inception
     
Changes in valuation techniques
     
Current period changes (a)
    4,998  
 
Contracts at March 31, 2007
  $ 901  
 
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                         
    Source of March 31, 2007
    Valuation Prices
    Total   Maturity
    Fair Value   Year 1   1-3 Years
            (in thousands)        
 
Actively quoted
  $ 917     $ (56 )   $ 973  
External sources
    (16 )     (16 )      
Models and other methods
                 
 
Contracts at March 31, 2007
  $ 901     $ (72 )   $ 973  
 
Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to Gulf Power’s fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through Gulf Power’s fuel cost recovery clause. Gains and losses on derivative energy contracts that are not designated as hedges are recognized in the statements of income as incurred. At March 31, 2007, the fair value gain/(loss) of derivative energy contracts was reflected in the financial statements as follows:
         
    Amounts
    (in thousands)
Regulatory liabilities, net
  $ 900  
Accumulated other comprehensive income
     
Net income
    1  
 
Total fair value
  $ 901  
 
Unrealized pre-tax gains and losses recognized in income were not material for any period presented.
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Gulf Power in Item 7 and Notes 1 and 6 to the financial statements of Gulf Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.
Financing Activities
Gulf Power did not issue or redeem any long-term debt securities in the first three months of 2007. In January 2007, Gulf Power issued 800,000 shares of common stock to Southern Company at $100 stated value per share ($80 million aggregate purchase price). The proceeds were used to repay a portion of Gulf Power’s short-term indebtedness and for other general corporate purposes. In the first three months of 2007, Gulf Power entered into derivative transactions designed to mitigate interest rate risk related to future planned debt issuances. The total notional amount of these derivatives was $165 million. See Note (F) to the Condensed Financial Statements for further details.
In addition to any financings that may be necessary to meet capital requirements, contractual obligations, and storm-recovery, Gulf Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Operating Revenues:
               
Retail revenues
  $ 156,124     $ 131,364  
Wholesale revenues —
               
Non-affiliates
    77,294       61,322  
Affiliates
    18,915       11,772  
Other revenues
    4,493       4,483  
 
           
Total operating revenues
    256,826       208,941  
 
           
Operating Expenses:
               
Fuel
    121,759       78,263  
Purchased power —
               
Non-affiliates
    954       4,702  
Affiliates
    12,424       19,036  
Other operations
    43,847       37,277  
Maintenance
    13,947       14,415  
Depreciation and amortization
    14,228       12,320  
Taxes other than income taxes
    12,843       14,200  
 
           
Total operating expenses
    220,002       180,213  
 
           
Operating Income
    36,824       28,728  
Other Income and (Expense):
               
Interest income
    575       49  
Interest expense
    (4,423 )     (4,291 )
Interest expense to affiliate trusts
    (649 )     (649 )
Other income (expense), net
    (128 )     943  
 
           
Total other income and (expense)
    (4,625 )     (3,948 )
 
           
Earnings Before Income Taxes
    32,199       24,780  
Income taxes
    12,130       9,065  
 
           
Net Income
    20,069       15,715  
Dividends on Preferred Stock
    433       433  
 
           
Net Income After Dividends on Preferred Stock
  $ 19,636     $ 15,282  
 
           
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Net Income After Dividends on Preferred Stock
  $ 19,636     $ 15,282  
Other comprehensive income (loss):
               
Changes in fair value of qualifying hedges, net of tax of $(362) and $140, respectively
    (584 )     225  
 
           
COMPREHENSIVE INCOME
  $ 19,052     $ 15,507  
 
           
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

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CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Operating Activities:
               
Net income
  $ 20,069     $ 15,715  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    16,949       16,680  
Deferred income taxes and investment tax credits, net
    9,224       10,943  
Plant Daniel capacity
    (1,415 )     (3,252 )
Pension, postretirement, and other employee benefits
    2,680       1,506  
Stock option expense
    711       743  
Tax benefit of stock options
    71       25  
Other, net
    (4,151 )     (8,790 )
Changes in certain current assets and liabilities —
               
Receivables
    11,469       54,402  
Fossil fuel stock
    (10,693 )     12,561  
Materials and supplies
    (532 )     460  
Prepaid income taxes
    18,301       (7,904 )
Other current assets
    803       4,140  
Hurricane Katrina accounts payable
    (1,588 )     (36,088 )
Other accounts payable
    (9,578 )     (51,267 )
Accrued taxes
    (28,308 )     (31,003 )
Accrued compensation
    (17,828 )     (18,661 )
Over recovered regulatory clause revenues
          (10,797 )
Other current liabilities
    459       (6,681 )
 
           
Net cash provided from (used for) operating activities
    6,643       (57,268 )
 
           
Investing Activities:
               
Property additions
    (23,545 )     (52,798 )
Cost of removal, net of salvage
    (420 )     (12,229 )
Construction payables
    (2,926 )     (10,112 )
Other
    (50 )     (37 )
 
           
Net cash used for investing activities
    (26,941 )     (75,176 )
 
           
Financing Activities:
               
Increase in notes payable, net
    35,354       140,974  
Proceeds —
               
Gross excess tax benefit of stock options
    178       9  
Capital contributions from parent company
    (3 )      
Payment of preferred stock dividends
    (433 )     (433 )
Payment of common stock dividends
    (16,825 )     (16,300 )
 
           
Net cash provided from financing activities
    18,271       124,250  
 
           
Net Change in Cash and Cash Equivalents
    (2,027 )     (8,194 )
Cash and Cash Equivalents at Beginning of Period
    4,214       14,301  
 
           
Cash and Cash Equivalents at End of Period
  $ 2,187     $ 6,107  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest
  $ 5,183     $ 7,073  
Income taxes (net of refunds)
  $ (21,559 )   $ 5,824  
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

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CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2007     2006  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 2,187     $ 4,214  
Receivables —
               
Customer accounts receivable
    36,215       42,099  
Unbilled revenues
    22,243       23,807  
Under recovered regulatory clause revenues
    40,483       50,778  
Other accounts and notes receivable
    4,381       5,870  
Insurance receivable
    20,975       20,551  
Affiliated companies
    31,394       23,696  
Accumulated provision for uncollectible accounts
    (621 )     (855 )
Fossil fuel stock, at average cost
    53,372       42,679  
Materials and supplies, at average cost
    28,459       27,927  
Prepaid income taxes
    3,730       22,031  
Other regulatory assets
    39,980       42,391  
Other
    11,765       15,091  
 
           
Total current assets
    294,563       320,279  
 
           
Property, Plant, and Equipment:
               
In service
    2,074,011       2,054,151  
Less accumulated provision for depreciation
    848,063       836,922  
 
           
 
    1,225,948       1,217,229  
Construction work in progress
    45,678       40,608  
 
           
Total property, plant, and equipment
    1,271,626       1,257,837  
 
           
Other Property and Investments
    4,685       4,636  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    9,161       9,280  
Prepaid pension costs
    36,144       36,424  
Other regulatory assets
    58,593       61,086  
Other
    22,240       18,834  
 
           
Total deferred charges and other assets
    126,138       125,624  
 
           
Total Assets
  $ 1,697,012     $ 1,708,376  
 
           
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

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MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Liabilities and Stockholder’s Equity   2007     2006  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 36,082     $  
Notes payable
    86,731       51,377  
Accounts payable —
               
Affiliated
    26,915       24,615  
Other
    57,454       73,236  
Customer deposits
    8,927       8,676  
Accrued taxes —
               
Income taxes
    5,911       4,171  
Other
    16,201       50,346  
Accrued interest
    1,964       2,332  
Accrued compensation
    6,130       23,958  
Plant Daniel capacity
    4,244       5,659  
Other regulatory liabilities
    14,619       11,386  
Other
    27,193       28,880  
 
           
Total current liabilities
    292,371       284,636  
 
           
Long-term Debt
    242,553       242,553  
 
           
Long-term Debt Payable to Affiliated Trusts
          36,082  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    248,878       236,202  
Deferred credits related to income taxes
    15,912       16,218  
Accumulated deferred investment tax credits
    16,136       16,402  
Employee benefit obligations
    93,854       92,403  
Other cost of removal obligations
    84,807       82,397  
Other regulatory liabilities
    24,421       22,559  
Other
    52,296       56,324  
 
           
Total deferred credits and other liabilities
    536,304       522,505  
 
           
Total Liabilities
    1,071,228       1,085,776  
 
           
Preferred Stock
    32,780       32,780  
 
           
Common Stockholder’s Equity:
               
Common stock, without par value —
               
Authorized - 1,130,000 shares
               
Outstanding - 1,121,000 shares
    37,691       37,691  
Paid-in capital
    307,975       307,019  
Retained earnings
    247,323       244,511  
Accumulated other comprehensive income
    15       599  
 
           
Total common stockholder’s equity
    593,004       589,820  
 
           
Total Liabilities and Stockholder’s Equity
  $ 1,697,012     $ 1,708,376  
 
           
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2007 vs. FIRST QUARTER 2006
OVERVIEW
Mississippi Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the State of Mississippi and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Mississippi Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth, 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 Hurricane Katrina.
Mississippi Power continues to focus on several key performance indicators. In recognition that Mississippi Power’s long-term financial success is dependent upon how well it satisfies its customers’ needs, Mississippi Power’s retail base rate mechanism, PEP, includes performance indicators that directly tie customer service indicators to Mississippi Power’s allowed return. In addition to the PEP performance indicators, Mississippi Power focuses on other performance measures, including broader measures of customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Mississippi Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$4.3   28.5
 
Mississippi Power’s net income after dividends on preferred stock for the first quarter 2007 was $19.6 million compared to $15.3 million for the corresponding period in 2006. The increase was primarily a result of a $14.7 million increase in base revenues from customers within Mississippi Power’s service territory, of which $5.2 million is due to a retail base rate increase effective April 1, 2006 and $9.5 million is from sales growth and higher demand compared to the same period in 2006. The increases were partially offset by a $6.6 million increase in other operations expenses and a $1.9 million increase in depreciation and amortization expense due to the amortization of a regulatory liability related to Plant Daniel capacity.
Retail Revenues
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$24.7   18.8
 
In the first quarter 2007, retail revenues were $156.1 million compared to $131.4 million in the same period in 2006. Details of the change to retail revenues are as follows:

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                 
    First Quarter
    2007
    (in millions)   % change
Retail – prior year
  $ 131.4          
Change in —
               
Rates and pricing
    3.8       2.9  
Sales growth
    2.8       2.1  
Weather
    2.8       2.1  
Fuel cost recovery
    15.3       11.7  
 
Retail – current year
  $ 156.1       18.8 %
 
Revenues associated with changes in rates and pricing increased in the first quarter 2007 when compared to the same period of 2006 due to a base rate increase effective April 1, 2006 and continued recovery following Hurricane Katrina.
Revenues attributable to changes in sales growth increased in the first quarter 2007 when compared to the same period in 2006 due to a 13.2%, 14.6%, and 8.9% increase in KWH sales to residential, commercial, and industrial customers, respectively, primarily due to increase in usage and customer additions resulting from recovery after Hurricane Katrina.
Revenues resulting from changes in weather increased because of normal weather in the first quarter of 2007 compared to mild weather in the first quarter of 2006.
Fuel revenues increased in the first quarter of 2007 when compared to the same period in 2006. Electric rates 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 costs, and do not affect net income.
Wholesale Revenues – Non-Affiliates
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$16.0
  26.0
 
Revenues from wholesale sales to non-affiliates will vary depending on the market cost of available energy compared to the cost of Mississippi Power and Southern Company system owned generation, demand for energy within the Southern Company service territory, and availability of Southern Company system generation. In the first quarter 2007, wholesale revenues to non-affiliates were $77.3 million compared to $61.3 million in the same period in 2006. The increase was primarily due to increased fuel costs and higher demand by customers within Mississippi Power’s service territory of $11.4 million and increased sales to customers outside Mississippi Power’s service territory of $4.6 million.
Wholesale Revenues – Affiliates
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$7.1   60.7
 
Revenues from wholesale sales to affiliates will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by the FERC.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
These transactions do not have a significant impact on earnings since the energy is generally sold at marginal cost. In the first quarter 2007, wholesale revenues to affiliates were $18.9 million compared to $11.8 million in the same period in 2006. The increase was primarily due to a $7.9 million increase in energy revenues, of which a $14.0 million increase was associated with increased sales and a $6.1 million decrease was associated with lower fuel prices. Capacity revenues decreased $0.7 million.
Fuel and Purchased Power Expenses
                 
First Quarter 2007 vs. First Quarter 2006
    (change in millions)   % change
Fuel
  $ 43.5       55.6  
Purchased power-non-affiliates
    (3.8 )     (79.7 )
Purchased power-affiliates
    (6.6 )     (34.7 )
         
Total fuel and purchased power expenses
  $ 33.1          
         
In the first quarter 2007, total fuel and purchased power expenses was $135.1 million compared to $102.0 million in the same period in 2006. The increase in fuel and purchased power expenses was primarily due to a $10.3 million increase in the average cost of fuel and purchased power as well as a $22.8 million increase due to the KWH volume generated or purchased. Details of the individual components follow.
In the first quarter 2007, fuel expense was $121.8 million compared to $78.3 million in the same period in 2006. The increase was primarily due to a $29.1 million increase in generation from Mississippi Power-owned facilities and a $14.4 million increase in the cost of fuel.
Details of Mississippi Power’s cost of generation and purchased power are as follows:
                         
    First Quarter   First Quarter    
Average Cost   2007   2006   % change
    (cents per net KWH)        
Fuel
    3.56       3.14       13.4  
Purchased power
    3.37       4.38       (23.1 )
 
In the first quarter 2007, purchased power expense – non-affiliates was $1.0 million compared to $4.7 million in the same period in 2006. The decrease was primarily as the result of a 50.6% decrease in KWH volume purchased due to more of Mississippi Power’s generation being available to meet customer demand and a 58.9% decrease in the average cost of purchased power per KWH.
In the first quarter 2007, purchased power from affiliates was $12.4 million compared to $19.0 million in the same period in 2006. The decrease was primarily due to a 25.0% decrease in the average cost of purchased power per KWH due to decreased fuel costs and a 13.0% decrease in KWH volume purchased due to more of Mississippi Power’s generation being available to meet customer demand.
Energy purchases from affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. These purchases are made in accordance with the IIC, as approved by the FERC. These transactions did not have a significant impact on earnings since the energy purchases are generally offset by energy revenues through Mississippi Power’s retail and wholesale fuel cost recovery clauses.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operations Expense
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$6.6
  17.6
 
In the first quarter 2007, other operations expense was $43.8 million compared to $37.3 million in the same period in 2006. The increase was primarily the result of a $3 million insurance recovery for restoration expense recognized in 2006, a $2.4 million increase in employee benefit expenses which is primarily due to an increase in medical expense, and a $1.1 million increase in production operations expense.
Depreciation and Amortization Expense
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$1.9   15.5
 
In the first quarter 2007, depreciation and amortization expense was $14.2 million compared to $12.3 million in the same period in 2006. The increase was primarily due to amortization related to a regulatory liability recorded in 2003 in connection with the Mississippi PSC’s accounting order on Plant Daniel capacity. See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information.
Taxes Other Than Income Taxes
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$(1.4)   (9.6)
 
In the first quarter 2007, taxes other than income taxes were $12.8 million compared to $14.2 million in the same period in 2006. The change was primarily due to a $1.4 million decrease in ad valorem taxes. The retail portion, or approximately 83%, of the decrease in ad valorem taxes is recoverable under Mississippi Power’s ad valorem tax cost recovery clause, and, therefore, does not affect net income.
Total Other Income and (Expense)
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$(0.7)   (17.1)
 
In the first quarter 2007, total other income and (expense) was $(4.6) million compared to $(3.9) million in the same period in 2006. The change was primarily the result of a $0.3 million decrease in interest income related to the recovery mechanism for fuel hedging and energy cost hedging and a $0.4 million decrease in income associated with customer projects.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Taxes
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$3.1   33.8
 
In the first quarter 2007, income taxes were $12.1 million compared to $9.1 million in the same period in 2006. The increase was primarily due to the increase in pre-tax income.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Mississippi Power’s future earnings potential. The level of Mississippi Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Mississippi Power’s business of selling electricity. These factors include Mississippi Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Mississippi Power’s service area in the aftermath of Hurricane Katrina. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Mississippi Power in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be fully recovered in rates on a timely basis. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.
FERC and Mississippi PSC Matters
Intercompany Interchange Contract
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Intercompany Interchange Contract” of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for information regarding the proceeding initiated by the FERC in May 2005 to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the Power Pool 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.
On April 19, 2007, the FERC approved, with certain modifications, the compliance filing submitted by Southern Company on November 6, 2006. The compliance plan largely involves functional separation and information restrictions related to marketing activities conducted on behalf of Southern Power. The implementation of the plan is not expected to have a material impact on Mississippi Power’s financial statements. However, the ultimate outcome of this matter cannot now be determined.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Regulatory Matters
See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters – Environmental Compliance Overview Plan” in Item 8 of the Form 10-K for information on Mississippi Power’s annual environmental filing with the Mississippi PSC. In February 2007, Mississippi Power filed with the Mississippi PSC its annual 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 in annual revenues for Mississippi Power. On April 13, 2007, the Mississippi PSC approved Mississippi Power’s ECO Plan as filed. The new rates are effective in May 2007.
In April 2007, the Mississippi PSC issued an order allowing Mississippi Power to defer approximately $10.4 million of certain reliability related maintenance costs beginning January 1, 2007 and recover them over a four-year period beginning January 1, 2008. These costs relate to system upgrades and improvements that are now being made as a follow-up to the emergency repairs that were made subsequent to Hurricane Katrina. As of March 31, 2007, Mississippi Power had incurred and deferred approximately $2.1 million of such costs, which are included in Other Regulatory Assets on the Condensed Balance Sheets herein.
Fuel Cost Recovery
Mississippi Power has an established fuel cost recovery factor that is approved by the Mississippi PSC. Over the past several years, Mississippi Power experienced higher than expected fuel costs for coal and gas, which led to an increase in the under recovered fuel costs. Mississippi Power is required to file for an adjustment to the fuel cost recovery factor annually. The last such filing was made in November 2006. The Mississippi PSC approved an increase in the fuel cost recovery factor effective January 2007 in an amount equal to 4.6 % of total retail revenues. At March 31, 2007, the under recovered balance of fuel recorded in Mississippi Power’s Condensed Balance Sheets herein was $40.5 million compared to $50.8 million at December 31, 2006. Mississippi Power’s operating revenues are adjusted for differences in actual recoverable fuel cost and amounts billed in accordance with the currently approved cost recovery rate. Accordingly, changes to the billing factor will have no significant effect on Mississippi Power’s revenues or net income but will affect cash flow. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Mississippi Power in Item 7 of the Form 10-K for additional information.
Other Matters
Mississippi Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Mississippi Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements such as opacity and other air quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such pending or potential litigation against Mississippi Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Mississippi Power in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Mississippi Power’s financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Mississippi Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Mississippi Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Mississippi Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Mississippi Power in Item 7 of the Form 10-K for a complete discussion of Mississippi Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, Unbilled Revenues, and Plant Daniel Operating Lease.
New Accounting Standards
Income Taxes
On January 1, 2007, Mississippi Power adopted FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement, and classification of income tax uncertainties, along with any related interest and penalties. The provisions of FIN 48 were applied to all tax positions beginning January 1, 2007. The adoption of FIN 48 did not have a material impact on Mississippi Power’s financial statements.
Fair Value Measurement
The FASB issued FASB Statement No. 157 (SFAS No. 157), “Fair Value Measurements” in September 2006. This standard 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. Mississippi Power plans to adopt SFAS No. 157 on January 1, 2008 and is currently assessing the impact of this standard.
Fair Value Option
In February 2007, the FASB issued FASB Statement No. 159 (SFAS No. 159), “Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Mississippi Power plans to adopt SFAS No. 159 on January 1, 2008 and is currently assessing its impact.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Mississippi Power’s financial condition remained stable at March 31, 2007. Net cash provided from operating activities totaled $6.6 million for the first three months of 2007, compared to net cash flow used for operating activities of $57.3 million for the same period in 2006. The $63.9 million increase in the first three months of 2007 resulted primarily from fuel and base rate increases in effect in the first quarter of 2007 and cash outflows for restoration costs in the first quarter 2006 due to the impact of Hurricane Katrina.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Requirements and Contractual Obligations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Mississippi Power in Item 7 of the Form 10-K for a description of Mississippi Power’s capital requirements for its construction program, lease obligations, purchase commitments, preferred stock dividends, and trust funding requirements.
Sources of Capital
Mississippi Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Recently, Mississippi Power has primarily utilized funds from operating cash flows, short-term debt, external security offerings, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon, regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Mississippi Power in Item 7 of the Form 10-K for additional information.
Mississippi Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt as well as cash needs which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Mississippi Power had at March 31, 2007 approximately $2.2 million of cash and cash equivalents and $181 million of unused committed credit arrangements with banks. Of these unused facilities, $101 million expire in 2007 and $80 million expire in 2008. Approximately $39 million of these credit arrangements contain provisions allowing two-year term loans executable at expiration and $15 million contain provisions allowing one-year term loans executable at expiration. Subsequent to March 31, 2007, Mississippi Power increased an existing credit agreement by $25 million. Mississippi Power expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Mississippi Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. The credit arrangements provide liquidity support to Mississippi Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Mississippi Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Mississippi Power and other Southern Company subsidiaries. At March 31, 2007, Mississippi Power had $86.7 million in commercial paper outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.
Off-Balance Sheet Financing Arrangements
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Off-Balance Sheet Financing Arrangements” of Mississippi Power in Item 7 and Note 7 to the financial statements of Mississippi Power under “Operating Leases” in Item 8 of the Form 10-K for information related to Mississippi Power’s lease of a combined cycle generating facility at Plant Daniel.
Credit Rating Risk
Mississippi Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to below BBB- or Baa3. These contracts are primarily for physical electricity purchases and sales. At March 31, 2007, the maximum potential collateral requirements were $4.5 million. Further, Mississippi Power, along with all members of the Power Pool, is party to certain derivative agreements that could require collateral and/or accelerated payment in the

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 March 31, 2007, Mississippi Power’s total exposure to these types of agreements was not material.
Market Price Risk
Mississippi Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2006 reporting period. In addition, Mississippi Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulation, Mississippi Power has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Mississippi Power enters into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Mississippi Power has also implemented retail fuel hedging programs at the instruction of the Mississippi PSC and wholesale fuel hedging programs under agreements with wholesale customers.
The fair value of derivative, fuel, and energy contracts at March 31, 2007 was as follows:
         
    First Quarter
    2007
    Changes
    Fair Value
    (in thousands)
Contracts beginning of period
  $ (6,360 )
Contracts realized or settled
    1,497  
New contracts at inception
     
Changes in valuation techniques
     
Current period changes (a)
    11,506  
 
Contracts at March 31, 2007
  $ 6,643  
 
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
                         
    Source of March 31, 2007
    Valuation Prices
    Total   Maturity
    Fair Value   Year 1   1-3 Years
    (in thousands)
 
Actively quoted
  $ 6,616     $ 4,286     $ 2,330  
External sources
    27       27        
Models and other methods
                 
 
Contracts at March 31, 2007
  $ 6,643     $ 4,313     $ 2,330  
 
Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to Mississippi Power’s fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through Mississippi Power’s energy cost management clause. In addition, any unrealized gains and losses on energy-related derivatives used to hedge anticipated purchases and sales are deferred in other comprehensive income. Gains and losses on derivative contracts that are not designated as hedges are recognized in the statements of income as incurred. These

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
amounts were not material in any period presented. At March 31, 2007, the fair value gain/(loss) of derivative energy contracts was reflected in the financial statements as follows:
         
    Amounts
    (in thousands)
Regulatory liabilities, net
  $ 6,591  
Accumulated other comprehensive income
    24  
Net income
    28  
 
Total fair value
  $ 6,643  
 
Unrealized pre-tax gains (losses) recognized in income were not material for any period presented.
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Mississippi Power in Item 7 and Notes 1 and 6 to the financial statements of Mississippi Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.
Financing Activities
Mississippi Power did not issue or redeem any long-term securities in the first three months of 2007. Subsequent to March 31, 2007, Mississippi Power redeemed $36.1 million of long-term debt payable to affiliated trusts. In addition to any financings that may be necessary to meet capital requirements, contractual obligations, and storm restoration costs, Mississippi Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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SOUTHERN POWER COMPANY
AND SUBSIDIARY COMPANIES

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Operating Revenues:
               
Wholesale revenues —
               
Non-affiliates
  $ 81,117     $ 51,697  
Affiliates
    109,502       87,323  
Other revenues
    1,873       809  
 
           
Total operating revenues
    192,492       139,829  
 
           
Operating Expenses:
               
Fuel
    27,366       14,259  
Purchased power —
               
Non-affiliates
    11,030       13,971  
Affiliates
    31,287       19,407  
Other operations
    20,889       17,507  
Maintenance
    5,298       5,885  
Depreciation and amortization
    18,394       14,707  
Taxes other than income taxes
    3,711       3,661  
 
           
Total operating expenses
    117,975       89,397  
 
           
Operating Income
    74,517       50,432  
Other Income and (Expense):
               
Interest expense, net of amounts capitalized
    (20,894 )     (20,342 )
Other income (expense), net
    (82 )     2,403  
 
           
Total other income and (expense)
    (20,976 )     (17,939 )
 
           
Earnings Before Income Taxes
    53,541       32,493  
Income taxes
    21,505       12,593  
 
           
Net Income
  $ 32,036     $ 19,900  
 
           
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Net Income
  $ 32,036     $ 19,900  
Other comprehensive income (loss):
               
Changes in fair value of qualifying hedges, net of tax of $(580) and $(79), respectively
    (891 )     (122 )
Reclassification adjustment for amounts included in net income, net of tax of $1,156 and $1,112, respectively
    2,037       1,732  
 
           
COMPREHENSIVE INCOME
  $ 33,182     $ 21,510  
 
           
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Three Months  
    Ended March 31,  
    2007     2006  
    (in thousands)  
Operating Activities:
               
Net income
  $ 32,036     $ 19,900  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    22,086       18,070  
Deferred income taxes and investment tax credits, net
    20,953       17,251  
Deferred revenues
    (27,924 )     (26,672 )
Accumulated deferred billings on construction contract
    15,098       5,490  
Accumulated deferred costs on construction contract
    (4,408 )      
Other, net
    927       (2,010 )
Changes in certain current assets and liabilities —
               
Receivables
    5,399       38,672  
Fossil fuel stock
    149       (293 )
Materials and supplies
    (650 )     (356 )
Other current assets
    80       (8,517 )
Accounts payable
    (3,065 )     (46,701 )
Accrued taxes
    (2,961 )     2,899  
Accrued interest
    (12,067 )     (15,365 )
 
           
Net cash provided from operating activities
    45,653       2,368  
 
           
Investing Activities:
               
Property additions
    (45,852 )     (1,175 )
Change in construction payables, net
    5,104       2  
 
           
Net cash used for investing activities
    (40,748 )     (1,173 )
 
           
Financing Activities:
               
Increase in notes payable, net
    21,380       231  
Payment of common stock dividends
    (22,450 )     (19,425 )
Other
    (26 )      
 
           
Net cash used for financing activities
    (1,096 )     (19,194 )
 
           
Net Change in Cash and Cash Equivalents
    3,809       (17,999 )
Cash and Cash Equivalents at Beginning of Period
    29,929       27,631  
 
           
Cash and Cash Equivalents at End of Period
  $ 33,738     $ 9,632  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $3,409 and $0 capitalized for 2007 and 2006, respectively)
  $ 29,293     $ 32,260  
Income taxes (net of refunds)
  $ 6,948     $ 4,227  
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Assets   2007     2006  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 33,738     $ 29,929  
Receivables —
               
Customer accounts receivable
    16,379       16,789  
Other accounts receivable
    1,182       125  
Affiliated companies
    21,034       26,215  
Fossil fuel stock, at average cost
    11,337       11,056  
Materials and supplies, at average cost
    20,096       19,877  
Prepaid service agreements — current
    32,542       30,280  
Other prepaid expenses
    12,671       5,878  
Other
    512       2,006  
 
           
Total current assets
    149,491       142,155  
 
           
Property, Plant, and Equipment:
               
In service
    2,437,160       2,434,146  
Less accumulated provision for depreciation
    238,028       219,654  
 
           
 
    2,199,132       2,214,492  
Construction work in progress
    297,571       260,279  
 
           
Total property, plant, and equipment
    2,496,703       2,474,771  
 
           
Deferred Charges and Other Assets:
               
Prepaid long-term service agreements
    55,161       51,615  
Other—
               
Affiliated
    4,389       4,473  
Other
    16,461       17,929  
 
           
Total deferred charges and other assets
    76,011       74,017  
 
           
Total Assets
  $ 2,722,205     $ 2,690,943  
 
           
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                 
    At March 31,     At December 31,  
Liabilities and Stockholder’s Equity   2007     2006  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 1,209     $ 1,209  
Notes payable
    145,132       123,752  
Accounts payable —
               
Affiliated
    28,936       33,205  
Other
    23,032       16,453  
Accrued taxes —
               
Income taxes
          393  
Other
    6,354       2,183  
Accrued interest
    17,781       29,849  
Other
    2,701       4,840  
 
           
Total current liabilities
    225,145       211,884  
 
           
Long-term Debt
    1,296,909       1,296,845  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    128,005       106,016  
Deferred capacity revenues — Affiliated
    10,041       36,313  
Other—
               
Affiliated
    8,459       8,958  
Other
    17,413       5,423  
 
           
Total deferred credits and other liabilities
    163,918       156,710  
 
           
Total Liabilities
    1,685,972       1,665,439  
 
           
Common Stockholder’s Equity:
               
Common stock, par value $.01 per share —
               
Authorized - 1,000,000 shares
               
Outstanding - 1,000 shares
           
Paid-in capital
    854,930       854,933  
Retained earnings
    220,881       211,295  
Accumulated other comprehensive loss
    (39,578 )     (40,724 )
 
           
Total common stockholder’s equity
    1,036,233       1,025,504  
 
           
Total Liabilities and Stockholder’s Equity
  $ 2,722,205     $ 2,690,943  
 
           
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2007 vs. FIRST QUARTER 2006
OVERVIEW
Southern Power and its wholly-owned subsidiaries construct, acquire, own, and manage generation assets and sell electricity at market-based prices in the southeastern wholesale market. Southern Power continues to focus on executing its regional strategy in 2007 in the Southeast, one of the fastest growing regions of the country, including potential acquisition and/or expansion opportunities. Southern Power continues to face challenges at the federal regulatory level relative to market power and affiliate transactions. See FUTURE EARNINGS POTENTIAL – “FERC Matters” herein for additional detail.
To evaluate operating results and to ensure Southern Power’s ability to meet its contractual commitments to customers, Southern Power focuses on several key performance indicators. These indicators consist of plant availability, peak season equivalent forced outage rate (EFOR), and net income. Plant availability shows the percentage of time during the year that Southern Power’s generating units are available to be called upon to generate (the higher the better), whereas the EFOR more narrowly defines the hours during peak demand times when Southern Power’s generating units are not available due to forced outages (the lower the better). For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Southern Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$12.1   61.0
 
Southern Power’s net income for the first quarter 2007 was $32.0 million compared to $19.9 million for the corresponding period of 2006. This increase was primarily the result of increased energy sales from existing resources due to more favorable weather than the corresponding period in 2006. Also contributing to the increase in income were additional sales from the acquisitions of Plant DeSoto in June 2006 and Plant Rowan in September 2006.
Wholesale Revenues Affiliates and Wholesale Revenues Non-Affiliates
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$51.6   37.1
 
Wholesale revenues for the first quarter 2007 were $190.6 million compared to $139.0 million for the corresponding period of 2006. Wholesale energy sales to non-affiliates will vary depending on the energy demand of those customers and their generation capacity, as well as the market cost of available energy compared to the cost of Southern Power. Energy sales to affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. Sales to affiliate companies that are not covered by PPAs are made in accordance with the IIC, as approved by the FERC. In the first quarter 2007, wholesale revenues to non-affiliates and affiliates increased when compared to the corresponding period in 2006. Wholesale revenues to non-affiliates increased $29.4 million during the period, primarily due to short-term market energy sales and sales from Plants DeSoto and Rowan. Wholesale revenues to affiliates increased $22.2 million during the

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
period, primarily due to increased demand under existing PPAs with affiliates due to favorable weather within the Southern Company service territory. These increases were partially offset by lower energy revenues due to a decrease in natural gas prices.
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Power Sales Agreements” of Southern Power in Item 7 of the Form 10-K and FUTURE EARNINGS POTENTIAL — “Plant Acquisitions” and “Power Sales Agreements” herein for additional information.
Fuel and Purchased Power Expenses
                 
First Quarter 2007 vs. First Quarter 2006
    (change in millions)   % change
Fuel
  $ 13.1       91.9  
Purchased power-non-affiliates
    (2.9 )     (21.1 )
Purchased power-affiliates
    11.9       61.2  
         
Total fuel and purchased power expenses
  $ 22.1          
         
In the first quarter 2007, fuel and purchased power expenses were $69.7 million compared to $47.6 million for the corresponding period in 2006. This increase was primarily due to increased generation and purchases in order to meet the higher energy sales, partially offset by a decrease in the average cost of fuel and purchased power.
Other Operations Expense
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$3.4
  19.3
 
In the first quarter 2007, other operations expense was $20.9 million compared to $17.5 million for the corresponding period in 2006. This increase was primarily due to approximately $1.1 million of additional administrative and general expense, $1.5 million of operations expense primarily related to the newly acquired Plants DeSoto and Rowan, and $0.8 million increase in transmission expenses related to a PPA which provides for recovery of substantially all direct transmission costs; therefore, these transmission expenses do not have a significant impact on net income.
Maintenance Expense
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$(0.6)   (10.0)
 
In the first quarter 2007, maintenance expense was $5.3 million compared to $5.9 million for the corresponding period in 2006. This decrease was primarily due to the timing of plant maintenance activities.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation and Amortization Expense
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$3.7   25.1
 
In the first quarter 2007, depreciation and amortization expense was $18.4 million compared to $14.7 million for the corresponding period in 2006. This increase was primarily a result of additional plant in service relating to Plants DeSoto and Rowan, acquired in June 2006 and September 2006, respectively. These new plants contributed $2.9 million to the first quarter increase. Higher depreciation rates also contributed approximately $0.8 million to the first quarter 2007 expense due to the change in rates adopted in March 2006. See Note 1 to the financial statements of Southern Power under “Depreciation” in Item 8 of the Form 10-K for additional information.
Other Income (Expense), Net
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$(2.5)   (103.4)
 
In the first quarter 2007, other income (expense), net was $(0.1) million compared to $2.4 million for the corresponding period in 2006. This decrease was primarily due to unrealized mark-to-market gains on derivative positions recognized in the first quarter of 2006.
Income Tax Expense
     
First Quarter 2007 vs. First Quarter 2006
(change in millions)   % change
$8.9   70.8
 
In the first quarter 2007, income tax expense was $21.5 million compared to $12.6 million for the corresponding period in 2006. This increase was primarily due to higher earnings before taxes. Other factors include a higher state tax rate due to changes in state tax apportionment rules and new activity in the state of North Carolina related to the newly acquired Plant Rowan.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Southern Power’s future earnings potential. Several factors affect the opportunities, challenges, and risks of Southern Power’s competitive wholesale energy business. These factors include the ability to achieve sales growth while containing costs. Another major factor is federal regulatory policy, which may impact Southern Power’s level of participation in this market. The level of future earnings depends on numerous factors, including regulatory matters, especially those related to affiliate contracts, sales, creditworthiness of customers, total generating capacity available in the Southeast, and the successful remarketing of capacity as current contracts expire. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Power in Item 7 of the Form 10-K.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FERC Matters
Intercompany Interchange Contract
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Intercompany Interchange Contract” of Southern Power in Item 7 and Note 3 to the financial statements of Southern Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for information regarding the proceeding initiated by the FERC in May 2005 to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the Power Pool 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.
On April 19, 2007, the FERC approved, with certain modifications, the compliance filing submitted by Southern Company on November 6, 2006. The compliance plan largely involves functional separation and information restrictions related to marketing activities conducted on behalf of Southern Power. Southern Power’s cost of implementing the compliance plan, including the modifications, is expected to be approximately $9 million pre-tax per year. However, the ultimate outcome of this matter cannot now be determined.
Integrated Gasification Combined Cycle (IGCC) Project
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Construction Projects – Integrated Gasification Combined Cycle (IGCC)” of Southern Power in Item 7 of the Form 10-K for information regarding the development by Southern Power and the Orlando Utilities Commission (OUC) of an IGCC project in Orlando, Florida at OUC’s Stanton Energy site. Since the definitive agreements relating to the development of the project were executed in December 2005, the estimated costs of the gasifier portion have increased due primarily to increases in commodity costs and increased market demand for labor. Southern Power had the option under the original agreements to end its participation in the gasifier portion of the project at the end of the project definition phase, which has been completed. On March 29, 2007, Southern Power’s Board of Directors approved the continuation and the completion of the design, engineering, and construction of the gasifier portion of the project. This approval is contingent on the approval of a request for additional funding from the DOE of $58.75 million and OUC’s approval of amended agreements to share the remaining cost increases between Southern Power and OUC. Southern Power and OUC will share 65% and 35% of the estimated cost increase, respectively, under the proposed amended agreements. In April 2007, OUC approved its portion of the cost increase, subject to the DOE’s approval of the additional funding. The ultimate outcome of this matter cannot now be determined.
Power Sales Agreements
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Power Sales Agreements” of Southern Power in Item 7 of the Form 10-K for additional information on long-term PPAs. Southern Power’s PPAs with non-affiliated counterparties have provisions that require the posting of collateral or an acceptable substitute guarantee in the event that the counterparty does not meet certain rating or financial requirements. The PPAs are expected to provide Southern Power with a stable source of revenue during their respective terms.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On April 4, 2007, Southern Power entered into two purchased power agreements with Georgia Power. Under the first agreement, Southern Power will provide Georgia Power with a total of 561 megawatts of capacity annually from Plant Wansley Unit 6 for the period from June 2010 through May 2017. Under the second agreement, Southern Power will provide Georgia Power with a total of 292 megawatts of capacity annually from Plant Dahlberg Units 2, 6, 8, and 10 for the period June 2010 through May 2025. The contracts provide for fixed capacity payments and variable energy payments based on actual energy delivered. These contracts are contingent upon approval from the Georgia PSC and the FERC. The final outcome of this matter cannot now be determined.
Other Matters
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Southern Power in Item 7 of the Form 10-K for information on the development by federal and state environmental regulatory agencies of additional control strategies for emission of air pollution from industrial sources, including electric generating facilities. Compliance with possible additional federal or state legislation or regulations related to global climate change, air quality, or other environmental and health concerns could also affect earnings. While Southern Power’s PPAs generally contain provisions that permit charging the counterparty with some of the new costs incurred as a result of changes in environmental laws and regulations, the full impact of any such regulatory or legislative changes cannot be determined at this time.
Southern Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Southern Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements such as opacity and other air quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such potential litigation against Southern Power and its subsidiaries cannot be predicted at this time; however, management does not anticipate that the liabilities, if any, arising from any such proceedings would have a material adverse effect on Southern Power’s financial statements.
See Note (B) to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Power prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Southern Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Southern Power in Item 7 of the Form 10-K for a complete discussion of Southern Power’s critical accounting policies and estimates related to Revenue Recognition, Asset Impairments, and Acquisition Accounting.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
New Accounting Standards
Income Taxes
On January 1, 2007, Southern Power adopted FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement, and classification of income tax uncertainties, along with any related interest and penalties. The provisions of FIN 48 were applied to all tax positions beginning January 1, 2007. The adoption of FIN 48 did not have a material impact on Southern Power’s financial statements.
Fair Value Measurement
The FASB issued FASB Statement No. 157 (SFAS No. 157), “Fair Value Measurements” in September 2006. This standard 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 Power plans to adopt SFAS No. 157 on January 1, 2008 and is currently assessing the impact of this standard.
Fair Value Option
In February 2007, the FASB issued FASB Statement No. 159 (SFAS No. 159), “Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Southern Power plans to adopt SFAS No. 159 on January 1, 2008 and is currently assessing its impact.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Southern Power’s financial condition remained stable at March 31, 2007. Net cash provided from operating activities increased $43.3 million in the first quarter of 2007 compared to the same period in 2006. The increase in 2007 is primarily attributable to higher net income, as previously discussed, and a reduction in the outflow of cash for working capital due to a reduction in gas prices. Property additions in the first quarter of 2007 were $45.9 million primarily for ongoing construction activity at Plants Franklin and Oleander. The majority of funds for these additions were provided by cash from operations and the proceeds from the issuance of commercial paper. Southern Power paid dividends to Southern Company of $22.4 million in the first quarter of 2007.
Capital Requirements and Contractual Obligations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Southern Power in Item 7 of the Form 10-K for a description of Southern Power’s capital requirements for its construction program, maturing debt, purchase commitments, and long-term service agreements. The total estimated cost of the gasifier portion of the IGCC project for Southern Power has increased to $212 million. As a result of the increases in commodity costs and an increase in market demand for labor, the capital program of Southern Power is projected to be $257.8 million for 2007, $537.1 million for 2008, and $865.0 million for 2009.

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SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
These projections include Southern Power’s share of the gasifier portion of the IGCC project cost increase. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Integrated Gasification Combined Cycle (IGCC) Project” herein for additional information.
Sources of Capital
Southern Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Recently, Southern Power has primarily utilized funds from operating cash flows, short-term debt, external security offerings and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Southern Power in Item 7 of the Form 10-K for additional information.
Southern Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source as well as cash needs which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Southern Power had at March 31, 2007 approximately $33.7 million of cash and cash equivalents and a $400 million unused committed credit facility with banks that expires in 2011. Southern Power expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Southern Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. At March 31, 2007, Southern Power had approximately $145.1 million of commercial paper outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.
Credit Rating Risk
Southern Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB and Baa2 or to BBB- or Baa3 or below. Generally, collateral may be provided with a Southern Company guaranty, letter of credit, or cash. These contracts are primarily for physical electricity purchases and sales. At March 31, 2007, the maximum potential collateral requirements at a BBB and Baa2 rating were approximately $9 million and at a BBB- or Baa3 rating were approximately $220 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $366 million. In addition, through the acquisition of Plant Rowan, Southern Power assumed a PPA with Duke Power Company LLC that could require collateral, but not accelerated payment, in the event of a downgrade to Southern Power’s credit rating to below BBB- or Baa3. The amount of collateral required would depend upon actual losses, if any, resulting from a credit downgrade, limited to Southern Power’s remaining obligations under the PPA. Subsequent to March 31, 2007, Southern Power entered into certain contracts for the sale of electric capacity and energy. These contracts also contain provisions that could require collateral, but not accelerated payment, in the event of a change in credit rating. Under these contracts, the maximum potential collateral requirement at a rating of BBB- is $32 million. The maximum potential collateral requirement at a rating below BBB- is $64 million. Further, Southern Power, along with the other members of the Power Pool, is also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas and power price risk management activities. At March 31, 2007, Southern Power’s total exposure to these types of agreements was not material.

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SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Market Price Risk
Southern Power is exposed to market risks, including changes in interest rates, certain energy-related commodity prices, and, occasionally, currency exchange rates. To manage the volatility attributable to these exposures, Southern Power nets the exposures to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to Southern Power’s policies in areas such as counterparty exposure and hedging practices. Southern Power’s policy is that derivatives are to be used primarily for hedging purposes. Derivative positions are monitored using techniques that include market valuation and sensitivity analysis.
Southern Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2006 reporting period. In addition, Southern Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Because energy from Southern Power’s generating facilities is primarily sold under long-term PPAs with tolling agreements and provisions shifting substantially all of the responsibility for fuel cost to the counterparties, Southern Power’s exposure to market volatility in commodity fuel prices and prices of electricity is limited. To mitigate residual risks in those areas, Southern Power enters into fixed-price contracts for the sale of electricity.
The fair value of changes in derivative energy contracts at March 31, 2007 was as follows:
         
    First Quarter
    2007
    Changes
    Fair Value
    (in thousands)
Contracts beginning of period
  $ 1,850  
Contracts realized or settled
    (1,378 )
New contracts at inception
     
Changes in valuation techniques
     
Current period changes (a)
    (504 )
 
Contracts at March 31, 2007
  $ (32 )
 
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
                         
    Source of March 31, 2007
    Valuation Prices
    Total   Maturity
    Fair Value   Year 1   1-3 Years
    (in thousands)
Actively quoted
  $ (267 )   $ (267 )   $  
External sources
    235       235        
Models and other methods
                 
 
Contracts at March 31, 2007
  $ (32 )   $ (32 )   $  
 
Unrealized pre-tax gains and losses on electric contracts used to hedge anticipated sales, and gas contracts used to hedge anticipated purchases and sales, are deferred in other comprehensive income. Gains and losses on derivative contracts that are not designated as hedges are recognized in the statements of income as incurred.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At March 31, 2007, the fair value gain/(loss) of derivative energy contracts was as follows:
         
     
    Amounts
    (in thousands)
Net Income
  $ 84  
Accumulated other comprehensive loss
    (116 )
 
Total fair value
  $ (32 )
 
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Southern Power in Item 7 and Notes 1 and 6 to the financial statements of Southern Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.
Financing Activities
Southern Power did not issue or redeem any long-term securities during the three months ended March 31, 2007.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS
FOR
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
INDEX TO APPLICABLE NOTES TO
FINANCIAL STATEMENTS BY REGISTRANT
     
Registrant   Applicable Notes
Southern Company
  A, B, C, E, F, G, H, I
 
   
Alabama Power
  A, B, F, G, I
 
   
Georgia Power
  A, B, F, G, H, I
 
   
Gulf Power
  A, B, F, G, I
 
   
Mississippi Power
  A, B, D, F, G, I
 
   
Southern Power
  A, B, F, I

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
NOTES TO THE CONDENSED FINANCIAL STATEMENTS:
  (A)   INTRODUCTION
 
      The condensed quarterly financial statements of the registrants included herein have been prepared by each registrant, without audit, pursuant to the rules and regulations of the SEC. The Condensed Balance Sheets as of December 31, 2006 have been derived from the audited financial statements of each registrant. In the opinion of each registrant’s management, the information regarding such registrant furnished herein reflects all adjustments necessary to present fairly the results of operations for the periods ended March 31, 2007 and 2006. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although each registrant believes that the disclosures regarding such registrant are adequate to make the information presented not misleading. Disclosure which would substantially duplicate the disclosure in the latest Form 10-K and details which have not changed significantly in amount or composition since the filing of the Form 10-K are omitted from this Quarterly Report on Form 10-Q. Therefore, these condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in the Form 10-K. Certain prior period amounts have been reclassified to conform to current period presentation. Due to seasonal variations in the demand for energy, operating results for the periods presented do not necessarily indicate operating results for the entire year.
 
  (B)   CONTINGENCIES AND REGULATORY MATTERS
 
      See Note 3 to the financial statements of Southern Company, the traditional operating companies, and Southern Power in Item 8 of the Form 10-K for information relating to various lawsuits and other contingencies.
 
      NEW SOURCE REVIEW LITIGATION
 
      See Note 3 to the financial statements of Southern Company and Alabama Power under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding civil actions brought by the EPA alleging that Alabama Power and Georgia Power had violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of their respective coal-fired generating facilities. The plaintiffs’ appeal against Alabama Power was stayed by the U.S. Court of Appeals for the Eleventh Circuit pending the U.S. Supreme Court’s decision in a similar case against Duke Energy. On April 2, 2007, the U.S. Supreme Court issued an opinion in the Duke Energy case. On April 11, 2007, Alabama Power filed a motion to lift the stay and to reset the briefing schedule. The plaintiffs have opposed the motion and have moved to vacate the district court’s decision and remand for further proceedings consistent with the Duke Energy decision. The final resolution of these claims is dependent on these appeals and possible further court action and, therefore, cannot be determined at this time.
 
      PLANT WANSLEY ENVIRONMENTAL LITIGATION
 
      See MANAGEMENT’S DISCUSSION AND ANALYSIS - FUTURE EARNINGS POTENTIAL – “Environmental Matters – Plant Wansley Environmental Litigation” of Southern Company and Georgia Power in Item 7 and Note 3 to the financial statements of Southern Company and Georgia Power under “Environmental Matters - Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K for

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
additional information on litigation involving alleged violations of the Clean Air Act at four of the units at Plant Wansley. On March 30, 2007, the parties filed a joint motion seeking entry of a proposed consent decree resolving all remaining issues in the case. If the consent decree is approved as proposed, the resolution of this case will not have a material impact on the financial statements of Georgia Power or Southern Company.
MIRANT MATTERS
Mirant was an energy company with businesses that included independent power projects and energy trading and risk management companies in the U.S. and selected other countries. It was a wholly-owned subsidiary of Southern Company until its initial public offering in October 2000. In April 2001, Southern Company completed a spin-off to its shareholders of its remaining ownership, and Mirant became an independent corporate entity. In July 2003, Mirant filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code. See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Bankruptcy” in Item 8 of the Form 10-K for information regarding Southern Company’s contingent liabilities associated with Mirant, including guarantees of contractual commitments, litigation, and joint and several liabilities in connection with the consolidated federal income tax return.
Mirant Securities Litigation
See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Securities Litigation” in Item 8 of the Form 10-K for information regarding a class action lawsuit that several Mirant shareholders (plaintiffs) originally filed against Mirant and certain Mirant officers in May 2002. In November 2002, Southern Company, certain former and current senior officers of Southern Company, and 12 underwriters of Mirant’s initial public offering were added as defendants. On March 24, 2006, the plaintiffs filed a motion for reconsideration requesting that the court vacate that portion of its July 14, 2003 order dismissing the plaintiffs’ claims based upon Mirant’s alleged improper energy trading and marketing activities involving the California energy market. On March 6, 2007, the court granted plaintiffs’ motion for reconsideration, reinstated the California energy market claims, and granted in part and denied in part defendants’ motion to compel certain class certification discovery. On March 21, 2007, defendants filed renewed motions to dismiss the California energy claims on grounds originally set forth in their 2003 motions to dismiss, but which were not addressed by the court. The ultimate outcome of this matter cannot be determined at this time.
MC Asset Recovery Litigation
See Note 3 to the financial statements of Southern Company under “Mirant Matters – MC Asset Recovery Litigation” in Item 8 of the Form 10-K for information regarding a suit between MC Asset Recovery, a special purpose subsidiary of Reorganized Mirant, and Southern Company. On March 28, 2007, MC Asset Recovery filed a Fourth Amended Complaint. Among other things, the Fourth Amended Complaint adds a claim under the Federal Debt Collection Procedure Act (FDCPA) to avoid certain transfers from Mirant to Southern Company and withdraws the breach of fiduciary duty claim the court struck as a result of Southern Company’s motion for summary judgment. MC Asset Recovery claims to have standing to assert violations of the FDCPA and to recover property on behalf of the Mirant debtors’ estates. The ultimate outcome of this matter cannot be determined at this time.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
FERC MATTERS
Intercompany Interchange Contract
See Note 3 to the financial statements of Southern Company, the traditional operating companies and Southern Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for information regarding the proceeding initiated by the FERC in May 2005 to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the Power Pool 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.
On April 19, 2007, the FERC approved, with certain modifications, the compliance filing submitted by Southern Company on November 6, 2006. The compliance plan largely involves functional separation and information restrictions related to marketing activities conducted on behalf of Southern Power. The implementation of the plan is not expected to have a material impact on the financial statements of Southern Company or the traditional operating companies. Southern Power’s cost of implementing the compliance plan, including the modifications, is expected to be approximately $9 million pre-tax per year. However, the ultimate outcome of this matter cannot now be determined.
INCOME TAX MATTERS
Leveraged Lease Transactions
See Note 3 to the financial statements of Southern Company under “Income Tax Matters” in Item 8 of the Form 10-K. The IRS challenged Southern Company’s deductions related to three international lease transactions (so-called SILO or sale-in-lease-out transactions), in connection with its audits of Southern Company’s 2000 through 2003 tax returns. 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 now 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 the IRS and Southern Company has initiated litigation in the U.S. District Court for the Northern District of Georgia for a complete refund of tax and interest paid for the 2000 - 2001 tax years. The estimated amount of disputed tax and interest for tax years 2002 and 2003 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. For tax years 2000 through 2006, Southern Company has claimed $284 million in tax benefits related to these SILO transactions challenged by the IRS.
Effective January 1, 2007, Southern Company adopted both FASB Interpretation No. 48 (FIN 48), “Accounting for the Uncertainty in Income Taxes” and FASB Staff Position No. FAS 13-2 (FSP 13-2), “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction.” FIN 48 requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement, and classification of income tax uncertainties, along with any related interest and penalties. FSP 13-2 amends FASB Statement No. 13, “Accounting for Leases” requiring 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 with recognition of the resulting gain or loss in the year of the revision. FSP 13-2 also requires that all recognized tax positions in a leveraged lease must be measured in accordance with the criteria in FIN 48 and any changes resulting from FIN 48 must be reflected as a change in an important lease assumption as of the date of adoption. In

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
adopting these standards, Southern Company concluded that a portion of the SILO tax benefits were uncertain tax positions, as defined in FIN 48. Accordingly, Southern Company also concluded that there was a change in the projected income tax cash flows and, as required by FSP 13-2, recalculated the rate of return and allocation of income under the LILO and SILO transactions.
The cumulative effect of the initial adoption of FIN 48 and FSP 13-2 was recorded as an adjustment to beginning retained earnings. For the lease-in-lease-out (LILO) transaction settled with the IRS in February 2005, the cumulative effect of adopting FSP 13-2 was a $17 million reduction in beginning retained earnings. With respect to Southern Company’s SILO transactions, the adoption of FSP 13-2 reduced beginning retained earnings by $108 million and the adoption of FIN 48 reduced beginning retained earnings by an additional $15 million. The adoption of FSP 13-2 also resulted in a reduction to net income in the first quarter 2007 of approximately $4 million. The adjustments to retained earnings are non-cash charges and those related to FSP 13-2 will be recognized as income over the remaining terms of the affected leases. Any future changes in the projected or actual income tax cash flows will result in an additional recalculation of the net investment in the leases and will be recorded currently in income. The ultimate impact on Southern Company’s net income will be dependent on the outcome of pending litigation, but could be significant, and potentially material. Southern Company believes these transactions are valid leases for U.S. tax purposes and the related deductions are allowable. Southern Company is continuing to pursue resolution of these matters through administrative appeals or litigation; however, the ultimate outcome of these matters cannot now be determined.
Synthetic Fuel Tax Credits
Southern Company has an investment in an entity that produces synthetic fuel and receives tax credits under Section 45K (formerly Section 29) of the IRC. In accordance with Section 45K of the IRC, these tax credits are subject to limitation as the annual average price of oil (as determined by the DOE) increases over a specified, inflation-adjusted dollar amount published in the spring of the subsequent year. Southern Company, along with its partners in this investment, has continued to monitor oil prices. Reserves against tax credits earned in 2007 of $2.8 million have been recorded in the first three months of 2007 due to projected phase-outs of the credits in 2007 as a result of current and projected future oil prices.
PROPERTY TAX DISPUTE
See Note 3 to the financial statements of Georgia Power and Gulf Power under “Property Tax Dispute” in Item 8 of the Form 10-K for information on the property tax dispute with Monroe County, Georgia (Monroe County). The administrative appeals and notices of arbitration have been expanded to include tax year 2006. The appeals remain stayed pending the outcome of the related litigation. On March 30, 2007, the Georgia Court of Appeals reversed the trial court and ruled that the Monroe Board had exceeded its legal authority and remanded the case for entry of an injunction prohibiting the Monroe Board from collecting taxes based on its independent valuation of Plant Scherer. On April 16, 2007, the Monroe Board filed an appeal to the Georgia Supreme Court. Georgia Power and Gulf Power intend to oppose that action. The suit could impact all co-owners. If Georgia Power and Gulf Power are successful, the litigation will be concluded. Otherwise, Georgia Power and Gulf Power could be subject to total taxes through March 31, 2007 of up to $20.0 million and $4.4 million, respectively, plus penalties and interest. In accordance with Gulf Power’s unit power sales contract for Plant Scherer, such property taxes would be recoverable from the customer. The ultimate outcome of this matter cannot currently be determined.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
  (C)   SEGMENT AND RELATED INFORMATION
 
      Southern Company’s reportable business segment is the sale of electricity in the Southeast by the traditional operating companies and Southern Power. The “All Other” column includes parent Southern Company, which does not allocate operating expenses to business segments. Also, this category includes segments below the quantitative threshold for separate disclosure. These segments include investments in synthetic fuels and leveraged lease projects, telecommunications, and energy-related services. Southern Power’s revenues from sales to the traditional operating companies were $110 million and $87 million for the three months ended March 31, 2007 and March 31, 2006, respectively. All other intersegment revenues are not material. Financial data for business segments and products and services are as follows:
                                                         
    Electric Utilities            
    Traditional                                    
    Operating                           All        
    Companies   Southern Power   Eliminations   Total   Other   Eliminations   Consolidated
    (in millions)
Three Months Ended March 
31, 2007:
                                                       
Operating revenues
  $ 3,294     $ 192     $ (140 )   $ 3,346     $ 101     $ (38 )   $ 3,409  
Segment net income (loss)
    284       32             316       24       (1 )     339  
Total assets at March 31, 2007
  $ 39,107     $ 2,722     $ (73 )   $ 41,756     $ 1,993     $ (644 )   $ 43,105  
                                                         
    Electric Utilities            
    Traditional                                    
    Operating                           All        
    Companies   Southern Power   Eliminations   Total   Other   Eliminations   Consolidated
    (in millions)
Three Months Ended March 
31, 2006:
                                                       
Operating revenues
  $ 2,964     $ 140     $ (107 )   $ 2,997     $ 104     $ (38 )   $ 3,063  
Segment net income (loss)
    239       20             259       1       2       262  
Total assets at December 31, 2006
  $ 38,825     $ 2,691     $ (110 )   $ 41,406     $ 1,933     $ (481 )   $ 42,858  
 
Products and Services
                                 
    Electric Utilities Revenues
Period   Retail   Wholesale   Other   Total
    (in millions)
Three Months Ended March 31, 2007
  $ 2,744     $ 481     $ 121     $ 3,346  
Three Months Ended March 31, 2006
    2,471       415       111       2,997  
 
  (D)   MISSISSIPPI POWER RETAIL REGULATORY MATTERS
 
      See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters – Environmental Compliance Overview Plan” in Item 8 of the Form 10-K for information on Mississippi Power’s annual environmental filing with the Mississippi PSC. In February 2007, Mississippi Power filed with the Mississippi PSC its annual 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 in annual revenues for Mississippi Power. On April 13, 2007, the Mississippi PSC approved Mississippi Power’s ECO Plan as filed. The new rates are effective in May 2007.
 
      In April 2007, the Mississippi PSC issued an order allowing Mississippi Power to defer approximately $10.4 million of certain reliability related maintenance costs beginning January 1, 2007 and recover them over a four-year period beginning January 1, 2008. These costs relate to system upgrades and improvements that are now being made as a follow-up to the emergency repairs that were made subsequent to Hurricane Katrina. As of March 31, 2007, Mississippi Power had incurred and deferred approximately $2.1 million of such costs, which are included in Other Regulatory Assets on the Condensed Balance Sheets herein.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
  (E)   COMMON STOCK
 
      For Southern Company, the only difference in computing basic and diluted earnings per share is attributable to exercised options and outstanding options under the stock option plan. See Note 8 to the financial statements of Southern Company in Item 8 of the Form 10-K for further information on the stock option plan. The effect of the stock options was determined using the treasury stock method. Shares used to compute diluted earnings per share are as follows (in thousands):
                 
    Three Months   Three Months
    Ended   Ended
    March 31,   March 31,
    2007   2006
     
As reported shares
    750,259       742,195  
Effect of options
    5,093       4,844  
     
Diluted shares
    755,352       747,039  
     
  (F)   FINANCIAL INSTRUMENTS
 
      See Note 6 to the financial statements of Southern Company, the traditional operating companies, and Southern Power under “Financial Instruments” in Item 8 of the Form 10-K. At March 31, 2007, the fair value gain/(loss) of derivative energy contracts was reflected in the financial statements as follows (in millions):
                                                 
    Southern     Alabama     Georgia     Gulf     Mississippi     Southern  
    Company     Power     Power     Power     Power     Power  
     
Regulatory (assets)/ liabilities, net
  $ 11.0     $ (0.3 )   $ 3.8     $ 0.9     $ 6.6     $  
Accumulated other comprehensive income (loss)
    (0.2 )     (0.1 )                       (0.1 )
Net income (loss)
    0.1                               0.1  
 
Total fair value
  $ 10.9     $ (0.4 )   $ 3.8     $ 0.9     $ 6.6     $  
 
For the three months ended March 31, 2007, the unrealized gain/loss recognized in income for derivative energy contracts that are not hedges was immaterial for all registrants. For the three months ended March 31, 2006, the unrealized gain recognized in income was $2.2 million for Southern Power and was immaterial for the other registrants.
The amounts reclassified from other comprehensive income to fuel expense for the three-month period ending March 31, 2007 and 2006 were immaterial for each registrant. Additionally, no material ineffectiveness has been recorded in net income for the three months ended March 31, 2007 and 2006. The amounts expected to be reclassified from other comprehensive income to revenue for the next twelve-month period to March 31, 2008 is also immaterial for each registrant.
During 2006 and January 2007, Southern Company entered into derivative transactions to reduce its exposure to a potential phase-out of certain income tax credits related to synthetic fuel production in 2007. In accordance with Section 45K of the IRC, these tax credits are subject to limitation as the annual average price of oil increases. At March 31, 2007, the fair value of all derivative transactions related to synthetic fuel production was a $26.5 million net asset. For the three months ended March 31, 2007, the fair value gain recognized in income to mark the transactions to market was $6.4 million. In April 2007, Southern Company entered into further derivative transactions to offset remaining exposure to a potential phase out of tax credits in 2007. Southern Company received a net premium of $4.4 million under these transactions.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
     At March 31, 2007, Southern Company had $2.0 billion notional amount of interest rate derivatives outstanding with net fair value losses of $0.5 million as follows:
     Cash Flow Hedges
                             
            Weighted       Fair Value
        Variable   Average   Hedge   Gain (Loss)
    Notional   Rate   Fixed Rate   Maturity   March 31, 2007
    Amount   Received   Paid   Date   (in millions)
 
Alabama Power*
  $100 million   3-month LIBOR     6.15 %   November 2017   $ (1.6 )
Alabama Power*
  $100 million   3-month LIBOR     6.15 %   December 2017     (1.7 )
Georgia Power*
  $300 million   3-month LIBOR     5.75 %   July 2037     1.1  
Georgia Power**
  $400 million   Floating     3.85 %   December 2007  
Georgia Power
  $150 million   3-month LIBOR     5.25 %   June 2017     (0.9 )
Georgia Power
  $100 million   3-month LIBOR     5.10 %   December 2017     0.7  
Georgia Power
  $225 million   3-month LIBOR     5.26 %   March 2018     (1.1 )
Georgia Power
  $100 million   3-month LIBOR     5.12 %   June 2018     0.7  
Georgia Power
  $300 million   1-month LIBOR     2.68 %   June 2007     0.7  
Georgia Power
  $14 million   BMA Index     2.50 %   December 2007     0.1  
Gulf Power
  $85 million   3-month LIBOR     5.07 %   July 2017     0.7  
Gulf Power
  $80 million   3-month LIBOR     5.10 %   July 2018     0.8  
 
*   Interest rate collar showing rate cap
 
**   Interest rate collar with variable rate based on one-month LIBOR (showing rate cap)
The amounts reclassified from other comprehensive income to interest expense for the three-month period ending March 31, 2007 and 2006 was a loss of $3.5 million and $0.6 million, respectively, for Southern Company. No material ineffectiveness has been recorded in net income for any of the periods reported.
For the next twelve-month period ending March 31, 2008, the following table reflects the estimated pre-tax gains/(losses) that will be reclassified from other comprehensive income to interest expense (in millions):
         
Southern Company
  $ (17.5 )
Alabama Power
    (0.9 )
Georgia Power
    (2.2 )
Gulf Power
    (0.8 )
Southern Power
    (13.6 )

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
  (G)   RETIREMENT BENEFITS
 
      See Note 2 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power in Item 8 of the Form 10-K. Components of the pension plans’ and postretirement plans’ net periodic costs for the three-month periods ended March 31, 2007 and 2006 are as follows (in millions):
                                         
    Southern   Alabama   Georgia   Gulf   Mississippi
PENSION PLANS   Company   Power   Power   Power   Power
 
Three Months Ended March 31, 2007
                                       
Service cost
  $ 37     $ 9     $ 13     $ 2     $ 2  
Interest cost
    81       21       31       4       4  
Expected return on plan assets
    (120 )     (37 )     (49 )     (6 )     (5 )
Recognized net (gain)/loss
    10       3       4              
Net amortization
    2             1              
           
Net cost (income)
  $ 10     $ (4 )   $     $     $ 1  
           
 
Three Months Ended March 31, 2006
                                       
Service cost
  $ 38     $ 9     $ 13     $ 2     $ 2  
Interest cost
    75       19       30       3       3  
Expected return on plan assets
    (114 )     (35 )     (46 )     (5 )     (4 )
Recognized net (gain)/loss
    4       1       1              
Net amortization
    7       2       2              
           
Net cost (income)
  $ 10     $ (4 )   $     $     $ 1  
           
                                         
    Southern   Alabama   Georgia   Gulf   Mississippi
POSTRETIREMENT PLANS   Company   Power   Power   Power   Power
 
Three Months Ended March 31, 2007
                                       
Service cost
  $ 7     $ 2     $ 3     $     $  
Interest cost
    27       7       12       1       1  
Expected return on plan assets
    (13 )     (5 )     (7 )            
Net amortization
    10       3       5             1  
           
Net cost (income)
  $ 31     $ 7     $ 13     $ 1     $ 2  
           
 
Three Months Ended March 31, 2006
                                       
Service cost
  $ 7     $ 2     $ 3     $     $  
Interest cost
    25       6       11       1       1  
Expected return on plan assets
    (12 )     (4 )     (6 )            
Net amortization
    11       3       5              
        — -
Net cost (income)
  $ 31     $ 7     $ 13     $ 1     $ 1  
           
  (H)   EFFECTIVE TAX RATES
 
      See Note 5 to the financial statements of Southern Company and Georgia Power in Item 8 of the Form 10-K for information on each company’s effective income tax rate. Southern Company has recorded synthetic fuel tax credits as of the three months ended March 31, 2007 that are $23.1 million less than the synthetic fuel tax credits recorded for the same period in 2006, which resulted in an increase in income tax expense. The increase in income tax expense was partially offset by a $17.3 million reduction to tax credit reserves in the first quarter of 2007 compared to the first quarter 2006. See Note (B) herein for additional information regarding the production of synthetic fuel tax credits in 2007. The impact of the reduction in synthetic fuel tax credits and these reserves is an increase in Southern Company’s effective tax rate for the three months ended March 31, 2007 as compared to the same period in 2006.

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
      Georgia Power recorded certain state income tax credits that resulted in a lower effective income tax rate for the first quarter ended March 31, 2007 when compared to the same period in 2006. In September 2006, Georgia Power filed its 2005 income tax returns, which included certain other state income tax credits. Georgia Power has also filed similar claims for the years 2001 through 2004. The Georgia Department of Revenue is currently reviewing these claims. If approved as filed, such claims could have a significant, and possibly material, effect on Georgia Power’s net income. The ultimate outcome of this matter cannot now be determined.
 
  (I)   ADOPTION OF FIN 48
 
      On January 1, 2007, Southern Company, the traditional operating companies, and Southern Power adopted FIN 48, which requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement, and classification of income tax uncertainties, along with any related interest and penalties. Prior to adoption of FIN 48, Southern Company had unrecognized tax benefits of approximately $65 million, which included approximately $62 million for Georgia Power. As of adoption, an additional $146 million of unrecognized tax benefits were recorded, which resulted in a total balance of $211 million. The $146 million is associated with a tax timing difference which was recorded by reclassifying a deferred tax liability to an unrecognized tax benefit. Of the total $211 million unrecognized tax benefits, $65 million would impact Southern Company’s effective tax rate if recognized, which includes $62 million for Georgia Power. For the first three months of 2007, the total amount of unrecognized tax benefits increased by $7 million, resulting in a balance of $218 million as of March 31, 2007.
 
      Southern Company classifies interest on tax uncertainties as interest expense. The net amount of interest accrued as of adoption was $24 million. The impact of adopting FIN 48 on Southern Company’s financial statements was a reduction to beginning 2007 retained earnings of approximately $15 million. The other registrants’ retained earnings balances were not impacted by the adoption of FIN 48. Net interest accrued for the three months ended March 31, 2007 was $0.2 million.
 
      Southern Company files a consolidated federal income tax return. The IRS has audited and closed all tax returns prior to 2004. Southern Company also files income tax returns in various states. The audits for these returns have either been concluded, or the statute of limitations has expired, for years prior to 2002.
 
      Southern Company does not anticipate that the total unrecognized tax benefits will significantly change due to settlement of audits or litigatio