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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, 2005
 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. EmployerFile Number
    
    Address and Telephone Number
    
    Identification No.1-3526
    
    The Southern Company
    
    
    58-0690070(A Delaware Corporation)270 Peachtree Street, N.W.Atlanta, Georgia 30303(404) 506-50001-3164
    
    Alabama Power Company
    
    
    63-0004250(An Alabama Corporation)600 North 18th StreetBirmingham, Alabama 35291(205) 257-10001-6468
    
    Georgia Power Company
    
    
    58-0257110(A Georgia Corporation)241 Ralph McGill Boulevard, N.E.Atlanta, Georgia 30308(404) 506-65260-2429
    
    Gulf Power Company
    
    
    59-0276810(A Maine Corporation)One Energy PlacePensacola, Florida 32520(850) 444-6111001-11229
    
    Mississippi Power Company
    
    
    64-0205820(A Mississippi Corporation)2992 West BeachGulfport, Mississippi 39501(228) 864-12111-5072
    
    Savannah Electric and Power Company
    
    
    58-0418070(A Georgia Corporation)600 East Bay StreetSavannah, Georgia 31401(912) 644-7171333-98553
    
    Southern Power Company(A Delaware Corporation)
    
    
    58-2598670270 Peachtree Street, N.W.Atlanta, Georgia 30303(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 or15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrants were required to file such reports), and (2) have been
subject to such filing requirements for the past 90 days. Yes
þ  No
o Indicate by check
mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities
Exchange Act of 1934). Registrant
    
    
    Yes
    
    
    NoThe Southern Company
    
    
    üAlabama Power Company
    
    
    
    
    
    üGeorgia Power Company
    
    
    
    
    
    üGulf Power Company
    
    
    
    
    
    üMississippi Power Company
    
    
    
    
    
    üSavannah Electric and Power Company
    
    
    
    
    
    üSouthern Power Company
    
    
    
    
    
    ü
 Description of
    
    Shares OutstandingRegistrant
    
    Common Stock
    
    at March 31, 2005The Southern Company
    
    Par Value $5 Per Share
    
    
    744,318,776Alabama Power Company
    
    Par Value $40 Per Share
    
    
    8,250,000Georgia Power Company
    
    Without Par Value
    
    
    7,761,500Gulf Power Company
    
    Without Par Value
    
    
    992,717Mississippi Power Company
    
    Without Par Value
    
    
    1,121,000Savannah Electric and Power Company
    
    Par Value $5 Per Share
    
    
    10,844,635Southern Power Company
    
    Par Value $0.01 Per Share
    
    
    1,000
 This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company,
Georgia Power Company, Gulf Power Company, Mississippi Power Company, Savannah Electric and Power
Company, and Southern Power Company. Information contained herein relating to any individual
company is filed by such company on its own behalf. Each company makes no representation as to
information relating to the other companies. 2




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INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2005 PageNumberDEFINITIONS
    
    
    5CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
    
    
    6PART I  FINANCIAL INFORMATIONItem 1.
Financial Statements (Unaudited)Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsThe Southern Company and Subsidiary CompaniesCondensed Consolidated Statements of Income
    
    
    8Condensed Consolidated Statements of Cash Flows
    
    
    9Condensed Consolidated Balance Sheets
    
    
    10Condensed Consolidated Statements of Comprehensive Income
    
    
    12Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Alabama Power CompanyCondensed Statements of Income
    
    
    26Condensed Statements of Comprehensive Income
    
    
    26Condensed Statements of Cash Flows
    
    
    27Condensed Balance Sheets
    
    
    28Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Georgia Power CompanyCondensed Statements of Income
    
    
    39Condensed Statements of Comprehensive Income
    
    
    39Condensed Statements of Cash Flows
    
    
    40Condensed Balance Sheets
    
    
    41Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    43Gulf Power CompanyCondensed Statements of Income
    
    
    52Condensed Statements of Comprehensive Income
    
    
    52Condensed Statements of Cash Flows
    
    
    53Condensed Balance Sheets
    
    
    54Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    56Mississippi Power CompanyCondensed Statements of Income
    
    
    64Condensed Statements of Comprehensive Income
    
    
    64Condensed Statements of Cash Flows
    
    
    65Condensed Balance Sheets
    
    
    66Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    68Savannah Electric and Power CompanyCondensed Statements of Income
    
    
    76Condensed Statements of Comprehensive Income
    
    
    76Condensed Statements of Cash Flows
    
    
    77Condensed Balance Sheets
    
    
    78Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    80Southern Power CompanyCondensed Statements of Income
    
    
    88Condensed Statements of Comprehensive Income
    
    
    88Condensed Statements of Cash Flows
    
    
    89Condensed Balance Sheets
    
    
    90Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    92Notes to the Condensed Financial Statements
    
    
    97Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23
  3




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INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2005 PageNumberPART II  OTHER INFORMATIONItem 1.
    Legal Proceedings
    
    106Item 2.
    Unregistered Sales of Equity Securities and Use of Proceeds
    InapplicableItem 3.
    Defaults Upon Senior Securities
    InapplicableItem 4.
    Submission of Matters to a Vote of Security Holders
    InapplicableItem 5.
    Other Information
    InapplicableItem 6.
    Exhibits
    
    106Signatures
    
    110
 4




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DEFINITIONS TERM
    
    MEANINGAlabama Power
    
    Alabama Power CompanyAFUDC
    
    Allowance for funds used during constructionBMA
    
    Bond Market AssociationClean Air Act
    
    Clean Air Act Amendments of 1990DOE
    
    U.S. Department of EnergyECO Plan
    
    Environmental Compliance Overview PlanEPA
    
    U.S. Environmental Protection AgencyFASB
    
    Financial Accounting Standards BoardFERC
    
    Federal Energy Regulatory CommissionForm 10-K
    
    Combined Annual Report on Form 10-K of Southern Company,
Alabama Power, Georgia Power, Gulf Power, Mississippi Power,
Savannah Electric, and Southern Power for the year ended
December 31, 2004Georgia Power
    
    Georgia Power CompanyGulf Power
    
    Gulf Power CompanyIRC
    
    Internal Revenue Code of 1986, as amendedIRS
    
    Internal Revenue ServiceLIBOR
    
    London Interbank Offered RateMirant
    
    Mirant CorporationMississippi Power
    
    Mississippi Power CompanyMoodys
    
    Moodys Investors Service, Inc.MW
    
    MegawattsPEP
    
    Performance Evaluation PlanPPA
    
    Purchase Power AgreementPSC
    
    Public Service Commissionretail operating companies
    
    Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah ElectricRTO
    
    Regional Transmission OrganizationS&P
    
    Standard and Poors, a division of The McGraw-Hill Companies, Inc.Savannah Electric
    
    Savannah Electric and Power CompanySCS
    
    Southern Company Services, Inc.SEC
    
    Securities and Exchange CommissionSouthern Company
    
    The Southern CompanySouthern Company GAS
    
    Southern Company Gas LLCSouthern Company system
    
    Southern Company, the retail operating
companies, Southern Power, and other
subsidiariesSouthern Power
    
    Southern Power CompanySuper Southeast
    
    Southern Companys traditional service
territory, Alabama, Florida, Georgia, and
Mississippi, plus the surrounding states of
Kentucky, Louisiana, North Carolina, South
Carolina, Tennessee, and Virginia
 5




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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 Southern
Companys wholesale business, retail sales growth, storm damage cost recovery, environmental
regulations and expenditures, financing activities, completion of construction projects, and
estimated construction and other expenditures. In some cases, forward-looking statements can be
identified by terminology such as may, will, could, should, expects, plans,
anticipates, believes, estimates, projects, predicts, potential, or continue or the
negative of these terms or other 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, 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, IRS audits, and Mirant related 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 and gas, 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;
    the performance of projects undertaken by the non-utility businesses and the success of efforts to invest in and
develop new opportunities;
    internal restructuring or other restructuring options that may be pursued;
    potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured
to be completed or beneficial to Southern Company or its subsidiaries;
    the ability of counterparties of Southern Company and its subsidiaries to make payments as and when due;
    the ability to obtain new short- and long-term contracts with neighboring utilities;
    the direct or indirect effect on Southern Companys business resulting from terrorist incidents and the threat of
terrorist incidents;
    interest rate fluctuations and financial market conditions and the results of financing efforts, including Southern
Companys and its subsidiaries credit ratings;
    the ability of Southern Company and its subsidiaries to obtain additional generating capacity at competitive prices;
    catastrophic events such as fires, earthquakes, explosions, floods, hurricanes, or other similar occurrences;
    the direct or indirect effects on Southern Companys business resulting from incidents similar to the August 2003 power
outage in the Northeast;
    the effect of accounting pronouncements issued periodically by standard setting bodies; and
    other factors discussed elsewhere herein and in other reports filed by the registrants from time to time with the SEC. The registrants expressly disclaim any obligation to update any forward-looking statements. 6




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THE SOUTHERN COMPANY
AND SUBSIDIARY COMPANIES 7




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THE SOUTHERN COMPANY AND
SUBSIDIARY COMPANIES 
 CONDENSED CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
 For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Operating Revenues:Retail revenues
    
    $
    2,268,809
    
    
    $
    2,144,089Sales for resale
    
    
    347,065
    
    
    
    350,737Other electric revenues
    
    
    101,095
    
    
    
    93,571Other revenues
    
    
    147,491
    
    
    
    143,918Total operating revenues
    
    
    2,864,460
    
    
    
    2,732,315Operating Expenses:Fuel
    
    
    921,384
    
    
    
    838,772Purchased power
    
    
    98,216
    
    
    
    119,758Other operations
    
    
    526,099
    
    
    
    514,015Maintenance
    
    
    294,092
    
    
    
    237,497Depreciation and amortization
    
    
    292,609
    
    
    
    240,654Taxes other than income taxes
    
    
    162,998
    
    
    
    158,484Total operating expenses
    
    
    2,295,398
    
    
    
    2,109,180Operating Income
    
    
    569,062
    
    
    
    623,135Other Income and (Expense):Allowance for equity funds used during construction
    
    
    16,859
    
    
    
    8,184Interest income
    
    
    5,272
    
    
    
    7,654Equity in losses of unconsolidated subsidiaries
    
    
    (23,104
    )
    
    
    (25,316
    )Leveraged lease income
    
    
    18,248
    
    
    
    15,927Interest expense, net of amounts capitalized
    
    
    (138,986
    )
    
    
    (130,585
    )Interest expense to affiliate trusts
    
    
    (31,930
    )
    
    
    Distributions on mandatorily redeemable preferred securities
    
    
    
    
    
    
    (31,168
    )Preferred dividends of subsidiaries
    
    
    (7,402
    )
    
    
    (5,472
    )Other income (expense), net
    
    
    (5,736
    )
    
    
    (8,162
    )Total other income and (expense)
    
    
    (166,779
    )
    
    
    (168,938
    )Earnings Before Income Taxes
    
    
    402,283
    
    
    
    454,197Income taxes
    
    
    79,323
    
    
    
    123,055Consolidated Net Income
    
    $
    322,960
    
    
    $
    331,142Common Stock Data:Consolidated basic earnings per share
    
    $
    0.43
    
    
    $
    0.45Consolidated diluted earnings per share
    
    $
    0.43
    
    
    $
    0.45Average number of basic shares of common
stock outstanding (in thousands)
    
    
    744,025
    
    
    
    736,638Average number of diluted shares of common
stock outstanding (in thousands)
    
    
    748,672
    
    
    
    741,603Cash dividends paid per share of common stock
    
    $
    0.3575
    
    
    $
    0.350
 The accompanying notes as
they relate to Southern Company are an integral part
of these condensed financial statements. 8




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES 
 CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
 For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Operating Activities:Consolidated net income
    
    $
    322,960
    
    
    $
    331,142Adjustments to reconcile consolidated net income
to net cash provided from operating activities Depreciation and amortization
    
    
    343,071
    
    
    
    301,461Deferred income taxes and investment tax credits
    
    
    111,385
    
    
    
    130,231Allowance for equity funds used during construction
    
    
    (16,859
    )
    
    
    (7,996
    )Equity in losses of unconsolidated subsidiaries
    
    
    23,104
    
    
    
    25,316Leveraged lease income
    
    
    (18,248
    )
    
    
    (15,927
    )Pension, postretirement, and other employee benefits
    
    
    16,695
    
    
    
    15,915Tax benefit of stock options
    
    
    15,049
    
    
    
    11,731Hedge settlements
    
    
    (18,357
    )
    
    
    (1,966
    )Natural disaster reserve accounting order
    
    
    45,000
    
    
    
    Other, net
    
    
    (19,586
    )
    
    
    (53,324
    )Changes in certain current assets and liabilities Receivables, net
    
    
    (16,670
    )
    
    
    101,118Fossil fuel stock
    
    
    (36,951
    )
    
    
    23,978Materials and supplies
    
    
    (3,885
    )
    
    
    (2,932
    )Other current assets
    
    
    5,260
    
    
    
    (96,052
    )Accounts payable
    
    
    (88,579
    )
    
    
    (7,736
    )Accrued taxes
    
    
    (231,334
    )
    
    
    (134,227
    )Accrued compensation
    
    
    (275,701
    )
    
    
    (248,051
    )Other current liabilities
    
    
    14,458
    
    
    
    (65,345
    )Net cash provided from operating activities
    
    
    170,812
    
    
    
    307,336Investing Activities:Gross property additions
    
    
    (479,518
    )
    
    
    (515,233
    )Investment in unconsolidated subsidiaries
    
    
    (23,913
    )
    
    
    (8,215
    )Cost of removal net of salvage
    
    
    (16,040
    )
    
    
    (9,767
    )Construction receivables/payables, net
    
    
    (45,399
    )
    
    
    (20,632
    )Other
    
    
    13,658
    
    
    
    1,465Net cash used for investing activities
    
    
    (551,212
    )
    
    
    (552,382
    )Financing Activities:Increase in notes payable, net
    
    
    363,710
    
    
    
    107,398Proceeds Long-term debt
    
    
    500,000
    
    
    
    597,717Mandatorily redeemable preferred securities
    
    
    
    
    
    
    200,000Preferred stock
    
    
    
    
    
    
    100,000Common stock
    
    
    56,031
    
    
    
    48,702Redemptions Long-term debt
    
    
    (252,423
    )
    
    
    (282,524
    )Mandatorily redeemable preferred securities
    
    
    
    
    
    
    (240,000
    )Payment of common stock dividends
    
    
    (265,958
    )
    
    
    (257,506
    )Other
    
    
    (12,370
    )
    
    
    (14,524
    )Net cash provided from financing activities
    
    
    388,990
    
    
    
    259,263Net Change in Cash and Cash Equivalents
    
    
    8,590
    
    
    
    14,217Cash and Cash Equivalents at Beginning of Period
    
    
    373,199
    
    
    
    311,274Cash and Cash Equivalents at End of Period
    
    $
    381,789
    
    
    $
    325,491Supplemental Cash Flow Information:Cash paid during the period for Interest (net of $6,708 and $11,962 capitalized for 2005 and 2004, respectively)
    
    $
    170,760
    
    
    $
    142,750Income taxes (net of refunds)
    
    $
    31,855
    
    
    $
    25,884
 The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements. 9




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES 
 CONDENSED CONSOLIDATED
BALANCE SHEETS (UNAUDITED)
 At March 31,
    
    
    At December 31,Assets
    
    2005
    
    
    2004(in thousands)Current Assets:Cash and cash equivalents
    
    $
    381,789
    
    
    $
    373,199Receivables Customer accounts receivable
    
    
    718,831
    
    
    
    755,436Unbilled revenues
    
    
    252,412
    
    
    
    304,479Under recovered regulatory clause revenues
    
    
    609,742
    
    
    
    530,898Other accounts and notes receivable
    
    
    278,479
    
    
    
    310,971Accumulated provision for uncollectible accounts
    
    
    (38,722
    )
    
    
    (46,100
    )Fossil fuel stock, at average cost
    
    
    362,321
    
    
    
    325,370Vacation pay
    
    
    105,007
    
    
    
    105,437Materials and supplies, at average cost
    
    
    605,705
    
    
    
    601,820Prepaid expenses
    
    
    171,533
    
    
    
    126,059Other
    
    
    153,051
    
    
    
    75,134Total current assets
    
    
    3,600,148
    
    
    
    3,462,703Property, Plant, and Equipment:In service
    
    
    41,722,002
    
    
    
    41,437,517Less accumulated depreciation
    
    
    15,127,836
    
    
    
    14,950,93926,594,166
    
    
    
    26,486,578Nuclear fuel, at amortized cost
    
    
    214,975
    
    
    
    218,133Construction work in progress
    
    
    1,730,097
    
    
    
    1,656,772Total property, plant, and equipment
    
    
    28,539,238
    
    
    
    28,361,483Other Property and Investments:Nuclear decommissioning trusts, at fair value
    
    
    899,569
    
    
    
    904,828Leveraged leases
    
    
    994,248
    
    
    
    976,000Other
    
    
    362,446
    
    
    
    380,904Total other property and investments
    
    
    2,256,263
    
    
    
    2,261,732Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    878,715
    
    
    
    864,477Prepaid pension costs
    
    
    995,292
    
    
    
    985,633Unamortized debt issuance expense
    
    
    161,470
    
    
    
    153,351Unamortized loss on reacquired debt
    
    
    317,797
    
    
    
    323,394Other regulatory assets
    
    
    212,378
    
    
    
    248,953Other
    
    
    328,652
    
    
    
    300,360Total deferred charges and other assets
    
    
    2,894,304
    
    
    
    2,876,168Total Assets
    
    $
    37,289,953
    
    
    $
    36,962,086
 The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements. 10




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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
    
    2005
    
    
    2004(in thousands)Current Liabilities:Securities due within one year
    
    $
    1,053,609
    
    
    $
    983,282Notes payable
    
    
    789,097
    
    
    
    426,394Accounts payable
    
    
    728,169
    
    
    
    884,240Customer deposits
    
    
    206,135
    
    
    
    200,454Accrued taxes Income taxes
    
    
    41,024
    
    
    
    47,237Other
    
    
    154,432
    
    
    
    243,200Accrued interest
    
    
    182,017
    
    
    
    179,301Accrued vacation pay
    
    
    136,363
    
    
    
    137,452Accrued compensation
    
    
    154,384
    
    
    
    431,023Other
    
    
    275,468
    
    
    
    258,308Total current liabilities
    
    
    3,720,698
    
    
    
    3,790,891Long-term Debt
    
    
    10,655,460
    
    
    
    10,488,076Long-term Debt Payable to Affiliated Trusts
    
    
    1,960,644
    
    
    
    1,960,644Deferred Credits and Other Liabilities:Accumulated deferred income taxes
    
    
    5,299,736
    
    
    
    5,237,162Deferred credits related to income taxes
    
    
    334,530
    
    
    
    372,528Accumulated deferred investment tax credits
    
    
    545,322
    
    
    
    552,108Employee benefit obligations
    
    
    890,888
    
    
    
    864,216Asset retirement obligations
    
    
    918,514
    
    
    
    903,385Other cost of removal obligations
    
    
    1,311,351
    
    
    
    1,295,871Miscellaneous regulatory liabilities
    
    
    396,381
    
    
    
    350,166Other
    
    
    287,919
    
    
    
    308,880Total deferred credits and other liabilities
    
    
    9,984,641
    
    
    
    9,884,316Total Liabilities
    
    
    26,321,443
    
    
    
    26,123,927Preferred Stock of Subsidiaries
    
    
    560,450
    
    
    
    560,472Common Stockholders Equity:Common stock, par value $5 per share Authorized  1 billion sharesIssued   March 31, 2005: 744,574,000 Shares;
         December 31, 2004: 741,734,998 SharesTreasury   March 31, 2005: 255,224 Shares;
         December 31, 2004: 240,425 SharesPar value
    
    
    3,722,870
    
    
    
    3,708,675Paid-in capital
    
    
    925,696
    
    
    
    868,747Treasury, at cost
    
    
    (5,895
    )
    
    
    (5,557
    )Retained earnings
    
    
    5,895,565
    
    
    
    5,838,986Accumulated other comprehensive loss
    
    
    (130,176
    )
    
    
    (133,164
    )Total Common Stockholders Equity
    
    
    10,408,060
    
    
    
    10,277,687Total Liabilities and Stockholders Equity
    
    $
    37,289,953
    
    
    $
    36,962,086
 The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements. 11




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES 
 CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Consolidated Net Income
    
    $
    322,960
    
    
    $
    331,142Other comprehensive income (loss):Change in fair value of marketable securities, net of tax
of $(1,729) and $4,061, respectively
    
    
    (3,326
    )
    
    
    7,623Changes in fair value of qualifying hedges, net of tax
of $2,025 and $(7,711), respectively
    
    
    3,163
    
    
    
    (12,704
    )Reclassification adjustment for amounts included in net income,
net of tax of $2,010 and $2,171, respectively
    
    
    3,151
    
    
    
    3,490COMPREHENSIVE INCOME
    
    $
    325,948
    
    
    $
    329,551
 The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements. 12




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##### Table of Contents



THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES 
 MANAGEMENTS DISCUSSION AND ANALYSIS OF
 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FIRST QUARTER 2005 vs. FIRST QUARTER 2004 OVERVIEW Discussion of the results of operations is focused on Southern Companys primary business of
electricity sales in the Southeast by the retail operating companies  Alabama Power, Georgia
Power, Gulf Power, Mississippi Power, and Savannah Electric  and Southern Power. Southern Power
is an electric wholesale generation subsidiary with market-based rate authority. Southern
Companys other business activities include investments in synthetic fuels and leveraged lease
projects, telecommunications, energy-related services, and natural gas marketing. For additional
information on these businesses, see BUSINESS  The SOUTHERN System  Retail Operating Companies,
Southern Power, and Other Business in Item 1 of the Form 10-K. Southern Company continues to focus on several key performance indicators. These indicators
include customer satisfaction, peak season equivalent forced outage rate, return on equity, and
earnings per share. For additional information on these indicators, see MANAGEMENTS DISCUSSION AND
ANALYSIS  OVERVIEW  Key Performance Indicators of Southern Company in Item 7 of the Form 10-K. RESULTS OF OPERATIONS Earnings Southern Companys first quarter 2005 earnings were $323 million ($0.43 per share) compared
with $331 million ($0.45 per share) in the first quarter 2004. Earnings in the first quarter 2005
decreased due to milder than normal weather, the expiration of certain provisions of Georgia
Powers three-year retail rate plan ending December 31, 2004 (2001 Retail Rate Plan), and higher
non-fuel operation and maintenance costs as compared to the first quarter of 2004. These decreases
were partially offset by a base rate increase at Georgia Power and customer growth in the Southern
Company service area. Significant income statement items appropriate for discussion include the following: Increase (Decrease)First Quarter(in thousands)
    
    
    
    %Retail revenues
    
    $
    124,720
    
    
    
    5.8Other electric revenues
    
    
    7,524
    
    
    
    8.0Fuel expense
    
    
    82,612
    
    
    
    9.8Purchased power expense
    
    
    (21,542
    )
    
    
    (18.0
    )Other operations and maintenance expense
    
    
    68,679
    
    
    
    9.1Depreciation and amortization expense
    
    
    51,955
    
    
    
    21.6Allowance for equity funds used during construction
    
    
    8,675
    
    
    
    106.0Interest expense, net of amounts capitalized
    
    
    8,401
    
    
    
    6.4Income taxes
    
    
    (43,732
    )
    
    
    (35.5
    )
 Retail revenues.The chart below reflects the primary drivers of the 5.8% increase in retail
revenues in the first quarter 2005 compared to the prior year. Changes in revenue related to cost
recovery mechanisms such as fuel and environmental have no effect on net income. In the first
quarter 2005, retail kilowatt-hour energy sales decreased by 0.8% from the same period a year ago,
primarily due to milder weather. The decrease was partially offset by continued customer and demand
growth due to sustained economic growth in the Southeast. The number of retail customers increased
by 1.6% and weather-adjusted average consumption by retail customers increased by 1.1% in the first
quarter 2005 when compared with the first quarter 2004. 13




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Details of retail revenues are as follows: First Quarter(in millions)
    
    
    %Retail  prior year
    
    $
    2,144Change in Base rates
    
    
    47
    
    
    
    2.2Sales growth
    
    
    23
    
    
    
    1.1Weather
    
    
    (27
    )
    
    
    (1.3
    )Fuel cost recovery
    
    
    77
    
    
    
    3.6Other cost recovery
    
    
    5
    
    
    
    0.2Retail  current year
    
    $
    2,269
    
    
    
    5.8
    %
 Other electric revenues.In the first quarter 2005, when compared to the same period in 2004,
other electric revenues increased $7.5 million, or 8.0%, primarily due to higher transmission and
outdoor lighting revenues of $2.4 million and $1.5 million, respectively. Fuel expense. During the first quarter 2005, fuel expense was higher due to a 10.7% increase
in the average unit cost of fuel per net kilowatt-hour generated when compared to the same period
in the prior year. Increases in fuel expense at the retail operating companies are generally
offset by fuel revenues and do not affect net income. Purchased power expense.The decrease in the first quarter 2005 for purchased power compared
with the same period last year is primarily a result of lower kilowatt-hour purchases and a
decrease in the cost of purchased power per kilowatt-hour. These expenses do not have a
significant impact on earnings since energy expenses are generally offset by energy revenues. Other operations and maintenance expense.The $68.7 million increase in other operations and
maintenance in the first quarter 2005 is mainly attributable to $45 million of expenses recorded by
Alabama Power in accordance with an accounting order approved by the Alabama PSC to offset the
costs of Hurricane Ivan and restore the natural disaster reserve. In accordance with the
accounting order, Alabama Power also returned certain regulatory liabilities related to deferred
taxes to its retail customers; therefore, the combined effects of this accounting order had no
impact on net income. See Note 3 to the financial statements of Southern Company under Gulf Power
and Alabama Power Storm Damage Recovery in Item 8 of the
Form 10-K and Income taxes below for additional information. In
addition, fossil and hydro expenses increased $13.3 million as compared to the prior year primarily
due to lower than normal operation and maintenance spending in the first quarter 2004. Depreciation and amortization expense. The $52 million increase in depreciation and
amortization in the first quarter of 2005 is due to the expiration in 2004 of certain provisions in
Georgia Powers 2001 Retail Rate Plan. In accordance with the 2001 Retail Rate Plan, Georgia Power
amortized an accelerated cost recovery liability equally as a credit to amortization expense and
recognized new Georgia PSC-certified purchased power costs in rates evenly over the three years
ended December 31, 2004. This treatment resulted in a credit to amortization expense of $47
million during the first quarter of 2004. See Note 3 to the financial statements of Southern
Company under Georgia Power Retail Rate Activity in Item 8 of the Form 10-K for additional
information. Allowance for equity funds used during construction. The first quarter 2005 increase in AFUDC
compared to the same period in the prior year relates primarily to construction of the McIntosh
combined cycle units 10 and 11 by Georgia Power and Savannah Electric. See Note 3 to the financial
statements of Southern Company under Plant McIntosh Construction Project in Item 8 of the Form
10-K for further information. 14




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest expense, net of amounts capitalized.The increase in interest expense, net of
amounts capitalized in the first quarter 2005 when compared to the same period in 2004 is mainly
attributed to an increase in the amount of senior notes outstanding and lower amounts of interest
capitalized as projects have reached completion, partially offset by refinancing long-term debt
with lower interest-rate debt. 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. Income taxes.The decrease in income taxes in the first quarter 2005 compared to the prior
year is primarily due to the impact of the Alabama PSC accounting order discussed under Other
operations and maintenance expense above and is expected to
maintain Southern Companys annual effective income tax rate at
approximately 27% for 2005. See Note 5 to the financial statements of
Southern Company in Item 8 of the Form 10-K and Note (N) to the Condensed Financial Statements herein for additional information. FUTURE EARNINGS POTENTIAL The results of operations discussed above are not necessarily indicative of future earnings
potential. The level of Southern Companys future earnings depends on numerous factors that affect
the opportunities, challenges, and risks of Southern Companys primary business of selling
electricity. These factors include the retail operating companies ability to maintain a stable
regulatory environment, to achieve energy sales growth while containing costs, and to recover costs
related to growing demand and increasingly stringent environmental standards. Another major factor
is the profitability of the competitive market-based wholesale generating business and federal
regulatory policy, which may impact Southern Companys level of participation in this
market. Future earnings for the electricity business in the near term will depend, in part, upon
growth in energy sales, which is subject to a number of factors. 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 BUSINESS 
The SOUTHERN System  Risk Factors in Item 1 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 recovered. For additional information, including information on
certain environmental litigation, 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. Plant Wansley Environmental Litigation On March 11, 2005, the U.S. Court of Appeals for the Eleventh Circuit accepted Georgia Powers
petition for review of the U.S. District Court for the Northern District of Georgias December 15,
2004 order related to the Plant Wansley environmental litigation. Oral argument on that appeal has
not been scheduled. See 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. The ultimate outcome of this matter cannot now be determined. Other Environmental Matters The EPA issued the final Clean Air Interstate Rule on March 10, 2005. The rule addresses sulfur
dioxide (SO2) and nitrogen oxide (NOx) emissions that contribute to
nonattainment of the eight-hour ozone and fine particulate matter National Ambient Air Quality
Standards. Twenty-eight eastern states, including each of the 15




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS states within Southern Companys
service area, are subject to the fine particulate and/or the
eight-hour ozone requirements set forth within the rule. The rule may require
additional reductions of NOx and/or SO2 to be achieved by the installation of additional controls at Southern Company facilities or through the
purchase of allowances. The impact of this final rule on Southern Company will, however, depend on
the development and implementation of applicable state regulations and therefore cannot be
determined at this time. On March 15, 2005, the EPA announced the final Clean Air Mercury Rule, selecting a
cap-and-trade approach to be implemented in two phases, 2010 and 2018. The rule sets a permanent
cap on emissions at the 2018 level and provides for an emissions allowance trading market. The
impact of this final rule on Southern Company will depend on resolution of legal challenges and the
development and implementation of applicable state regulations and therefore cannot be determined
at this time. On April 15, 2005, the EPA announced plans to extend the deadline for issuance of final rules
addressing Best Available Retrofit Technology standards under its Regional Haze program until June
15, 2005. The EPA published a proposed rule on April 20, 2005 to approve redesignation of the Atlanta
metro area to attainment under the one-hour ozone standard. FERC and State PSC Matters Market-Based Rate Authority See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL  FERC and State
PSC Matters  Market-Based Rate Authority of Southern Company in Item 7 and Note 3 to the
financial statements of Southern Company under Market-Based Rate Authority in Item 8 of the
Form 10-K for information on the FERCs April 2004 order adopting a new interim analysis for
measuring generation market power and a proceeding initiated by the FERC in December 2004 to
assess Southern Companys generation dominance within its retail service territory. Each of the
retail operating companies and Southern Power has authorization from the FERC to sell power to
non-affiliates at market-based prices. The retail operating companies and Southern Power also
have FERC authority to make short-term opportunity sales at market rates. Specific FERC
approval must be obtained with respect to a market-based contract with an affiliate. As
directed by this order, on February 15, 2005, Southern Company submitted additional information
related to generation dominance in its retail service territory. Any new market-based rate
transactions in its retail service territory entered into after February 27, 2005 will be
subject to refund to the level of the default cost-based rates, pending the outcome of the
proceeding. In the event that the FERCs default mitigation measures are ultimately applied,
the retail operating companies and Southern Power may be required to charge cost-based rates for
certain wholesale sales in the Southern Company retail service territory, which may be lower
than negotiated market-based rates. The impact of such sales through
March 31, 2005 is not material to Southern Companys net income. The final outcome of this matter will depend on the form in
which the final methodology for assessing generation market power and mitigation rules may be
ultimately adopted and cannot be determined at this time. Generation Interconnection Agreements See MANAGEMENTS DISCUSSION AND ANALYSIS  FUTURE EARNINGS POTENTIAL  FERC and State PSC Matters
 Generation Interconnection Agreements of Southern Company in Item 7 of the Form 10-K for
information on the FERCs Order 2003 related to standardization of generation interconnection
agreements and procedures. The FERC has indicated that Order 2003, which was effective January 20,
2004, is to be applied prospectively to interconnection agreements. Subsidiaries of Tenaska, Inc.,
as counterparties to three previously executed interconnection agreements with subsidiaries of
Southern Company, have filed complaints at the FERC requesting that the FERC modify the agreements
and that Southern Company refund a total of $19 million previously paid for interconnection
facilities, with interest. Southern Company has also received similar requests from other entities
totaling approximately $14 million. Southern Company has 16




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS opposed such relief, and the proceedings are still pending. The impact of Order 2003 and its
subsequent rehearings on Southern Company and the final results of these matters cannot be
determined at this time. Retail Fuel Cost Recovery The retail operating companies each have established fuel cost recovery rates approved by their
respective state PSCs. In recent quarters, the retail operating companies have experienced higher
than expected fuel costs for coal and gas. These higher fuel costs have increased the under
recovered fuel costs included in the balance sheets. The retail operating companies will continue
to monitor the under recovered fuel cost balance in light of these higher fuel costs. Alabama Power fuel costs are recovered under Rate ECR (Energy Cost Recovery), which provides
for the addition of a fuel and energy cost factor to base rates. Alabama Powers under recovered
fuel costs as of March 31, 2005 totaled $96.4 million as compared to $101.6 million at December 31,
2004. Alabama Power increased its fuel billing factor in April 2005. See Note 3 to the financial
statements of Southern Company under Alabama Power Retail Regulatory Matters in Item 8 of the
Form 10-K and Note (H) to the Condensed Financial Statements herein for additional information. On February 18, 2005, Georgia Power filed a request with the Georgia PSC for a fuel cost
recovery rate increase. The requested increase, representing an average annual increase in
revenues of approximately 11.8%, will allow for the recovery of fuel costs based on an estimate of
future fuel costs, as well as the collection of the existing under recovery of fuel costs. The
Georgia PSC may require that this existing under recovery be collected over a period greater than
twelve months. Georgia Powers under recovered fuel costs as of March 31, 2005 totaled $455.2
million. Hearings before the Georgia PSC were held in April 2005. A final decision from the
Georgia PSC is expected in May 2005 with the new fuel rate effective June 1. The final outcome of
the filing cannot be determined at this time. For additional information on Georgia Powers current
fuel cost recovery rate, see Note 3 to the financial statements of Southern Company under Georgia
Power Retail Rate Activity in Item 8 of the Form 10-K and Note (I) to the Condensed Financial
Statements herein. Storm Damage Cost Recovery See MANAGEMENTS DISCUSSION AND ANALYSIS  FUTURE EARNINGS POTENTIAL  FERC and State PSC
Matters  Storm Damage Cost Recovery of Southern Company in Item 7 and Notes 1 and 3 to the
financial statements of Southern Company under Storm Damage Reserves and Gulf Power and
Alabama Power Storm Damage Recovery, respectively, in Item 8 of the Form 10-K. Each retail
operating company maintains a reserve for property damage to cover the cost of damages from
major storms to its transmission and distribution lines and the cost of uninsured damages to its
generation facilities and other property. Hurricane Ivan hit Gulf Powers service territory in September 2004. In March 2005, the
Florida PSC approved a Stipulation and Settlement between Gulf Power, the Office of Public
Counsel for the State of Florida, and the Florida Industrial Power Users Group which allows Gulf
Power to recover the retail portion of $51.7 million, the projected reserve deficiency, plus
interest and revenue taxes, from customers over a 24-month period beginning in April 2005. In
connection with the Stipulation, Gulf Power has agreed that it will not seek any additional
increase in its base rates and charges to become effective on or before March 1, 2007. Mirant Related Matters See MANAGEMENTS DISCUSSION AND ANALYSIS  FUTURE EARNINGS POTENTIAL  Other Matters of Southern
Company in Item 7 and Note 3 to the financial statements of Southern Company under Mirant Related
Matters in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein under
Mirant Related Matters. In July 2003, Mirant filed for voluntary reorganization under Chapter 17




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 of the U.S. Bankruptcy Code. In June 2004, Mirants bankruptcy counsel notified Southern
Company that it was investigating, on behalf of a committee of independent Mirant directors,
potential claims against Southern Company. On March 25, 2005, Mirant filed with the U.S.
Bankruptcy Court for the Northern District of Texas a First Amended Disclosure Statement relating to Mirants plan of reorganization. In the First
Amended Disclosure Statement, Mirant disclosed that its board of directors has authorized
litigation against Southern Company to recover certain transfers made by Mirant to Southern Company
from 1999 through 2001. Other than identifying these transfers, the First Amended Disclosure
Statement provided no factual or legal basis for any claim against Southern Company. Southern
Company believes there is no meritorious basis for a claim and intends to vigorously defend itself
in the event that Mirant brings an action to recover any amounts in connection with these
transfers. The ultimate outcome of any potential action by Mirant cannot be determined at this
time. Southern Company has various other contingent liabilities associated with Mirant, including
guarantees of contractual commitments, litigation, and joint and several liabilities in connection
with the consolidated federal income tax return. The ultimate outcome of such contingent
liabilities cannot now be determined. Income Tax Matters Leveraged Lease Transactions See MANAGEMENTS DISCUSSION AND ANALYSIS  FUTURE EARNINGS POTENTIAL  Income Tax Matters -
Leveraged Lease Transactions of Southern Company in Item 7 and Note 3 to the financial statements
of Southern Company under Income Tax Matters  Leveraged Lease Transactions in Item 8 of the Form
10-K and Note (B) to the Condensed Financial Statements 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. The ultimate outcome of these
matters cannot now be determined. Synthetic Fuel Tax Credits As discussed in Note 3 to the financial statements of Southern Company under Income Tax Matters -
Synthetic Fuel Tax Credits in Item 8 of the Form 10-K, Southern Company has investments in two
entities that produce synthetic fuel and receive tax credits under Section 29 of the IRC. In
accordance with Section 29 of the IRC, these tax credits are subject to limitation as the annual
average price of oil (as determined by the DOE) increases over a specified, inflation-adjusted
dollar amount published in the spring of the subsequent year. Southern Company, along with its
partners in these investments, will continue to monitor oil prices. Any indicated potential
limitation on these credits could affect either the timing or the amount of the credit recognition
and could also require an impairment analysis of these investments by Southern Company. Subsequent
to March 31, 2005, Southern Company entered into a derivative transaction designed to reduce its
exposure to the potential phase-out of these credits in 2005. The purchased
option, which had an initial fair value of approximately $7 million,
will be marked to market over the remainder of the year through other
income (expense), net. Other Matters On April 8, 2005, Southern Power entered into an agreement with Constellation Power, Inc. and
certain other subsidiaries of Constellation Energy Group, Inc. to acquire all of the outstanding
general and limited partnership interests of Oleander Power Project, L.P. (Oleander), for an
aggregate purchase price of approximately $206 million. The purchase price is subject to certain
working capital and timing of closing adjustments. Oleander owns a dual-fueled generating plant in
Brevard County, Florida with a nominal installed capacity of 680 MW. The entire output of the
plant is sold under separate PPAs with Florida Power & Light Company and Seminole Electric
Cooperative, Inc. The PPAs expire in 2007 and 2009, respectively. The acquisition is subject to
certain regulatory approvals, including the approval of the FERC, as well as review by the Federal
Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act. 18




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Southern Company is subject to certain claims and legal actions arising in the ordinary course
of business. In addition, Southern Companys business activities are subject to extensive
governmental regulation related to public health and the environment. Litigation over
environmental issues and claims of various types, including property damage, personal injury, and
citizen enforcement of environmental requirements, has increased generally throughout the United
States. In particular, personal injury claims for damages caused by alleged exposure to hazardous
materials have become more frequent. The ultimate outcome of such litigation against Southern
Company and its subsidiaries cannot be predicted at this time; however, management does not
anticipate that the liabilities, if any, arising from such current proceedings would have a
material adverse effect on Southern Companys financial statements. See the Notes to the Condensed Financial Statements herein for discussion of various
contingencies and other matters which may affect future earnings potential. ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates Southern Company prepares its consolidated financial statements in accordance with accounting
principles generally accepted in the United States. Significant accounting policies are
described in Note 1 to the financial statements of Southern Company in Item 8 of the Form 10-K.
In the application of these policies, certain estimates are made that may have a material impact
on Southern Companys results of operations and related disclosures. Different assumptions and
measurements could produce estimates that are significantly different from those recorded in the
financial statements. Also see MANAGEMENTS DISCUSSION AND ANALYSIS  ACCOUNTING POLICIES -
Application of Critical Accounting Policies and Estimates of Southern Company in Item 7 of the
Form 10-K for a complete discussion of Southern Companys critical accounting policies and
estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues. New Accounting Standards FASB Statement No. 123R, Share-Based Payments, was issued in December 2004. This statement
requires that compensation cost relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the grant date fair value of the
equity or liability instruments issued. In April 2005, the SEC amended the compliance dates for
FASB Statement No. 123R. For Southern Company, this statement is now effective beginning
January 1, 2006. Although the compensation expense calculation required under the revised
statement differs slightly, the impacts on Southern Companys financial statements are expected
to be similar to the pro forma disclosures included in Note 1 to the financial statements of
Southern Company under Stock Options in Item 8 of the Form 10-K and in Note (C) to the
Condensed Financial Statements herein. FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations,
was issued in March 2005. This interpretation requires that asset retirement obligations be
recorded when a legal obligation exists even though the timing and/or the method of settlement are
conditional on a future event. For Southern Company, FIN 47 is effective no later than December
31, 2005. Southern Company is currently assessing the impact of FIN 47 on its balance sheet;
however, adoption is not currently expected to have a material impact on Southern Companys income
statement. In December 2004, the FASB issued Staff Position No. 109-1 (FSP 109-1), Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities provided by the American Jobs Creation Act of 2004, which requires that the generation
deduction for utilities be accounted for as a special tax deduction rather than as a tax rate
reduction. Southern Company adopted FSP 109-1 in the first quarter of 2005 with no material impact
on its financial statements. 19




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION AND LIQUIDITY Overview Southern Companys financial condition continued to be strong at March 31, 2005. Net cash flow
from operating activities totaled $170 million for the first quarter 2005, compared to $307
million for the first quarter 2004. The $137 million decrease in 2005 resulted primarily from
higher fuel costs at the retail operating companies. Those costs are recoverable in future
periods and are reflected on the balance sheets as under recovered regulatory clause revenues.
Gross property additions to utility plant were $480 million in the first quarter 2005. The
majority of funds needed for gross property additions since 2000 has been provided from
operating activities. Significant balance sheet changes include a $237 million increase in long-term debt for the
first quarter 2005 due to the replacement of short-term financing with long-term debt, consistent
with Southern Companys finance policy, and an increase of $178 million in property, plant, and
equipment. The market price of Southern Companys common stock at March 31, 2005 was $31.83 per share and
the book value was $13.98 per share, representing a market-to-book ratio of 228%, compared to
$33.52, $13.86, and 242%, respectively, at the end of 2004. The dividend for the first quarter
2005 was $0.3575 per share compared to $0.35 per share in the first quarter 2004. In April 2005,
the dividend was increased to $0.3725 per share for the dividend payable in June 2005. The retail operating companies, Southern Power, and SCS have each maintained investment grade
ratings from the major rating agencies. Capital Requirements and Contractual Obligations See MANAGEMENTS DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY Capital Requirements
and Contractual Obligations of Southern Company in Item 7 of the Form 10-K for a description of
Southern Companys capital requirements for its construction program and other funding requirements
associated with scheduled maturities of long-term debt, as well as the related interest, preferred
stock dividends, leases, trust funding requirements, and other purchase commitments. Approximately
$745 million will be required by March 31, 2006 for redemptions and maturities of long-term debt. Sources of Capital Southern Company intends to meet its future capital needs through internal cash flow and external
security issuances. The amounts and timing of additional equity capital to be raised will be
contingent on Southern Companys investment opportunities. The retail operating companies and
Southern Power plan to obtain the funds required for construction and other purposes from sources similar to those used in the past,
which were primarily from operating cash flows, security issuances, and term loan and short-term
borrowings. However, the a mount, type, and timing of any financings, if needed, will
depend upon market conditions and regulatory approval. 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. To meet short term cash needs and contingencies, the Southern Company system had at March 31,
2005 approximately $382 million of cash and cash equivalents and approximately $3.2 billion of
unused credit arrangements with banks, of which $1.8 billion expire in 2005 and $1.4 billion expire
in 2006 and beyond. Of the facilities maturing in 2005 and 2006, $1.2 billion contain provisions
allowing two-year term loans executable at the expiration date and $275 million contain provisions
allowing one-year term loans executable at the expiration date. These unused credit arrangements
also provide liquidity support to variable rate pollution control bonds and commercial paper
programs. Southern Company expects to renew its credit 20




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS facilities, as needed, prior to expiration. The retail operating companies may also meet
short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial
paper and extendible commercial notes at the request and for the benefit of each of the retail
operating companies. At March 31, 2005, the Southern Company system had outstanding commercial
paper of $714.5 million and extendible commercial notes of $24.6 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- or Baa3 or below. These contracts are primarily for physical electricity
purchases and sales. At March 31, 2005, the maximum potential collateral requirements at a BBB-
or Baa3 rating were approximately $43 million. The maximum potential collateral requirements at
a rating below BBB- or Baa3 were approximately $326 million. Generally, collateral may be
provided for by a Southern Company guaranty, letter of credit, or cash. Southern Company is
also party to certain derivative agreements that could require collateral and/or accelerated
payment in the event of a credit rating change to below investment grade. These agreements are
primarily for natural gas price and interest rate risk management activities. At March 31, 2005,
Southern Company and its subsidiaries had no exposure under these contracts. Market Price Risk Southern Companys market risk exposures relative to interest rate changes have not changed
materially compared with the December 31, 2004 reporting period. In addition, Southern Company is
not aware of any facts or circumstances that would significantly affect such exposures in the near
term. Due to cost-based rate regulations, the retail operating companies have limited exposure to
market volatility in interest rates, commodity fuel prices, and prices of electricity. In
addition, Southern Powers exposure to market volatility in commodity fuel prices and prices of
electricity is limited because its long-term sales contracts shift substantially all fuel cost
responsibility to the purchaser. To mitigate residual risks relative to movements in
electricity prices, the retail operating companies and Southern Power enter into fixed-price
contracts for the purchase and sale of electricity through the wholesale electricity market and,
to a lesser extent, into similar contracts for gas purchases. The retail operating companies
have implemented fuel hedging programs at the instruction of their respective state PSCs.
Southern Company GAS also has in place a risk management program to substantially mitigate its
exposure to price volatility for its natural gas purchases. 21




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##### Table of Contents



THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS The fair value of derivative energy contracts at March 31, 2005 was as follows: First Quarter2005ChangesFair Value(in millions)Contracts beginning of period
    
    $
    10.5Contracts realized or settled
    
    
    10.0New contracts at inception
    
    
    Changes in valuation techniques
    
    
    Current period changes (a)
    
    
    99.0Contracts at March 31, 2005
    
    $
    119.5
  (a)
    Current period changes also include the changes in fair value of new contracts entered
into during the period. Source of March 31, 2005Valuation PricesTotal
    
    
    MaturityFair Value
    
    
    Year 1
    
    
    1-3 Years(in millions)Actively quoted
    
    $
    120.6
    
    
    $
    92.3
    
    
    $
    28.3External sources
    
    
    (1.1
    )
    
    
    (1.1
    )
    
    
    Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at March 31, 2005
    
    $
    119.5
    
    
    $
    91.2
    
    
    $
    28.3
 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 2005, Southern Company and its subsidiaries issued $500 million of
senior notes and $55 million of common stock through employee and director stock plans. The
proceeds were primarily used to refund senior notes and other long-term debt and to fund ongoing
construction projects. The remainder was used to repay short-term indebtedness. See Southern
Companys Condensed Consolidated Statements of Cash Flows herein for further details on financing
activities during the first three months of 2005. Subsequent to March 31, 2005, Georgia Power issued $125 million of Series Y 5.80% Senior
Notes. Additionally, Georgia Power refinanced $85 million of obligations incurred in connection
with pollution control bonds. Also, subsequent to March 31, 2005, Georgia Power entered
into an interest rate swap related to the Series Y 5.80% Senior Notes issued in April 2005. The
interest rate swap had a fixed rate of 4.984%, a final maturity of 2015, and was terminated at a
cost of $0.3 million. This cost will be amortized over a 10-year period. 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. 22




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##### Table of Contents



PART I 
 Item 3. Quantitative And Qualitative Disclosures About Market Risk. See MANAGEMENTS DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY  Market Price Risk
herein for each registrant and Notes 1 and 6 to the financial statements of each registrant under
Financial Instruments in Item 8 of the Form 10-K. Also, see Note (F) to the Condensed Financial
Statements herein for information relating to derivative instruments. 
 Item 4. Controls and Procedures. (a) Evaluation of disclosure controls and procedures. Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern
Power As of the end of the period covered by this quarterly report, Southern Company, Alabama Power,
Georgia Power, Gulf Power, Mississippi Power, and Southern Power conducted separate evaluations
under the supervision and with the participation of each companys management, including the Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation
of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934). Based upon these evaluations, the Chief Executive Officer and
the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures
are effective in alerting them in a timely manner to material information relating to their company
(including its consolidated subsidiaries, if any) required to be included in periodic filings with
the SEC. Savannah Electric As of the end of the period covered by this quarterly report, Savannah Electric conducted an
evaluation under the supervision and with the participation of its management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
the disclosure controls and procedures (as defined in Section 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934). Based upon these evaluations, which took into consideration the
revisions made in February 2005 to Savannah Electrics process and controls related to unbilled
revenues which are described below, the Chief Executive Officer and the Chief Financial Officer
concluded that the disclosure controls and procedures were effective in alerting them in a timely
manner to material information relating to Savannah Electric required to be included in periodic
filings with the SEC. As disclosed in the Form 10-K, in connection with the review and preparation of the financial
statements of Savannah Electric for the year ended December 31, 2004, errors in Savannah Electrics
estimates of unbilled revenues for the years ended December 31, 2003 and 2002 and periods prior to
2002 were identified. The errors also affected Savannah Electrics previously issued financial
statements for the quarters ended March 31, June 30, and September 30, 2004 and 2003. Savannah
Electrics financial statements were restated to reflect adjustments to the financial information
previously reported. See Note 9 to the financial statements of Savannah Electric in Item 8 of the
Form 10-K. In February 2005, management revised its process and controls related to estimating unbilled
revenues to utilize a gross change methodology that reverses each periods estimate in total in the
following period. 23




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##### Table of Contents



(b) Changes in internal controls. Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern
Power 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 2005 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. Savannah Electric As described above under Disclosure Controls and Procedures, Savannah Electric made changes
to its process and controls related to estimating unbilled revenues in February 2005. Otherwise,
there have been no changes in Savannah Electric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 2005 that have materially affected or are reasonably likely to
materially affect Savannah Electrics internal control over financial reporting. 24




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##### Table of Contents



ALABAMA POWER COMPANY 25




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##### Table of Contents



ALABAMA POWER COMPANY 
 CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Operating Revenues:Retail revenues
    
    $
    709,086
    
    
    $
    744,633Sales for resale Non-affiliates
    
    
    114,414
    
    
    
    111,945Affiliates
    
    
    107,286
    
    
    
    65,788Other revenues
    
    
    38,950
    
    
    
    37,328Total operating revenues
    
    
    969,736
    
    
    
    959,694Operating Expenses:Fuel
    
    
    299,820
    
    
    
    271,979Purchased power Non-affiliates
    
    
    23,866
    
    
    
    28,642Affiliates
    
    
    48,298
    
    
    
    59,932Other operations
    
    
    146,290
    
    
    
    146,386Maintenance
    
    
    123,554
    
    
    
    80,387Depreciation and amortization
    
    
    108,491
    
    
    
    105,353Taxes other than income taxes
    
    
    62,549
    
    
    
    64,447Total operating expenses
    
    
    812,868
    
    
    
    757,126Operating Income
    
    
    156,868
    
    
    
    202,568Other Income and (Expense):Allowance for equity funds used during construction
    
    
    5,654
    
    
    
    4,110Interest income
    
    
    3,568
    
    
    
    4,439Interest expense, net of amounts capitalized
    
    
    (46,307
    )
    
    
    (50,079
    )Interest expense to affiliate trusts
    
    
    (4,059
    )
    
    
    Distributions on mandatorily redeemable preferred securities
    
    
    
    
    
    
    (3,938
    )Other income (expense), net
    
    
    (2,805
    )
    
    
    (4,338
    )Total other income and (expense)
    
    
    (43,949
    )
    
    
    (49,806
    )Earnings Before Income Taxes
    
    
    112,919
    
    
    
    152,762Income taxes
    
    
    13,445
    
    
    
    57,268Net Income
    
    
    99,474
    
    
    
    95,494Dividends on Preferred Stock
    
    
    6,072
    
    
    
    4,747Net Income After Dividends on Preferred Stock
    
    $
    93,402
    
    
    $
    90,747
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Net Income After Dividends on Preferred Stock
    
    $
    93,402
    
    
    $
    90,747Other comprehensive loss:Changes in fair value of qualifying hedges, net of tax
of $(713) and $(6,162), respectively
    
    
    (1,172
    )
    
    
    (10,136
    )Reclassification adjustment for amounts included in net income,
net of tax of $66 and $854, respectively
    
    
    108
    
    
    
    1,405COMPREHENSIVE INCOME
    
    $
    92,338
    
    
    $
    82,016
 The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements. 26




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##### Table of Contents



ALABAMA POWER COMPANY 
 CONDENSED STATEMENTS
OF CASH FLOWS (UNAUDITED)
 For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Operating Activities:Net income
    
    $
    99,474
    
    
    $
    95,494Adjustments to reconcile net income
to net cash provided from operating activities Depreciation and amortization
    
    
    127,300
    
    
    
    124,220Deferred income taxes and investment tax credits, net
    
    
    64
    
    
    
    35,416Deferred revenues
    
    
    (3,555
    )
    
    
    (3,080
    )Allowance for equity funds used during construction
    
    
    (5,654
    )
    
    
    (4,110
    )Pension, postretirement, and other employee benefits
    
    
    (1,227
    )
    
    
    (12,907
    )Tax benefit of stock options
    
    
    5,302
    
    
    
    4,091Hedge settlements
    
    
    (19,942
    )
    
    
    (1,706
    )Natural disaster reserve accounting order
    
    
    45,000
    
    
    
    Other, net
    
    
    (4,881
    )
    
    
    3,110Changes in certain current assets and liabilities Receivables, net
    
    
    31,219
    
    
    
    3,258Fossil fuel stock
    
    
    (26,299
    )
    
    
    9,043Materials and supplies
    
    
    (9,039
    )
    
    
    (3,448
    )Other current assets
    
    
    (11,661
    )
    
    
    (70,705
    )Accounts payable
    
    
    (88,387
    )
    
    
    (63,611
    )Accrued taxes
    
    
    (27,128
    )
    
    
    49,427Accrued compensation
    
    
    (45,701
    )
    
    
    (47,924
    )Other current liabilities
    
    
    36,423
    
    
    
    6,368Net cash provided from operating activities
    
    
    101,308
    
    
    
    122,936Investing Activities:Gross property additions
    
    
    (197,648
    )
    
    
    (204,249
    )Cost of removal net of salvage
    
    
    (8,824
    )
    
    
    (9,272
    )Other
    
    
    (189
    )
    
    
    14,048Net cash used for investing activities
    
    
    (206,661
    )
    
    
    (199,473
    )Financing Activities:Proceeds Senior notes
    
    
    250,000
    
    
    
    200,000Preferred stock
    
    
    
    
    
    
    100,000Common stock
    
    
    
    
    
    
    20,000Redemptions  Other long-term debt
    
    
    (3
    )
    
    
    (1,438
    )Payment of preferred stock dividends
    
    
    (4,742
    )
    
    
    (4,636
    )Payment of common stock dividends
    
    
    (102,475
    )
    
    
    (109,325
    )Other
    
    
    (2,344
    )
    
    
    (4,807
    )Net cash provided from financing activities
    
    
    140,436
    
    
    
    199,794Net Change in Cash and Cash Equivalents
    
    
    35,083
    
    
    
    123,257Cash and Cash Equivalents at Beginning of Period
    
    
    84,461
    
    
    
    42,752Cash and Cash Equivalents at End of Period
    
    $
    119,544
    
    
    $
    166,009Supplemental Cash Flow Information:Cash paid during the period for Interest (net of $2,078 and $1,648 capitalized for 2005 and 2004, respectively)
    
    $
    26,375
    
    
    $
    36,445Income taxes (net of refunds)
    
    $
    23,154
    
    
    $
    2,140
 The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements. 27




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##### Table of Contents



ALABAMA POWER COMPANY 
 CONDENSED BALANCE
SHEETS (UNAUDITED)
 At March 31,
    
    
    At December 31,Assets
    
    2005
    
    
    2004(in thousands)Current Assets:Cash and cash equivalents
    
    $
    119,544
    
    
    $
    84,461Receivables Customer accounts receivable
    
    
    220,704
    
    
    
    235,221Unbilled revenues
    
    
    76,807
    
    
    
    96,486Under recovered regulatory clause revenues
    
    
    101,340
    
    
    
    119,773Other accounts and notes receivable
    
    
    49,918
    
    
    
    52,145Affiliated companies
    
    
    71,553
    
    
    
    61,149Accumulated provision for uncollectible accounts
    
    
    (6,882
    )
    
    
    (5,404
    )Fossil fuel stock, at average cost
    
    
    84,087
    
    
    
    57,787Vacation pay
    
    
    36,494
    
    
    
    36,494Materials and supplies, at average cost
    
    
    246,958
    
    
    
    237,919Prepaid expenses
    
    
    75,063
    
    
    
    61,897Other
    
    
    36,348
    
    
    
    11,268Total current assets
    
    
    1,111,934
    
    
    
    1,049,196Property, Plant, and Equipment:In service
    
    
    14,780,404
    
    
    
    14,636,168Less accumulated provision for depreciation
    
    
    5,154,335
    
    
    
    5,097,9309,626,069
    
    
    
    9,538,238Nuclear fuel, at amortized cost
    
    
    90,208
    
    
    
    93,388Construction work in progress
    
    
    478,806
    
    
    
    470,844Total property, plant, and equipment
    
    
    10,195,083
    
    
    
    10,102,470Other Property and Investments:Equity investments in unconsolidated subsidiaries
    
    
    45,457
    
    
    
    45,455Nuclear decommissioning trusts, at fair value
    
    
    443,900
    
    
    
    445,634Other
    
    
    36,553
    
    
    
    36,192Total other property and investments
    
    
    525,910
    
    
    
    527,281Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    330,395
    
    
    
    316,528Prepaid pension costs
    
    
    493,455
    
    
    
    489,193Unamortized debt issuance expense
    
    
    29,650
    
    
    
    28,392Unamortized loss on reacquired debt
    
    
    107,347
    
    
    
    109,403Other regulatory assets
    
    
    8,916
    
    
    
    46,603Other
    
    
    108,982
    
    
    
    114,393Total deferred charges and other assets
    
    
    1,078,745
    
    
    
    1,104,512Total Assets
    
    $
    12,911,672
    
    
    $
    12,783,459
 The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements. 28




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##### Table of Contents



ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At March 31,
    
    
    At December 31,Liabilities and Stockholder's Equity
    
    2005
    
    
    2004(in thousands)Current Liabilities:Securities due within one year
    
    $
    395,005
    
    
    $
    225,005Accounts payable Affiliated
    
    
    101,028
    
    
    
    141,096Other
    
    
    137,392
    
    
    
    198,834Customer deposits
    
    
    51,460
    
    
    
    49,598Accrued taxes Income taxes
    
    
    44,203
    
    
    
    28,498Other
    
    
    48,409
    
    
    
    29,688Accrued interest
    
    
    60,114
    
    
    
    40,029Accrued vacation pay
    
    
    36,494
    
    
    
    36,494Accrued compensation
    
    
    31,157
    
    
    
    76,858Other
    
    
    35,174
    
    
    
    26,365Total current liabilities
    
    
    940,436
    
    
    
    852,465Long-term Debt
    
    
    3,935,527
    
    
    
    3,855,257Long-term Debt Payable to Affiliated Trusts
    
    
    309,279
    
    
    
    309,279Deferred Credits and Other Liabilities:Accumulated deferred income taxes
    
    
    1,870,314
    
    
    
    1,885,120Deferred credits related to income taxes
    
    
    114,932
    
    
    
    148,395Accumulated deferred investment tax credits
    
    
    202,614
    
    
    
    205,353Employee benefit obligations
    
    
    197,872
    
    
    
    194,837Deferred capacity revenues
    
    
    21,501
    
    
    
    25,056Asset retirement obligations
    
    
    390,051
    
    
    
    383,621Asset retirement obligation regulatory liability
    
    
    155,059
    
    
    
    159,230Other cost of removal obligations
    
    
    603,703
    
    
    
    597,147Miscellaneous regulatory liabilities
    
    
    77,912
    
    
    
    55,459Other
    
    
    21,963
    
    
    
    36,989Total deferred credits and other liabilities
    
    
    3,655,921
    
    
    
    3,691,207Total Liabilities
    
    
    8,841,163
    
    
    
    8,708,208Preferred Stock
    
    
    465,046
    
    
    
    465,047Common Stockholders Equity:Common stock, par value $40 per share Authorized - 15,000,000 sharesOutstanding - 8,250,000 shares
    
    
    330,000
    
    
    
    330,000Paid-in capital
    
    
    1,960,483
    
    
    
    1,955,183Retained earnings
    
    
    1,332,072
    
    
    
    1,341,049Accumulated other comprehensive loss
    
    
    (17,092
    )
    
    
    (16,028
    )Total common stockholders equity
    
    
    3,605,463
    
    
    
    3,610,204Total Liabilities and Stockholders Equity
    
    $
    12,911,672
    
    
    $
    12,783,459
 The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements. 29




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##### Table of Contents



ALABAMA POWER COMPANY 
   FIRST QUARTER 2005 vs. FIRST QUARTER 2004 OVERVIEW Discussion of the results of operations is focused on Alabama Powers business of
electricity sales to retail customers within its traditional service area located within the State
of Alabama and to wholesale customers in the Southeast. Many factors affect the opportunities,
challenges, and risks of Alabama Powers business of selling electricity. These factors
include the ability to maintain a stable regulatory environment, to achieve energy sales growth
while containing costs, and to recover costs related to growing demand and increasingly stringent
environmental standards. Alabama Power continues to focus on several key performance indicators. These indicators
include customer satisfaction, peak season equivalent forced outage rate, and return on equity. For
additional information on these indicators, see MANAGEMENTS DISCUSSION AND ANALYSIS  OVERVIEW 
Key Performance Indicators of Alabama Power in Item 7 of the Form 10-K. RESULTS OF OPERATIONS Earnings Alabama Powers net income after dividends on preferred stock for the first quarter 2005 was $93.4
million compared to $90.7 million for the corresponding period of 2004. Earnings in the first
quarter of 2005 increased by $2.7 million, or 2.9%, primarily due to an increase in industrial
revenues reflecting sustained economic strength and a decrease in interest expense. In addition,
retail rates increased 1% in January 2005 resulting from an environmental rate order of the Alabama
PSC. Significant income statement items appropriate for discussion include the following: Increase (Decrease)First Quarter(in thousands)
    
    
    %Retail revenues
    
    $
    (35,547
    )
    
    
    (4.8
    )Sales for resale  affiliates
    
    
    41,498
    
    
    
    63.1Fuel expense
    
    
    27,841
    
    
    
    10.2Purchased power expense  non-affiliates
    
    
    (4,776
    )
    
    
    (16.7
    )Purchased power expense  affiliates
    
    
    (11,634
    )
    
    
    (19.4
    )Maintenance expense
    
    
    43,167
    
    
    
    53.7Income tax expense
    
    
    (43,823
    )
    
    
    (76.5
    )Interest expense, net of amounts capitalized
    
    
    (3,772
    )
    
    
    (7.5
    )
 Retail revenues. The chart below reflects the primary drivers of the 4.8% decrease in retail
revenues in the first quarter 2005 compared to the same period in the prior year. Energy cost
recovery revenues and revenues associated with the recovery of costs associated with the PPAs
certificated by the Alabama PSC (Rate CNP-PPA) generally do not affect net income. Excluding these
revenues, retail revenues decreased by $1.2 million, or 0.2%, for the first quarter 2005 when
compared to the corresponding period in 2004. Kilowatt-hour energy sales to residential and
commercial customers decreased 3.7% and 1.6%, respectively, for the first quarter 2005 when
compared to the corresponding period of 2004 primarily due to less favorable weather conditions in
2005. Kilowatt-hour energy sales to industrial customers increased 3.2% for the first quarter 2005
when compared to the corresponding period of 2004 primarily due to improved sales mainly in the
pulp and paper, mining, and automotive sectors. 30




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##### Table of Contents



ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Details of retail revenues are as follows: First Quarter(in millions)
    
    
    %Retail  prior year
    
    $
    745Change in Base rates
    
    
    3
    
    
    
    0.4Sales growth
    
    
    7
    
    
    
    1.0Weather
    
    
    (12
    )
    
    
    (1.6
    )Energy cost recovery
    
    
    (35
    )
    
    
    (4.7
    )Rate CNP-PPA cost recovery
    
    
    1
    
    
    
    0.1Retail  current year
    
    $
    709
    
    
    
    (4.8
    )%
 Sales for resale affiliates and Purchased power expense affiliates. Energy sales to and
purchases from affiliated companies within the Southern Company electric system vary from period to
period depending on demand and the availability and cost of generating resources at each company.
These sales and purchases are made in accordance with the affiliated company interchange agreement,
as approved by the FERC. Sales for resale to affiliates increased in the first quarter 2005 when
compared to the corresponding period in 2004 primarily due to a 21% increase in kilowatt-hour sales
to affiliates from Alabama Powers more economical available capacity and price increases related
to the recovery of increased fuel-related expenses. Purchased power from affiliates decreased in
the first quarter 2005 compared to the same period in 2004 due to a
20.1% reduction in energy
purchased due to increased self-generation, which was more economical. Excluding the increase in
capacity revenues of $1.3 million received under the interchange agreement, these transactions did
not have a significant impact on earnings since the related energy is sold at marginal cost, and
energy purchases are generally offset by energy revenues through Alabama Powers energy cost
recovery clause. Purchased power expense  non-affiliates. Purchased power from 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 2005, purchased power
from non-affiliates decreased when compared to the same period in 2004 primarily due to a 13.3%
decrease in the amount of energy purchased due to increased self-generation and a 22.1% decrease in
the average price of non-affiliate purchased power. 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. Fuel expense.Fuel expense was higher in the first quarter 2005 when compared to the
corresponding period in 2004 mainly due to a 13.9% increase in coal prices and a 14.3% increase in
generation from coal-fired generating facilities. The increase in generation from coal-fired
facilities in the first quarter 2005 when compared to the first quarter 2004 is mainly due to a
42.6% decrease in generation from Alabama Powers gas-fired generating facilities because of
increased gas prices. Since energy expenses are generally offset by energy revenues, these
expenses do not have a significant impact on earnings. Maintenance expense.The increase in maintenance expense for the first quarter 2005 when
compared to the same period in 2004 is attributed to a $10.8 million increase to transmission
expense and a $34.2 million increase in distribution expense. This increase is due to the Alabama
PSC accounting order to offset the costs of the damage from Hurricane Ivan in September 2004 and to
restore a balance in the natural disaster reserve. See Notes 1 and 3 to the financial statements
of Alabama Power under Natural Disaster Reserve and Natural Disaster Cost Recovery,
respectively, in Item 8 of the Form 10-K for additional information. Also, see Income tax
expense below for additional offsetting impacts of the Alabama PSCs order. 31




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Income
tax expense. In accordance with the Alabama PSC accounting order
described above, Alabama Power returned $27.7 million of regulatory
liabilities related to deferred income taxes to its retail customers.
The remainder of the decrease in income tax expense in the first
quarter 2005 primarily reflects the $17.3 million tax effect of the
additional maintenance expenses recorded under the accounting order.
For additional information, see Maintenance expense above
and Note 3 to the financial statements of Alabama Power under
Natural Disaster Cost Recovery in Item 8 of the Form
10-K. The impact of this accounting order is expected to reduce
Alabama Powers annual effective income tax rate to
approximately 34% for 2005. See Note 5 to the financial statements of
Alabama Power in Item 8 of the Form 10-K and Note (N) to the Condensed Financial Statements herein for additional information. Interest expense, net of amounts capitalized.The decrease in interest expense, net of
amounts capitalized during the first quarter 2005 when compared to the same period in 2004 is the
result of refinancing higher cost debt. For additional information, see FINANCIAL CONDITION AND
LIQUIDITY  Financing Activities herein and in Item 7 of Alabama Power of the Form 10-K. 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 business of selling
electricity. These factors include Alabama Powers ability to maintain a stable regulatory
environment, to achieve energy sales growth while containing costs, and to recover costs related to
growing demand and increasingly stringent environmental standards. 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 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 recovered. For additional information, including information on
certain environmental litigation, 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. The EPA issued the final Clean Air Interstate Rule on March 10, 2005. The rule addresses
sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions that contribute to
nonattainment of the eight-hour ozone and fine particulate matter National Ambient Air Quality
Standards. Twenty-eight eastern states, including the State of Alabama, are subject to the fine
particulate and/or the eight-hour ozone requirements set forth within the rule. The rule may
require additional reductions of NOx and/or SO2 to be achieved by the
installation of additional controls at Alabama Powers facilities or through the purchase of
allowances. The impact of this final rule on Alabama Power will, however, depend on the development
and implementation of applicable state regulations and therefore cannot be determined at this time. On March 15, 2005, the EPA announced the final Clean Air Mercury Rule, selecting a
cap-and-trade approach to be implemented in two phases, 2010 and 2018. The rule sets a permanent
cap on emissions at the 2018 level and provides for an emissions allowance trading market. The impact of this final rule
on Alabama Power will depend on resolution of legal challenges and the development and
implementation of applicable state regulations and therefore cannot be determined at this time. 32




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS On April 15, 2005, the EPA announced plans to extend the deadline for issuance of final rules
addressing Best Available Retrofit Technology standards under its Regional Haze program until June
15, 2005. FERC and Alabama PSC Matters Market-Based Rate Authority See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL  FERC and
Alabama PSC Matters  Market-Based Rate Authority of Alabama Power in Item 7 and Note 3 to the
financial statements of Alabama Power under Market-Based Rate Authority in Item 8 of the Form
10-K for information on the FERCs April 2004 order adopting a new interim analysis for
measuring generation market power and a proceeding initiated by the FERC in December 2004 to
assess Southern Companys generation dominance within its retail service territory. Alabama
Power has authorization from the FERC to sell power to non-affiliates at market-based prices.
Alabama Power, through SCS as agent, also has FERC authority to make short-term opportunity
sales at market rates. Specific FERC approval must be obtained with respect to a market-based
contract with an affiliate. As directed by this order, on February 15, 2005, Southern Company
submitted additional information related to generation dominance in its retail service
territory. Any new market-based rate transactions in Southern Companys retail service
territory entered into after February 27, 2005 will be subject to refund to the level of the
default cost-based rates, pending the outcome of the proceeding. In the event that the FERCs
default mitigation measures are ultimately applied Alabama Power may be required to charge
cost-based rates for certain wholesale sales in the Southern Company retail service territory,
which may be lower than negotiated market-based rates. The impact of
such sales through March 31, 2005 is not material to Alabama
Powers net income. The final outcome of this matter will
depend on the form in which the final methodology for assessing generation market power and
mitigation rules may be ultimately adopted and cannot be determined at this time. Generation Interconnection Agreements See MANAGEMENTS DISCUSSION AND ANALYSIS  FUTURE EARNINGS POTENTIAL  FERC and Alabama PSC
Matters  Generation Interconnection Agreements of Alabama Power in Item 7 of the Form 10-K for
information on the FERCs Order 2003 related to standardization of generation interconnection
agreements and procedures. The FERC has indicated that Order 2003, which was effective January 20,
2004, is to be applied prospectively to interconnection agreements. Subsidiaries of Tenaska, Inc.,
as counterparties to two previously executed interconnection agreements with Alabama Power, have
filed complaints at the FERC requesting that the FERC modify the agreements and that Alabama Power
refund a total of $11 million previously paid for interconnection facilities, with interest.
Alabama Power has also received similar requests from other entities totaling $7 million. Alabama
Power has opposed such relief, and the proceedings are still pending. The impact of Order 2003 and
its subsequent rehearings on Alabama Power and the final results of these matters cannot be
determined at this time. Environmental Rate Filing On October 5, 2004, the Alabama PSC approved a specific rate mechanism for the recovery of
Alabama Powers retail costs associated with environmental laws, regulations, or other such
mandates. The rate mechanism began operation in January 2005 and provides for the recovery of
these costs pursuant to a factor that will be calculated annually. Environmental costs to be
recovered include operation and maintenance expenses, depreciation, and a return on invested
capital. Retail rates have increased 1 percent in 2005, which should yield an annual recovery
of approximately $33 million, and are expected to increase an additional 1 percent in 2006. In
conjunction with the Alabama PSCs approval, Alabama Power
agreed to a moratorium until March 2007 on any retail rate increase under the previously approved Rate Stabilization
and Equalization plan (RSE). Any increase in March 2007 would be based upon the earned return
on retail common equity at December 31, 2006. See Note 3 to the financial statements of Alabama
Power under Retail Regulatory Matters in Item 8 of the Form 10-K for further information on
the RSE plan. 33




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2005 totaled $96.4 million as compared to $101.6
million at December 31, 2004. Alabama Power increased its fuel billing factor in April 2005.
Alabama Power will continue to monitor the under recovered fuel cost balance to determine if an
additional adjustment to billing rates should be requested from the Alabama PSC. See MANAGEMENTS
DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Revenues 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 and Note (H) to the Condensed Financial Statements herein for additional information. 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, has increased generally throughout the United States. In particular,
personal injury claims for damages caused by alleged exposure to hazardous materials have become
more frequent. The ultimate outcome of such litigation against Alabama Power cannot be predicted
at this time; however, management does not anticipate that the liabilities, if any, arising from
such current proceedings would have a material adverse effect on Alabama Powers financial
statements. See the Notes to the Condensed Financial Statements herein for discussion of various
contingencies and other matters which may affect future earnings potential. ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates Alabama Power prepares its financial statements in accordance with accounting principles generally
accepted in the United States. Significant accounting policies are described in Note 1 to the
financial statements of Alabama Power in Item 8 of the Form 10-K. In the application of these
policies, certain estimates are made that may have a material impact on Alabama Powers results of
operations and related disclosures. Different assumptions and measurements could produce estimates
that are significantly different from those recorded in the financial statements. See MANAGEMENTS
DISCUSSION AND ANALYSIS ACCOUNTING POLICIES  Application of Critical Accounting Policies and Estimates of Alabama Power in Item 7
of the Form 10-K for a complete discussion of Alabama Powers critical accounting policies and
estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues. New Accounting Standards FASB Statement No. 123R, Share-Based Payments, was issued in December 2004. This statement
requires that compensation cost relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the grant date fair value of the equity
or liability instruments issued. In April 34




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2005, the SEC amended the compliance dates for FASB Statement No. 123R. For Alabama Power, this
statement is now effective beginning January 1, 2006. Although the compensation expense
calculation required under the revised statement differs slightly, the impacts on the financial
statements are expected to be similar to the pro forma disclosures included in Note 1 to the
financial statements of Alabama Power under Stock Options in Item 8 of the Form 10-K and in Note
(C) to the Condensed Financial Statements herein. FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations,
was issued in March 2005. This interpretation requires that asset retirement obligations be
recorded when a legal obligation exists even though the timing and/or the method of settlement are
conditional on a future event. For Alabama Power, FIN 47 is effective no later than December 31,
2005. Alabama Power is currently assessing the impact of FIN 47 on its balance sheet; however,
adoption is not currently expected to have a material impact on Alabama Powers income statement. In December 2004, the FASB issued Staff Position No. 109-1 (FSP 109-1), Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities provided by the American Jobs Creation Act of 2004, which requires that the generation
deduction for utilities be accounted for as a special tax deduction rather than as a tax rate
reduction. Alabama Power adopted FSP 109-1 in the first quarter of 2005 with no material impact on
its financial statements. FINANCIAL CONDITION AND LIQUIDITY Overview Alabama Powers financial condition continued to be strong at March 31, 2005. Net cash flows
from operating activities totaled $101.3 million for the first quarter 2005, compared to $122.9
million for the first quarter 2004. The $21.6 million decrease in 2005 resulted primarily from
an increase in cost and inventory of fuel. Those costs are recoverable in future periods and are
reflected on the balance sheets as under recovered regulatory clause revenues. Gross property
additions to utility plant were $197.6 million in the first quarter 2005 and are included in the
balance sheets herein. The majority of funds needed for gross property additions since 2000 has
been provided from operating activities. Capital Requirements and Contractual Obligations See MANAGEMENTS DISCUSSION AND ANALYSIS -
FINANCIAL CONDITION AND LIQUIDITY Capital Requirements and Contractual Obligations of
Alabama Power in Item 7 of the Form 10-K for a description of Alabama Powers capital requirements
for its construction program, lease obligations, purchase commitments, and trust funding
requirements. Approximately $395 million will be required by March 31, 2006 for redemptions and
maturities of long-term debt. Sources of Capital In addition to the financing activities described below, Alabama Power plans to
obtain the funds required for construction and other purposes from sources similar to those used in
the past. The amount, type, and timing of any financings  if needed  will depend upon
maintenance of adequate earnings, regulatory approval, prevailing market conditions, and other
factors. See MANAGEMENTS DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY  Sources
of Capital of Alabama Power in Item 7 of the Form 10-K for additional information. To meet short-term cash needs and contingencies, at March 31, 2005 Alabama Power had $120
million of cash and cash equivalents, unused committed lines of credit of approximately $868
million (including $504 35




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS million of such lines which are dedicated to funding purchase obligations relating to variable rate
pollution control bonds), of which $643 million will expire at various times during 2005, and an
extendible commercial
note program. 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 the benefit of Alabama Power and other
Southern Company subsidiaries. Alabama Power has regulatory authority for up to $1 billion of
short-term borrowings. At March 31, 2005, Alabama Power had no commercial paper or extendible
notes payable outstanding. Management believes that the need for working capital can be adequately
met by issuing commercial paper or utilizing lines of credit without maintaining large cash
balances. Credit Rating Risk Alabama Power does not have any credit arrangements that would require material changes in payment
schedules or terminations as a result of a credit rating downgrade. There are contracts that could
require collateral  but not accelerated payment  in the event of a credit rating change to below
investment grade. These contracts are primarily for physical electricity purchases and sales,
fixed-price physical gas purchases, and agreements covering interest rate swaps. At March 31,
2005, Alabama Power had no exposure under these types of contracts. Market Price Risk Alabama Powers market risk exposures relative to interest rate changes have not changed materially
compared with the December 31, 2004 reporting period. In addition, Alabama Power is not aware of
any facts or circumstances that would significantly affect such exposures in the near term. Due to cost-based rate regulations, Alabama Power has limited exposure to market volatility in
interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks
relative to movements in electricity prices, Alabama Power enters into fixed-price contracts for
the purchase and sale of electricity through the wholesale electricity market and, to a lesser
extent, similar contracts for gas purchases. Alabama Power has also implemented a retail fuel
hedging program at the instruction of the Alabama PSC. The fair value of derivative energy
contracts at March 31, 2005 was as follows: First Quarter2005ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    4,017Contracts realized or settled
    
    
    3,820New contracts at inception
    
    
    Changes in valuation techniques
    
    
    Current period changes (a)
    
    
    30,325Contracts at March 31, 2005
    
    $
    38,162
  (a)
    
    Current period changes also include the changes in fair value of new contracts
entered into during the period. 36




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Source of March 31, 2005Valuation PricesTotal
    
    
    MaturityFair Value
    
    
    Year 1
    
    
    1-3 Years(in thousands)Actively quoted
    
    $
    38,164
    
    
    $
    29,944
    
    
    $
    8,220External sources
    
    
    (2
    )
    
    
    (2
    )
    
    
    Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at March 31, 2005
    
    $
    38,162
    
    
    $
    29,942
    
    
    $
    8,220
 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 March 2005, Alabama Power issued $250 million of Series DD 5.65% Senior Notes due March 15,
2035. The proceeds from the sale were used to repay a portion of Alabama Powers outstanding
short-term indebtedness and for other general corporate purposes, including Alabama Powers
continuing construction activities. Alabama Power settled an interest rate swap related to the
transaction at a cost of $21 million, which was recorded in other comprehensive income. This cost
will be amortized over a 30-year period. 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. 37




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GEORGIA POWER COMPANY 38




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GEORGIA POWER COMPANY 
 CONDENSED STATEMENTS
OF INCOME (UNAUDITED)
 For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Operating Revenues:Retail revenues
    
    $
    1,185,236
    
    
    $
    1,037,795Sales for resale Non-affiliates
    
    
    112,852
    
    
    
    65,456Affiliates
    
    
    25,631
    
    
    
    54,142Other revenues
    
    
    46,711
    
    
    
    41,996Total operating revenues
    
    
    1,370,430
    
    
    
    1,199,389Operating Expenses:Fuel
    
    
    309,266
    
    
    
    285,214Purchased power Non-affiliates
    
    
    52,974
    
    
    
    62,689Affiliates
    
    
    220,004
    
    
    
    135,142Other operations
    
    
    202,079
    
    
    
    198,393Maintenance
    
    
    116,650
    
    
    
    108,468Depreciation and amortization
    
    
    123,100
    
    
    
    67,737Taxes other than income taxes
    
    
    60,759
    
    
    
    56,432Total operating expenses
    
    
    1,084,832
    
    
    
    914,075Operating Income
    
    
    285,598
    
    
    
    285,314Other Income and (Expense):Allowance for equity funds used during construction
    
    
    9,257
    
    
    
    3,347Interest income
    
    
    471
    
    
    
    2,352Interest expense, net of amounts capitalized
    
    
    (50,420
    )
    
    
    (45,650
    )Interest expense to affiliate trusts
    
    
    (14,878
    )
    
    
    Distributions on mandatorily redeemable preferred securities
    
    
    
    
    
    
    (15,839
    )Other income (expense), net
    
    
    (2,842
    )
    
    
    (4,395
    )Total other income and (expense)
    
    
    (58,412
    )
    
    
    (60,185
    )Earnings Before Income Taxes
    
    
    227,186
    
    
    
    225,129Income taxes
    
    
    84,654
    
    
    
    81,120Net Income
    
    
    142,532
    
    
    
    144,009Dividends on Preferred Stock
    
    
    168
    
    
    
    168Net Income After Dividends on Preferred Stock
    
    $
    142,364
    
    
    $
    143,841
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Net Income After Dividends on Preferred Stock
    
    $
    142,364
    
    
    $
    143,841Other comprehensive income (loss):Change in fair value of marketable securities, net of tax
of $75
    
    
    118
    
    
    
    Changes in fair value of qualifying hedges, net of tax
of $1,370 and $(880), respectively
    
    
    2,172
    
    
    
    (1,395
    )Reclassification adjustment for amounts included in net income,
net of tax of $176 and $679, respectively
    
    
    280
    
    
    
    1,077COMPREHENSIVE INCOME
    
    $
    144,934
    
    
    $
    143,523
 The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements. 39




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GEORGIA POWER COMPANY 
 CONDENSED STATEMENTS
OF CASH FLOWS (UNAUDITED)
 For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Operating Activities:Net income
    
    $
    142,532
    
    
    $
    144,009Adjustments to reconcile net income
to net cash provided from operating activities Depreciation and amortization
    
    
    142,765
    
    
    
    99,095Deferred income taxes and investment tax credits
    
    
    59,414
    
    
    
    49,190Deferred expenses  affiliates
    
    
    19,974
    
    
    
    12,860Allowance for equity funds used during construction
    
    
    (9,257
    )
    
    
    (3,347
    )Pension, postretirement, and other employee benefits
    
    
    3,755
    
    
    
    5,614Tax benefit of stock options
    
    
    4,907
    
    
    
    4,523Other, net
    
    
    (16,384
    )
    
    
    (24,802
    )Changes in certain current assets and liabilities Receivables, net
    
    
    (82,623
    )
    
    
    42,798Fossil fuel stock
    
    
    (5,334
    )
    
    
    (3,808
    )Materials and supplies
    
    
    1,430
    
    
    
    773Other current assets
    
    
    6,828
    
    
    
    24,430Accounts payable
    
    
    (106,494
    )
    
    
    (7,380
    )Accrued taxes
    
    
    (65,104
    )
    
    
    (131,794
    )Accrued compensation
    
    
    (86,041
    )
    
    
    (93,468
    )Other current liabilities
    
    
    3,880
    
    
    
    (261
    )Net cash provided from operating activities
    
    
    14,248
    
    
    
    118,432Investing Activities:Gross property additions
    
    
    (202,405
    )
    
    
    (158,743
    )Cost of removal net of salvage
    
    
    (4,696
    )
    
    
    2,059Change in construction payables, net of joint owner portion
    
    
    (34,441
    )
    
    
    (20,809
    )Other
    
    
    11,622
    
    
    
    5,210Net cash used for investing activities
    
    
    (229,920
    )
    
    
    (172,283
    )Financing Activities:Increase in notes payable, net
    
    
    339,693
    
    
    
    55,044Proceeds Senior notes
    
    
    250,000
    
    
    
    350,000Mandatorily redeemable preferred securities
    
    
    
    
    
    
    200,000Redemptions Senior notes
    
    
    (250,000
    )
    
    
    (200,000
    )Mandatorily redeemable preferred securities
    
    
    
    
    
    
    (200,000
    )Payment of preferred stock dividends
    
    
    (48
    )
    
    
    (16
    )Payment of common stock dividends
    
    
    (139,025
    )
    
    
    (141,375
    )Other
    
    
    (9,725
    )
    
    
    (11,551
    )Net cash provided from financing activities
    
    
    190,895
    
    
    
    52,102Net Change in Cash and Cash Equivalents
    
    
    (24,777
    )
    
    
    (1,749
    )Cash and Cash Equivalents at Beginning of Period
    
    
    33,497
    
    
    
    8,699Cash and Cash Equivalents at End of Period
    
    $
    8,720
    
    
    $
    6,950Supplemental Cash Flow Information:Cash paid during the period for Interest (net of $3,709 and $1,180 capitalized for 2005 and 2004, respectively)
    
    $
    58,350
    
    
    $
    62,923Income taxes (net of refunds)
    
    $
    (492
    )
    
    $
    16,494
 The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements. 40




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GEORGIA POWER COMPANY 
 CONDENSED BALANCE SHEETS (UNAUDITED)
 At March 31,
    
    
    At December 31,Assets
    
    2005
    
    
    2004(in thousands)Current Assets:Cash and cash equivalents
    
    $
    8,720
    
    
    $
    33,497Receivables Customer accounts receivable
    
    
    306,838
    
    
    
    317,937Unbilled revenues
    
    
    124,239
    
    
    
    140,027Under recovered regulatory clause revenues
    
    
    455,408
    
    
    
    345,542Other accounts and notes receivable
    
    
    77,818
    
    
    
    94,377Affiliated companies
    
    
    26,229
    
    
    
    17,042Accumulated provision for uncollectible accounts
    
    
    (6,500
    )
    
    
    (7,100
    )Fossil fuel stock, at average cost
    
    
    189,601
    
    
    
    184,267Vacation pay
    
    
    56,942
    
    
    
    57,372Materials and supplies, at average cost
    
    
    268,992
    
    
    
    270,422Prepaid expenses
    
    
    18,544
    
    
    
    32,696Other
    
    
    39,152
    
    
    
    25,260Total current assets
    
    
    1,565,983
    
    
    
    1,511,339Property, Plant, and Equipment:In service
    
    
    18,803,605
    
    
    
    18,681,533Less accumulated provision for depreciation
    
    
    7,306,929
    
    
    
    7,217,60711,496,676
    
    
    
    11,463,926Nuclear fuel, at amortized cost
    
    
    124,767
    
    
    
    124,745Construction work in progress
    
    
    808,933
    
    
    
    766,140Total property, plant, and equipment
    
    
    12,430,376
    
    
    
    12,354,811Other Property and Investments:Equity investments in unconsolidated subsidiaries
    
    
    66,159
    
    
    
    66,192Nuclear decommissioning trusts, at fair value
    
    
    455,668
    
    
    
    459,194Other
    
    
    64,418
    
    
    
    64,571Total other property and investments
    
    
    586,245
    
    
    
    589,957Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    506,358
    
    
    
    505,664Prepaid pension costs
    
    
    452,545
    
    
    
    450,270Unamortized debt issuance expense
    
    
    86,379
    
    
    
    77,925Unamortized loss on reacquired debt
    
    
    174,101
    
    
    
    176,825Other regulatory assets
    
    
    97,273
    
    
    
    72,639Other
    
    
    70,048
    
    
    
    82,908Total deferred charges and other assets
    
    
    1,386,704
    
    
    
    1,366,231Total Assets
    
    $
    15,969,308
    
    
    $
    15,822,338
 The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements. 41




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GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At March 31,
    
    
    At December 31,Liabilities and Stockholder's Equity
    
    2005
    
    
    2004(in thousands)Current Liabilities:Securities due within one year
    
    $
    352,550
    
    
    $
    452,498Notes payable
    
    
    547,926
    
    
    
    208,233Accounts payable Affiliated
    
    
    121,045
    
    
    
    194,253Other
    
    
    236,617
    
    
    
    310,763Customer deposits
    
    
    120,393
    
    
    
    115,661Accrued taxes Income taxes
    
    
    119,245
    
    
    
    78,269Other
    
    
    61,484
    
    
    
    129,520Accrued interest
    
    
    77,485
    
    
    
    74,529Accrued vacation pay
    
    
    44,179
    
    
    
    44,894Accrued compensation
    
    
    41,299
    
    
    
    127,340Other
    
    
    77,124
    
    
    
    75,699Total current liabilities
    
    
    1,799,347
    
    
    
    1,811,659Long-term Debt
    
    
    3,809,180
    
    
    
    3,709,852Long-term Debt Payable to Affiliated Trusts
    
    
    969,073
    
    
    
    969,073Deferred Credits and Other Liabilities:Accumulated deferred income taxes
    
    
    2,582,917
    
    
    
    2,556,040Deferred credits related to income taxes
    
    
    167,781
    
    
    
    170,973Accumulated deferred investment tax credits
    
    
    296,945
    
    
    
    300,018Employee benefit obligations
    
    
    336,935
    
    
    
    331,002Asset retirement obligations
    
    
    512,537
    
    
    
    504,515Other cost of removal obligations
    
    
    414,122
    
    
    
    411,692Miscellaneous regulatory liabilities
    
    
    110,622
    
    
    
    92,611Other
    
    
    53,862
    
    
    
    59,733Total deferred credits and other liabilities
    
    
    4,475,721
    
    
    
    4,426,584Total Liabilities
    
    
    11,053,321
    
    
    
    10,917,168Preferred Stock
    
    
    14,609
    
    
    
    14,609Common Stockholders Equity:Common stock, without par valueAuthorized
 15,000,000 sharesOutstanding    7,761,500 shares
    
    
    344,250
    
    
    
    344,250Paid-in capital
    
    
    2,483,175
    
    
    
    2,478,268Retained earnings
    
    
    2,106,138
    
    
    
    2,102,798Accumulated other comprehensive loss
    
    
    (32,185
    )
    
    
    (34,755
    )Total common stockholders equity
    
    
    4,901,378
    
    
    
    4,890,561Total Liabilities and Stockholders Equity
    
    $
    15,969,308
    
    
    $
    15,822,338
 The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements. 42




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GEORGIA POWER COMPANY 
   FIRST QUARTER 2005 vs. FIRST QUARTER 2004 OVERVIEW Georgia Power operates as a vertically integrated utility providing electricity to retail customers
within its traditional service area located within the State of Georgia and to wholesale customers
in the Southeast. Many factors affect the opportunities, challenges, and risks of Georgia Powers
business of selling electricity. These factors include the ability to maintain a stable
regulatory environment, to achieve energy sales growth while containing costs, and to recover costs
related to growing demand and increasingly stringent environmental standards. Georgia Power continues to focus on several key performance indicators. These indicators
include customer satisfaction, peak season equivalent forced outage rate, and return on equity.
For additional information on these indicators, see MANAGEMENTS DISCUSSION AND ANALYSIS  OVERVIEW
 Key Performance Indicators of Georgia Power in Item 7 of the Form 10-K. RESULTS OF OPERATIONS Earnings Georgia Powers net income after dividends on preferred stock for the first quarter 2005
was $142.4 million compared to $143.8 million for the corresponding period in 2004. The slight
decrease was due to higher non-fuel operating expenses, partially offset by higher retail base
revenues resulting from the retail rate increase effective January 1, 2005. For additional
information on the rate increase, see MANAGEMENTS DISCUSSION AND ANALYSIS  FUTURE EARNINGS
POTENTIAL  FERC and Georgia PSC Matters  Retail Rate Case of Georgia Power in Item 7 of the
Form 10-K. Significant income statement items appropriate for discussion include the following: Increase (Decrease)First Quarter(in thousands)
    
    
    %Retail revenues
    
    $
    147,441
    
    
    
    14.2Sales for resale  non-affiliates
    
    
    47,396
    
    
    
    72.4Sales for resale  affiliates
    
    
    (28,511
    )
    
    
    (52.7
    )Fuel expense
    
    
    24,052
    
    
    
    8.4Purchased power expense  non-affiliates
    
    
    (9,715
    )
    
    
    (15.5
    )Purchased power expense  affiliates
    
    
    84,862
    
    
    
    62.8Maintenance expense
    
    
    8,182
    
    
    
    7.5Depreciation and amortization expense
    
    
    55,363
    
    
    
    81.7Allowance for equity funds used during
construction
    
    
    5,910
    
    
    
    176.6
 Retail revenues.The chart below reflects the primary drivers of the 14.2% increase in
retail revenues in the first quarter 2005 compared to the same period in the prior year. Excluding
fuel cost recovery revenues, which generally do not affect net income, retail sales revenue
increased by $59.8 million, or 8.5%, in the first quarter 2005 compared to the corresponding period
in 2004, primarily due to the retail rate increase effective January 1, 2005. During the first
quarter 2005, kilowatt-hour energy sales to residential, commercial, and industrial customers were
down by 2.3%, up by 2.8%, and down by 2.5%, respectively, when compared to the same period in 2004.
Despite customer growth of 1.9% in the residential sector, the decrease in kilowatt-hour 43




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS energy sales in the first quarter 2005 was due to milder winter weather in 2005. The increase in
commercial kilowatt-hour energy sales in the first quarter 2005 can be attributed to sustained
economic strength and customer growth of 2.4% when compared to the same period in 2004. Industrial
kilowatt-hour energy sales were down primarily due to a 2.7% decrease in customers resulting
primarily from a reclassification of customers from industrial to commercial when compared to the
same period in 2004. Details of retail revenues are as follows: Increase (Decrease)First Quarter(in millions)
    
    
    %Retail  prior year
    
    $
    1,038Change in Base Rates
    
    
    44
    
    
    
    4.3Sales Growth
    
    
    22
    
    
    
    2.1Weather
    
    
    (7
    )
    
    
    (0.7
    )Fuel Cost Recovery
    
    
    88
    
    
    
    8.5Retail  current year
    
    $
    1,185
    
    
    
    14.2
    %
 Sales for resale  non-affiliates.During the first quarter 2005, sales for resale to
non-affiliates increased due to higher demand for energy by these customers as a result of new
contracts effective in January 2005 when compared to the corresponding period in 2004. Sales for resale  affiliates and Purchased power expense  affiliates.Energy sales to and
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 sales and
purchases are made in accordance with the affiliated company interchange agreement, as approved by
the FERC. These transactions did not have a significant impact on earnings since this energy is
generally sold at marginal cost and energy purchases are generally offset by energy revenues
through Georgia Powers fuel cost recovery clause. Sales to affiliated companies decreased due to
an increase in Georgia Powers fuel costs relative to other Southern Company system generating
plants. Therefore, Georgia Powers generating plants were not called upon as often in the first
quarter 2005 to supply energy to affiliates. Purchased power from affiliates increased during the
first quarter 2005 when compared to the first quarter 2004 due to a 46.4% increase in the average
cost of fuel per kilowatt-hour and $17.6 million of additional capacity expenses under PPAs with
Southern Power that went into effect in June 2004. Fuel expense. Fuel expense increased in the first quarter 2005 as a result of an increase in
the average cost of fuel per net kilowatt-hour generated of 12.7% when compared to the same period
in the prior year. 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
MANAGEMENTS DISCUSSION AND ANALYSIS  FUTURE EARNINGS POTENTIAL  FERC and Georgia PSC Matters 
Retail Fuel Cost Recovery herein for additional information. Purchased power  non-affiliates.The decrease in purchased power from non-affiliates in the
first quarter 2005 when compared to the first quarter 2004 resulted from lower demand which caused
self-generation to be more economical. 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. 44




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Maintenance expense.In the first quarter 2005, maintenance expense increased primarily due
to an increase of $6.1 million in scheduled fossil power production maintenance expense at Plants
Yates and Branch and an increase of $1.5 million in scheduled distribution line maintenance when
compared to the same period in 2004. Depreciation and amortization expense.Depreciation and amortization expense in the first
quarter 2005 compared to the same period in the prior year increased primarily due to the
expiration in 2004 of certain provisions in Georgia Powers three-year retail rate plan ending
December 31, 2001 (2001 Retail Rate Plan). In accordance with the 2001 Retail Rate Plan, Georgia
Power amortized an accelerated cost recovery liability equally as a credit to amortization expense
and recognized new Georgia PSC-certified purchased power costs in rates evenly over the three years
ended December 31, 2004. This treatment resulted in a credit to amortization expense of $47
million during the first quarter 2004. See Note 3 to the financial statements of Georgia Power
under Retail Rate Orders in Item 8 of the Form 10-K for additional information. Allowance for equity funds used during construction. The first quarter 2005 increase in AFUDC
compared to the same period in the prior year relates primarily to construction of the McIntosh
combined cycle units 10 and 11. See Note 3 to the financial statements of Georgia Power under
Plant McIntosh Construction Project in Item 8 of the Form 10-K for further information. 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, to achieve energy sales growth while containing costs, and to recover costs related to
growing demand and increasingly stringent environmental standards. 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 BUSINESS  The SOUTHERN System  Risk Factors in Item 1 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 recovered. For additional information, including information on
certain environmental litigation, 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 New Source Review Actions in Item 8 of the Form 10-K. Plant Wansley Environmental Litigation On March 11, 2005, the U.S. Court of Appeals for the Eleventh Circuit accepted Georgia Powers
petition for review of the U.S. District Court for the Northern District of Georgias December 15,
2004 order related to the Plant Wansley environmental litigation. Oral argument on that appeal has
not been scheduled. See Note 3 to the financial statements of Georgia Power under Plant Wansley
Environmental Litigation in Item 8 of the Form 10-K for additional information. The ultimate
outcome of this matter cannot now be determined. 45




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other Environmental Matters The EPA issued the final Clean Air Interstate Rule on March 10, 2005. The rule addresses sulfur
dioxide (SO2) and nitrogen oxide (NOx) emissions that contribute to
nonattainment of the eight-hour ozone and fine particulate matter National Ambient Air Quality
Standards. Twenty-eight eastern states, including the State of Georgia, are subject to the fine
particulate and/or the eight-hour ozone requirements set forth within the rule. The rule may
require additional reductions of NOx and/or SO2 to be achieved by the
installation of additional controls at Georgia Powers facilities or through the purchase of
allowances. The impact of this final rule on Georgia Power will, however, depend on the development
and implementation of applicable state regulations and therefore cannot be determined at this time. On March 15, 2005, the EPA announced the final Clean Air Mercury Rule, selecting a
cap-and-trade approach to be implemented in two phases, 2010 and 2018. The rule sets a permanent
cap on emissions at the 2018 level and provides for an emissions allowance trading market. The
impact of this final rule on Georgia Power will depend on resolution of legal challenges and the
development and implementation of applicable state regulations and therefore cannot be determined
at this time. On April 15, 2005, the EPA announced plans to extend the deadline for issuance of final rules
addressing Best Available Retrofit Technology standards under its Regional Haze program until June
15, 2005. The EPA published a proposed rule on April 20, 2005 to approve redesignation of the Atlanta
metro area to attainment under the one-hour ozone standard. FERC and Georgia PSC Matters Market-Based Rate Authority See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL  FERC and
Georgia PSC Matters  Market-Based Rate Authority, of Georgia Power in Item 7 and Note 3 to the
financial statements of Georgia Power under Market-Based Rate Authority in Item 8 of the Form
10-K for information on the FERCs April 2004 order adopting a new interim analysis for
measuring generation market power and a proceeding initiated by the FERC in December 2004 to
assess Southern Companys generation dominance within its retail service territory. Georgia
Power has authorization from the FERC to sell power to non-affiliates at market-based prices.
Georgia Power, through SCS as agent, also has FERC authority to make short-term opportunity
sales at market rates. Specific FERC approval must be obtained with respect to a market-based
contract with an affiliate. As directed by this order, on February 15, 2005, Southern Company
submitted additional information related to generation dominance in its retail service
territory. Any new market-based rate transactions in Southern Companys retail service
territory entered into after February 27, 2005 will be subject to refund to the level of the
default cost-based rates, pending the outcome of the proceeding. In the event that the FERCs
default mitigation measures are ultimately applied, Georgia Power may be required to charge
cost-based rates for certain wholesale sales in the Southern Company retail service territory,
which may be lower than negotiated market-based rates. The impact of
such sales through March 31, 2005 is not material to Georgia
Powers net income. The final outcome of this matter will
depend on the form in which the final methodology for assessing generation market power and
mitigation rules may be ultimately adopted and cannot be determined at this time. Generation Interconnection Agreements See MANAGEMENTS DISCUSSION AND ANALYSIS  FUTURE EARNINGS POTENTIAL  FERC and Georgia PSC
Matters  Generation Interconnection Agreements of Georgia Power in Item 7 of the Form 10-K for
information on the FERCs Order 2003 related to standardization of generation interconnection
agreements and procedures. The FERC has indicated that Order 2003, which was effective January 20,
2004, is to be 46




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS applied prospectively to interconnection agreements. Subsidiaries of Tenaska, Inc., as
counterparties to previously executed interconnection agreements with Georgia Power and another
Southern Company subsidiary, have filed complaints at the FERC requesting that the FERC modify the
agreements and that Georgia Power refund a total of $7.9 million previously paid for
interconnection facilities, with interest. Georgia Power has opposed such relief, and the
proceedings are still pending. The impact of Order 2003 and its subsequent rehearings on Georgia
Power and the final results of these matters cannot be determined at this time. Retail Fuel Cost Recovery On February 18, 2005, Georgia Power filed a request with the Georgia PSC for a fuel cost recovery
rate increase. The requested increase, representing an average annual increase in revenues of
approximately 11.8%, will allow for the recovery of fuel costs based on an estimate of future fuel
costs, as well as the collection of the existing under recovery of fuel costs. The Georgia PSC may
require that this existing under recovery be collected over a period greater than twelve months.
Georgia Powers under recovered fuel costs as of March 31, 2005 totaled $455.4 million. Hearings
before the Georgia PSC were held in April 2005. A final decision from the Georgia PSC is expected
in May 2005 with the new fuel rate effective June 1. The final outcome of the filing cannot be
determined at this time. For additional information on Georgia Powers current fuel cost recovery
rate, see Note 3 to the financial statements of Georgia Power under Fuel Cost Recovery in Item 8
of the Form 10-K and Note (I) to the Condensed Financial Statements herein. Other Matters Georgia Power is subject to certain claims and legal actions arising in the ordinary course of
business. In addition, Georgia Powers business activities are subject to extensive governmental
regulation related to public health and the environment. Litigation over environmental issues and
claims of various types, including property damage, personal injury, and citizen enforcement of
environmental requirements, has increased generally throughout the United States. In particular,
personal injury claims for damages caused by alleged exposure to hazardous materials have become
more frequent. The ultimate outcome of such litigation against Georgia Power cannot be predicted at
this time; however, management does not anticipate that the liabilities, if any, arising from such
current proceedings would have a material adverse effect on Georgia Powers financial statements. See the Notes to the Condensed Financial Statements herein for discussion of various
contingencies and other matters which may affect future earnings potential. ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates Georgia Power prepares its financial statements in accordance with accounting principles generally
accepted in the United States. Significant accounting policies are described in Note 1 to the
financial statements of Georgia Power in Item 8 of the Form 10-K. In the application of these
policies, certain estimates are made that may have a material impact on Georgia Powers results of
operations and related disclosures. Different assumptions and measurements could produce estimates
that are significantly different from those recorded in the financial statements. Also see
MANAGEMENTS DISCUSSION AND ANALYSIS  ACCOUNTING POLICIES  Application of Critical Accounting
Policies and Estimates of Georgia Power in Item 7 of the Form 10-K for a complete discussion of
Georgia Powers critical accounting policies and estimates related to Electric Utility Regulation,
Contingent Obligations, and Unbilled Revenues. 47




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS New Accounting Standards FASB Statement No. 123R, Share-Based Payments, was issued in December 2004. This statement
requires that compensation cost relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the grant date fair value of the equity
or liability instruments issued. In April 2005, the SEC amended the compliance dates for FASB
Statement No. 123R. For Georgia Power, this statement is now effective beginning January 1, 2006.
Although the compensation expense calculation required under the revised statement differs
slightly, the impacts on Georgia Powers financial statements are expected to be similar to the pro
forma disclosures included in Note 1 to the financial statements of Georgia Power under Stock
Options in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein. FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations,
was issued in March 2005. This interpretation requires that asset retirement obligations be
recorded when a legal obligation exists even though the timing and/or the method of settlement are
conditional on a future event. For Georgia Power, FIN 47 is effective no later than December 31,
2005. Georgia Power is currently assessing the impact of FIN 47 on its balance sheet; however,
adoption is not currently expected to have a material impact on Georgia Powers income statement. In December 2004, the FASB issued Staff Position No. 109-1 (FSP 109-1), Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities provided by the American Jobs Creation Act of 2004, which requires that the generation
deduction for utilities be accounted for as a special tax deduction rather than as a tax rate
reduction. Georgia Power adopted FSP 109-1 in the first quarter of 2005 with no material impact on
its financial statements. FINANCIAL CONDITION AND LIQUIDITY Overview Over the last several years, Georgia Powers financial condition has remained stable. Net
cash flow from operating activities totaled $14.2 million for the first quarter 2005, compared to
$118.4 million for the first quarter 2004. The decrease of $104.2 million in 2005 is primarily the
result of higher fuel costs, which are recoverable in future periods and are reflected in the
balance sheets as under recovered regulatory clause revenues. During the first quarter 2005, gross
property additions were $202.4 million. These additions were primarily related to the construction
of Plant McIntosh Units 10 and 11, transmission and distribution facilities, and purchases of
nuclear fuel and equipment to comply with environmental standards. The majority of funds for these
additions and other capital requirements were derived primarily from operating activities and
financing activities. See Georgia Powers Condensed Statements of Cash Flows herein for further
details. Capital Requirements and Contractual Obligations See MANAGEMENTS DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY Capital
Requirements and Contractual Obligations of Georgia Power in Item 7 of the Form 10-K for a
description of Georgia Powers capital requirements for its construction program, lease
obligations, purchase commitments, and trust funding requirements. Approximately $353 million will
be required by March 31, 2006 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 used in the past, including funds from operations and new security issuances. The
amount, type, and 48




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS timing of additional security issuances, if needed, will depend upon maintenance of adequate
earnings, regulatory approval, prevailing market conditions, and other factors. See MANAGEMENTS
DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY  Sources of Capital of Georgia Power
in Item 7 of the Form 10-K for additional information. At March 31, 2005, Georgia Powers current liabilities exceeded current assets because of the
continued use of short-term debt as a funding source to meet cash needs, which can fluctuate
significantly due to the seasonality of the business. To meet short-term cash needs and
contingencies, Georgia Power had at March 31, 2005 approximately $9 million of cash and cash
equivalents and $773 million of unused credit arrangements with banks. Of these facilities, $423
million expire in 2005 and contain provisions allowing two-year term loans executable at
expiration; and the remaining $350 million expire in 2007. Georgia Power expects to renew its
credit facilities, as needed, prior to expiration. These unused credit arrangements provide
liquidity support to Georgia Powers obligations with respect to variable rate pollution control
bonds and commercial paper. Georgia Power may also meet short-term cash needs through 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, 2005, Georgia Power had $531.4 million of commercial paper and $16.6 million of extendible
commercial notes outstanding. Management believes that the need for working capital can be
adequately met by utilizing commercial paper programs and lines of credit without maintaining large
cash balances. 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. 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, 2005, 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 $247 million. Georgia Power is also party to certain
derivative agreements that could require collateral and/or accelerated payment in the event of a
credit rating change to below investment grade. These agreements are primarily for natural gas
price and interest rate risk management activities. At March 31, 2005, Georgia Power had no
material exposure related to these agreements. Market Price Risk Georgia Powers market risk exposures relative to interest rate changes have not
changed materially compared with the December 31, 2004 reporting period. In addition, Georgia
Power is not aware of any facts or circumstances that would significantly affect such exposures in
the near term. Due to cost-based rate regulations, Georgia Power has limited exposure to market volatility in
interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks
relative to movements in electricity prices, Georgia Power enters into fixed-price contracts for
the purchase and sale of electricity through the wholesale electricity market and, to a lesser
extent, similar contracts for gas purchases. Georgia Power has also implemented a fuel hedging
program at the instruction of the Georgia PSC. 49




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS The fair value of derivative energy contracts at March 31, 2005 was as follows: First Quarter 2005ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    5,777Contracts realized or settled
    
    
    1,249New contracts at inception
    
    
    Changes in valuation techniques
    
    
    Current period changes(a)
    
    
    30,106Contracts at March 31, 2005
    
    $
    37,132
  (a)
    
    Current period changes also include the changes in fair value of new contracts
entered into during the period. Source of March 31, 2005Valuation PricesTotal
    
    
    MaturityFair Value
    
    
    Year 1
    
    
    1-3 Years(in thousands)Actively quoted
    
    $
    36,932
    
    
    $
    29,034
    
    
    $
    7,898External sources
    
    
    200
    
    
    
    200
    
    
    
    Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at March 31, 2005
    
    $
    37,132
    
    
    $
    29,234
    
    
    $
    7,898
 For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND
LIQUIDITY   Market Price Risk of Georgia Power in Item 7 and Notes 1 and 6 to the financial
statements of Georgia Power under Financial Instruments in Item 8 of the Form 10-K and Note (F)
to the Condensed Financial Statements herein. Financing Activities In January 2005, Georgia Power issued $250 million of Series X 5.70% Senior Notes due January 15,
2045. Proceeds from the sale were used to repay at maturity $250 million principal amount of
Series L Floating Rate Senior Notes in February 2005. In April 2005, Georgia Power incurred obligations in connection with the issuance of $85
million 4.75% pollution control revenue bonds. Proceeds from the sale will be used to repay
obligations in connection with $85 million of 5.40% pollution control revenue bonds in May 2005.
Also in April, Georgia Power issued $125 million of Series Y 5.80% Senior Notes due April 15, 2035.
Proceeds were used to repay a portion of Georgia Powers short-term indebtedness and for other
corporate purposes. In April 2005, Georgia Power entered into an interest rate swap designed to mitigate its
exposure to adverse interest rate movements with respect to the anticipated Series Y Senior Note
issuance. In connection with the issuance of such senior notes, Georgia Power terminated the swap
at a fair value loss of $0.3 million, which will be amortized over a 10-year period. 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. 50




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GULF POWER COMPANY 51




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GULF POWER COMPANY 
 CONDENSED STATEMENTS OF
INCOME (UNAUDITED)
 For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Operating Revenues:Retail revenues
    
    $
    162,282
    
    
    $
    165,084Sales for resale Non-affiliates
    
    
    19,712
    
    
    
    19,488Affiliates
    
    
    32,600
    
    
    
    20,695Other revenues
    
    
    10,003
    
    
    
    9,652Total operating revenues
    
    
    224,597
    
    
    
    214,919Operating Expenses:Fuel
    
    
    92,630
    
    
    
    78,416Purchased power Non-affiliates
    
    
    5,108
    
    
    
    6,433Affiliates
    
    
    6,012
    
    
    
    7,428Other operations
    
    
    33,769
    
    
    
    33,018Maintenance
    
    
    17,599
    
    
    
    16,206Depreciation and amortization
    
    
    20,749
    
    
    
    20,552Taxes other than income taxes
    
    
    17,501
    
    
    
    17,063Total operating expenses
    
    
    193,368
    
    
    
    179,116Operating Income
    
    
    31,229
    
    
    
    35,803Other Income and (Expense):Allowance for equity funds used during construction
    
    
    719
    
    
    
    527Interest income
    
    
    255
    
    
    
    135Interest expense, net of amounts capitalized
    
    
    (8,260
    )
    
    
    (7,894
    )Interest expense to affiliate trusts
    
    
    (1,148
    )
    
    
    Distributions on mandatorily redeemable preferred securities
    
    
    
    
    
    
    (1,113
    )Other income (expense), net
    
    
    (527
    )
    
    
    (644
    )Total other income and (expense)
    
    
    (8,961
    )
    
    
    (8,989
    )Earnings Before Income Taxes
    
    
    22,268
    
    
    
    26,814Income taxes
    
    
    7,568
    
    
    
    9,921Net Income
    
    
    14,700
    
    
    
    16,893Dividends on Preferred Stock
    
    
    54
    
    
    
    54Net Income After Dividends on Preferred Stock
    
    $
    14,646
    
    
    $
    16,839
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Net Income After Dividends on Preferred Stock
    
    $
    14,646
    
    
    $
    16,839Other comprehensive income:Reclassification adjustment for amounts included in net income,
net of tax of $31 and $31, respectively
    
    
    51
    
    
    
    50COMPREHENSIVE INCOME
    
    $
    14,697
    
    
    $
    16,889
 The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements. 52




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GULF POWER COMPANY 
 CONDENSED STATEMENTS
OF CASH FLOWS (UNAUDITED)
 For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Operating Activities:Net income
    
    $
    14,700
    
    
    $
    16,893Adjustments to reconcile net income
to net cash provided from operating activities Depreciation and amortization
    
    
    22,209
    
    
    
    22,084Deferred income taxes
    
    
    (2,230
    )
    
    
    5Pension, postretirement, and other employee benefits
    
    
    1,219
    
    
    
    1,427Tax benefit of stock options
    
    
    534
    
    
    
    932Other, net
    
    
    (2,972
    )
    
    
    1,940Changes in certain current assets and liabilities Receivables, net
    
    
    27,861
    
    
    
    16,812Fossil fuel stock
    
    
    (11,650
    )
    
    
    2,303Materials and supplies
    
    
    464
    
    
    
    624Other current assets
    
    
    5,630
    
    
    
    (2,248
    )Accounts payable
    
    
    (8,853
    )
    
    
    (4,899
    )Accrued taxes
    
    
    (150
    )
    
    
    7,199Accrued compensation
    
    
    (11,504
    )
    
    
    (8,591
    )Other current liabilities
    
    
    5,878
    
    
    
    1,998Net cash provided from operating activities
    
    
    41,136
    
    
    
    56,479Investing Activities:Gross property additions
    
    
    (34,060
    )
    
    
    (33,145
    )Cost of removal net of salvage
    
    
    (1,731
    )
    
    
    (3,067
    )Investment in property damage fund
    
    
    
    
    
    
    (6,700
    )Other
    
    
    (15,424
    )
    
    
    (1,327
    )Net cash used for investing activities
    
    
    (51,215
    )
    
    
    (44,239
    )Financing Activities:Decrease in notes payable, net
    
    
    
    
    
    
    (19,682
    )Proceeds  Capital contributions from parent company
    
    
    
    
    
    
    25,000Payment of preferred stock dividends
    
    
    (54
    )
    
    
    (54
    )Payment of common stock dividends
    
    
    (17,100
    )
    
    
    (17,500
    )Other
    
    
    (171
    )
    
    
    (203
    )Net cash used for financing activities
    
    
    (17,325
    )
    
    
    (12,439
    )Net Change in Cash and Cash Equivalents
    
    
    (27,404
    )
    
    
    (199
    )Cash and Cash Equivalents at Beginning of Period
    
    
    64,829
    
    
    
    2,548Cash and Cash Equivalents at End of Period
    
    $
    37,425
    
    
    $
    2,349Supplemental Cash Flow Information:Cash paid during the period for Interest (net of $317 and $233 capitalized for 2005 and 2004, respectively)
    
    $
    28,562
    
    
    $
    8,915Income taxes (net of refunds)
    
    $
    6,720
    
    
    $
    1,849
 The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
 53




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GULF POWER COMPANY 
 CONDENSED BALANCE
SHEETS (UNAUDITED)
 At March 31,
    
    
    At December 31,Assets
    
    2005
    
    
    2004(in thousands)Current Assets:Cash and cash equivalents
    
    $
    37,425
    
    
    $
    64,829Receivables Customer accounts receivable
    
    
    41,195
    
    
    
    44,255Unbilled revenues
    
    
    28,572
    
    
    
    35,889Under recovered regulatory clause revenues
    
    
    1,361
    
    
    
    9,283Other accounts and notes receivable
    
    
    8,608
    
    
    
    7,177Affiliated companies
    
    
    4,256
    
    
    
    16,218Accumulated provision for uncollectible accounts
    
    
    (1,166
    )
    
    
    (2,144
    )Fossil fuel stock, at average cost
    
    
    44,649
    
    
    
    32,999Vacation pay
    
    
    5,446
    
    
    
    5,446Materials and supplies, at average cost
    
    
    36,297
    
    
    
    36,761Prepaid income taxes
    
    
    35,902
    
    
    
    34,812Other regulatory assets  current
    
    
    26,897
    
    
    
    7,097Other
    
    
    11,093
    
    
    
    5,198Total current assets
    
    
    280,535
    
    
    
    297,820Property, Plant, and Equipment:In service
    
    
    2,374,400
    
    
    
    2,367,189Less accumulated provision for depreciation
    
    
    858,867
    
    
    
    844,6171,515,533
    
    
    
    1,522,572Construction work in progress
    
    
    94,845
    
    
    
    74,004Total property, plant, and equipment
    
    
    1,610,378
    
    
    
    1,596,576Other Property and Investments
    
    
    6,486
    
    
    
    6,425Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    17,382
    
    
    
    17,566Prepaid pension costs
    
    
    44,911
    
    
    
    45,384Unamortized debt issuance expense
    
    
    6,608
    
    
    
    6,615Unamortized loss on reacquired debt
    
    
    18,763
    
    
    
    19,197Other regulatory assets
    
    
    88,363
    
    
    
    107,994Other
    
    
    17,183
    
    
    
    13,086Total deferred charges and other assets
    
    
    193,210
    
    
    
    209,842Total Assets
    
    $
    2,090,609
    
    
    $
    2,110,663
 The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements. 54




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GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At March 31,
    
    
    At December 31,Liabilities
and Stockholders Equity
    
    2005
    
    
    2004(in thousands)Current Liabilities:Securities due within one year
    
    $
    100,000
    
    
    $
    100,000Notes payable
    
    
    50,000
    
    
    
    50,000Accounts payable Affiliated
    
    
    34,632
    
    
    
    35,359Other
    
    
    51,039
    
    
    
    77,452Customer deposits
    
    
    18,122
    
    
    
    18,470Accrued taxes Income taxes
    
    
    
    
    
    
    1,927Other
    
    
    9,100
    
    
    
    9,250Accrued interest
    
    
    8,486
    
    
    
    7,665Accrued vacation pay
    
    
    5,446
    
    
    
    5,446Accrued compensation
    
    
    6,200
    
    
    
    16,989Other regulatory liabilities  current
    
    
    21,331
    
    
    
    7,821Other
    
    
    3,183
    
    
    
    5,167Total current liabilities
    
    
    307,539
    
    
    
    335,546Long-term Debt
    
    
    551,116
    
    
    
    550,989Long-term Debt Payable to Affiliated Trusts
    
    
    72,166
    
    
    
    72,166Deferred Credits and Other Liabilities:Accumulated deferred income taxes
    
    
    233,767
    
    
    
    229,909Deferred credits related to income taxes
    
    
    22,673
    
    
    
    23,354Accumulated deferred investment tax credits
    
    
    18,009
    
    
    
    18,489Employee benefit obligations
    
    
    55,616
    
    
    
    54,869Other cost of removal obligations
    
    
    158,241
    
    
    
    155,831Miscellaneous regulatory liabilities
    
    
    6,353
    
    
    
    2,048Other
    
    
    70,728
    
    
    
    71,192Total deferred credits and other liabilities
    
    
    565,387
    
    
    
    555,692Total Liabilities
    
    
    1,496,208
    
    
    
    1,514,393Preferred Stock
    
    
    4,098
    
    
    
    4,098Common Stockholders Equity:Common stock, without par valueAuthorized - 992,717 sharesOutstanding - 992,717 shares
    
    
    38,060
    
    
    
    38,060Paid-in capital
    
    
    397,929
    
    
    
    397,396Retained earnings
    
    
    157,128
    
    
    
    159,581Accumulated other comprehensive loss
    
    
    (2,814
    )
    
    
    (2,865
    )Total common stockholders equity
    
    
    590,303
    
    
    
    592,172Total Liabilities and Stockholders Equity
    
    $
    2,090,609
    
    
    $
    2,110,663
 The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements. 55




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GULF POWER COMPANY 
   FIRST QUARTER 2005 vs. FIRST QUARTER 2004 OVERVIEW Gulf Power operates as a vertically integrated utility providing electricity to customers within
its traditional service area located in northwest Florida and to wholesale customers in the
Southeast. Prices for electricity provided by Gulf Power to retail customers are set by the
Florida PSC. Many factors affect the opportunities, challenges, and risks of Gulf Powers business of selling electricity. These factors include the ability to maintain a stable regulatory
environment, to achieve energy sales growth while containing costs, and to recover costs related to
growing demand and increasingly stringent environmental standards. Gulf Power continues to focus on several key performance indicators. These indicators include
customer satisfaction, peak season equivalent forced outage rate, and return on equity. For
additional information on these indicators, see MANAGEMENTS DISCUSSION AND ANALYSIS  OVERVIEW -
Key Performance Indicators of Gulf Power in Item 7 of the Form 10-K. RESULTS OF OPERATIONS Earnings Gulf Powers net income after dividends on preferred stock for the first quarter 2005 was $14.6
million compared to $16.8 million for the corresponding period in 2004. First quarter 2005 net
income decreased by $2.2 million, or 13.0%, primarily due to a reduction in retail revenue caused
by milder winter weather, as compared to the same period in 2004. Significant income statement items appropriate for discussion include the following: Increase (Decrease)First Quarter(in thousands)
    
    
    %Retail revenues
    
    $
    (2,802
    )
    
    
    (1.7
    )Sales for resale  affiliates
    
    
    11,905
    
    
    
    57.5Fuel expense
    
    
    14,214
    
    
    
    18.1Purchased power expense  non-affiliates
    
    
    (1,325
    )
    
    
    (20.6
    )Purchased power expense  affiliates
    
    
    (1,416
    )
    
    
    (19.1
    )Other operations and maintenance expense
    
    
    2,144
    
    
    
    4.4Income tax expense
    
    
    (2,353
    )
    
    
    (23.7
    )
 Retail revenues.The chart below reflects the primary drivers of the 1.7% decrease in retail
revenues in the first quarter 2005 compared to the same period in the prior year. Excluding
revenues related to fuel and other cost recovery, which do not affect net income, retail revenues
decreased by $4.3 million, or 4.5%, for the first quarter 2005 as compared to the corresponding
period in 2004. Energy sales to residential, commercial, and industrial customers were lower by
8.6%, 2.7%, and 2.8%, respectively, in the first quarter 2005 as compared to the same period in
2004 primarily due to milder winter weather conditions. 56




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Details of retail revenues are as follows: First Quarter(in thousands)
    
    
    %Retail  prior year
    
    $
    165,084Change in Sales growth
    
    
    1,504
    
    
    
    0.9Weather
    
    
    (5,812
    )
    
    
    (3.5
    )Fuel cost recovery
    
    
    (380
    )
    
    
    (0.2
    )Other cost recovery
    
    
    1,886
    
    
    
    1.1Retail  current year
    
    $
    162,282
    
    
    
    (1.7
    )%
 Sales for resale  affiliates and Purchased power expense affiliates. Revenues from sales
for resale to affiliates and purchases of energy from affiliates will vary depending on demand and
the availability and cost of generating resources at each company within the Southern Company
system. These affiliate sales and purchases are made in accordance with the affiliate company
interchange agreement as approved by the FERC. These transactions do not have a significant impact
on earnings since this energy is generally sold at marginal cost and energy purchases are generally
offset by energy revenues through Gulf Powers fuel cost recovery mechanism. The increase in sales
for resale to affiliates is due to increased sales of available generation to affiliate companies
at a higher unit cost resulting from higher fuel prices. The decrease in purchased power from
affiliates is the result of a decrease in the demand for purchased power due to increased
self-generation, which was more economical. Fuel expense.In the first quarter 2005, fuel expense was higher than the same period in 2004
primarily due to a greater percentage of generation needs supplied by higher priced natural gas
units as well as a 10.7% increase in coal prices and a 12.8% increase in natural gas prices. Since
energy expenses are generally offset by energy revenues through Gulf Powers fuel cost recovery
mechanism, these expenses do not have a material impact on net income. Purchased power expense  non-affiliates.The decrease in the first quarter 2005, as compared
to the corresponding period in 2004, is primarily the result of an increase in available Southern
Company system generation. 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 and maintenance expense. The increase in other operations expense during the
first quarter 2005 is primarily due to increased employee benefit expenses as compared to the same
period in 2004. The first quarter 2005 increase in maintenance expense from the same period in the
prior year reflects an increase in scheduled maintenance performed on power generation and
distribution facilities in 2005. Income tax expense.The decrease in income taxes of $2.4 million, or 23.7%, in the first
quarter 2005 is primarily due to the $4.5 million reduction in pretax net income as compared to the
same period in 2004. 57




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FUTURE EARNINGS POTENTIAL The results of operations discussed above are not necessarily indicative of 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 the ability of Gulf Power to maintain a stable regulatory
environment, to achieve energy sales growth while containing costs, and to recover costs related to
growing demand and increasingly stringent environmental standards. 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 BUSINESS The SOUTHERN System Risk Factors in Item 1 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 recovered. For additional information, including information on
certain environmental litigation, 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. The EPA issued the final Clean Air Interstate Rule on March 10, 2005. The rule addresses
sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions that contribute to
nonattainment of the eight-hour ozone and fine particulate matter National Ambient Air Quality
Standards. Twenty-eight eastern states, including the States of Georgia, Florida, and Mississippi,
are subject to the fine particulate and/or the eight-hour ozone requirements set forth within the
rule. The rule may require additional reductions of NOx and/or SO2 to be
achieved by the installation of additional controls at Gulf Powers facilities or through the
purchase of allowances. The impact of this final rule on Gulf Power will, however, depend on the
development and implementation of applicable state regulations and therefore cannot be determined
at this time. On March 15, 2005, the EPA announced the final Clean Air Mercury Rule, selecting a
cap-and-trade approach to be implemented in two phases, 2010 and 2018. The rule sets a permanent
cap on emissions at the 2018 level and provides for an emissions allowance trading market. The
impact of this final rule on Gulf Power will depend on resolution of legal challenges and the
development and implementation of applicable state regulations and therefore cannot be determined
at this time. On April 15, 2005, the EPA announced plans to extend the deadline for issuance of final rules
addressing Best Available Retrofit Technology standards under its Regional Haze program until June
15, 2005. FERC Matters Market-Based Rate Authority See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL  FERC and
Florida PSC Matters  Market-Based Rate Authority of Gulf Power in Item 7 and Note 3 to the
financial statements of Gulf Power under Market-Based Rate Authority in Item 8 of the Form
10-K for information on the FERCs April 2004 order adopting a new interim analysis for measuring generation market
power and a proceeding initiated by the FERC in December 2004 to assess Southern Companys 58




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS generation dominance within its retail service territory. Gulf Power has authorization from the
FERC to sell power to non-affiliates at market-based prices. Gulf Power, through SCS as agent,
also has FERC authority to make short-term opportunity sales at market rates. Specific FERC
approval must be obtained with respect to a market-based contract with an affiliate. As
directed by this order, on February 15, 2005, Southern Company submitted additional information
related to generation dominance in its retail service territory. Any new market-based rate
transactions in Southern Companys retail service territory entered into after February 27, 2005
will be subject to refund to the level of the default cost-based rates, pending the outcome of
the proceeding. In the event that the FERCs default mitigation measures are ultimately applied
Gulf Power may be required to charge cost-based rates for certain wholesale sales in the
Southern Company retail service territory, which may be lower than negotiated market-based
rates. The impact of such sales through March 31, 2005 is not
material to Gulf Powers net income. The final outcome of this matter will depend on the form in which the final methodology
for assessing generation market power and mitigation rules may be ultimately adopted and cannot
be determined at this time. Generation Interconnection Agreements See MANAGEMENTS DISCUSSION AND ANALYSIS  FUTURE EARNINGS POTENTIAL  FERC and Florida PSC
Matters  Generation Interconnection Agreements of Gulf Power in Item 7 of the Form 10-K for
information on the FERCs Order 2003 related to standardization of generation interconnection
agreements and procedures. The FERC has indicated that Order 2003, which was effective January 20,
2004, is to be applied prospectively to interconnection agreements. Subsidiaries of Tenaska, Inc.,
as counterparties to three previously executed interconnection agreements with other Southern
Company subsidiaries, have filed complaints at the FERC requesting that the FERC modify the
agreements and that Southern Company refund amounts previously paid for interconnection facilities,
with interest. Gulf Power has also received similar requests from other entities totaling $6.6
million. Gulf Power has opposed such relief, and the proceedings are still pending. The impact of
Order 2003 and its subsequent rehearings on Gulf Power and the final results of these matters
cannot be determined at this time. Storm Damage Cost Recovery Hurricane Ivan hit Gulf Powers service territory in September 2004. In March 2005, the Florida
PSC approved a Stipulation and Settlement between Gulf Power, the Office of Public Counsel for
the State of Florida, and the Florida Industrial Power Users Group which allows Gulf Power to
recover the retail portion of $51.7 million, the projected reserve deficiency, plus interest and
revenue taxes, from customers over a 24-month period beginning in April 2005. In connection
with the Stipulation, Gulf Power has agreed that it will not seek any additional increase in its
base rates and charges to become effective on or before March 1, 2007. See Storm Damage Cost
Recovery of Gulf Power in Item 7 of the Form 10-K for additional information. Other Matters Gulf Power is subject to certain claims and legal actions arising in the ordinary course of
business. In addition, Gulf Powers business activities are subject to extensive governmental
regulation related to public health and the environment. Litigation over environmental issues and
claims of various types, including property damage, personal injury, and citizen enforcement of
environmental requirements, has increased generally throughout the United States. In particular,
personal injury claims for damages caused by alleged exposure to hazardous materials have become
more frequent. The ultimate outcome of such litigation against Gulf Power cannot be predicted at
this time; however, management does not anticipate that the liabilities, if any, arising from such
current proceedings would have a material adverse effect on Gulf Powers financial statements. See the Notes to the Condensed Financial Statements herein for discussion of various
contingencies and other matters which may affect future earnings potential. 59




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. Also 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 FASB Statement No. 123R, Share-Based Payments, was issued in December 2004. This statement
requires that compensation cost relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the grant date fair value of the equity
or liability instruments issued. In April 2005, the SEC amended the compliance dates for FASB
Statement No. 123R. For Gulf Power, this statement is now effective beginning January 1, 2006.
Although the compensation expense calculation required under the revised statement differs
slightly, the impacts on Gulf Powers financial statements are expected to be similar to the pro
forma disclosures included in Note 1 to the financial statements of Gulf Power under Stock
Options in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein. FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations,
was issued in March 2005. This interpretation requires that asset retirement obligations be
recorded when a legal obligation exists even though the timing and/or the method of settlement are
conditional on a future event. For Gulf Power, FIN 47 is effective no later than December 31,
2005. Gulf Power is currently assessing the impact of FIN 47 on its balance sheet; however,
adoption is not currently expected to have a material impact on Gulf Powers income statement. In December 2004, the FASB issued Staff Position No. 109-1 (FSP 109-1), Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities provided by the American Jobs Creation Act of 2004, which requires that the generation
deduction for utilities be accounted for as a special tax deduction rather than as a tax rate
reduction. Gulf Power adopted FSP 109-1 in the first quarter of 2005 with no material impact on
its financial statements. FINANCIAL CONDITION AND LIQUIDITY Overview Gulf Powers financial condition continued to be strong at March 31, 2005. Net cash flow from
operating activities totaled $41.1 million for the first quarter 2005, compared to $56.5 million
for the first quarter 2004. The $15.4 million decrease in 2005 resulted primarily from payments
related to storm damage from Hurricane Ivan. Gross property additions to utility plant were
$34.1 million in the first quarter 2005. Funds for Gulf Powers property additions were
provided by operating activities, capital contributions, and other financing activities. See
the Condensed Statements of Cash Flows for additional information. 60




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GULF 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 Gulf Power in Item 7 of the Form 10-K for a
description of Gulf Powers capital requirements for its construction program, lease obligations,
purchase commitments, and trust funding requirements. Sources of Capital Gulf Power plans to obtain the funds required for construction and other purposes from sources
similar to those used in the past. These sources include cash flows from operating activities and
issuances of unsecured debt, preferred securities or stock, and pollution control bonds issued for
Gulf Powers benefit by public authorities. The amount, type, and timing of any future financings,
if needed, will depend upon maintenance of adequate earnings, regulatory approval, prevailing
market conditions, and other factors. SeeMANAGEMENTS DISCUSSION AND ANALYSIS 
FINANCIAL CONDITION AND LIQUIDITY  Sources of Capital of Gulf Power in Item 7 of the Form 10-K
for additional information. At March 31, 2005, Gulf Powers current liabilities exceeded current assets because of the
continued use of short-term debt as a funding source to meet cash needs, which can fluctuate
significantly due to the seasonality of the business. To meet short-term cash needs and
contingencies, Gulf Power has various internal and external sources of liquidity. At March 31,
2005, Gulf Power had approximately $37.4 million of cash and cash equivalents and $56.3 million of
unused committed lines of credit with banks that expire in 2005. Gulf Power expects to renew its
credit facilities, as needed, prior to expiration. In addition, Gulf Power has substantial cash
flow from operating activities. The credit arrangements provide liquidity support to Gulf Powers
obligations with respect to variable rate pollution control bonds and commercial paper. Gulf Power
may also meet short-term cash needs through a Southern Company subsidiary organized to issue and
sell commercial paper and extendible commercial notes at the request and for the benefit of Gulf
Power and other Southern Company subsidiaries. At March 31, 2005, Gulf Power had no commercial
paper or extendible commercial notes outstanding. 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 the sale of electric
capacity. At March 31, 2005, the maximum potential collateral requirements at a BBB- or Baa3
rating were approximately $5 million. The maximum potential collateral requirements at a rating
below BBB- or Baa3 were approximately $10 million. Gulf Power is also party to certain derivative
agreements that could require collateral and/or accelerated payment in the event of a credit rating
change to below investment grade. These agreements are primarily for natural gas price and
interest rate risk management activities. At March 31, 2005, Gulf Power had no exposure under
these agreements. Market Price Risk Gulf Powers market risk exposures relative to interest rate changes have not changed materially
compared with the December 31, 2004 reporting period. In addition, Gulf Power is not aware of any
facts or circumstances that would significantly affect such exposures in the near term. 61




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 fixed-price contracts for
purchase of coal supplies, the purchase and sale of electricity through the wholesale electricity
market, and, to a lesser extent, similar contracts for gas purchases. Gulf Power has received
approval from the Florida PSC to recover prudently incurred costs related to its fuel
hedging program through the fuel cost recovery mechanism. The fair value of derivative energy
contracts at March 31, 2005 was as follows: First Quarter2005ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    317Contracts realized or settled
    
    
    1,435New contracts at inception
    
    
    Changes in valuation techniques
    
    
    Current period changes (a)
    
    
    10,164Contracts at March 31, 2005
    
    $
    11,916
  (a)
    
    Current period changes also include the changes in fair value of new contracts
entered into during the period. Source of March 31, 2005Valuation PricesTotal
    
    
    MaturityFair Value
    
    
    Year 1
    
    
    1-3 Years(in thousands)Actively quoted
    
    $
    11,917
    
    
    $
    9,159
    
    
    $
    2,758External sources
    
    
    (1
    )
    
    
    (1
    )
    
    
    Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at March 31, 2005
    
    $
    11,916
    
    
    $
    9,158
    
    
    $
    2,758
 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 for further information. Financing Activities Gulf Power did not issue or redeem any long-term securities in the first quarter of 2005. In
addition to any financings that may be necessary to meet capital requirements and contractual
obligations, 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. Subsequent to March 31, 2005, Gulf Power repaid $30 million of a $50 million short-term
borrowing incurred in the fourth quarter 2004. 62




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MISSISSIPPI POWER COMPANY 63




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MISSISSIPPI POWER COMPANY 
 CONDENSED STATEMENTS OF
INCOME (UNAUDITED) For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Operating Revenues:Retail revenues
    
    $
    131,794
    
    
    $
    128,555Sales for resale Non-affiliates
    
    
    59,586
    
    
    
    65,800Affiliates
    
    
    18,925
    
    
    
    11,809Other revenues
    
    
    4,905
    
    
    
    3,564Total operating revenues
    
    
    215,210
    
    
    
    209,728Operating Expenses:Fuel
    
    
    91,039
    
    
    
    76,547Purchased power Non-affiliates
    
    
    5,434
    
    
    
    6,955Affiliates
    
    
    9,582
    
    
    
    17,316Other operations
    
    
    39,512
    
    
    
    34,956Maintenance
    
    
    15,538
    
    
    
    15,072Depreciation and amortization
    
    
    8,057
    
    
    
    14,143Taxes other than income taxes
    
    
    14,146
    
    
    
    13,139Total operating expenses
    
    
    183,308
    
    
    
    178,128Operating Income
    
    
    31,902
    
    
    
    31,600Other Income and (Expense):Interest income
    
    
    35
    
    
    
    119Interest expense
    
    
    (3,526
    )
    
    
    (2,803
    )Interest expense to affiliate trusts
    
    
    (649
    )
    
    
    Distributions on mandatorily redeemable
preferred securities
    
    
    
    
    
    
    (630
    )Other income (expense), net
    
    
    431
    
    
    
    452Total other income and (expense)
    
    
    (3,709
    )
    
    
    (2,862
    )Earnings Before Income Taxes
    
    
    28,193
    
    
    
    28,738Income taxes
    
    
    10,813
    
    
    
    10,916Net Income
    
    
    17,380
    
    
    
    17,822Dividends on Preferred Stock
    
    
    433
    
    
    
    503Net Income After Dividends on Preferred Stock
    
    $
    16,947
    
    
    $
    17,319
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Net Income After Dividends on Preferred Stock
    
    $
    16,947
    
    
    $
    17,319Other comprehensive loss:Changes in fair value of qualifying hedges, net of tax
net of tax of $(172) and $(474), respectively
    
    
    (277
    )
    
    
    (765
    )COMPREHENSIVE INCOME
    
    $
    16,670
    
    
    $
    16,554
 The accompanying notes as they relate to Mississippi Power are an integral part of these condensed
financial statements. 64




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MISSISSIPPI POWER COMPANY 
 CONDENSED STATEMENTS
OF CASH FLOWS (UNAUDITED)
 For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Operating Activities:Net income
    
    $
    17,380
    
    
    $
    17,822Adjustments to reconcile net income
to net cash provided from operating activities Depreciation and amortization
    
    
    15,467
    
    
    
    15,247Deferred income taxes and investment tax credits, net
    
    
    6,956
    
    
    
    5,872Plant Daniel capacity
    
    
    (6,281
    )
    
    
    Pension, postretirement, and other employee benefits
    
    
    1,473
    
    
    
    (272
    )Tax benefit of stock options
    
    
    1,067
    
    
    
    293Other, net
    
    
    474
    
    
    
    869Changes in certain current assets and liabilities Receivables, net
    
    
    22,138
    
    
    
    6,776Fossil fuel stock
    
    
    (4,789
    )
    
    
    4,732Materials and supplies
    
    
    1,104
    
    
    
    571Other current assets
    
    
    (1,378
    )
    
    
    (244
    )Accounts payable
    
    
    (4,327
    )
    
    
    (7,781
    )Accrued taxes
    
    
    (20,795
    )
    
    
    (28,379
    )Accrued compensation
    
    
    (15,302
    )
    
    
    (14,552
    )Over recovered regulatory clause revenues
    
    
    (3,373
    )
    
    
    (8,844
    )Other current liabilities
    
    
    (2,328
    )
    
    
    (3,039
    )Net cash provided from (used for) operating activities
    
    
    7,486
    
    
    
    (10,929
    )Investing Activities:Gross property additions
    
    
    (14,197
    )
    
    
    (15,611
    )Cost of removal net of salvage
    
    
    265
    
    
    
    2,463Other
    
    
    (581
    )
    
    
    (1,651
    )Net cash used for investing activities
    
    
    (14,513
    )
    
    
    (14,799
    )Financing Activities:Increase in notes payable, net
    
    
    19,940
    
    
    
    34,939Proceeds  Senior notes
    
    
    
    
    
    
    40,000Redemptions  Senior notes
    
    
    
    
    
    
    (80,000
    )Payment of preferred stock dividends
    
    
    (434
    )
    
    
    (503
    )Payment of common stock dividends
    
    
    (15,500
    )
    
    
    (16,550
    )Net cash provided from (used for) financing activities
    
    
    4,006
    
    
    
    (22,114
    )Net Change in Cash and Cash Equivalents
    
    
    (3,021
    )
    
    
    (47,842
    )Cash and Cash Equivalents at Beginning of Period
    
    
    6,945
    
    
    
    69,120Cash and Cash Equivalents at End of Period
    
    $
    3,924
    
    
    $
    21,278Supplemental Cash Flow Information:Cash paid during the period for Interest
    
    $
    2,765
    
    
    $
    2,468Income taxes (net of refunds)
    
    $
    (11,281
    )
    
    $
    1,615
 The accompanying notes as they relate to Mississippi Power are an integral part of these condensed
financial statements. 65




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MISSISSIPPI POWER COMPANY 
 CONDENSED BALANCE
SHEETS (UNAUDITED)
 At March 31,
    
    
    At December 31,Assets
    
    2005
    
    
    2004(in thousands)Current Assets:Cash and cash equivalents
    
    $
    3,924
    
    
    $
    6,945Receivables Customer accounts receivable
    
    
    30,091
    
    
    
    32,978Unbilled revenues
    
    
    17,853
    
    
    
    20,803Under recovered regulatory clause revenues
    
    
    19,171
    
    
    
    32,499Other accounts and notes receivable
    
    
    3,046
    
    
    
    8,881Affiliated companies
    
    
    18,484
    
    
    
    15,769Accumulated provision for uncollectible accounts
    
    
    (628
    )
    
    
    (774
    )Fossil fuel stock, at average cost
    
    
    24,493
    
    
    
    19,704Vacation pay
    
    
    6,125
    
    
    
    6,125Materials and supplies, at average cost
    
    
    26,335
    
    
    
    27,438Assets from risk management activities
    
    
    17,629
    
    
    
    4,471Prepaid income taxes
    
    
    7,457
    
    
    
    5,814Prepaid expenses
    
    
    5,504
    
    
    
    3,423Other
    
    
    920
    
    
    
    3,193Total current assets
    
    
    180,404
    
    
    
    187,269Property, Plant, and Equipment:In service
    
    
    1,885,378
    
    
    
    1,882,542Less accumulated provision for depreciation
    
    
    705,113
    
    
    
    697,8621,180,265
    
    
    
    1,184,680Construction work in progress
    
    
    32,290
    
    
    
    27,961Total property, plant, and equipment
    
    
    1,212,555
    
    
    
    1,212,641Other Property and Investments
    
    
    6,439
    
    
    
    6,402Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    10,492
    
    
    
    10,668Prepaid pension costs
    
    
    17,754
    
    
    
    19,158Unamortized debt issuance expense
    
    
    6,882
    
    
    
    6,955Unamortized loss on reacquired debt
    
    
    9,249
    
    
    
    9,437Prepaid rent
    
    
    12,403
    
    
    
    12,874Other
    
    
    22,720
    
    
    
    13,709Total deferred charges and other assets
    
    
    79,500
    
    
    
    72,801Total Assets
    
    $
    1,478,898
    
    
    $
    1,479,113
 The accompanying notes as they relate to Mississippi Power are an integral part of these condensed
financial statements. 66




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MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At March 31,
    
    
    At December 31,Liabilities
and Stockholders Equity
    
    2005
    
    
    2004(in thousands)Current Liabilities:Notes payable
    
    $
    19,940
    
    
    $
    Accounts payable Affiliated
    
    
    28,662
    
    
    
    19,568Other
    
    
    39,969
    
    
    
    52,688Customer deposits
    
    
    8,350
    
    
    
    9,053Accrued taxes Income taxes
    
    
    9,329
    
    
    
    396Other
    
    
    14,246
    
    
    
    44,285Accrued interest
    
    
    2,403
    
    
    
    1,731Accrued vacation pay
    
    
    6,125
    
    
    
    6,125Accrued compensation
    
    
    8,611
    
    
    
    23,913Regulatory clauses over recovery
    
    
    1,984
    
    
    
    5,356Plant Daniel capacity
    
    
    22,096
    
    
    
    25,125Other
regulatory liabilities - current
    
    
    19,625
    
    
    
    4,806Other
    
    
    9,111
    
    
    
    13,390Total current liabilities
    
    
    190,451
    
    
    
    206,436Long-term Debt
    
    
    242,500
    
    
    
    242,498Long-term Debt Payable to Affiliated Trusts
    
    
    36,082
    
    
    
    36,082Deferred Credits and Other Liabilities:Accumulated deferred income taxes
    
    
    177,443
    
    
    
    167,345Deferred credits related to income taxes
    
    
    19,881
    
    
    
    20,261Accumulated deferred investment tax credits
    
    
    18,357
    
    
    
    18,654Employee benefit obligations
    
    
    56,934
    
    
    
    57,275Plant Daniel lease guarantee obligation, at
fair value
    
    
    10,519
    
    
    
    10,990Plant Daniel capacity
    
    
    15,415
    
    
    
    18,667Other cost of removal obligations
    
    
    77,849
    
    
    
    76,228Miscellaneous regulatory liabilities
    
    
    12,746
    
    
    
    9,522Other
    
    
    39,867
    
    
    
    36,538Total deferred credits and other liabilities
    
    
    429,011
    
    
    
    415,480Total Liabilities
    
    
    898,044
    
    
    
    900,496Preferred Stock
    
    
    32,780
    
    
    
    32,780Common Stockholders Equity:Common stock, without par value Authorized - 1,130,000 sharesOutstanding - 1,121,000 shares
    
    
    37,691
    
    
    
    37,691Paid-in capital
    
    
    296,904
    
    
    
    295,837Retained earnings
    
    
    217,340
    
    
    
    215,893Accumulated other comprehensive loss
    
    
    (3,861
    )
    
    
    (3,584
    )Total common stockholders equity
    
    
    548,074
    
    
    
    545,837Total Liabilities and Stockholders Equity
    
    $
    1,478,898
    
    
    $
    1,479,113
 The accompanying notes as they relate to Mississippi Power are an integral part of these condensed
financial statements. 67




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MISSISSIPPI POWER COMPANY 
   FIRST QUARTER 2005 vs. FIRST QUARTER 2004 OVERVIEW Mississippi Power operates as a vertically integrated utility providing electricity to retail
customers within its traditional service area located within the State of Mississippi and to
wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks
of Mississippi Powers business of selling electricity. These factors include the ability
to maintain a stable regulatory environment, to achieve energy sales growth while containing costs,
and to recover costs related to growing demand and increasingly stringent environmental standards. 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, return on equity, and peak season
equivalent forced outage rate. For additional information on these indicators, see MANAGEMENTS
DISCUSSION AND ANALYSIS  OVERVIEW  Key Performance Indicators of Mississippi Power in Item 7 of
the Form 10-K. RESULTS OF OPERATIONS Earnings Mississippi Powers net income after dividends on preferred stock for the first quarter 2005 of
$16.9 million decreased $372,000, or 2.1%, from $17.3 million for the same period of 2004. Significant income statement items appropriate for discussion include the following: Increase (Decrease)First Quarter(in thousands)
    
    
    %Retail revenues
    
    $
    3,239
    
    
    
    2.5Sales for resale  non-affiliates
    
    
    (6,214
    )
    
    
    (9.4
    )Sales for resale  affiliates
    
    
    7,116
    
    
    
    60.3Fuel expense
    
    
    14,492
    
    
    
    18.9Purchased power expense  non-affiliates
    
    
    (1,521
    )
    
    
    (21.9
    )Purchased power expense  affiliates
    
    
    (7,734
    )
    
    
    (44.7
    )Other operations expense
    
    
    4,556
    
    
    
    13.0Depreciation and amortization expense
    
    
    (6,086
    )
    
    
    (43.0
    )Taxes other than income taxes
    
    
    1,007
    
    
    
    7.7
 Retail revenues.The chart below reflects the primary drivers of the 2.5% increase in retail
revenues in the first quarter 2005 compared to the same period in the prior year. Retail revenues
for the first quarter 2005 increased when compared to the same period in 2004 primarily as a result of a $5.6 million increase
in fuel and other cost recovery revenues, which generally do not have an effect on income. Retail
revenues, excluding fuel revenues, for the first quarter 2005 from residential and commercial
customers decreased 3.2% and 6.0%, respectively, primarily as a result of milder weather. Retail
revenues, excluding fuel revenues, for the first quarter 2005 from industrial customers remained
consistent compared to the same period in 2004. 68




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Details of retail revenues are as follows: First Quarter(in thousands)
    
    
    %Retail  prior year
    
    $
    128,555Change in Base rates
    
    
    (94
    )
    
    
    (0.1
    )Sales growth
    
    
    (103
    )
    
    
    (0.1
    )Weather
    
    
    (2,181
    )
    
    
    (1.7
    )Fuel cost recovery
    
    
    3,538
    
    
    
    2.8Other cost recovery
    
    
    2,079
    
    
    
    1.6Retail  current year
    
    $
    131,794
    
    
    
    2.5
    %
 Sales for resale non-affiliates.The decrease in sales for resale to non-affiliates in the
first quarter 2005 as compared to the same period in 2004 is primarily due to fewer opportunities
in the wholesale market as a result of higher fuel prices. Sales for resale affiliates and Purchased power expense affiliates. Revenues from sales
for resale to affiliates, as well as purchases of energy from affiliates, will vary depending on
demand and the availability and cost of generating resources at each company within the Southern
Company system. These affiliate sales and purchases are made in accordance with the affiliate
company interchange agreement approved by the FERC. These transactions do not have a significant
impact on earnings since the energy is generally sold at marginal cost and energy purchases are
generally offset by energy revenues through Mississippi Powers retail and wholesale fuel cost
recovery clauses. The increase in sales for resale to affiliates and the decrease in purchased
power from affiliates are a result of Mississippi Powers more economical generating costs when
compared to others. Fuel expense.In the first quarter 2005, fuel expense increased when compared to the same
period in 2004 as a result of a 2.6% increase in generation and a 18.0% increase in the cost of
coal, oil, gas, and emission allowances. Since energy expenses are generally offset by energy
revenues through Mississippi Powers retail and wholesale fuel cost recovery clauses, these
expenses do not have a significant impact on earnings. Purchased power expense  non-affiliates. In the first quarter 2005, purchased power from
non-affiliates decreased due to increased self-generation that resulted from higher generating unit
availability during the first quarter 2005 as compared to the same period in 2004, when more
scheduled maintenance outages occurred. Other
operations expense. In the first quarter 2005, other operations expense increased primarily
due to a $1.6 million increase in employee and retiree benefit
expense as a result of higher employee medical expenses and updated
actuarial studies for pension and postretirement benefits for 2005,
an increase in lease expense of approximately $0.6 million due
to higher interest rates on the embedded variable rate debt, a
$0.4 million increase in expenses related to customer accounts,
and a $0.4 million increase in legal and accounting expenses. Depreciation and amortization.The first quarter 2005 decrease in depreciation and
amortization expense when compared to the same period in 2004 is primarily the result of
$6.3 million in amortization of the regulatory liability related to Plant Daniel capacity recorded in
2005 as approved by the Mississippi PSC. 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.The increase in taxes other than income taxes for the first
quarter 2005 as compared to the same period in 2004 is a result of higher property taxes. 69




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FUTURE EARNINGS POTENTIAL The results of operations discussed above are not necessarily indicative of 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 the ability of Mississippi Power to
maintain a stable regulatory environment, to achieve energy sales growth while containing costs,
and to recover costs related to growing demand and increasingly stringent environmental standards.
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. For additional information relating to these issues, see BUSINESS  The SOUTHERN System -
Risk Factors in Item 1 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 recovered. For additional information, including information on
certain environmental litigation, 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. The EPA issued the final Clean Air Interstate Rule on March 10, 2005. The rule addresses
sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions that contribute to
nonattainment of the eight-hour ozone and fine particulate matter National Ambient Air Quality
Standards. Twenty-eight eastern states, including the States of Alabama and Mississippi, are
subject to the fine particulate and/or the eight-hour ozone requirements set forth within the rule.
The rule may require additional reductions of NOx and/or SO2 to be achieved
by the installation of additional controls at Mississippi Powers facilities or through the
purchase of allowances. The impact of this final rule on Mississippi Power will, however, depend
on the development and implementation of applicable state regulations and therefore cannot be
determined at this time. On March 15, 2005, the EPA announced the final Clean Air Mercury Rule, selecting a
cap-and-trade approach to be implemented in two phases, 2010 and 2018. The rule sets a permanent
cap on emissions at the 2018 level and provides for an emissions allowance trading market. The
impact of this final rule on Mississippi Power will depend on resolution of legal challenges and
the development and implementation of applicable state regulations and therefore cannot be
determined at this time. On April 15, 2005, the EPA announced plans to extend the deadline for issuance of final rules
addressing Best Available Retrofit Technology standards under its Regional Haze program until June
15, 2005. FERC and Mississippi PSC Matters Market-Based Rate Authority See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL  FERC and
Mississippi PSC Matters  Market-Based Rate Authority of Mississippi Power in Item 7 and Note 3
to the financial statements of Mississippi Power under Market-Based Rate Authority in Item 8
of the Form 10-K for information on the FERCs April 2004 order adopting a new interim analysis
for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern
Companys generation dominance within its retail service territory. Mississippi Power has
authorization 70




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS from the FERC to sell power to non-affiliates at market-based prices. Mississippi Power,
through SCS as agent, also has FERC authority to make short-term opportunity sales at market
rates. Specific FERC approval must be obtained with respect to a market-based contract with an
affiliate. As directed by this order, on February 15, 2005, Southern Company submitted
additional information related to generation dominance in its retail service territory. Any new
market-based rate transactions in Southern Companys retail service territory entered into after
February 27, 2005 will be subject to refund to the level of the default cost-based rates,
pending the outcome of the proceeding. In the event that the FERCs default mitigation measures
are ultimately applied Mississippi Power may be required to charge cost-based rates for certain
wholesale sales in the Southern Company retail service territory, which may be lower than
negotiated market-based rates. The impact of such sales through March
31, 2005 is not material to Mississippi Powers net income. The final outcome of this matter will depend on the form in which
the final methodology for assessing generation market power and mitigation rules may be
ultimately adopted and cannot be determined at this time. See Note 3 to the financial statements of Mississippi Power under Environmental Compliance
Overview Plan in Item 8 of the Form 10-K for additional information on the ECO Plan. Mississippi
Powers ECO Plan annual filing for 2005 was approved by the Mississippi PSC at the conclusion of
the ECO Plan hearings on April 5, 2005. An order is forthcoming. The result will be a slight
increase in rates effective May 2005. Compliance costs related to the Clean Air Act and other
environmental regulations could affect earnings if such costs cannot continue to be recovered. Other Matters Mississippi Power is subject to certain claims and legal actions arising in the ordinary course of
business. In addition, Mississippi Powers business activities are subject to extensive
governmental regulation related to public health and the environment. Litigation over
environmental issues and claims of various types, including property damage, personal injury, and
citizen enforcement of environmental requirements, has increased generally throughout the United
States. In particular, personal injury claims for damages caused by alleged exposure to hazardous
materials have become more frequent. The ultimate outcome of such litigation against Mississippi
Power cannot be predicted at this time; however, management does not anticipate that the
liabilities, if any, arising from such current proceedings would have a material adverse effect on
Mississippi Powers financial statements. See the Notes to the Condensed Financial Statements herein for discussion of various
contingencies and other matters which may affect future earnings potential. ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates Mississippi Power prepares its financial statements in accordance with accounting principles
generally accepted in the United States. Significant accounting policies are described in Note 1
to the financial statements of Mississippi Power in Item 8 of the Form 10-K. In the application of
these policies, certain estimates are made that may have a material impact on Mississippi Powers
results of operations and related disclosures. Different assumptions and measurements could
produce estimates that are significantly different from those recorded in the financial statements.
Also 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. 71




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS New Accounting Standards FASB Statement No. 123R, Share-Based Payments, was issued in December 2004. This statement
requires that compensation cost relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the grant date fair value of the equity
or liability instruments issued. In April 2005, the SEC amended the compliance dates for FASB
Statement No. 123R. For Mississippi Power, this statement is now effective beginning January 1,
2006. Although the compensation expense calculation required under the revised statement differs
slightly, the impacts on Mississippi Powers financial statements are expected to be similar to the
pro forma disclosures included in Note 1 to the financial statements of Mississippi Power under
Stock Options in Item 8 of the Form 10-K and Note (C) to the Condensed Financial Statements
herein. FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations,
was issued in March 2005. This interpretation requires that asset retirement obligations be
recorded when a legal obligation exists even though the timing and/or the method of settlement are
conditional on a future event. For Mississippi Power, FIN 47 is effective no later than December
31, 2005. Mississippi Power is currently assessing the impact of FIN 47 on its balance sheet;
however, adoption is not currently expected to have a material impact on Mississippi Powers income
statement. In December 2004, the FASB issued Staff Position No. 109-1 (FSP 109-1), Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities provided by the American Jobs Creation Act of 2004, which requires that the generation
deduction for utilities be accounted for as a special tax deduction rather than as a tax rate
reduction. Mississippi Power adopted FSP 109-1 in the first quarter of 2005 with no material
impact on its financial statements. FINANCIAL CONDITION AND LIQUIDITY Overview Mississippi Powers financial condition continued to be strong at March 31, 2005. Net cash flow
provided from operating activities totaled $7.5 million for the first quarter 2005, compared to
net cash flow used for operating activities of $10.9 million for the first quarter 2004. The
$18.4 million increase in 2005 resulted primarily from fuel and Energy Cost Management clause
collections. Gross property additions to utility plant were $14.2 million in the first quarter
2005. The majority of funds needed for gross property additions since 2000 has been provided
from operating activities. Capital Requirements and Contractual Obligations See MANAGEMENTS DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY  Capital
Requirements and Contractual Obligations of Mississippi Power in Item 7 of the Form 10-K for a
description of Mississippi Powers capital requirements for its construction program, lease
obligations, purchase commitments, and trust funding requirements. Sources of Capital In addition to the financing activities described herein, Mississippi Power plans to obtain the
funds required for construction and other purposes from sources similar to those used in the past.
The amount, type, and timing of any financings, if needed, will depend upon maintenance of adequate
earnings, regulatory approval, prevailing market conditions, and other factors. See 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. 72




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS At March 31, 2005, Mississippi Powers current liabilities exceeded current assets because of
the continued use of short-term debt as a funding source to meet cash needs, which can fluctuate
significantly due to the seasonality of the business. To meet short-term cash needs and
contingencies, Mississippi Power had at March 31, 2005 approximately $3.9 million of cash and cash
equivalents and $100.5 million of unused committed credit arrangements with banks that expire in
2005. Approximately $38 million of these credit arrangements contain provisions allowing two-year
term loans executable at expiration. Mississippi Power expects to renew its credit facilities, as
needed, prior to expiration. The credit arrangements provide liquidity support to Mississippi
Powers obligations with respect to variable rate pollution control bonds and commercial paper.
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, 2005,
Mississippi Power had $19.9 million in outstanding notes payable. Management believes that the
need for working capital can be adequately met by utilizing lines of credit without maintaining
large cash balances. Off-Balance Sheet Financing Arrangements See MANAGEMENTS DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY  Off-Balance Sheet
Financing Arrangements in Item 7 and Note 7 to the financial statements of Mississippi Power under
Operating Leases in Item 8 of the Form 10-K for information related to Mississippi Powers lease
of a combined cycle generating facility at Plant Daniel. Credit Rating Risk Mississippi Power does not have any credit arrangements that would require material changes in
payment schedules or terminations as a result of a credit rating downgrade. Mississippi Power is
party to certain derivative agreements that could require collateral and/or accelerated payment in
the event of a credit rating change to below investment grade. These agreements are primarily for
natural gas price risk management activities. At March 31, 2005, Mississippi
Power had no exposure under these agreements. Market Price Risk Mississippi Powers market risk exposures relative to interest rate changes have not changed
materially compared with the December 31, 2004 reporting period. In addition, Mississippi Power is
not aware of any facts or circumstances that would significantly affect such exposures in the near
term. Due to cost-based rate regulation, Mississippi Power has limited exposure to market volatility
in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks
relative to movements in electricity prices, Mississippi Power enters into fixed-price contracts
for the purchase and sale of electricity through the wholesale electricity market. Mississippi
Power has also implemented retail fuel hedging programs at the instruction of the Mississippi PSC
and wholesale fuel hedging programs under agreements with wholesale customers. 73




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS The fair value of
derivative, fuel, and energy contracts at March 31, 2005 was as follows: First Quarter2005ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    889Contracts realized or settled
    
    
    2,005New contracts at inception
    
    
    Changes in valuation techniques
    
    
    Current period changes (a)
    
    
    20,286Contracts at March 31, 2005
    
    $
    23,180
  (a)
    
    Current period changes also include the changes in fair value of new contracts
entered into during the period. Source of March 31, 2005Valuation PricesTotal
    
    
    MaturityFair Value
    
    
    Year 1
    
    
    1-3 Years(in thousands)Actively quoted
    
    $
    24,499
    
    
    $
    17,563
    
    
    $
    6,936External sources
    
    
    (1,319
    )
    
    
    (1,319
    )
    
    
    Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at March 31, 2005
    
    $
    23,180
    
    
    $
    16,244
    
    
    $
    6,936
 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 under Financial Instruments of Mississippi Power 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 during the first quarter of
2005. In addition to any financings that may be necessary to meet capital requirements and
contractual obligations, 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. 74




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SAVANNAH ELECTRIC
AND
POWER COMPANY 75




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SAVANNAH ELECTRIC AND POWER COMPANY 
 CONDENSED STATEMENTS OF
INCOME (UNAUDITED) For the Three MonthsEnded March 31,2004As Restated2005
    
    
    (Note L)(in thousands)Operating Revenues:Retail revenues
    
    $
    85,004
    
    
    $
    67,509Sales for resale Non-affiliates
    
    
    458
    
    
    
    1,410Affiliates
    
    
    2,061
    
    
    
    2,437Other revenues
    
    
    1,065
    
    
    
    965Total operating revenues
    
    
    88,588
    
    
    
    72,321Operating Expenses:Fuel
    
    
    13,122
    
    
    
    10,484Purchased power Non-affiliates
    
    
    1,886
    
    
    
    2,342Affiliates
    
    
    36,279
    
    
    
    22,130Other operations
    
    
    14,324
    
    
    
    14,101Maintenance
    
    
    9,886
    
    
    
    6,431Depreciation and amortization
    
    
    5,348
    
    
    
    5,204Taxes other than income taxes
    
    
    3,799
    
    
    
    3,597Total operating expenses
    
    
    84,644
    
    
    
    64,289Operating Income
    
    
    3,944
    
    
    
    8,032Other Income and (Expense):Interest income
    
    
    17
    
    
    
    71Interest expense, net of amounts capitalized
    
    
    (3,223
    )
    
    
    (3,143
    )Distributions on mandatorily redeemable preferred securities
    
    
    
    
    
    
    (109
    )Other income (expense), net
    
    
    1,106
    
    
    
    (418
    )Total other income and (expense)
    
    
    (2,100
    )
    
    
    (3,599
    )Earnings Before Income Taxes
    
    
    1,844
    
    
    
    4,433Income taxes
    
    
    149
    
    
    
    1,600Net Income
    
    
    1,695
    
    
    
    2,833Dividends on Preferred Stock
    
    
    675
    
    
    
    Net Income After Dividends on Preferred Stock
    
    $
    1,020
    
    
    $
    2,833
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three MonthsEnded March 31,2004As Restated2005
    
    
    (Note L)(in thousands)Net Income After Dividends on Preferred Stock
    
    $
    1,020
    
    
    $
    2,833Other comprehensive income (loss):Changes in fair value of qualifying hedges, net of tax
of $450 and $(20), respectively
    
    
    713
    
    
    
    (33
    )Reclassification adjustment for amounts included in
net income,
net of tax of $3 and $15, respectively
    
    
    4
    
    
    
    24COMPREHENSIVE INCOME
    
    $
    1,737
    
    
    $
    2,824
 The accompanying notes as they relate to Savannah Electric are an integral part of these condensed
financial statements. 76




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SAVANNAH ELECTRIC AND POWER COMPANY 
 CONDENSED STATEMENTS
OF CASH FLOWS (UNAUDITED)
 For the Three MonthsEnded March 31,2004As Restated2005
    
    
    (Note L)(in thousands)Operating Activities:Net income
    
    $
    1,695
    
    
    $
    2,833Adjustments to reconcile net income
to net cash provided from operating activities Depreciation and amortization
    
    
    5,804
    
    
    
    5,739Deferred income taxes and investment tax credits, net
    
    
    6,606
    
    
    
    1,516Allowance for equity funds used during construction
    
    
    (1,194
    )
    
    
    (106
    )Pension, postretirement, and other employee benefits
    
    
    2,077
    
    
    
    1,713Tax benefit of stock options
    
    
    574
    
    
    
    263Other, net
    
    
    3,272
    
    
    
    2,586Changes in certain current assets and liabilities Receivables, net
    
    
    (6,156
    )
    
    
    5,934Fossil fuel stock
    
    
    (1,587
    )
    
    
    122Materials and supplies
    
    
    981
    
    
    
    (967
    )Other current assets
    
    
    (7,365
    )
    
    
    (2,526
    )Accounts payable
    
    
    (2,850
    )
    
    
    (2,275
    )Accrued taxes
    
    
    (2,476
    )
    
    
    923Accrued compensation
    
    
    (3,537
    )
    
    
    (3,129
    )Other current liabilities
    
    
    2,041
    
    
    
    1,017Net cash provided from (used for) operating activities
    
    
    (2,115
    )
    
    
    13,643Investing Activities:Gross property additions
    
    
    (15,945
    )
    
    
    (11,743
    )Other
    
    
    (357
    )
    
    
    (515
    )Net cash used for investing activities
    
    
    (16,302
    )
    
    
    (12,258
    )Financing Activities:Increase in notes payable, net
    
    
    19,546
    
    
    
    6,695Redemptions  Mandatorily redeemable preferred securities
    
    
    
    
    
    
    (40,000
    )Payment of preferred stock dividends
    
    
    (675
    )
    
    
    Payment of common stock dividends
    
    
    (6,675
    )
    
    
    (5,800
    )Other
    
    
    (6
    )
    
    
    1,105Net cash provided from (used for) financing activities
    
    
    12,190
    
    
    
    (38,000
    )Net Change in Cash and Cash Equivalents
    
    
    (6,227
    )
    
    
    (36,615
    )Cash and Cash Equivalents at Beginning of Period
    
    
    8,862
    
    
    
    37,943Cash and Cash Equivalents at End of Period
    
    $
    2,635
    
    
    $
    1,328Supplemental Cash Flow Information:Cash paid during the period for Interest (net of $595 and $95 capitalized for 2005 and 2004, respectively)
    
    $
    1,338
    
    
    $
    1,392Income taxes (net of refunds)
    
    $
    (384
    )
    
    $
    774
 The accompanying notes as they relate to Savannah Electric are an integral part of these condensed
financial statements. 77




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SAVANNAH ELECTRIC AND POWER COMPANY 
 CONDENSED BALANCE
SHEETS (UNAUDITED)
 At March 31,
    
    
    At December 31,Assets
    
    2005
    
    
    2004(in thousands)Current Assets:Cash and cash equivalents
    
    $
    2,635
    
    
    $
    8,862Receivables Customer accounts receivable
    
    
    22,936
    
    
    
    22,875Unbilled revenues
    
    
    4,941
    
    
    
    6,681Under recovered regulatory clause revenues
    
    
    32,462
    
    
    
    23,800Other accounts and notes receivable
    
    
    1,303
    
    
    
    1,608Affiliated companies
    
    
    2,868
    
    
    
    3,392Accumulated provision for uncollectible accounts
    
    
    (876
    )
    
    
    (878
    )Fossil fuel stock, at average cost
    
    
    12,177
    
    
    
    10,590Materials and supplies, at average cost
    
    
    8,931
    
    
    
    9,913Prepaid income taxes
    
    
    24,715
    
    
    
    21,615Prepaid expenses
    
    
    2,147
    
    
    
    1,415Assets from risk management activities
    
    
    5,541
    
    
    
    1,772Total current assets
    
    
    119,780
    
    
    
    111,645Property, Plant, and Equipment:In service
    
    
    951,534
    
    
    
    945,359Less accumulated provision for depreciation
    
    
    411,128
    
    
    
    408,415540,406
    
    
    
    536,944Construction work in progress
    
    
    99,521
    
    
    
    91,275Total property, plant, and equipment
    
    
    639,927
    
    
    
    628,219Other Property and Investments
    
    
    3,981
    
    
    
    3,925Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    10,590
    
    
    
    10,588Cash surrender value of life insurance for
deferred compensation plans
    
    
    25,653
    
    
    
    25,335Unamortized debt issuance expense
    
    
    5,183
    
    
    
    5,303Unamortized loss on reacquired debt
    
    
    7,753
    
    
    
    7,935Other regulatory assets
    
    
    14,868
    
    
    
    16,107Other
    
    
    4,443
    
    
    
    3,534Total deferred charges and other assets
    
    
    68,490
    
    
    
    68,802Total Assets
    
    $
    832,178
    
    
    $
    812,591
 The accompanying notes as they relate to Savannah Electric are an integral part of these condensed
financial statements. 78




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SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At March 31,
    
    
    At December 31,Liabilities
and Stockholders Equity
    
    2005
    
    
    2004(in thousands)Current Liabilities:Securities due within one year
    
    $
    1,041
    
    
    $
    1,010Notes payable
    
    
    40,114
    
    
    
    20,567Accounts payable Affiliated
    
    
    15,651
    
    
    
    17,379Other
    
    
    14,155
    
    
    
    16,166Customer deposits
    
    
    7,058
    
    
    
    6,973Accrued taxes Income taxes
    
    
    
    
    
    
    148Other
    
    
    3,062
    
    
    
    5,390Accrued interest
    
    
    4,549
    
    
    
    3,050Accrued vacation pay
    
    
    2,683
    
    
    
    2,661Accrued compensation
    
    
    2,075
    
    
    
    5,612Other
    
    
    5,084
    
    
    
    5,200Total current liabilities
    
    
    95,472
    
    
    
    84,156Long-term Debt
    
    
    237,611
    
    
    
    237,769Deferred Credits and Other Liabilities:Accumulated deferred income taxes
    
    
    93,996
    
    
    
    90,079Deferred credits related to income taxes
    
    
    8,483
    
    
    
    8,738Accumulated deferred investment tax credits
    
    
    7,795
    
    
    
    7,961Employee benefit obligations
    
    
    48,657
    
    
    
    46,580Other cost of removal obligations
    
    
    43,124
    
    
    
    41,890Miscellaneous regulatory liabilities
    
    
    18,273
    
    
    
    12,631Other
    
    
    7,037
    
    
    
    6,693Total deferred credits and other liabilities
    
    
    227,365
    
    
    
    214,572Total Liabilities
    
    
    560,448
    
    
    
    536,497Preferred Stock
    
    
    43,917
    
    
    
    43,938Common Stockholders Equity:Common stock, par value $5 per share Authorized -
16,000,000 shares

Outstanding - 10,844,635 shares
    
    
    54,223
    
    
    
    54,223Paid-in capital
    
    
    73,107
    
    
    
    72,533Retained earnings
    
    
    102,051
    
    
    
    107,685Accumulated other comprehensive loss
    
    
    (1,568
    )
    
    
    (2,285
    )Total common stockholders equity
    
    
    227,813
    
    
    
    232,156Total Liabilities and Stockholders Equity
    
    $
    832,178
    
    
    $
    812,591
 The accompanying notes as they relate to Savannah Electric are an integral part of these condensed
financial statements. 79




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SAVANNAH ELECTRIC AND POWER COMPANY 
   FIRST QUARTER 2005 vs. FIRST QUARTER 2004 OVERVIEW Savannah Electric operates as a vertically integrated utility providing electricity to retail
customers within its traditional service area of southeastern Georgia. Many factors affect the
opportunities, challenges, and risks of Savannah Electrics business of selling
electricity. These factors include the ability to maintain a stable regulatory environment, to
achieve energy sales growth while containing costs, and to recover costs related to growing demand
and increasingly stringent environmental standards. Savannah Electric continues to focus on several key performance indicators. These indicators
include customer satisfaction, peak season equivalent forced outage rate, and return on equity.
For additional information on these indicators, see MANAGEMENTS DISCUSSION AND ANALYSIS  OVERVIEW
 Key Performance Indicators of Savannah Electric in Item 7 of the Form 10-K. See Note 9 to the financial statements of Savannah Electric in Item 8
of the Form 10-K for information regarding Savannah Electrics
restatement of its financial statements for the quarter ended March
31, 2004 as the result of errors in the estimate of unbilled revenues
for the period. RESULTS OF OPERATIONS Earnings Savannah Electrics net income after dividends on preferred stock for the first quarter 2005 was
$1.0 million compared to $2.8 million for the corresponding period of 2004. Earnings decreased by
$1.8 million, or 64.0%, in the first quarter 2005, primarily due to higher operating expenses,
partially offset by higher operating revenues. Significant income statement items appropriate for discussion include the following: Increase (Decrease)First Quarter(in thousands)
    
    
    %Retail revenues
    
    $
    17,495
    
    
    
    25.9Sales for resale  non-affiliates
    
    
    (952
    )
    
    
    (67.5
    )Sales for resale  affiliates
    
    
    (376
    )
    
    
    (15.4
    )Fuel expense
    
    
    2,638
    
    
    
    25.2Purchased power expense  non-affiliates
    
    
    (456
    )
    
    
    (19.5
    )Purchased power expense  affiliates
    
    
    14,149
    
    
    
    63.9Maintenance expense
    
    
    3,455
    
    
    
    53.7Other income (expense), net
    
    
    1,524
    
    
    
    N/MIncome taxes
    
    
    (1,451
    )
    
    
    N/MDividends on preferred stock
    
    
    675
    
    
    
    N/M
  N/M Not meaningful Retail revenues. The chart below reflects the primary drivers of the 25.9% increase in retail
revenues in the first quarter 2005 compared to the same period in the prior year. Excluding fuel
cost recovery revenues, which do not affect net income, retail revenue increased by $0.2 million,
or 0.4%, in the first quarter 2005 when compared to the corresponding period in 2004. The first
quarter 2005 increase in retail revenue is mainly attributed to a slight increase in residential
and commercial customer growth. 80




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Details of retail revenues are as follows: Retail Revenues
    
    First Quarter(in thousands)
    
    
    %Retail  prior year
    
    $
    67,509Change in Sales growth
    
    
    378
    
    
    
    0.6Weather
    
    
    (205
    )
    
    
    (0.3
    )Fuel cost recovery
    
    
    17,322
    
    
    
    25.6Retail  current year
    
    $
    85,004
    
    
    
    25.9
    %
 Sales for resale non-affiliates.In the first quarter 2005, revenues from sales for resale
to non-affiliates were lower primarily due to less opportunity in the market as a result of higher
fuel prices. These transactions had no significant effect on net income. Sales for resale  affiliates and Purchased power expense affiliates.Energy sales to and
purchases from affiliated companies within the Southern Company system will vary from period to
period depending on demand and the availability and cost of generating resources at each company.
These sales and purchases are made in accordance with the affiliated company interchange agreement,
as approved by the FERC. Sales for resale to affiliates decreased in the first quarter 2005 when
compared to the corresponding period in 2004 due to higher fuel prices. Purchased power from
affiliates increased during the first quarter 2005 due to a 20.5% increase in energy purchases as a
result of scheduled maintenance on Savannah Electrics largest
coal units and an increase in the
average cost of fuel per net kilowatt-hour. These transactions do not have a significant impact on
earnings since energy is sold at marginal cost and energy purchases are generally offset by energy
revenues through Savannah Electrics fuel cost recovery clause. Fuel expense.Fuel expense increased in the first quarter 2005 primarily as a result of
higher energy prices and an adjustment in 2004 as a result of billing credits relating to the Plant
McIntosh combustion turbines, which reduced 2004 fuel expense. Since fuel expenses are generally
offset by fuel revenues through Savannah Electrics fuel cost recovery clause, these expenses do
not have a significant impact on net income. Purchased power expense non-affiliates.The slight decrease in the amount of purchased
power from non-affiliates in the first quarter 2005 when compared to the first quarter 2004
resulted from the increase in more economical purchased power from affiliates discussed above.
These transactions do not have a significant impact on earnings, as energy costs are generally
recovered through Savannah Electrics fuel cost recovery clause. Maintenance expense.The increase in the first quarter 2005 as compared to the same period in
the prior year is mainly due to scheduled maintenance outages at Plant Kraft and Plant McIntosh and
an increase in distribution expenses primarily related to tree trimming. Other
income (expense), net and income taxes.In the first quarter 2005, other
income increased and income taxes decreased primarily due
to an increase in non-taxable AFUDC equity of $1.1 million associated with the Plant McIntosh combined cycle
construction project. See Note 3 to the financial statements under Retail Regulatory Matters 
Plant McIntosh Construction Project of Savannah Electric in Item 8 of the Form 10-K for additional
information. AFUDC equity is expected to substantially decrease
following commercial operation of the project in June 2005; thus
Savannah Electrics annual effective income tax rate is expected
to be approximately 35%
for 2005. See Note 5 to the financial statements of Savannah Electric
in Item 8 of the Form 10-K and Note (N) to the Condensed Financial
Statements herein for additional information. Dividends on preferred stock.Dividends on preferred stock increased for the first quarter
2005 due to the issuance of 1.8 million shares of 6.00% Series Preferred Stock in June 2004. 81




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FUTURE EARNINGS POTENTIAL The results of operations discussed above are not necessarily indicative of Savannah Electrics
future earnings potential. The level of Savannah Electrics future earnings depends on numerous
factors that affect the opportunities, challenges, and risks of Savannah Electrics business of selling electricity. These factors include Savannah Electrics ability to maintain a
stable regulatory environment, to achieve energy sales growth while containing costs, and to
recover costs related to growing demand and increasingly stringent environmental standards. 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, energy conservation practiced by
customers, the price of electricity, the price elasticity of demand, and the rate of economic
growth in Savannah Electrics service area. For additional information relating to these issues,
see BUSINESS- The SOUTHERN System  Risk Factors in Item 1 and MANAGEMENTS DISCUSSION
AND ANALYSIS  FUTURE EARNINGS POTENTIAL of Savannah Electric in Item 7 of the Form 10-K. Environmental Matters Compliance costs related to the Clean Air Act and other environmental regulations could affect
earnings if such costs cannot be recovered. For additional information, including information on
certain environmental litigation, see MANAGEMENTS DISCUSSION AND ANALYSIS  FUTURE EARNINGS
POTENTIAL  Environmental Matters of Savannah Electric in Item 7 and Note 3 to the financial
statements of Savannah Electric under Environmental Matters in Item 8 of the Form 10-K. The EPA issued the final Clean Air Interstate Rule on March 10, 2005. The rule addresses
sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions that contribute to
nonattainment of the eight-hour ozone and fine particulate matter National Ambient Air Quality
Standards. Twenty-eight eastern states, including the State of Georgia, are subject to the fine
particulate and/or the eight-hour ozone requirements set forth within the rule. The rule may
require additional reductions of NOx and/or SO2 to be achieved by the
installation of additional controls at Savannah Electrics facilities or through the purchase of
allowances. The impact of this final rule on Savannah Electric will, however, depend on the
development and implementation of applicable state regulations and therefore cannot be determined
at this time. On March 15, 2005, the EPA announced the final Clean Air Mercury Rule, selecting a
cap-and-trade approach to be implemented in two phases, 2010 and 2018. The rule sets a permanent
cap on emissions at the 2018 level and provides for an emissions allowance trading market. The
impact of this final rule on Savannah Electric will depend on resolution of legal challenges and
the development and implementation of applicable state regulations and therefore cannot be
determined at this time. On April 15, 2005, the EPA announced plans to extend the deadline for issuance of final rules
addressing Best Available Retrofit Technology standards under its Regional Haze program until June
15, 2005. FERC and Georgia PSC Matters Market-Based Rate Authority See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL  FERC and
Georgia PSC Matters  Market-Based Rate Authority of Savannah Electric in Item 7 and Note 3 to
the financial statements of Savannah Electric under Market-Based Rate Authority in Item 8 of
the Form 10-K for information on the FERCs April 2004 order adopting a new interim analysis for
measuring generation market power and a proceeding initiated by the FERC in December 2004 to
assess Southern Companys generation dominance within its retail service territory. Savannah
Electric has authorization from the FERC 82




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS to sell power to non-affiliates at market-based prices. Savannah Electric, through SCS as
agent, also has FERC authority to make short-term opportunity sales at market rates. Specific
FERC approval must be obtained with respect to a market-based contract with an affiliate. As
directed by this order, on February 15, 2005, Southern Company submitted additional information
related to generation dominance in its retail service territory. Any new market-based rate
transactions in Southern Companys retail service territory entered into after February 27, 2005
will be subject to refund to the level of the default cost-based rates, pending the outcome of
the proceeding. In the event that the FERCs default mitigation measures are ultimately applied
Savannah Electric may be required to charge cost-based rates for certain wholesale sales in the
Southern Company retail service territory, which may be lower than negotiated market-based
rates. The impact of such sales through March 31, 2005 is not
material to Savannah Electrics net income. The final outcome of this matter will depend on the form in which the final methodology
for assessing generation market power and mitigation rules may be ultimately adopted and cannot
be determined at this time. Retail Rate Case Filing On November 30, 2004, Savannah Electric filed a traditional one-year rate case with the Georgia PSC
requesting a $23.2 million, or 6.7%, increase in retail revenues, effective January 1, 2005. The
requested increase is based on a future test year ending December 31, 2005 and a proposed retail
return on common equity of 12.5%. As an alternative, Savannah Electric has also included in its
request a three-year rate plan that is based on the same test year and proposed retail return on
common equity. The increase in retail revenues is being requested to cover Savannah Electrics investment in
the new Plant McIntosh Combined Cycle Units 10 and 11; increasing operating and maintenance
expenses; and continued investment in generation, transmission, and distribution facilities to
support growth and ensure reliability. Hearings were held in March and April 2005 and the Georgia
PSC is expected to issue a final order in May 2005, following which the new rates will become
effective in June 2005. The final outcome of this matter cannot now be determined. See
MANAGEMENTS DISCUSSION AND ANALYSIS  FUTURE EARNINGS POTENTIAL  FERC and Georgia PSC Matters 
Retail Rate Case Filing in Item 7 and Note 3 to the financial statements of Savannah Electric
under Retail Regulatory Matters  2004 Retail Rate Case Filing in Item 8 of the Form 10-K and
Note (K) to the Condensed Financial Statements herein for additional information. Other Matters Effective September 30, 2004, Savannah Electric retired Units 4 and 5 at Plant Riverside. The
remaining units at the plant are expected to be retired on May 31, 2005. These retirements will
have no material impact on Savannah Electrics financial statements. Savannah Electric is subject to certain claims and legal actions arising in the ordinary
course of business. In addition, Savannah Electrics business activities are subject to extensive
governmental regulation related to public health and the environment. Litigation over
environmental issues and claims of various types, including property damage, personal injury, and
citizen enforcement of environmental requirements, has increased generally throughout the United
States. In particular, personal injury claims for damages caused by alleged exposure to hazardous
materials have become more frequent. The ultimate outcome of such litigation against Savannah
Electric cannot be predicted at this time; however, management does not anticipate that the
liabilities, if any, arising from such current proceedings would have a material adverse effect on
Savannah Electrics financial statements. See the Notes to the Condensed Financial Statements herein for discussion of various
contingencies and other matters which may affect future earnings potential. 83




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates Savannah Electric prepares its financial statements in accordance with accounting principles
generally accepted in the United States. Significant accounting policies are described in Note 1
to the financial statements of Savannah Electric in Item 8 of the Form 10-K. In the application of
these policies, certain estimates are made that may have a material impact on Savannah Electrics
results of operations and related disclosures. Different assumptions and measurements could
produce estimates that are significantly different from those recorded in the financial statements.
Also see MANAGEMENTS DISCUSSION AND ANALYSIS  ACCOUNTING POLICIES  Application of Critical
Accounting Policies and Estimates of Savannah Electric in Item 7 of the Form 10-K for a complete
discussion of Savannah Electrics critical accounting policies and estimates related to Electric
Utility Regulation, Contingent Obligations, and Unbilled Revenues. New Accounting Standards FASB Statement No. 123R, Share-Based Payments, was issued in December 2004. This statement
requires that compensation cost relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the grant date fair value of the equity
or liability instruments issued. In April 2005, the SEC amended the compliance dates for FASB
Statement No. 123R. For Savannah Electric, this statement is now effective beginning January 1,
2006. Although the compensation expense calculation required under the revised statement differs
slightly, the impacts on Savannah Electrics financial statements are expected to be similar to the
pro forma disclosures included in Note 1 to the financial statements of Savannah Electric under
Stock Options in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements
herein. FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations,
was issued in March 2005. This interpretation requires that asset retirement obligations be
recorded when a legal obligation exists even though the timing and/or the method of settlement are
conditional on a future event. For Savannah Electric, FIN 47 is effective no later than December
31, 2005. Savannah Electric is currently assessing the impact of FIN 47 on its balance sheet;
however, adoption is not currently expected to have a material impact on Savannah Electrics income
statement. In December 2004, the FASB issued Staff Position No. 109-1 (FSP 109-1), Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities provided by the American Jobs Creation Act of 2004, which requires that the generation
deduction for utilities be accounted for as a special tax deduction rather than as a tax rate
reduction. Savannah Electric adopted FSP 109-1 in the first quarter of 2005 with no material
impact on its financial statements. FINANCIAL CONDITION AND LIQUIDITY Overview Net cash flow provided from operating activities totaled $(2.1) million for the first quarter 2005,
compared to $13.6 million for the first quarter 2004. The $15.7 million decrease in 2005 resulted
primarily from higher fuel costs. Those costs are recoverable in future periods and are reflected
on the balance sheets as under recovered regulatory clause revenues. Major changes in Savannah
Electrics financial condition during the first three months of 2005 included the addition of
approximately $15.9 million to utility plant, which includes the Plant McIntosh combined cycle
construction project. The funds for these additions and other capital requirements 84




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS were derived primarily from short-term debt. See Savannah Electric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 Savannah Electric in Item 7 of the Form 10-K for a
description of Savannah Electrics capital requirements for its construction program, lease
obligations, purchase commitments, and trust funding requirements. Sources of Capital Savannah Electric plans to obtain the funds required for construction and other purposes from
sources similar to those used in the past including both internal and external funds. The amount,
type, and timing of any future financings  if needed  will depend upon maintenance of adequate
earnings, regulatory approval, prevailing market conditions, and other factors. See MANAGEMENTS
DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY  Sources of Capital of Savannah
Electric in Item 7 of the Form 10-K for additional information. To meet short-term cash needs and contingencies, Savannah Electric had at March 31, 2005
approximately $2.6 million of cash and cash equivalents and $80 million of unused committed credit
arrangements with banks, of which $70 million expires in 2005, and $10 million expires in 2007. Of
the unused credit arrangements expiring in 2005, $40 million include two-year term loan options
executable at the expiration date. The credit arrangements provide liquidity support to some of
Savannah Electrics obligations with respect to its variable rate debt and its commercial paper.
Savannah Electric expects to renew its credit facilities, as needed, prior to expiration. Savannah
Electric may also meet short-term cash needs through a Southern Company subsidiary organized to
issue and sell commercial paper and extendible commercial notes at the request and for the benefit
of Savannah Electric and other Southern Company subsidiaries. At March 31, 2005, Savannah Electric
had $32.1 million of outstanding commercial paper and $8.0 million of outstanding extendible
commercial notes. Credit Rating Risk Savannah Electric does not have any credit arrangements that would require material changes in
payment schedules or terminations as a result of a credit rating downgrade. Savannah Electric is
party to certain derivatives agreements that could require collateral and/or accelerated payment in
the event of a credit rating change to below investment grade. These agreements are primarily for natural gas price and
interest rate risk management activities. At March 31, 2005, Savannah Electric had no exposure
under these contracts. Market Price Risk Savannah Electrics market risk exposures relative to interest rate changes have not changed
materially compared with the December 31, 2004 reporting period. In addition, Savannah Electric is
not aware of any facts or circumstances that would significantly affect such exposures in the near
term. Due to cost-based rate regulations, Savannah Electric has limited exposure to market
volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate
residual risks relative to movements in electricity prices, Savannah Electric enters into
fixed-price contracts for the purchase and sale of electricity through the wholesale electricity
market and, to a lesser extent, similar contracts for gas and oil purchases. Savannah Electric has
also implemented a retail fuel hedging program at the instruction of the Georgia PSC. 85




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS The fair value of derivative energy contracts at March 31, 2005 was as follows: First Quarter2005ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    1,474Contracts realized or settled
    
    
    (20
    )New contracts at inception
    
    
    Changes in valuation techniques
    
    
    Current period changes (a)
    
    
    6,580Contracts at March 31, 2005
    
    $
    8,034
  (a)
    
    Current period changes also include the changes in fair value of new contracts
entered into during the period. Source of March 31, 2005Valuation PricesTotal
    
    
    MaturityFair Value
    
    
    Year 1
    
    
    1-3 Years(in thousands)Actively quoted
    
    $
    7,995
    
    
    $
    5,467
    
    
    $
    2,528External sources
    
    
    39
    
    
    
    39
    
    
    
    Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at March 31, 2005
    
    $
    8,034
    
    
    $
    5,506
    
    
    $
    2,528
 For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND
LIQUIDITY  Market Price Risk of Savannah Electric in Item 7 and Notes 1 and 6 to the financial
statements of Savannah Electric under Financial Instruments in Item 8 of the Form 10-K, and Note
(F) to the Condensed Financial Statements herein. Financing Activities Savannah Electric did not issue or redeem any long-term securities during the first quarter of
2005. In addition to any financings that may be necessary to meet capital requirements and
contractual obligations, Savannah Electric plans to continue, when economically feasible, a program
to retire higher-cost securities and replace these obligations with lower-cost capital if market
conditions permit. In the first quarter of 2005, Savannah Electric entered into a forward starting interest rate
swap in order to mitigate its exposure to unfavorable changes in interest rates related to a series
of senior notes Savannah Electric anticipates to issue in 2006. See Note (F) to the Condensed
Financial Statements herein for additional information. 86




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SOUTHERN POWER COMPANY 87




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##### Table of Contents



SOUTHERN POWER COMPANY 
 CONDENSED STATEMENTS OF
INCOME (UNAUDITED)
 For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Operating Revenues:Sales for resale Non-affiliates
    
    $
    40,104
    
    
    $
    86,699Affiliates
    
    
    112,337
    
    
    
    86,795Other revenues
    
    
    380
    
    
    
    2,111Total operating revenues
    
    
    152,821
    
    
    
    175,605Operating Expenses:Fuel
    
    
    34,544
    
    
    
    30,335Purchased power Non-affiliates
    
    
    8,862
    
    
    
    13,605Affiliates
    
    
    20,954
    
    
    
    42,056Other operations
    
    
    12,719
    
    
    
    14,725Maintenance
    
    
    3,259
    
    
    
    3,012Depreciation and amortization
    
    
    12,783
    
    
    
    12,778Taxes other than income taxes
    
    
    2,955
    
    
    
    2,679Total operating expenses
    
    
    96,076
    
    
    
    119,190Operating Income
    
    
    56,745
    
    
    
    56,415Other Income and (Expense):Interest expense, net of amounts capitalized
    
    
    (19,244
    )
    
    
    (12,586
    )Other income (expense), net
    
    
    92
    
    
    
    493Total other income and (expense)
    
    
    (19,152
    )
    
    
    (12,093
    )Earnings Before Income Taxes
    
    
    37,593
    
    
    
    44,322Income taxes
    
    
    14,520
    
    
    
    17,137Net Income
    
    $
    23,073
    
    
    $
    27,185
 
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Net Income
    
    $
    23,073
    
    
    $
    27,185Other comprehensive income:Changes in fair value of qualifying hedges, net of tax
of $(522)
    
    
    
    
    
    
    (928
    )Reclassification adjustment for amounts included in
net income,
net of tax of $1,041 and $987, respectively
    
    
    1,612
    
    
    
    1,569COMPREHENSIVE INCOME
    
    $
    24,685
    
    
    $
    27,826
 The accompanying notes as they relate to Southern Power are an integral part of these condensed
financial statements. 88




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SOUTHERN POWER COMPANY 
 CONDENSED STATEMENTS
OF CASH FLOWS (UNAUDITED)
 For the Three MonthsEnded March 31,2005
    
    
    2004(in thousands)Operating Activities:Net income
    
    $
    23,073
    
    
    $
    27,185Adjustments to reconcile net income
to net cash provided from operating activities Depreciation and amortization
    
    
    16,448
    
    
    
    15,267Deferred income taxes and investment tax credits, net
    
    
    15,598
    
    
    
    16,525Deferred revenues
    
    
    (26,194
    )
    
    
    (19,235
    )Tax benefit of stock options
    
    
    188
    
    
    
    109Other, net
    
    
    (538
    )
    
    
    (4,957
    )Changes in certain current assets and liabilities Receivables, net
    
    
    964
    
    
    
    (9,435
    )Fossil fuel stock
    
    
    593
    
    
    
    2,867Materials and supplies
    
    
    (232
    )
    
    
    (508
    )Other current assets
    
    
    (3,894
    )
    
    
    (161
    )Accounts payable
    
    
    (6,148
    )
    
    
    (9,961
    )Accrued taxes
    
    
    3,014
    
    
    
    2,884Accrued interest
    
    
    (15,598
    )
    
    
    (16,166
    )Net cash provided from operating activities
    
    
    7,274
    
    
    
    4,414Investing Activities:Gross property additions
    
    
    (2,075
    )
    
    
    (68,779
    )Change in construction payables, net
    
    
    (121
    )
    
    
    (6,589
    )Other
    
    
    (2,292
    )
    
    
    185Net cash used for investing activities
    
    
    (4,488
    )
    
    
    (75,183
    )Financing Activities:Increase in notes payable, net  affiliated
    
    
    
    
    
    
    67,411Increase in notes payable, net
    
    
    
    
    
    
    94Other
    
    
    
    
    
    
    933Net cash provided from financing activities
    
    
    
    
    
    
    68,438Net Change in Cash and Cash Equivalents
    
    
    2,786
    
    
    
    (2,331
    )Cash and Cash Equivalents at Beginning of Period
    
    
    25,241
    
    
    
    2,798Cash and Cash Equivalents at End of Period
    
    $
    28,027
    
    
    $
    467Supplemental Cash Flow Information:Cash paid during the period for Interest (net of $0 and $8,739 capitalized for 2005 and 2004, respectively)
    
    $
    31,073
    
    
    $
    25,114Income taxes (net of refunds)
    
    $
    3,593
    
    
    $
    1,684
 The accompanying notes as they relate to Southern Power are an integral part of these condensed
financial statements. 89




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SOUTHERN POWER COMPANY 
 CONDENSED BALANCE
SHEETS (UNAUDITED)
 At March 31,
    
    
    At December 31,Assets
    
    2005
    
    
    2004(in thousands)Current Assets:Cash and cash equivalents
    
    $
    28,027
    
    
    $
    25,241Receivables Customer accounts receivable
    
    
    9,851
    
    
    
    12,865Other accounts receivable
    
    
    52
    
    
    
    893Accumulated provision for uncollectible accounts
    
    
    (350
    )
    
    
    (350
    )Affiliated companies
    
    
    28,313
    
    
    
    25,423Fossil fuel stock, at average cost
    
    
    2,311
    
    
    
    2,904Materials and supplies, at average cost
    
    
    10,070
    
    
    
    9,839Prepaid income taxes
    
    
    10,655
    
    
    
    4,619Prepaid expenses
    
    
    6,781
    
    
    
    8,085Other
    
    
    17
    
    
    
    112Total current assets
    
    
    95,727
    
    
    
    89,631Property, Plant, and Equipment:In service
    
    
    1,822,316
    
    
    
    1,821,434Less accumulated provision for depreciation
    
    
    123,973
    
    
    
    111,2001,698,343
    
    
    
    1,710,234Construction work in progress
    
    
    202,095
    
    
    
    200,903Total property, plant, and equipment
    
    
    1,900,438
    
    
    
    1,911,137Deferred Charges and Other Assets:Unamortized debt issuance expense
    
    
    13,105
    
    
    
    14,078Prepaid long-term service agreements
    
    
    36,946
    
    
    
    34,800OtherAffiliated
    
    
    6,455
    
    
    
    6,455Other
    
    
    10,638
    
    
    
    10,912Total deferred charges and other assets
    
    
    67,144
    
    
    
    66,245Total Assets
    
    $
    2,063,309
    
    
    $
    2,067,013
 The accompanying notes as they relate to Southern Power are an integral part of these condensed
financial statements. 90




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SOUTHERN POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At March 31,
    
    
    At December 31,Liabilities
and Stockholders Equity
    
    2005
    
    
    2004(in thousands)Current Liabilities:Securities due within one year
    
    $
    200
    
    
    $
    200Accounts payable Affiliated
    
    
    20,297
    
    
    
    19,265Other
    
    
    3,827
    
    
    
    11,024Accrued taxes  Other
    
    
    7,118
    
    
    
    4,104Accrued interest
    
    
    13,028
    
    
    
    28,626Other
    
    
    15
    
    
    
    83Total current liabilities
    
    
    44,485
    
    
    
    63,302Long-term Debt
    
    
    1,099,484
    
    
    
    1,099,435Deferred Credits and Other Liabilities:Accumulated deferred income taxes
    
    
    56,852
    
    
    
    40,212Deferred capacity revenues  Affiliated
    
    
    12,923
    
    
    
    39,118OtherAffiliated
    
    
    13,076
    
    
    
    13,333Other
    
    
    5
    
    
    
    2Total deferred credits and other liabilities
    
    
    82,856
    
    
    
    92,665Total Liabilities
    
    
    1,226,825
    
    
    
    1,255,402Common Stockholders Equity:Common stock, par value $.01 per share 
    
    
    
    
    
    
    Authorized - 1,000,000 sharesOutstanding - 1,000 sharesPaid-in capital
    
    
    740,723
    
    
    
    740,535Retained earnings
    
    
    145,207
    
    
    
    122,134Accumulated other comprehensive loss
    
    
    (49,446
    )
    
    
    (51,058
    )Total common stockholders equity
    
    
    836,484
    
    
    
    811,611Total Liabilities and Stockholders Equity
    
    $
    2,063,309
    
    
    $
    2,067,013
 The accompanying notes as they relate to Southern Power are an integral part of these condensed
financial statements. 91




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SOUTHERN POWER COMPANY 
   FIRST QUARTER 2005 vs. FIRST QUARTER 2004 OVERVIEW Southern Power constructs, owns, and manages Southern Companys competitive generation assets
and sells electricity at market-based rates in the Super Southeast wholesale market. Southern
Power continues to focus on executing its regional strategy in the Super Southeast in 2005.
However, Southern Power continues to face challenges related to market power issues at the
federal regulatory level, specifically the ability to charge market-based rates. To evaluate operating results and to ensure Southern Powers ability to meet its
contractual commitments to customers, Southern Power focuses on two key performance indicators.
These indicators consist of plant availability and peak season equivalent forced outage rate
(EFOR). Plant availability shows the percentage of time during the year that Southern Powers
generating units are available to be called upon to generate (the higher the better), whereas
the EFOR more narrowly defines the hours during peak demand times when Southern Powers
generating units are not available due to forced outages (the lower the better). For additional
information on these indicators, see MANAGEMENTS DISCUSSION AND ANALYSIS  OVERVIEW  Key
Performance Indicators of Southern Power in Item 7 of the Form 10-K. RESULTS OF OPERATIONS Earnings Southern Powers net income for first quarter 2005 was $23.1 million compared to $27.2 million for
the corresponding period of 2004. The decrease in first quarter 2005 earnings of $4.1 million, or
15.1%, was primarily the result of ceasing the capitalization of interest on construction.
Capitalization of construction interest ended with the sale of Plant McIntosh Units 10 and 11 to
Georgia Power and Savannah Electric in May 2004 and the cessation of construction activities at
Plant Franklin Unit 3 in August 2004. For further information, see Note 2 to the financial
statements of Southern Power under Plant Franklin Unit 3 Construction Project and Plant McIntosh
Construction Project in Item 8 of the Form 10-K. Reductions in operating revenues at Plant Harris
Unit 2 and Plant Franklin 2 caused by the shift from market sales of this capacity to sales to
affiliates under PPAs in June 2004 were largely offset by reductions in purchased power expense. Significant income statement items appropriate for discussion include the following: Increase (Decrease)First Quarter(in thousands)
    
    
    %Sales for resale  non-affiliates
    
    $
    (46,595
    )
    
    
    (53.7
    )Sales for resale  affiliates
    
    
    25,542
    
    
    
    29.4Fuel expense
    
    
    4,209
    
    
    
    13.9Purchased power expense  non-affiliates
    
    
    (4,743
    )
    
    
    (34.9
    )Purchased power expense  affiliates
    
    
    (21,102
    )
    
    
    (50.2
    )Other operations expense
    
    
    (2,006
    )
    
    
    (13.6
    )Interest expense, net of amounts capitalized
    
    
    (6,658
    )
    
    
    (52.9
    )
 Sales for resale affiliates and non-affiliates. In the first quarter 2005, revenues from
sales for resale to non-affiliates were lower when compared to the corresponding period in 2004.
This decrease was due primarily 92




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SOUTHERN POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS to the inception of a PPA with Georgia Power at Plant Harris Unit 2 and a scheduled increase in the
PPA with Georgia Power at Plant Franklin Unit 2 in June 2004; these units were initially placed
into service in June 2003 and were previously available for market sales to non-affiliates until
the commencement of the PPAs. Fuel expense. Fuel expense in the first quarter 2005 increased when compared to the same
period in 2004 primarily from increased generation at Plant Wansley under PPAs with Georgia Power
and Savannah Electric and also due to an average increase in gas prices over the same period in
2004 of 20.2%. The PPAs for Plant Wansley call for Southern Power to purchase the gas and to bill
the cost to Georgia Power and Savannah Electric. Therefore, these expenses have no impact on net
income. Under Southern Powers other PPAs, the responsibility for fuel purchases lies directly
with the counterparty. Purchased power expense affiliates and non-affiliates. The decrease in purchased power from
affiliates and non-affiliates during the first quarter 2005 when compared to the first quarter 2004
is primarily due to the commitment of Plant Harris Unit 2 and an additional portion of Plant
Franklin Unit 2 to Georgia Power beginning in June 2004; prior to that time the capacity from these
units was sold into short-term markets and related energy sales were sometimes served with
short-term power purchases from both affiliates and non-affiliates when market costs were lower
than the cost of self-generation. Other operations expense.During the first quarter 2005, other operations expense decreased
when compared to the same period in the prior year due primarily to transmission costs incurred
with Plant Harris Unit 2 prior to its commitment to Georgia Power in June 2004. Under the PPA,
Georgia Power is now responsible for providing transmission service for Plant Harris Unit 2. Interest expense, net of amounts capitalized.In the first quarter 2005, interest expense,
net of amounts capitalized when compared to the same period in 2004 increased primarily as the
result of ceasing the capitalization of interest on construction. Capitalized interest on
construction ended with the sale of Plant McIntosh Units 10 and 11 to Georgia Power and Savannah
Electric in May 2004 and the cessation of construction activities at Plant Franklin Unit 3 in
August 2004. For further information, see Note 2 to the financial statements of Southern Power
under Plant Franklin Unit 3 Construction Project and Plant McIntosh Construction Project in
Item 8 of the Form 10-K. In addition Southern Power repurchased $50 million of its 4.875% senior
notes in December 2004. FUTURE EARNINGS POTENTIAL The results of operations are not necessarily indicative of future earnings. Several factors
affect the opportunities, challenges, and risks of Southern Powers competitive wholesale energy
business. These factors include the ability to achieve sales growth while containing costs.
Another major factor is federal regulatory policy, which may impact Southern Powers level of
participation in this market. The level of future earnings depends on numerous factors, especially
regulatory matters, including those related to affiliate contracts, sales, creditworthiness of
customers, total generating capacity available in the Southeast, and the successful remarketing of
capacity as current contracts expire. For additional information relating to these issues, see
BUSINESS  The SOUTHERN System  Risk Factors in Item 1 and MANAGEMENTS DISCUSSION AND ANALYSIS
 FUTURE EARNINGS POTENTIAL of Southern Power in Item 7 of the Form 10-K. See MANAGEMENTS DISCUSSION AND ANALYSIS  FUTURE EARNINGS POTENTIAL  General and Power
Sales Agreements of Southern Power in Item 7 of the Form 10-K for additional information on
long-term power sales agreements and PPAs. Southern Powers PPAs with non-affiliated
counterparties have provisions that require the posting of collateral or an acceptable substitute
guarantee in the event that S&P or Moodys downgrades the credit ratings of such counterparty to
below investment grade, or, if 93




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SOUTHERN POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS the counterparty is not rated, such counterparty fails to maintain a minimum coverage ratio. The
PPAs are expected to provide Southern Power with a stable source of revenue during their respective
terms. On April 8, 2005, Southern Power entered into an agreement with Constellation Power Inc. and
certain other subsidiaries of Constellation Energy Group, Inc. to acquire all of the outstanding
general and limited partnership interests of Oleander Power Project, L.P. (Oleander), for an
aggregate purchase price of approximately $206 million. The purchase price is subject to certain
working capital and timing of closing adjustments. Oleander owns a dual-fueled generating plant in
Brevard County, Florida with a nominal installed capacity of 680 MW. The entire output of the
plant is sold under PPAs with Florida Power & Light Company and Seminole Electric Cooperative, Inc.
The PPAs expire in 2007 and 2009, respectively. The acquisition is subject to certain regulatory
approvals, including the approval of the FERC, as well as review by the Federal Trade Commission
under the Hart-Scott-Rodino Antitrust Improvements Act. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL  FERC Matters
 Market-Based Rate Authority of Southern Power in Item 7 and Note 2 to the financial statements
of Southern Power under FERC Matters  Market-Based Rate Authority in Item 8 of the Form 10-K for
information on the FERCs April 2004 order adopting a new interim analysis for measuring generation
market power and a proceeding initiated by the FERC in December 2004 to assess Southern Companys
generation dominance within its retail service territory. Southern Power has authorization from
the FERC to sell power to non-affiliates at market-based prices. Southern Power, through SCS as
agent, also has FERC authority to make short-term opportunity sales at market rates. Specific FERC
approval must be obtained with respect to a market-based contract with an affiliate. As directed
by this order, on February 15, 2005, Southern Company submitted additional information related to
generation dominance in its retail service territory. Any new market-based rate transactions in
Southern Companys retail service territory entered into after February 27, 2005 will be subject to
refund to the level of the default cost-based rates, pending the outcome of the proceeding. In the
event that the FERCs default mitigation measures are ultimately applied, Southern Power may be
required to charge cost-based rates for certain wholesale sales in the Southern Company retail
service territory, which may be lower than negotiated market-based
rates. The impact of such sales through March 31, 2005 is not
material to Southern Powers net income. The final outcome of this
matter will depend on the form in which the final methodology for assessing generation market power
and mitigation rules may be ultimately adopted and cannot be determined at this time. See MANAGEMENTS DISCUSSION AND ANALYSIS  FUTURE EARNINGS POTENTIAL  Environmental Matters
of Southern Power in Item 7 of the Form 10-K for information on the development by federal and
state environmental regulatory agencies of additional control strategies for emission of air
pollution from industrial sources, including electric generating facilities. Compliance costs
related to current and future environmental laws and regulations could affect earnings if such
costs are not fully recovered. Southern Power is subject to certain claims and legal actions arising in the ordinary course
of business. In addition, Southern Powers business activities are subject to extensive
governmental regulation related to public health and the environment. Litigation over
environmental issues and claims of various types, including property damage, personal injury, and
citizen enforcement of environmental requirements, has increased generally throughout the United
States. In particular, personal injury claims for damages caused by alleged exposure to hazardous
materials have become more frequent. No such litigation is currently pending against Southern
Power. See also the Notes to the Condensed Financial Statements herein for discussion of various
contingencies and other matters which may affect future earnings potential. 94




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SOUTHERN POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates Southern Power prepares its financial statements in accordance with accounting principles generally
accepted in the United States. Significant accounting policies are described in Note 1 to the
financial statements of Southern Power in Item 8 of the Form 10-K. In the application of these
policies, certain estimates are made that may have a material impact on Southern Powers results of
operations and related disclosures. Different assumptions and measurements could produce estimates
that are significantly different from those recorded in the financial statements. Also see
MANAGEMENTS DISCUSSION AND ANALYSIS ACCOUNTING POLICIES  Application of Critical
Accounting Policies and Estimates of Southern Power in Item 7 of the Form 10-K for a complete
discussion of Southern Powers critical accounting policies and estimates related to Revenue
Recognition and Asset Impairments. New Accounting Standards FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations, was
issued in March 2005. This interpretation requires that asset retirement obligations be recorded
when a legal obligation exists even though the timing and/or the method of settlement are
conditional on a future event. For Southern Power, FIN 47 is effective no later than December 31,
2005. Southern Power is currently assessing the impact of FIN 47 on its financial statements. FINANCIAL CONDITION AND LIQUIDITY Overview There have been no major changes in Southern Powers financial condition during the first quarter
2005. With respect to the impending purchase of Oleander, it is anticipated this purchase will be
financed with a combination of commercial paper, loans or capital contributions from Southern
Company, and funds generated from operations. Pending regulatory approvals, this purchase is
expected to close in the second quarter of 2005. Capital Requirements and Contractual Obligations See MANAGEMENTS DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY Capital Requirements
and Contractual Obligations of Southern Power in Item 7 of the Form 10-K for a description of
Southern Powers capital requirements for its construction program, maturing debt, purchase
commitments, and long-term service agreements. Sources of Capital Southern Power may use external funds, equity capital from Southern Company, or internally
generated cash from operations to finance any new projects and ongoing capital requirements.
Southern Power expects to generate external funds from the issuance of unsecured senior debt and
commercial paper or utilization of credit arrangements from banks. See MANAGEMENTS DISCUSSION AND
ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY  Sources of Capital of Southern Power in Item 7 of
the Form 10-K for additional information. To meet liquidity and capital resource requirements, Southern Power had at March 31, 2005
approximately $325 million of an unused committed credit arrangement with banks expiring in 2006.
This arrangement also provides liquidity support for Southern Powers commercial paper program.
Amounts drawn under the 95




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SOUTHERN POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS arrangements may be used to finance acquisition and construction costs related to electric
generating facilities and for general corporate purposes, subject to borrowing limitations for each
generating facility. The arrangements permit Southern Power to fund construction of future generating facilities upon
meeting certain requirements. Southern Power expects to renew its credit facility, as needed,
prior to expiration. Credit Rating Risk Southern Power does not have any credit arrangements that would require material changes in payment
schedules or terminations as a result of a credit rating downgrade. There are 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 with a Southern Company guaranty, letter of credit, or cash.
These contracts are primarily for physical electricity purchases and sales. At March 31, 2005, the
maximum potential collateral requirements at a BBB- or Baa3 rating were approximately $35 million.
The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $79
million. Southern Power is also party to certain derivative agreements that could require
collateral and/or accelerated payment in the event of a credit rating change to below investment
grade. These agreements are primarily for natural gas price risk management activities. At March
31, 2005, Southern Power had no material exposure related to these agreements. Market Price Risk Southern Powers market risk exposures relative to interest rate changes have not changed
materially compared with the December 31, 2004 reporting period. In addition, Southern Power is
not aware of any facts or circumstances that would significantly affect such exposures in the near
term. Because energy from Southern Powers generating facilities is primarily sold under long-term
PPAs with tolling agreements and provisions shifting substantially all of the responsibility for
fuel cost to the purchasers, Southern Powers exposure to market volatility in commodity fuel
prices and prices of electricity is limited. To mitigate residual risks in those areas, Southern
Power enters into fixed-price contracts for the sale of electricity. Unrealized gains and losses
on electric and gas contracts qualifying as cash flow hedges of anticipated purchases and sales are
deferred in Other Comprehensive Income. The fair values of derivative energy contracts outstanding at March 31, 2005 were not
material. At March 31, 2005, all of these contracts mature within one year and are based on
actively quoted market prices. For additional information, see MANAGEMENTS DISCUSSION AND
ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY  Market Price Risk of Southern Power in Item 7 and
Notes 1 and 5 to the financial statements of Southern Power under Financial Instruments in Item 8
of the Form 10-K and Note (F) to the Condensed Financial Statements herein. 96




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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
 SAVANNAH ELECTRIC AND POWER COMPANY
 SOUTHERN POWER COMPANY
 INDEX TO APPLICABLE NOTES TO
FINANCIAL STATEMENTS BY REGISTRANT Registrant
    
    Applicable NotesSouthern Company
    
    A, B, C, D, E, F, G, H, I, J, N, OAlabama Power
    
    A, B, C, D, F, G, H, NGeorgia Power
    
    A, B, C, D, F, G, IGulf Power
    
    A, B, C, D, F, G, JMississippi Power
    
    A, B, C, D, F, GSavannah Electric
    
    A, B, C, D, F, G, K, L, NSouthern Power
    
    A, B, F, M
 97




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##### Table of Contents



THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SAVANNAH ELECTRIC AND POWER COMPANY
SOUTHERN POWER COMPANY NOTES TO THE CONDENSED FINANCIAL STATEMENTS:  (A)
    The condensed financial statements of the registrants included herein have been
prepared by each registrant, without audit, pursuant to the rules and regulations of the
SEC. In the opinion of each registrants management, the information regarding such
registrant furnished herein reflects all adjustments necessary to present fairly the
results of operations for the periods ended March 31, 2005 and 2004. Certain information
and footnote disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations, although each registrant believes that the
disclosures regarding such registrant are adequate to make the information presented not
misleading. Disclosure which would substantially duplicate the disclosure in the Form 10-K
and details which have not changed significantly in amount or composition since the filing
of the Form 10-K are omitted from this Quarterly Report on Form 10-Q. Therefore, these
condensed financial statements should be read in conjunction with the financial statements
and the notes thereto included in the Form 10-K. Certain prior period amounts have been
reclassified to conform to current period presentation. Due to seasonal variations in the
demand for energy, operating results for the periods presented do not necessarily indicate
operating results for the entire year.(B)
    See Note 3 to the financial statements of Southern Company and the retail operating
companies and Note 2 to the financial statements of Southern Power in Item 8 of the Form
10-K for information relating to various lawsuits and other contingencies.PLANT WANSLEY ENVIRONMENTAL LITIGATIONSee Note 3 to the financial statements of Southern Company under Environmental Matters -
Plant Wansley Environmental Litigation and Georgia Power under Plant Wansley Environmental
Litigation in Item 8 of the Form 10-K. On March 11, 2005, the U.S. Circuit Court of
Appeals for the Eleventh Circuit accepted Georgia Powers petition for review of the U.S.
District Court for the Northern District of Georgias December 15, 2004 order related to the
Plant Wansley environmental litigation. Oral argument on that appeal has not been
scheduled. The final outcome of this matter cannot now be determined.MIRANT RELATED MATTERSSee Note 3 to the financial statements of Southern Company under Mirant Related 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. In July 2003, Mirant filed for voluntary reorganization under Chapter 11 of the U.S.
Bankruptcy Code. In June 2004, Mirants bankruptcy counsel notified Southern Company that it
was investigating, on behalf of a committee of independent Mirant directors, potential
claims against Southern Company. On March 25, 2005, Mirant filed with the U.S. Bankruptcy
Court for the Northern District of Texas a First Amended Disclosure Statement relating to Mirants plan of reorganization. In the
First Amended Disclosure Statement, Mirant disclosed that its board of directors has
authorized litigation against 98




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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) Southern Company to recover certain transfers made by Mirant to Southern Company from 1999
through 2001. The transfers disclosed by Mirant include (1) certain dividends in an
aggregate amount of $668 million, (2) the repayment of certain intercompany loans and
accrued interest thereon in an aggregate amount of $1.035 billion, and (3) the dividend
distribution that Mirant asserts is valued at $242 million of one share of Series B
Preferred Stock and its subsequent redemption in exchange for Mirants 80% interest in
Southern Company Holdings, which owned SE Finance Capital Corporation and Southern Company
Capital Funding, Inc. Other than identifying these transfers, the First Amended Disclosure
Statement provided no factual or legal basis for any claim against Southern Company.
Southern Company believes there is no meritorious basis for a claim and intends to
vigorously defend itself in the event that Mirant brings an action to recover any amounts in
connection with these transfers. The ultimate outcome of any potential action by Mirant
cannot be determined at this time. RACE DISCRIMINATION LITIGATION See Note 3 to the financial statements of Southern Company and Georgia Power under Race
Discrimination Litigation in Item 8 of the Form 10-K. On April 15, 2005, the U.S. Court of
Appeals for the Eleventh Circuit denied the plaintiffs petition for rehearing by the entire
Eleventh Circuit panel of judges. The plaintiffs have 90 days from April 15, 2005 to file a
petition for writ of certiorari to the U.S. Supreme Court. The final outcome of this matter
cannot now be determined. FERC MATTERS See Note 3 to the financial statements of Southern Company, Alabama Power, Georgia Power,
Gulf Power, Mississippi Power, and Savannah Electric under Market-Based Rate Authority and
Note 2 to the financial statements of Southern Power under FERC Matters  Market-Based Rate
Authority in Item 8 of the Form 10-K for information on the FERCs April 2004 order
adopting a new interim analysis for measuring generation market power and a proceeding
initiated by the FERC in December 2004 to assess Southern Companys generation dominance
within its retail service territory. Each of the retail operating companies and Southern
Power has authorization from the FERC to sell power to non-affiliates at market-based
prices. Through SCS, as agent, the retail operating companies and Southern Power also have
FERC authority to make short-term opportunity sales at market rates. Specific FERC approval
must be obtained with respect to a market-based contract with an affiliate. As directed by
this order, on February 15, 2005, Southern Company submitted additional information related
to generation dominance in its retail service territory. Any new market-based rate
transactions in Southern Companys retail service territory entered into after February 27,
2005 will be subject to refund to the level of the default cost-based rates, pending the
outcome of the proceeding. In the event that the FERCs default mitigation measures are
ultimately applied, Southern Power and the retail operating companies may be required to
charge cost-based rates for certain wholesale sales in the Southern Company retail service
territory, which may be lower than negotiated market-based rates. The
impact of such sales through March 31, 2005 is not material to the
net income of Southern Company, any of the retail operating
companies, or Southern Power. The final outcome of this
matter will depend on the form in which the final methodology for assessing generation
market power and mitigation rules may be ultimately adopted and cannot be determined at this
time. INCOME TAX MATTERS See Note 3 to the financial statements of Southern Company under Income Tax Matters -
Leveraged Lease Transactions in Item 8 of the Form 10-K for information related to Southern
Companys deductions related to three international lease transactions (so-called SILO or
sale-in-lease-out transactions), which the IRS challenged in connection with its audit of
Southern Companys 2000 and 2001 tax returns. If the IRS is ultimately successful in
disallowing the tax deductions related to these transactions beginning with the 2000 tax
year, Southern Company could be subject to additional interest charges of up to $23 million. Furthermore, although management does not believe a penalty is
appropriate, the IRS is currently evaluating whether one may be assessed. Additionally,
although the 99




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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) payment of the tax liability, exclusive of interest and any penalties, would not affect
Southern Companys results of operations under current accounting standards, it could have a
material impact on cash flow. See Note 1 to the financial statements of Southern Company under Leveraged Leases in Item
8 of the Form 10-K for additional details of the deferred taxes related to these
transactions. The ultimate outcome of these matters cannot now be determined.  (C)
    See Note 1 to the financial statements of Southern Company and the retail operating
companies under Stock Options and Note 8 to the financial statements of Southern Company
and the retail operating companies under Stock Option Plan in Item 8 of the Form 10-K for
information regarding non-qualified employee stock options provided by Southern Company.
Southern Company accounts for options granted in accordance with Accounting Principles
Board Opinion No. 25; thus, no compensation expense is recognized because the exercise
price of all options granted equaled the fair market value on the date of the grant. The
estimated fair values of stock options granted during the three-month periods ending March 31, 2005 and 2004 have been derived using the
Black-Scholes stock option pricing model. The following table shows the assumptions and the
weighted average fair values of these stock options: Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2005
    
    
    2004Interest rate
    
    
    3.9
    %
    
    
    3.1
    %Average expected life of stock options (in
years)
    
    
    5.0
    
    
    
    5.0Expected volatility of common stock
    
    
    17.9
    %
    
    
    19.7
    %Expected annual dividends on common stock
    
    $
    1.43
    
    
    $
    1.40Weighted average fair value of stockoptions Granted
    
    $
    3.90
    
    
    $
    3.29
 The pro forma impact of fair-value accounting for options granted on Southern Companys
consolidated earnings per share is as follows: As Reported
    
    
    Pro FormaThree Months Ended March 31, 2005
Earnings per share (dollars):Basic
    
    $
    0.43
    
    
    $
    0.42Diluted
    
    $
    0.43
    
    
    $
    0.42Three Months Ended March 31, 2004
Earnings per share (dollars):Basic
    
    $
    0.45
    
    
    $
    0.44Diluted
    
    $
    0.45
    
    
    $
    0.44
 The pro forma impact of fair-value accounting for options granted on net income after
dividends on preferred stock is as follows: As Reported
    
    
    Pro Forma(in millions)
    
    
    (in millions)Three Months Ended March 31, 2005Net income after dividends on preferred stockAlabama Power
    
    $
    93
    
    
    $
    91Georgia Power
    
    
    142
    
    
    
    140Gulf Power
    
    
    15
    
    
    
    14Mississippi Power
    
    
    17
    
    
    
    16Savannah Electric
    
    
    1
    
    
    
    1Southern Power
    
    
    23
    
    
    
    23Southern Company
    
    $
    323
    
    
    $
    311
 100




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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) As Reported
    
    
    Pro Forma(in millions)
    
    
    (in millions)Three Months Ended March 31, 2004Net income after dividends on preferred stockAlabama Power
    
    $
    91
    
    
    $
    89Georgia Power
    
    
    144
    
    
    
    142Gulf Power
    
    
    17
    
    
    
    17Mississippi Power
    
    
    17
    
    
    
    17Savannah Electric
    
    
    3
    
    
    
    3Southern Power
    
    
    27
    
    
    
    27Southern Company
    
    $
    331
    
    
    $
    321
  (D)
    See Note 1 to the financial statements of Southern Company, Alabama Power, Georgia
Power, Gulf Power, Mississippi Power, and Savannah Electric under Asset Retirement
Obligations and Other Costs of Removal in Item 8 of the Form 10-K. The following table
reflects the details of the asset retirement obligations included in the Condensed Balance
Sheets. Balance at
    
    
    Liabilities
    
    
    Liabilities
    
    
    
    
    
    
    Cash Flow
    
    
    Balance at12/31/04
    
    
    Incurred
    
    
    Settled
    
    
    Accretion
    
    
    Revisions
    
    
    3/31/05(in millions)Alabama Power
    
    $
    383.6
    
    
    $
    
    
    
    $
    
    
    
    $
    6.4
    
    
    $
    
    
    
    $
    390.0Georgia Power
    
    
    504.5
    
    
    
    
    
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    512.5Gulf Power
    
    
    5.8
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    5.9Mississippi Power
    
    
    5.5
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    5.6Savannah Electric
    
    
    3.9
    
    
    
    0.5
    
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    
    
    
    
    4.4Southern Company
    
    $
    903.3
    
    
    $
    0.5
    
    
    $
    (0.1
    )
    
    $
    14.7
    
    
    $
    
    
    
    $
    918.4
  (E)
    For Southern Company, the only difference in computing basic and diluted earnings per
share is attributable to 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: Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2005
    
    
    March 31, 2004(in thousands)As reported shares
    
    
    744,025
    
    
    
    736,638Effect of options
    
    
    4,647
    
    
    
    4,965Diluted shares
    
    
    748,672
    
    
    
    741,603
 101




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##### Table of Contents



NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  (F)
    See Note 6 to the financial statements of Southern Company, Alabama Power, Georgia
Power, Gulf Power, Mississippi Power, and Savannah Electric under Financial Instruments
in Item 8 of the Form 10-K. At March 31, 2005, the fair value of derivative energy
contracts was reflected in the financial statements as follows: Southern
    
    
    Alabama
    
    
    Georgia
    
    
    Gulf
    
    
    Mississippi
    
    
    SavannahCompany
    
    
    Power
    
    
    Power
    
    
    Power
    
    
    Power
    
    
    ElectricAmounts(in millions)Regulatory liabilities, net
    
    $
    119.3
    
    
    $
    38.2
    
    
    $
    37.1
    
    
    $
    11.9
    
    
    $
    24.1
    
    
    $
    8.0Other comprehensive income
(loss)
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.9
    )
    
    
    Total fair value
    
    $
    119.5
    
    
    $
    38.2
    
    
    $
    37.1
    
    
    $
    11.9
    
    
    $
    23.2
    
    
    $
    8.0
 For the three months ended March 31, 2005 and 2004, the amounts recognized in income
for derivative energy contracts that are not hedges, as well as the amounts expected to be
reclassified from other comprehensive income to fuel expense for the twelve month period ending March 31, 2006 were
immaterial for each company. Additionally, no material ineffectiveness has been recorded in
net income for the three months ended March 31, 2005 and 2004. At March 31, 2005, Southern Company had $1.9 billion notional amount of interest rate
derivatives outstanding with net fair value gains of $23.8 million as follows: Fair Value Hedges Fair Value Gain(Loss)Notional
    
    
    Fixed Rate
    
    
    Variable Rate
    
    
    Maturity
    
    
    March 31, 2005Amount
    
    
    Received
    
    
    Paid
    
    
    Date
    
    
    (in millions)Southern Company
    
    $400 million
    
    
    5.30
    %
    
    6-month LIBOR
    
    February 2007
    
    $
    7.4(in arrears)less 0.103%Southern Company
    
    $40 million
    
    
    7.625
    %
    
    6-month LIBOR
    
    December 2009
    
    $
    (0.1
    )(in arrears) plus2.9225
    %
 Cash Flow Hedges Weighted
    
    
    
    
    
    
    Fair ValueAverage
    
    
    
    
    
    
    Gain (Loss)Notional
    
    
    Variable Rate
    
    
    Fixed Rate
    
    
    Maturity
    
    
    March 31, 2005Amount
    
    
    Received
    
    
    Paid
    
    
    Date
    
    
    (in millions)Alabama Power
    
    $536 million
    
    BMA Index
    
    
    2.007
    %
    
    January 2007
    
    $
    8.4Alabama Power
    
    $195 million
    
    3-month LIBOR
    
    
    1.89
    %
    
    April 2006
    
    $
    4.2Georgia Power
    
    $100 million
    
    3-month LIBOR
    
    
    5.029
    %
    
    December 2015
    
    $
    0.5Georgia Power*
    
    $150 million
    
    3-month LIBOR
    
    
    4.133  6.00
    %
    
    February 2006
    
    $
    0.3Georgia Power**
    

    $400 million
    
    Floating
    
    
    2.35  3.85
    %
    
    December 2007
    
    $
    1.9Savannah Electric
    
    $14 million
    
    BMA Index
    
    
    2.502
    %
    
    December 2007
    
    $
    0.2Savannah Electric
    
    $30 million
    
    3-month LIBOR
    
    
    4.686
    %
    
    May 2016
    
    $
    1.0
  *
    
    Interest rate collar**
    
    Series of interest rate caps and collars with variable rate based on one-month LIBOR 102




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##### Table of Contents



NOTES TO THE
CONDENSED FINANCIAL STATEMENTS: (Continued) For the twelve month period ended March 31, 2006, the following table reflects the estimated
pre-tax gains/(losses) that will be reclassified from Accumulated Other Comprehensive Income
to Interest Expense. (in millions)Alabama Power
    
    $
    4.4Georgia Power
    
    
    (1.4
    )Gulf Power
    
    
    (0.3
    )Savannah Electric
    
    
    Southern Power
    
    
    (11.3
    )Southern Company
    
    $
    (8.6
    )
  (G)
    See Note 2 to the financial statements of Southern Company, Alabama Power, Georgia
Power, Gulf Power, Mississippi Power, and Savannah Electric in Item 8 of the Form 10-K.
Components of the pension plans and postretirement plans net periodic costs for the
three-month periods ending March 31, 2005 and 2004 are as follows: Southern
    
    
    Alabama
    
    
    Georgia
    
    
    Gulf
    
    
    Mississippi
    
    
    SavannahPENSION PLANS (in millions)
    
    Company
    
    
    Power
    
    
    Power
    
    
    Power
    
    
    Power
    
    
    ElectricThree Months Ended
March 31, 2005Service cost
    
    $
    36
    
    
    $
    8
    
    
    $
    11
    
    
    $
    2
    
    
    $
    2
    
    
    $
    1Interest cost
    
    
    72
    
    
    
    19
    
    
    
    27
    
    
    
    3
    
    
    
    3
    
    
    
    1Expected return on plan assets
    
    
    (116
    )
    
    
    (35
    )
    
    
    (46
    )
    
    
    (5
    )
    
    
    (5
    )
    
    
    (1
    )Recognized
net (gain)/loss
    
    
    3
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Net amortization
    
    
    5
    
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Net cost (income)
    
    $
    
    
    
    $
    (5
    )
    
    $
    (5
    )
    
    $
    
    
    
    $
    
    
    
    $
    1Three Months Ended
March 31, 2004Service cost
    
    $
    32
    
    
    $
    8
    
    
    $
    10
    
    
    $
    1
    
    
    $
    2
    
    
    $
    1Interest cost
    
    
    68
    
    
    
    18
    
    
    
    26
    
    
    
    3
    
    
    
    3
    
    
    
    1Expected return on plan assets
    
    
    (113
    )
    
    
    (35
    )
    
    
    (45
    )
    
    
    (5
    )
    
    
    (5
    )
    
    
    (1
    )Recognized
net (gain)/loss
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Net amortization
    
    
    4
    
    
    
    1
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Net cost (income)
    
    $
    (10
    )
    
    $
    (9
    )
    
    $
    (8
    )
    
    $
    (1
    )
    
    $
    
    
    
    $
    1
 POSTRETIREMENT PLANS
    
    Southern
    
    
    Alabama
    
    
    Georgia
    
    
    Gulf
    
    
    Mississippi
    
    
    Savannah(in millions)
    
    Company
    
    
    Power
    
    
    Power
    
    
    Power
    
    
    Power
    
    
    ElectricThree Months Ended
March 31, 2005Service cost
    
    $
    7
    
    
    $
    2
    
    
    $
    3
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest cost
    
    
    24
    
    
    
    7
    
    
    
    10
    
    
    
    1
    
    
    
    1
    
    
    
    1Expected return on plan assets
    
    
    (11
    )
    
    
    (4
    )
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    Net amortization
    
    
    9
    
    
    
    2
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    Net cost (income)
    
    $
    29
    
    
    $
    7
    
    
    $
    12
    
    
    $
    1
    
    
    $
    1
    
    
    $
    1Three Months Ended
March 31, 2004Service cost
    
    $
    7
    
    
    $
    2
    
    
    $
    2
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest cost
    
    
    24
    
    
    
    6
    
    
    
    11
    
    
    
    1
    
    
    
    1
    
    
    
    1Expected return on plan assets
    
    
    (12
    )
    
    
    (4
    )
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    Net amortization
    
    
    9
    
    
    
    2
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    Net cost (income)
    
    $
    28
    
    
    $
    6
    
    
    $
    12
    
    
    $
    1
    
    
    $
    1
    
    
    $
    1
 103




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##### Table of Contents



NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  (H)
    Alabama Power fuel costs are recovered under Rate ECR (Energy Cost Recovery), which
provides for the addition of a fuel and energy cost factor to base rates. In April 2005,
this factor was increased from 1.518 cents per kilowatt-hour to 1.788 cents per
kilowatt-hour, which should result in a 4.5% increase in annual retail revenues, or
approximately $148 million. Alabama Power will continue to monitor the under recovered
fuel cost balance to determine if an additional adjustment to billing rates should be
requested from the Alabama PSC. Alabama Powers under recovered fuel costs as of March 31,
2005 totaled $96.4 million. See Note 3 to the financial statements of Southern Company and
Alabama Power under Alabama Power Retail Regulatory Matters and Retail Regulatory
Matters, respectively, in Item 8 of the Form 10-K for additional information.(I)
    On February 18, 2005, Georgia Power filed a request with the Georgia PSC for a fuel
cost recovery rate increase. The requested increase, representing an annual increase in
revenues of approximately 11.8%, will allow for the recovery of fuel costs based on an
estimate of future fuel costs, as well as the collection of the existing under recovery of
fuel costs. The Georgia PSC may require that this existing under recovery be collected
over a period greater than twelve months. Georgia Powers under recovered fuel costs as of
March 31, 2005 totaled $455.4 million. Hearings were held in April 2005 and a final
decision from the Georgia PSC is expected in May 2005, following which the new rates will
become effective June 1, 2005. The final outcome of this matter cannot be determined at
this time. For additional information on Georgia Powers fuel cost recovery, see Note 3 to
the financial statements of Southern Company and Georgia Power under Georgia Power Retail
Rate Activity and Fuel Cost Recovery, respectively, in Item 8 of the Form 10-K.(J)
    See Note 3 to the financial statements of Southern Company
and Gulf Power under Gulf Power and Alabama Power Storm Damage
Recovery and Retail Regulatory Matters,
respectively, in Item 8 of the Form 10-K for information on a
Stipulation and Settlement filed with the Florida PSC  to resolve all
matters regarding the effects of Hurricane Ivan on Gulf Powers
reserve for property damage. The Florida PSC approved the Stipulation
and Settlement as filed in March 2005 and Gulf Power began billing
customers accordingly in April 2005.(K)
    On November 30, 2004, Savannah Electric filed a traditional one-year rate case with the
Georgia PSC requesting a $23.2 million, or 6.7%, increase in retail revenues, effective
January 1, 2005. The requested increase is based on a future test year ending December 31,
2005 and a proposed retail return on common equity of 12.5%. As an alternative, Savannah
Electric also included in its request a three-year rate plan that is based on the same test
year and proposed retail return on common equity. The increase in retail revenues was
requested to cover Savannah Electrics investment in the Plant McIntosh Combined Cycle
Units 10 and 11; increasing operating and maintenance expenses; and continued investment in
generation, transmission, and distribution facilities to support growth and ensure
reliability. The increase also includes recognition on an annual basis of the $3.8 million
of Plant Wansley PPA expenses which were excluded by the Georgia PSC from Savannah
Electrics last rate case and subsequently were subject to deferral through a Georgia PSC
accounting order issued in December 2002. The Georgia PSC suspended implementation of the
rates until the completion of the hearing process. Hearings were held in March and April
2005 and the Georgia PSC is expected to issue a final order in May 2005, following which
the new rates will become effective in June 2005. The final outcome of this matter cannot
now be determined.(L)
    See Notes 9 and 10 to the financial statements of Savannah Electric
in Item 8 of the Form 10-K for information regarding Savannah
Electrics restatement of its financial statements for the
quarter ended March 31, 2004 as the result of errors in the estimate
of unbilled revenues for the period. A summary of the effects of
those restatement
adjustments for the quarter ended March 31, 2004 is as follows (in
thousands of dollars): March 31, 2004As Originally
 Reported
    
    
AsRestatedRetail sales revenues
    
    $
    68,023
    
    
    $
    67,509Total operating revenues
    
    
    72,835
    
    
    
    72,321Operating income
    
    
    8,546
    
    
    
    8,032Earnings before income taxes
    
    
    4,946
    
    
    
    4,433Income taxes
    
    
    1,798
    
    
    
    1,600Net income
    
    
    3,148
    
    
    
    2,833Net income after dividends on preferred stock
    
    
    3,148
    
    
    
    2,833Comprehensive income
    
    
    3,139
    
    
    
    2,824
  104




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##### Table of Contents



NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  (M)
    On April 8, 2005, Southern Power and two of its wholly-owned subsidiaries entered into
an agreement with Constellation Power, Inc. and certain other subsidiaries of Constellation
Energy Group, Inc. to acquire all of the outstanding general and limited partnership
interests of Oleander Power Project, L.P. (Oleander), for an aggregate purchase price of
approximately $206 million. The purchase price is subject to certain working capital and
timing of closing adjustments. Oleander owns a dual-fueled generating plant in Brevard
County, Florida with a nominal installed capacity of 680 MW. The entire output of the
plant is sold under separate PPAs with Florida Power & Light Company and Seminole Electric
Cooperative, Inc. The PPAs expire in 2007 and 2009, respectively. The acquisition is
subject to certain regulatory approvals, including the approval of the FERC, as well as
review by the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements
Act.  (N)
    See Note 5 to the financial statements of Southern
Company, Alabama Power, and Savannah Electric in Item 8 of the
Form 10-K for information on each companys effective
income tax rate. In accordance with an Alabama PSC approved
accounting order to restore the natural disaster reserve, Alabama
Power recorded a reduction in its income tax expense of approximately
$27.7 million for the quarter ended March 31, 2005. In
addition, in connection with construction on the Plant McIntosh
combined cycle units, Savannah Electric recorded an increase of
approximately $1.1 million in AFUDC equity, which is not
taxable, for the quarter ended March 31, 2005. The impact of
these entries caused a significant reduction in the effective income
tax rate for the quarter ended March 31, 2005, for each of
Southern Company, Alabama Power, and Savannah Electric. On a annual
basis, the effective income tax rate for 2005 is expected to be
approximately 27% for Southern Company, 34% for Alabama Power, and
35% for Savannah Electric. For additional information
on Alabama Powers accounting order, see Note 3 to the
financial statements of Southern Company and Alabama Power under
Gulf Power and Alabama Power Storm Damage Recovery and
Natural Disaster Cost Recovery, respectively, in
Item 8 of the Form 10-K. For additional information on the
Plant McIntosh construction, see Note 3 to the financial
statements of Southern Company and Savannah Electric under
Plant McIntosh Construction Project in Item 8 of the
Form 10-K.  (O)
    Southern Companys reportable business segment is the sale of electricity in the
Southeast by the five retail operating companies and Southern Power. The All Other
column includes parent Southern Company, which does not allocate operating expenses to
business segments. Also, this category includes segments below the quantitative
threshold for separate disclosure. These segments include investments in synthetic
fuels and leveraged lease projects, telecommunications, energy-related services, and
natural gas marketing. Southern Powers revenues from sales to the retail operating
companies were $112 million and $87 million for the three months ended March 31, 2005
and 2004, respectively. All other intersegment revenues are not material. Financial
data for business segments and products and services are as follows: Electric UtilitiesRetailOperating
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    All
    
    
    ReconcilingCompanies
    
    
    Southern Power
    
    
    Eliminations
    
    
    Total
    
    
    Other
    
    
    Eliminations
    
    
    Consolidated(in millions)Three Months Ended March 31, 2005:Operating revenues
    
    $
    2,697
    
    
    $
    153
    
    
    $
    (133
    )
    
    $
    2,717
    
    
    $
    173
    
    
    $
    (26
    )
    
    $
    2,864Segment net income (loss)
    
    
    266
    
    
    
    23
    
    
    
    
    
    
    
    289
    
    
    
    35
    
    
    
    (1
    )
    
    
    323Total assets at March 31, 2005
    
    $
    33,839
    
    
    $
    2,063
    
    
    $
    (81
    )
    
    $
    35,821
    
    
    $
    1,926
    
    
    $
    (457
    )
    
    $
    37,290Three Months Ended March 31, 2004:Operating revenues
    
    $
    2,542
    
    
    $
    176
    
    
    $
    (130
    )
    
    $
    2,588
    
    
    $
    173
    
    
    $
    (29
    )
    
    $
    2,732Segment net income (loss)
    
    
    272
    
    
    
    27
    
    
    
    
    
    
    
    299
    
    
    
    33
    
    
    
    (1
    )
    
    
    331Total assets at December 31, 2004
    
    $
    33,524
    
    
    $
    2,067
    
    
    $
    (103
    )
    
    $
    35,488
    
    
    $
    1,996
    
    
    $
    (522
    )
    
    $
    36,962
 Products and ServicesElectric Utilities RevenuesPeriod
    
    Retail
    
    
    Wholesale
    
    
    Other
    
    
    Total(in millions)Three Months Ended March 31, 2005
    
    $
    2,269
    
    
    $
    347
    
    
    $
    101
    
    
    $
    2,717Three Months Ended March 31, 2004
    
    
    2,144
    
    
    
    351
    
    
    
    93
    
    
    
    2,588
 105




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##### Table of Contents



PART II- OTHER INFORMATION 
 Item 1.
    
    Legal Proceedings.See the Notes to the Condensed Financial Statements
herein for information regarding certain legal and
administrative proceedings in which Southern Company and
its reporting subsidiaries are involved.
 
 Item 6.  Exhibits. (24)
    
    Power of Attorney and ResolutionsSouthern Company(a) 1 -
    
    Power of Attorney and resolution. (Designated in the Form 10-K for
the year ended December 31, 2004, File No. 1-3526 as Exhibit 24(a) and
incorporated herein by reference.)Alabama Power(b) 1 -
    
    Power of Attorney and resolution. (Designated in the Form 10-K for
the year ended December 31, 2004, File No. 1-3164 as Exhibit 24(b) and
incorporated herein by reference.)Georgia Power(c) 1 -
    
    Power of Attorney and resolution. (Designated in
the Form 10-K for the year ended December 31, 2004,
File No. 1-6468 as Exhibit 24(c) and incorporated
herein by reference.)(c) 2 -
    
    Power of Attorney for Cliff S. Thrasher.Gulf Power(d) 1 -
    
    Power of Attorney and resolution. (Designated in the Form 10-K for
the year ended December 31, 2004, File No. 0-2429 as Exhibit 24(d) and
incorporated herein by reference.)Mississippi Power(e) 1 -
    
    Power of Attorney and resolution. (Designated in the Form 10-K for
the year ended December 31, 2004, File No. 001-11229 as Exhibit 24(e) and
incorporated herein by reference.)Savannah Electric(f)1 -
    
    Power of Attorney and resolution.
(Designated in the Form 10-K for the year
ended December 31, 2004, File No. 1-5072
as Exhibit 24(f) and incorporated herein
by reference.)
 106




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##### Table of Contents



Item 6. Exhibits. (24)
    
    Power of Attorney and Resolutions (continued)Southern Power(g) 1 -
    
    Power of Attorney and resolution. (Designated in
the Form 10-K for the year ended December 31, 2004,
File No. 333-98553 as Exhibit 24(g) and incorporated
herein by reference.)(g)2 -
    
    Power of Attorney for Ronnie L. Bates.(g)3 -
    
    Power of Attorney for Michael W. Southern.
 (31)
    
    Section 302 CertificationsSouthern Company(a) 1 -
    
    Certificate of Southern Companys Chief Executive
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.(a) 2 -
    
    Certificate of Southern Companys Chief Financial
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.Alabama Power(b) 1 -
    
    Certificate of Alabama Powers Chief Executive
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.(b) 2 -
    
    Certificate of Alabama Powers Chief Financial
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.Georgia Power(c) 1 -
    
    Certificate of Georgia Powers Chief Executive
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.(c) 2 -
    
    Certificate of Georgia Powers Chief Financial
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.Gulf Power(d)1 -
    
    Certificate of Gulf Powers Chief
Executive Officer required by Section 302
of the Sarbanes-Oxley Act of 2002.(d)2 -
    
    Certificate of Gulf Powers Chief
Financial Officer required by Section 302
of the Sarbanes-Oxley Act of 2002.
 107




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##### Table of Contents



Item 6. Exhibits. (31)
    
    Section 302 Certifications (continued)Mississippi Power(e) 1 -
    
    Certificate of Mississippi Powers Chief Executive Officer required
by Section 302 of the Sarbanes-Oxley Act of 2002.(e) 2 -
    
    Certificate of Mississippi Powers Chief Financial Officer required
by Section 302 of the Sarbanes-Oxley Act of 2002.Savannah Electric(f) 1 -
    
    Certificate of Savannah Electrics Chief Executive
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.(f) 2 -
    
    Certificate of Savannah Electrics Chief Financial
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.Southern Power(g) 1 -
    
    Certificate of Southern Powers Chief Executive
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.(g) 2 -
    
    Certificate of Southern Powers Chief Financial
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
 (32)
    
    Section 906 CertificationsSouthern Company(a) -
    
    Certificate of Southern Companys Chief Executive Officer and Chief
Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.Alabama Power(b) -
    
    Certificate of Alabama Powers Chief Executive Officer and Chief
Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.Georgia Power(c) -
    
    Certificate of Georgia Powers Chief
Executive Officer and Chief Financial
Officer required by Section 906 of the
Sarbanes-Oxley Act of 2002.Gulf Power(d) -
    
    Certificate of Gulf Powers Chief
Executive Officer and Chief Financial
Officer required by Section 906 of the
Sarbanes-Oxley Act of 2002.
 108




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Item 6. Exhibits. (32)
    
    Section 906 Certifications (continued)Mississippi Power(e) -
    
    Certificate of Mississippi Powers Chief Executive Officer and Chief
Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.Savannah Electric(f) -
    
    Certificate of Savannah Electrics Chief Executive Officer and Chief
Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.Southern Power(g) -
    
    Certificate of Southern Powers Chief Executive Officer and Chief
Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
 109




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THE SOUTHERN COMPANY 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The signature of the undersigned company shall be deemed to relate only to matters having
reference to such company and any subsidiaries thereof. THE SOUTHERN COMPANYBy
    
    David M. RatcliffeChairman and Chief Executive Officer(Principal Executive Officer)By
    
    Thomas A. FanningExecutive Vice President, Chief Financial Officer and Treasurer(Principal Financial Officer)By
    
    /s/ Wayne Boston(Wayne Boston, Attorney-in-fact)
 Date: May 4, 2005 110




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ALABAMA POWER COMPANY SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The signature of the undersigned company shall be deemed to relate only to matters having
reference to such company and any subsidiaries thereof. ALABAMA POWER COMPANYBy
    
    Charles D. McCraryPresident and Chief Executive Officer(Principal Executive Officer)By
    
    Art P. BeattieExecutive Vice President, Chief Financial Officer and Treasurer(Principal Financial Officer)By
    
    /s/ Wayne Boston(Wayne Boston, Attorney-in-fact)
 Date: May 4, 2005 111




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GEORGIA POWER COMPANY SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The signature of the undersigned company shall be deemed to relate only to matters having
reference to such company and any subsidiaries thereof. GEORGIA POWER COMPANYBy
    
    Michael D. GarrettPresident and Chief Executive Officer(Principal Executive Officer)By
    
    Cliff S. ThrasherExecutive Vice President, Chief Financial Officer and Treasurer(Principal Financial Officer)By
    
    /s/ Wayne Boston(Wayne Boston, Attorney-in-fact)
 Date: May 4, 2005 112




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GULF POWER COMPANY SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The signature of the undersigned company shall be deemed to relate only to matters having
reference to such company and any subsidiaries thereof. GULF POWER COMPANYBy
    
    Susan N. StoryPresident and Chief Executive Officer(Principal Executive Officer)By
    
    Ronnie R. LabratoVice President, Chief Financial Officer and Comptroller(Principal Financial and Accounting Officer)By
    
    /s/ Wayne Boston(Wayne Boston, Attorney-in-fact)
 Date: May 4, 2005 113




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MISSISSIPPI POWER COMPANY SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The signature of the undersigned company shall be deemed to relate only to matters having
reference to such company and any subsidiaries thereof. MISSISSIPPI POWER COMPANYBy
    
    Anthony J. TopaziPresident and Chief Executive Officer(Principal Executive Officer)By
    
    Frances V. TurnageVice President, Chief Financial Officer and Treasurer(Principal Financial Officer)By
    
    /s/ Wayne Boston(Wayne Boston, Attorney-in-fact)
 Date: May 4, 2005 114




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SAVANNAH ELECTRIC AND POWER COMPANY SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The signature of the undersigned company shall be deemed to relate only to matters having
reference to such company and any subsidiaries thereof. SAVANNAH ELECTRIC AND POWER COMPANYBy
    
    A. R. JamesPresident and Chief Executive Officer(Principal Executive Officer)By
    
    Kirby R. WillisVice President, Chief Financial Officer and Treasurer(Principal Financial and Accounting Officer)By
    
    /s/ Wayne Boston(Wayne Boston, Attorney-in-fact)
 Date: May 4, 2005 115




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SOUTHERN POWER COMPANY SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The signature of the undersigned company shall be deemed to relate only to matters having
reference to such company and any subsidiaries thereof. SOUTHERN POWER COMPANYBy
    
    Ronnie L. BatesPresident and Chief Executive Officer(Principal Executive Officer)By
    
    Michael W. SouthernSenior Vice President and Chief Financial Officer(Principal Financial Officer)By
    
    /s/ Wayne Boston(Wayne Boston, Attorney-in-fact)
 Date: May 4, 2005 116