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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 1934For the Quarter Ended June 30,
2004
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934For 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
    
    58-2598670(A Delaware Corporation)270 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 X   No ___ Indicate by
check mark whether the registrant is an accelerated filer (as defined by Rule
12b-2 of the Securities Exchange Act of 1934). Registrant
    
    Yes
    
    NoThe Southern Company
    
    
    xAlabama Power Company
    
    
    
    
    
    
    xGeorgia Power Company
    
    
    
    
    
    
    xGulf Power Company
    
    
    
    
    
    
    xMississippi Power Company
    
    
    
    
    
    
    xSavannah Electric and Power Company
    
    
    
    
    
    
    xSouthern Power Company
    
    
    
    
    
    
    x
 Description of
    
    Shares OutstandingRegistrant
    
    Common Stock
    
    at June 30, 2004The Southern Company
    
    Par Value $5 Per Share
    
    
    738,180,277Alabama Power Company
    
    Par Value $40 Per Share
    
    
    7,750,000Georgia 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
June 30, 2004  
 PageNumberDEFINITIONS
    
    
    5PART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Item 2. Managements Discussion and Analysis of
Results of Operations and Financial ConditionThe 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
Results of Operations and Financial Condition
    
    
    13Alabama Power CompanyCondensed Statements of Income
    
    
    28Condensed Statements of Comprehensive Income
    
    
    28Condensed Statements of Cash Flows
    
    
    29Condensed Balance Sheets
    
    
    30Managements Discussion and Analysis of Results of
Operations and Financial Condition
    
    
    32Georgia Power CompanyCondensed Statements of Income
    
    
    42Condensed Statements of Comprehensive Income
    
    
    42Condensed Statements of Cash Flows
    
    
    43Condensed Balance Sheets
    
    
    44Managements Discussion and Analysis of
Results of Operations and Financial Condition
    
    
    46Gulf Power CompanyCondensed Statements of Income
    
    
    57Condensed Statements of Comprehensive Income
    
    
    57Condensed Statements of Cash Flows
    
    
    58Condensed Balance Sheets
    
    
    59Managements Discussion and Analysis of
Results of Operations and Financial Condition
    
    
    61Mississippi Power CompanyCondensed Statements of Income
    
    
    69Condensed Statements of Comprehensive Income
    
    
    69Condensed Statements of Cash Flows
    
    
    70Condensed Balance Sheets
    
    
    71Managements Discussion and Analysis of
Results of Operations and Financial Condition
    
    
    73Savannah Electric and Power CompanyCondensed Statements of Income
    
    
    82Condensed Statements of Comprehensive Income
    
    
    82Condensed Statements of Cash Flows
    
    
    83Condensed Balance Sheets
    
    
    84Managements Discussion and Analysis of
Results of Operations and Financial Condition
    

    
    86Southern Power CompanyCondensed Statements of Income
    
    
    95Condensed Statements of Comprehensive Income
    
    
    95Condensed Statements of Cash Flows
    
    
    96Condensed Balance Sheets
    
    
    97Managements Discussion and Analysis of
Results of Operations and Financial Condition
    
    
    99Notes to the Condensed Financial Statements
    
    
    105Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    26
 3




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INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2004 PageNumberPART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    118Item 2. Changes in Securities, 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
    
    118Item 5. Other Information
    
    InapplicableItem 6. Exhibits and Reports on Form 8-K
    
    120Signatures
    
    127
   
 4




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DEFINITIONS TERM
    
    MEANINGAlabama Power
    
    Alabama Power CompanyAFUDC
    
    Allowance for funds used during constructionClean Air Act
    
    Clean Air Act Amendments of 1990Dynegy
    
    Dynegy, Inc.ECO Plan
    
    Environmental Compliance Overview PlanEITF
    
    Emerging Issues Task ForceEnergy Act
    
    Energy Policy Act of 1992EPA
    
    U. S. Environmental Protection AgencyESOP
    
    Employee Stock Ownership PlanFASB
    
    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, 2003Georgia Power
    
    Georgia Power CompanyGulf Power
    
    Gulf Power CompanyIRC
    
    Internal Revenue CodeIRS
    
    Internal Revenue ServiceLIBOR
    
    London Interbank Offered RateMirant
    
    Mirant CorporationMississippi Power
    
    Mississippi Power CompanyMoodys
    
    Moodys Investors Service, Inc.NRC
    
    Nuclear Regulatory CommissionPEP
    
    Performance Evaluation PlanPPA
    
    Purchase Power AgreementPSC
    
    Public Service CommissionPUHCA
    
    Public Utility Holding Company Act of 1935, as amendedretail 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 CommissionSMA
    
    Supply Margin AssessmentSouthern Company
    
    The Southern CompanySouthern Company GAS
    
    Southern Company Gas LLCSouthern Company system
    
    Southern Company, the retail operating companies, Southern
Power and other subsidiariesSouthern LINC
    
    Southern Communications Services, Inc.Southern 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 VirginiaTVA
    
    Tennessee Valley Authority
 5




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-Q contains forward-looking statements in
addition to historical information. Forward-looking information includes,
among other things, statements concerning the strategic goals for Southern
Companys wholesale business, estimated construction and other expenditures. In
some cases, forward-looking statements can be identified by terminology such as
may, will, could, should, expects, plans, anticipates,
believes, estimates, projects, predicts, potential or continue or
the negative of these terms or other comparable terminology. The registrants
caution that there are various important factors that could cause actual
results to differ materially from those indicated in the forward-looking
statements; accordingly, there can be no assurance that such indicated results
will be realized. These factors include:  
    
    the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives
regarding deregulation and restructuring of the electric utility industry and also changes in environmental, tax and other
laws and regulations to which Southern Company and its subsidiaries are subject, as well as changes in application of
existing laws and regulations;  
    
    current and future litigation, regulatory investigations, proceedings or inquiries, including the pending EPA civil actions
against certain Southern Company subsidiaries and current IRS audits;  
    
    the effects, extent and timing of the entry of additional competition in the markets in which Southern Companys
subsidiaries operate;  
    
    the impact of fluctuations in commodity prices, interest rates and customer demand;  
    
    available sources and costs of fuels;  
    
    ability to control costs;  
    
    investment performance of Southern Companys employee benefit plans;  
    
    advances in technology;  
    
    state and federal rate regulations and pending and future rate cases and negotiations;  
    
    effects of and changes in political, legal and economic conditions and developments in the United States, including the
current state of the economy;  
    
    the performance of projects undertaken by the non-traditional business and the success of efforts to invest in and develop
new opportunities;  
    
    internal restructuring or other restructuring options that may be pursued;  
    
    potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to
be completed or beneficial to Southern Company or its subsidiaries;  
    
    the ability of counterparties of Southern Company and its subsidiaries to make payments as and when due;  
    
    the ability to obtain new short- and long-term contracts with neighboring utilities;  
    
    the direct or indirect effect on Southern Companys business resulting from the terrorist incidents on September 11, 2001,
or any similar incidents or responses to such incidents;  
    
    financial market conditions and the results of financing efforts, including Southern Companys and its subsidiaries credit
ratings;  
    
    the ability of Southern Company and its subsidiaries to obtain additional generating capacity at competitive prices;  
    
    weather and other natural phenomena;  
    
    the direct or indirect effects on Southern Companys business resulting from incidents similar to the August 2003 power
outage in the Northeast;  
    
    the effect of accounting pronouncements issued periodically by standard-setting bodies; and  
    
    other factors discussed elsewhere herein and in other reports filed by the registrants from time to time with the SEC. 6




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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 Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Operating Revenues:Retail sales
    
    $
    2,477,856
    
    
    $
    2,175,706
    
    
    $
    4,621,945
    
    
    $
    4,149,550Sales for resale
    
    
    343,819
    
    
    
    322,994
    
    
    
    694,617
    
    
    
    657,607Other electric revenues
    
    
    94,068
    
    
    
    227,921
    
    
    
    187,489
    
    
    
    319,798Other revenues
    
    
    93,152
    
    
    
    97,343
    
    
    
    237,159
    
    
    
    238,046Total operating revenues
    
    
    3,008,895
    
    
    
    2,823,964
    
    
    
    5,741,210
    
    
    
    5,365,001Operating Expenses:Fuel
    
    
    870,000
    
    
    
    738,048
    
    
    
    1,708,750
    
    
    
    1,448,375Purchased power
    
    
    218,066
    
    
    
    114,694
    
    
    
    337,824
    
    
    
    247,248Other operations
    
    
    569,421
    
    
    
    550,012
    
    
    
    1,083,458
    
    
    
    1,036,561Maintenance
    
    
    268,459
    
    
    
    238,954
    
    
    
    505,956
    
    
    
    468,664Depreciation and amortization
    
    
    233,449
    
    
    
    258,297
    
    
    
    474,103
    
    
    
    503,285Taxes other than income taxes
    
    
    154,583
    
    
    
    142,737
    
    
    
    313,067
    
    
    
    291,563Total operating expenses
    
    
    2,313,978
    
    
    
    2,042,742
    
    
    
    4,423,158
    
    
    
    3,995,696Operating Income
    
    
    694,917
    
    
    
    781,222
    
    
    
    1,318,052
    
    
    
    1,369,305Other Income and (Expense):Allowance for equity funds used during construction
    
    
    9,467
    
    
    
    4,173
    
    
    
    17,651
    
    
    
    12,024Interest income
    
    
    6,455
    
    
    
    20,589
    
    
    
    14,109
    
    
    
    25,087Equity in losses of unconsolidated subsidiaries
    
    
    (21,253
    )
    
    
    (26,275
    )
    
    
    (46,569
    )
    
    
    (53,442
    )Leveraged lease income
    
    
    17,005
    
    
    
    15,698
    
    
    
    32,932
    
    
    
    33,413Interest expense, net of amounts capitalized
    
    
    (138,613
    )
    
    
    (134,188
    )
    
    
    (269,198
    )
    
    
    (257,949
    )Interest expense to affiliate trusts
    
    
    (31,985
    )
    
    
    
    
    
    
    (31,985
    )
    
    
    Distributions on mandatorily redeemable preferred securities
    
    
    
    
    
    
    (39,951
    )
    
    
    (31,168
    )
    
    
    (79,537
    )Preferred dividends of subsidiaries
    
    
    (9,539
    )
    
    
    (5,472
    )
    
    
    (15,011
    )
    
    
    (10,222
    )Other income (expense), net
    
    
    (15,302
    )
    
    
    1,854
    
    
    
    (23,464
    )
    
    
    (2,429
    )Total other income and (expense)
    
    
    (183,765
    )
    
    
    (163,572
    )
    
    
    (352,703
    )
    
    
    (333,055
    )Earnings Before Income Taxes
    
    
    511,152
    
    
    
    617,650
    
    
    
    965,349
    
    
    
    1,036,250Income taxes
    
    
    159,020
    
    
    
    185,763
    
    
    
    282,075
    
    
    
    306,931Earnings
Before Cumulative Effect of Accounting Change
    
    
    352,132
    
    
    
    431,887
    
    
    
    683,274
    
    
    
    729,319Cumulative effect of accounting change 
less income taxes of $231
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    367Consolidated Net Income
    
    $
    352,132
    
    
    $
    431,887
    
    
    $
    683,274
    
    
    $
    729,686Common Stock Data:Consolidated basic earnings per share
    
    $
    0.48
    
    
    $
    0.60
    
    
    $
    0.93
    
    
    $
    1.01Consolidated diluted earnings per share
    
    $
    0.47
    
    
    $
    0.59
    
    
    $
    0.92
    
    
    $
    1.00Average number of basic shares of common
stock outstanding (in thousands)
    
    
    738,185
    
    
    
    724,627
    
    
    
    737,412
    
    
    
    721,785Average number of diluted shares of common
stock outstanding (in thousands)
    
    
    742,453
    
    
    
    730,286
    
    
    
    741,920
    
    
    
    727,140Cash dividends paid per share of common stock
    
    $
    0.350
    
    
    $
    0.343
    
    
    $
    0.700
    
    
    $
    0.685
 The accompanying notes as they relate to Southern Company are an integral part
of these condensed financial statements. 8




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




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) At June 30,
    
    At December 31,Assets
    
    2004
    
    2003(in thousands)Current Assets:Cash and cash equivalents
    
    $
    191,165
    
    
    $
    311,274ReceivablesCustomer accounts receivable
    
    
    722,557
    
    
    
    678,345Unbilled revenues
    
    
    362,276
    
    
    
    275,395Under recovered regulatory clause revenues
    
    
    405,561
    
    
    
    204,563Other accounts and notes receivable
    
    
    289,300
    
    
    
    338,557Accumulated provision for uncollectible accounts
    
    
    (27,878
    )
    
    
    (30,155
    )Fossil fuel stock, at average cost
    
    
    323,627
    
    
    
    316,126Vacation pay
    
    
    101,478
    
    
    
    96,700Materials and supplies, at average cost
    
    
    580,486
    
    
    
    570,787Prepaid expenses
    
    
    154,996
    
    
    
    125,477Other
    
    
    64,919
    
    
    
    30,380Total current assets
    
    
    3,168,487
    
    
    
    2,917,449Property, Plant, and Equipment:In service
    
    
    40,886,764
    
    
    
    40,339,785Less accumulated depreciation
    
    
    14,626,931
    
    
    
    14,303,51626,259,833
    
    
    
    26,036,269Nuclear fuel, at amortized cost
    
    
    210,268
    
    
    
    222,667Construction work in progress
    
    
    1,435,403
    
    
    
    1,274,888Total property, plant, and equipment
    
    
    27,905,504
    
    
    
    27,533,824Other Property and Investments:Nuclear decommissioning trusts, at fair value
    
    
    841,664
    
    
    
    807,893Leveraged leases
    
    
    939,152
    
    
    
    837,843Other
    
    
    342,623
    
    
    
    238,193Total other property and investments
    
    
    2,123,439
    
    
    
    1,883,929Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    866,777
    
    
    
    874,443Prepaid pension costs
    
    
    946,015
    
    
    
    911,442Unamortized debt issuance expense
    
    
    151,125
    
    
    
    151,558Unamortized loss on reacquired debt
    
    
    333,079
    
    
    
    326,389Other
    
    
    440,778
    
    
    
    446,149Total deferred charges and other assets
    
    
    2,737,774
    
    
    
    2,709,981Total Assets
    
    $
    35,935,204
    
    
    $
    35,045,183
 The accompanying notes as they relate to Southern Company are an integral part
of these condensed financial statements. 10




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) At June 30,
    
    At December 31,Liabilities and Stockholders Equity
    
    2004
    
    2003(in thousands)Current Liabilities:Securities due within one year
    
    $
    923,979
    
    
    $
    741,073Notes payable
    
    
    737,890
    
    
    
    567,771Accounts payable
    
    
    628,438
    
    
    
    698,758Customer deposits
    
    
    194,368
    
    
    
    189,000Accrued taxes Income taxes
    
    
    149,372
    
    
    
    153,757Other
    
    
    227,899
    
    
    
    248,937Accrued interest
    
    
    190,152
    
    
    
    186,935Accrued vacation pay
    
    
    132,392
    
    
    
    128,505Accrued compensation
    
    
    232,583
    
    
    
    436,854Other
    
    
    281,001
    
    
    
    264,688Total current liabilities
    
    
    3,698,074
    
    
    
    3,616,278Long-term Debt
    
    
    10,274,868
    
    
    
    10,164,018Long-term Debt Payable to Affiliated Trusts
    
    
    1,960,644
    
    
    
    Mandatorily Redeemable Preferred Securities
    
    
    
    
    
    
    1,900,486Deferred Credits and Other Liabilities:Accumulated deferred income taxes
    
    
    4,854,278
    
    
    
    4,586,377Deferred credits related to income taxes
    
    
    391,663
    
    
    
    409,339Accumulated deferred investment tax credits
    
    
    565,785
    
    
    
    579,490Employee benefit obligations
    
    
    812,852
    
    
    
    765,390Asset retirement obligations
    
    
    873,679
    
    
    
    845,392Other cost of removal obligations
    
    
    1,272,603
    
    
    
    1,268,729Miscellaneous regulatory liabilities
    
    
    475,928
    
    
    
    576,393Other
    
    
    269,517
    
    
    
    262,579Total deferred credits and other liabilities
    
    
    9,516,305
    
    
    
    9,293,689Total Liabilities
    
    
    25,449,891
    
    
    
    24,974,471Cumulative Preferred Stock of Subsidiaries
    
    
    569,738
    
    
    
    423,126Common Stockholders Equity:Common stock, par value $5 per share 
    Authorized  1 billion sharesIssued  June 30, 2004: 738,396,059 Shares;
               December 31, 2003: 735,021,270 Shares
    Treasury  June 30, 2004: 215,782 Shares;
               December 31, 2003: 192,691 Shares
    Par value
    
    
    3,691,980
    
    
    
    3,675,106Paid-in capital
    
    
    806,275
    
    
    
    746,080Treasury, at cost
    
    
    (4,720
    )
    
    
    (4,066
    )Retained earnings
    
    
    5,509,513
    
    
    
    5,343,471Accumulated other comprehensive loss
    
    
    (87,473
    )
    
    
    (113,005
    )Total Common Stockholders Equity
    
    
    9,915,575
    
    
    
    9,647,586Total Liabilities and Stockholders Equity
    
    $
    35,935,204
    
    
    $
    35,045,183
 The accompanying notes as they relate to Southern Company are an integral part
of these condensed financial statements. 11




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##### Table of Contents



THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Consolidated
Net Income
    
    $
    352,132
    
    
    $
    431,887
    
    
    $
    683,274
    
    
    $
    729,686Other comprehensive income (loss):Change in fair value of marketable securities, net of tax
of $(754), $-, $3,307 and $-, respectively
    
    
    (1,721
    )
    
    
    (16
    )
    
    
    5,902
    
    
    
    96Changes in fair value of qualifying hedges, net of tax
of $15,514, $(9,465), $7,803 and $(10,106), respectively
    
    
    25,274
    
    
    
    (12,787
    )
    
    
    12,570
    
    
    
    (13,504
    )Less: Reclassification adjustment for amounts included in net income,
net of tax of $2,214, $38, $4,385 and $(4,660), respectively
    
    
    3,570
    
    
    
    1,010
    
    
    
    7,060
    
    
    
    (6,357
    )COMPREHENSIVE INCOME
    
    $
    379,255
    
    
    $
    420,094
    
    
    $
    708,806
    
    
    $
    709,921
 The accompanying notes as they relate to Southern Company are an integral part
of these condensed financial statements. 12




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##### Table of Contents



THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
SECOND QUARTER 2004 vs. SECOND QUARTER 2003
AND
YEAR-TO-DATE 2004 vs. YEAR-TO-DATE 2003 OVERVIEW Discussion of the results of operations is focused on Southern Companys
primary business of electricity sales in the Southeast by the retail operating
companies  Alabama Power, Georgia Power, Gulf Power, Mississippi Power and
Savannah Electric  and Southern Power. Southern Power is an electric
wholesale generation subsidiary with market-based rate authority. Southern
Companys other business activities include investments in synthetic fuels and
leveraged lease projects, telecommunications, energy-related services and
natural gas marketing. For additional information on these businesses, see
BUSINESS  The SOUTHERN System  Retail Operating Companies, Southern Power
and Other Business in Item 1 of the Form 10-K. RESULTS OF OPERATIONS Earnings Southern Companys second quarter and year-to-date 2004 earnings were
$352 million ($0.48 per share) and $683 million ($0.93 per share),
respectively, compared with $432 million ($0.60 per share) and $730 million
($1.01 per share) in the second quarter and year-to-date 2003. The decreases
in second quarter and year-to-date 2004 results are attributed to a one-time
after-tax gain of $88 million included in the second quarter 2003 from
termination of capacity sales contracts with Dynegy. See Note 3 to the
financial statements of Southern Company under Uncontracted Generating
Capacity in Item 8 of the Form 10-K for additional information on these
contract terminations. Earnings in the second quarter and year-to-date 2004
when compared to the same periods in 2003, excluding the Dynegy contract
termination, increased due to a number of positive factors including growth in
customers, increased consumption of electricity by existing customers in the
Southern Company service area, and generally more favorable weather conditions,
as well as new generating capacity available for sale in wholesale markets.
This new capacity led to increases in wholesale revenues from new contracts and
sales of uncontracted capacity in those wholesale markets. These positive
factors were partially offset by higher operations and maintenance cost in the
second quarter as some maintenance projects not completed in 2003 and earlier
this year were undertaken in the second quarter of 2004. Significant income statement items appropriate for discussion include the
following: Increase (Decrease)Second Quarter
    
    Year-To-Date(in thousands)
    
    %
    
    (in thousands)
    
    %Retail sales
    
    $
    302,150
    
    
    
    13.9
    
    
    $
    472,395
    
    
    
    11.4Sales for resale
    
    
    20,825
    
    
    
    6.4
    
    
    
    37,010
    
    
    
    5.6Other electric revenues
    
    
    (133,853
    )
    
    
    (58.7
    )
    
    
    (132,309
    )
    
    
    (41.4
    )Fuel expense
    
    
    131,952
    
    
    
    17.9
    
    
    
    260,375
    
    
    
    18.0Purchased power expense
    
    
    103,372
    
    
    
    90.1
    
    
    
    90,576
    
    
    
    36.6Other operations and maintenance
expenses
    
    
    48,914
    
    
    
    6.2
    
    
    
    84,189
    
    
    
    5.6Depreciation and amortization expense
    
    
    (24,848
    )
    
    
    (9.6
    )
    
    
    (29,182
    )
    
    
    (5.8
    )Taxes other than income taxes
    
    
    11,846
    
    
    
    8.3
    
    
    
    21,504
    
    
    
    7.4Interest income
    
    
    (14,134
    )
    
    
    (68.6
    )
    
    
    (10,978
    )
    
    
    (43.8
    )Other income (expense), net
    
    
    (17,156
    )
    
    
    N/M
    
    
    
    (21,035
    )
    
    
    N/M
   N/M Not meaningful
 13




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##### Table of Contents



THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Retail sales.Excluding fuel revenues, which generally do not affect net
income, retail base revenues increased by $109 million, or 7.1%, in the second
quarter 2004, and increased by $181 million, or 6.2%, year-to-date 2004 when
compared to the same periods in 2003. In the second quarter and year-to-date
2004, retail kilowatt-hour energy sales increased by 5.3% and 4.9%,
respectively, over the same periods a year ago, primarily due to customer and
demand growth and the still improving economy evidenced by increases in
residential, commercial and industrial second quarter kilowatt-hour energy
sales of 8.5%, 5.1% and 3.0%, respectively. Year-to-date residential,
commercial and industrial kilowatt-hour energy sales increased by 6.9%, 4.3%
and 3.9%, respectively, when compared to the same period in 2003. In the second
quarter and year-to-date 2004, temperatures were slightly above normal, while
mild weather in the same periods last year resulted in reduced demand by retail
customers. The number of retail customers increased by 1.8%, and average
consumption by residential customers increased by 5.2% for the year-to-date
2004 when compared to year-to-date 2003. Sales for resale.Sales for resale revenues increased $20.8 million, or
6.4% and $37.0 million, or 5.6% for the second quarter and year-to-date 2004,
respectively, when compared to the same periods in the prior year. The
increase in revenues reflected new wholesale contracts and increases in fuel
revenues. An additional 2,407 megawatts of generating capacity were added in
June and October 2003 by Southern Power. A portion of this new capacity
contributed to the increase in sales for resale revenues for the second quarter
and year-to-date 2004 as a result of increased energy revenues from PPAs with
neighboring utilities. These increases in sales for resale revenues more than
offset the reduction in revenues resulting from the termination of contracts
with subsidiaries of Dynegy in May 2003. See Note 3 to the financial
statements of Southern Company under Uncontracted Generating Capacity in Item
8 of the Form 10-K for additional information on these contract terminations. Other electric revenues.In the second quarter and year-to-date 2004,
other electric revenues decreased $133.9 million, or 58.7% and $132.3 million
or 41.4%, respectively, because of the $142 million in contract termination
revenues from Dynegy recorded in May 2003. See Earnings discussion above for
additional information on these contract terminations. Excluding these
contract termination revenues, other electric revenues increased $8.3 million
or 9.6% and $9.8 million or 5.5% for the second quarter and year-to-date 2004,
respectively, when compared to the same periods in 2003 primarily as a result
of increased cogeneration sales and transmission revenue. Fuel expense. During the second quarter and year-to-date periods of 2004,
fuel expense was higher due to an increase in the average unit cost of fuel, as
well as increased generating capacity at Southern Power. Total fuel generation
remained flat for the second quarter and increased 2.3% for the year-to-date
2004, when compared to the same periods in the prior year. For the second
quarter and year-to-date periods in 2004, the average unit cost of fuel per
kilowatt-hour generated increased 13.2% and 12.9%, respectively, when compared to
the same periods in the prior year. Increases in fuel expense at the retail
operating companies are generally offset by fuel revenues and do not affect net
income. See Future Earnings Potential  FERC and State PSC Matters  Retail
Fuel Cost Recovery herein for additional information. Southern Powers PPAs
generally provide that the purchasers are responsible for substantially all of
the costs of fuel. Purchased power.The increases in purchased power for the second quarter
and year-to-date 2004 when compared with the same periods last year were
primarily due to increased demand for energy by retail customers and to
purchase energy used to meet off-system sales commitments. Also, at times
additional power was available for purchase from external parties at prices
lower than Southern Companys own system generation costs. These expenses do
not have a significant impact on earnings since energy expenses are generally
offset by energy revenues. 14




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##### Table of Contents



THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Other operations and maintenance expenses.The increases in other
operations and maintenance expenses in the second quarter and year-to-date 2004
are mainly attributable to increases in administrative and general,
transmission and distribution maintenance and other production expenses.
Administrative and general expenses increased $14.7 million, or 6.5% and $40.5
million, or 9.5%, for the second quarter and year-to-date 2004, respectively,
primarily as a result of payroll and employee benefits costs. Transmission and
distribution expenses increased $18.6 million or 13.7% and $30.3 million or
11.9% for the second quarter and year-to-date 2004, respectively, as a result
of completing work delayed from 2003. Other production expenses were up $7.1
million or 2.2% and $14.5 million, or 2.3% for the second quarter and
year-to-date 2004, respectively, due to increased expenses primarily resulting from
the operation of Southern Powers new generating facilities. Depreciation and amortization.The second quarter and year-to-date 2004
decreases of $24.8 million and $29.2 million, respectively, in depreciation and
amortization expense when compared to the same periods in 2003 are primarily
the result of increased amortization of regulatory liabilities at Georgia Power
and Mississippi Power. The decreases in Georgia Powers depreciation and
amortization expenses ($17 million and $35 million for the second quarter and
year-to-date 2004, respectively) were caused primarily by lower regulatory
charges needed to levelize purchased power capacity costs under the terms of
the retail rate order effective January 1, 2002. See Note 1 to the financial
statements of Southern Company under Depreciation and Amortization in Item 8
of the Form 10-K for additional information. The decreases in Mississippi
Powers second quarter and year-to-date 2004 depreciation and amortization
expenses ($8 million and $7 million for the second quarter and year-to-date
2004, respectively) are primarily the result of the amortization of a
regulatory liability as approved by the Mississippi PSC. The Mississippi PSC
issued an interim accounting order in December 2003 directing Mississippi Power
to expense and record in 2003 a regulatory liability in the amount of
approximately $60 million. Based on the final Mississippi PSC order issued May
25, 2004 that approved this treatment, Mississippi Power recorded a credit to
amortization of the regulatory liability of $8.3 million during the second
quarter of 2004. The year-to-date decreases are partially offset by increases
in depreciable plant in service, primarily as a result of Southern Powers
Stanton Unit A, which was placed in service in October 2003. Reference is made
to Note 3 to the financial statements of Southern Company under Mississippi
Power Regulatory Filing in Item 8 of the Form 10-K and Note (K) to the
Condensed Financial Statements and FERC and State PSC Matters herein for
additional information. Taxes other than income taxes.The second quarter and year-to-date 2004
increases in taxes other than income taxes over the comparable periods last
year are primarily a result of increases in payroll taxes, property taxes on
new facilities and higher tax assessments on property. Also, franchise and
gross receipts taxes increased for the respective periods due to the increase
in revenues from energy sales. Interest income.The second quarter and year-to-date 2004 decreases in
interest income when compared to the same periods in the prior year resulted
from $15.6 million of interest received from a federal income tax settlement in
the second quarter of 2003. Other income (expense), net.The second quarter and year-to-date 2004
decreases in other income (expense), net reflect decreased rental income at
Georgia Power of $4.0 million and $2.5 million, respectively, as well as the
impact of the ESOP contribution in June 2004 of $6.2 million when compared to
the same periods in 2003. The year-to-date 2004 decrease in other income
(expense), net also reflects a $5.0 million decrease related to the 2003
favorable resolution of a loss contingency by Georgia Power. 15




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##### Table of Contents



THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Future Earnings Potential The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors. These factors include the retail operating companies ability to
maintain a stable regulatory environment, to achieve energy sales growth while
containing costs and to recover costs related to growing demand and
increasingly stricter environmental standards. Another major factor is the
profitability of the competitive market-based wholesale generating business and
federal regulatory policy, which may impact Southern Companys level of
participation in this market. Future earnings for the electricity business in
the near term will depend, in part, upon growth in energy sales, which is
subject to a number of factors, including weather, competition, new energy
contracts with neighboring utilities, energy conservation practiced by
customers, the price of electricity, the price elasticity of demand and the
rate of economic growth in the service area. For additional information
relating to these issues, see BUSINESS  The SOUTHERN System  Risk Factors
in Item 1 and MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS 
Future Earnings Potential of Southern Company in Item 7 of the Form 10-K. Environmental Matters New Source Review Actions and Plant Wansley Environmental Litigation Compliance costs related to the Clean Air Act and other environmental
regulations could affect earnings if such costs cannot be recovered. For
additional information, including information on certain environmental
litigation, see MANAGEMENTS DISCUSSION AND ANALYSIS   RESULTS OF OPERATIONS 
Future Earnings Potential  Environmental Matters of Southern Company in Item
7 and Note 3 to the financial statements of Southern Company under New Source
Review Actions and Plant Wansley Environmental Litigation in Item 8 of the
Form 10-K. As of March 15, 2004, civil penalties under the Clean Air Act were
increased prospectively to a maximum of $32,500 per day, per violation. To the
extent alleged violations under either the New Source Review litigation or
Plant Wansley environmental litigation are deemed to be continuing, this
increased civil penalty amount could apply to such violations found to continue
after that date. On May 3, 2004, the U.S. Supreme Court denied the EPAs petition to review
the Eleventh Circuit Court of Appeals decision in the EPAs similar New Source
Review enforcement action against the TVA. The cases against Alabama Power,
Georgia Power and Savannah Electric have been effectively stayed pending final
resolution of the TVA case. With the denial of the EPAs petition for review,
the Court of Appeals decision became final. Alabama Power and the EPA jointly
notified the District Court for the Northern District of Alabama, where the
case against Alabama Power is pending and requested that the stay be lifted.
On June 16, 2004, the District Court lifted the stay, placing the case back
onto the District Courts active docket. At this time, no party to the case
against Georgia Power and Savannah Electric has sought to reopen that case,
which remains administratively closed in the District Court for the Northern
District of Georgia. On June 10, 2004, the U.S. District Court for the Northern
District of Georgia granted Georgia Powers motion in the Plant Wansley
environmental litigation for partial summary judgment regarding emissions
offsets. The case has been removed from the courts trial calendar due to
pending motions for summary judgment, and a new trial date has not been
scheduled. An adverse outcome in any one of these cases could require
substantial capital expenditures that cannot be determined at this time and
could possibly require payment of substantial penalties. This could affect
future results of operations, cash flows, and possibly financial condition if
such costs are not recovered through regulated rates. 16




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##### Table of Contents



THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Global Warming Litigation On July 21, 2004, attorneys general from eight states, each outside of Southern
Companys service territory, and the corporation counsel for New York City
filed a complaint in U.S. District Court for the Southern District of New York
against Southern Company and four other electric power companies. A nearly
identical complaint was filed by three environmental groups in the same court.
The complaints allege that the companies emissions of carbon dioxide, a
greenhouse gas, contribute to global warming, which the plaintiffs assert is a
public nuisance. Plaintiffs seek relief under the federal common law or, in the
alternative, under state law, of public nuisance. The environmental groups also
seek relief under common law private nuisance theories. The plaintiffs seek a
judicial order (1) holding each defendant jointly and severally liable for
creating, contributing to, and/or maintaining an ongoing public nuisance,
global warming and (2) permanently enjoining each of the defendants to abate
its contribution to the nuisance by capping its emissions of carbon dioxide and
then reducing those emissions by a specified percentage each year for at least
a decade. Plaintiffs have not, however, requested that damages be awarded in
connection with their claims. Southern Company believes these claims are
without merit and notes that the complaint cites no statutory or regulatory
basis for the claims. Southern Company has not yet responded to the suits;
however, it intends to vigorously defend against these claims. While the
outcome cannot be determined at this time, an adverse judgment could result in
substantial capital expenditures. Other Environmental Matters On March 12, 2004, the EPA redesignated the Birmingham, Alabama area from
nonattainment to attainment under the one-hour ozone national ambient air
quality standard. On April 30, 2004, the EPA published its eight-hour ozone
nonattainment designations and a portion of the rules implementing the new
eight-hour standard. Areas within the Southern Companys service area that
have been designated as nonattainment under the eight-hour ozone standard
include Birmingham, Macon (Georgia), and a 20-county area within metropolitan
Atlanta. Under the implementation provisions of the new rule, the EPA
announced that the one-hour ozone standard will be revoked on June 15, 2005.
Areas classified as severe nonattainment areas under the one-hour standard
will not be required to impose emissions fees as a result of nonattainment.
Georgia Power, therefore, will no longer be subject to imposition of emissions
fees if the Atlanta area does not come into attainment with the one-hour
standard. The impact of the eight-hour designations and the new standards will
depend on the development and implementation of applicable state regulations
and therefore cannot be determined at this time. In June 2004, the EPA issued its recommendations for areas to be
designated nonattainment for the fine particle national ambient air quality
standard. Areas within Southern Companys service area that were included in
the EPAs proposed fine particulate matter designations include 24 counties in
the metro-Atlanta area; counties surrounding Macon, Athens, and Columbus, Georgia;
counties surrounding Birmingham, Alabama; and counties in Alabama and Georgia
near Chattanooga, Tennessee. Alabama Power, Georgia
Power and Southern Power own several plants located within the counties
proposed for the nonattainment designations. The EPA plans to make final
nonattainment designations for fine particulate matter by the end of 2004. On April 21, 2004, the EPA published the final regional nitrogen oxide
reduction rules applicable to Georgia. These rules specify that the State of
Georgia must submit a revised state implementation plan by April 2005, and
affected sources must comply with the reduction requirements by May 1, 2007.
The impact of these regulations will depend on the development and approval of
Georgias state implementation plan and cannot be determined at this time. 17




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##### Table of Contents



THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Additionally, on May 5, 2004, the EPA published proposed amendments to its
Regional Haze rules with respect to Best Available Retrofit Technology
guidelines and requirements. The impact of these regulations will depend on the
development and implementation of the final rules and implementation by the
states, and therefore cannot be determined at this time. FERC and State PSC Matters Market-Based Rate Authority See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  FERC Matters  Market-Based Rate Authority of Southern
Company in Item 7 and Note 3 to the financial statements of Southern Company
under FERC Matters in Item 8 of the Form 10-K. On April 14, 2004, the FERC
issued an order that abandoned the SMA test and adopted a new interim analysis
for measuring generation market power. This new interim approach includes a
pivotal supplier analysis and a wholesale market share analysis, the results of
which provide a rebuttable presumption regarding generation market power. The
FERCs order also sets forth procedures for rebutting these presumptions and
addresses mitigation measures for those entities that are found to have market
power. In the absence of specific mitigation measures, the order includes
several cost-based mitigation measures that would apply by default. The FERC
also initiated a new rulemaking proceeding that, among other things, will adopt
a final methodology for assessing generation market power. Southern Company,
the retail operating companies and Southern Power believe that it may be
difficult for a traditional utility company, or an affiliate thereof, with a
significant load service obligation and generation to satisfy that obligation,
and that is not a member of a large, FERC-approved RTO, to pass all aspects of
the market power screens as currently designed. However, each of the companies
believes that it has an appropriate basis to rebut the generation market power
presumption. On July 8, 2004, the FERC denied Southern Companys request for rehearing,
along with a number of others, and reaffirmed the interim tests that it adopted
in April. Southern Company will submit the required analyses by August 9, 2004.
In the event that the FERCs default mitigation measures are ultimately
applied, Southern Power and the retail operating companies may be required to
charge cost-based rates, which may be lower than negotiated market-based rates.
The final outcome of this matter will depend on the form in which the final
methodology for assessing generation market power and mitigation rules may be
ultimately adopted and cannot be determined at this time. Transmission See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  FERC Matters  Transmission of Southern Company in Item 7
of the Form 10-K for information on the FERCs order related to RTOs and the
FERCs notice of proposed rulemaking regarding open access transmission service
and standard electricity market design. Plant McIntosh Construction Project See Note 3 to the financial statements of Southern Company under FERC Matters
in Item 8 of the Form 10-K for information regarding PPAs between Southern
Power and Georgia Power and Savannah Electric for Plant McIntosh capacity. In
April 2003, Southern Power applied for FERC approval of these PPAs. In July
2003, the FERC accepted the PPAs to become effective June 1, 2005, subject to
refund and ordered that hearings be held. To ensure the timely completion of
construction on McIntosh units 10 and 11 and their availability in the summer
of 2005 as supply side resources for the retail customers in the State of
Georgia, on May 7, 2004, Savannah Electric and Georgia Power requested the
Georgia PSC to direct them to acquire the McIntosh construction project.
Savannah Electric and Georgia Power proposed to place the units in rate base at
a cost 18




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION approved by the Georgia PSC and to recover the unit operation and maintenance
costs as retail service expenses as may be approved by the Georgia PSC. The
Georgia PSC issued such an order on May 18, 2004 and the transfer occurred on
May 24, 2004. On May 20, 2004,
Southern Power filed a request to withdraw the PPAs and to terminate the
ongoing FERC proceedings. On August 4, 2004, the FERC issued a notice
that it allowed the request to withdraw the PPAs to be accepted and
to become effective by operation of law on July 20, 2004. However,
the FERC made no determination on what additional steps may need to
be taken with respect to testimony provided in the proceedings. The ultimate
outcome of this matter cannot now be determined. The May 18, 2004 Georgia PSC order also directed Georgia Power and
Savannah Electric to file an application within 10 days of completing such
purchase to amend the resource certificate granted by the Georgia PSC in 2002
to describe the capacity resource as being the McIntosh units 10 and 11 (as
opposed to the McIntosh PPAs), the approximate construction schedule (which is
not expected to change) and the proposed rate base treatment. The application
was filed on June 3, 2004 and the Georgia PSC will have 180 days to respond.
The Georgia PSC is expected to review the application in accordance with its
affiliate transaction guidelines, which require a lower of cost or market
approach unless otherwise determined by the Georgia PSC. Georgia Power and
Savannah Electric have submitted information showing that the book cost of the
McIntosh construction project is lower than its market value. However, full
recovery of the project costs depends on the outcome of the Georgia PSCs
review. In the event the Georgia PSC does not allow full recovery of the
project costs, then part of such costs may have to be written off in accordance
with FASB Statement No. 90, Accounting for Abandonments and Disallowed Plant
Costs. At June 30, 2004, the investment in the McIntosh construction project
totaled approximately $355.2 million and $69.7 million for Georgia Power and
Savannah Electric, respectively. The ultimate outcome of the Georgia PSCs
review cannot now be determined. Georgia Power Retail Rate Case On July 1, 2004, Georgia Power filed a request with the Georgia PSC for an
approximate 7 percent increase in retail revenues, effective January 1, 2005.
The requested increase is based on a future test year ending July 31, 2005 and
a proposed retail return on common equity of 12.5 percent. Georgia Power is
currently operating under a three-year retail rate order that expires December
31, 2004. Under the terms of the existing order, earnings are evaluated
annually against a retail return on common equity range of 10 percent to 12.95
percent. Two-thirds of any earnings above the 12.95 percent return are applied
to rate refunds, with the remaining one-third retained by Georgia Power. The
order required Georgia Power to file a general rate case on July 1, 2004. The increase in retail revenues is being requested to cover the higher
costs of purchased power; operating and maintenance expenses; environmental
compliance; and continued investment in new generation, transmission and
distribution facilities to support growth and ensure reliability. Georgia Power
expects the Georgia PSC to issue a final order in this matter during December
2004. The final outcome of this matter cannot now be determined. See
MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future Earnings
Potential  Other Matters of Southern Company in Item 7 and Note 3 to the
financial statements of Southern Company under Georgia Power Retail Rate
Orders in Item 8 of the Form 10-K and Note (I) to the Condensed Financial
Statements herein for additional information. Alabama Power Environmental Rate Filing On August 2, 2004, Alabama Power made a filing with the Alabama PSC to
establish a specific rate mechanism for the recovery of retail costs associated
with environmental laws, regulations or other such mandates. If approved, the
rate mechanism would begin operation in January 2005 and provide for the
recovery of these costs pursuant to a factor that will be calculated annually.
It is anticipated that for the first two years of the increase, retail rates
would increase under the proposed mechanism by approximately 1% ($33 million)
in 2005 and approximately an additional 1% ($30 million) in 2006. Such
environmental cost recovery would include operations and maintenance expense,
depreciation and a return on invested capital. The outcome of this matter
cannot now be determined. 19




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Mississippi Power Retail Rate Filing On December 5, 2003, Mississippi Power filed a request with the Mississippi PSC
to include 266 megawatts of Plant Daniel Units 3 and 4 generating capacity not
included in jurisdictional cost of service. As part of Mississippi Powers
proposal to include the additional Plant Daniel capacity in retail rates, the
Mississippi PSC, at the time of such filing, issued an interim accounting order
in December 2003 directing Mississippi Power to expense and record in 2003 a
regulatory liability in the amount of approximately $60 million while the
Mississippi PSC fully considered the entire request. On May 25, 2004, the
Mississippi PSC issued an order related to this matter. The Mississippi PSC
approved Mississippi Powers request to reclassify the 266 megawatts of Plant
Daniel Unit 3 and 4 capacity to jurisdictional cost of service effective
January 1, 2004 and authorized Mississippi Power to include the related costs
and revenue credits in jurisdictional rate base, cost of service and revenue
requirement calculations for purposes of retail rate recovery. Mississippi
Power will amortize the regulatory liability established pursuant to the
Mississippi PSCs interim order in December 2003 as an increase to earnings as
follows: $16.5 million in 2004, $25.1 million in 2005, $13.0 million in 2006
and $5.7 million in 2007. In addition, the Mississippi PSC also approved Mississippi Powers
requested changes to PEP, including the use of a forward-looking test year,
with appropriate oversight; annual, rather than semi-annual, filings; and
certain changes to the performance indicator mechanisms. Rate changes will be
limited to 4% of retail revenues annually under the revised PEP. The
Mississippi PSC will review all aspects of PEP in 2007. See Note 3 to the
financial statements of Southern Company under Mississippi Power Regulatory
Filing in Item 8 of the Form 10-K for additional information. Retail Fuel Cost Recovery The retail operating companies each have established fuel cost recovery rates
approved by their respective state PSCs. In recent months, the companies have
experienced higher than expected fuel costs for coal and gas. Those higher
fuel costs have increased the under recovered fuel costs included in the
Condensed Balance Sheets herein. The companies will continue to monitor the
under recovered fuel cost balance in light of these higher fuel costs. Mirant Related Matters See Note 3 to the financial statements of Southern Company under Mirant
Related Matters in Item 8 and MANAGEMENTS DISCUSSION
AND ANALYSIS  RESULTS
OF OPERATIONS  Future Earnings Potential  Other Matters of Southern Company
in Item 7 of the Form 10-K and Note (B) to the Condensed Financial Statements
herein under Mirant Related Matters. In July 2003, Mirant filed for
voluntary reorganization under Chapter 11 of the Federal Bankruptcy Code.
Southern Company has various contingent liabilities associated with Mirant,
including guarantees of contractual commitments, litigation and joint and
several liabilities in connection with the consolidated federal income tax
return. The ultimate outcome of such contingent liabilities cannot now be
determined. Income Tax Matters See MANAGEMENTS
DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  Income Tax Matters of Southern Company in Item 7 and
Note 3 to the financial statements of Southern Company under Income Tax
Issues in Item 8 of the Form 10-K for information regarding IRS and other
challenges to Southern Companys transactions related to synthetic fuel tax
credits and international 20




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION leveraged leases. See Note (B) to the Condensed Financial Statements herein
under Income Tax Matters for information on potential additional challenges
related to the international leveraged leases that could have material impacts
on Southern Companys financial statements. The ultimate outcome of these
matters cannot now be determined. Other Matters Southern Power is completing limited construction activities on Plant Franklin
Unit 3 to preserve the long-term viability of the project but has deferred
final completion until the 2008-2011 period. See Note 3 to the financial
statements of Southern Company under Uncontracted Generating Capacity in Item
8 of the Form 10-K for additional information. The final outcome of these
matters cannot now be determined. See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  Other Matters of Southern Company in Item 7 of the Form
10-K for information on nuclear security measures. Implementation plans for
the measures ordered by the NRC to be in effect by October 29, 2004 have been
finalized based on current interpretations of the requirements. Alabama Power
and Georgia Power  based on its ownership interest  currently estimate their
respective expenditures related to these security measures to total $9.6
million and $9.3 million, of which $9.3 million and $1.3 million will be
capitalized. These estimates are subject to change in the event additional NRC
guidance is provided. Southern Company is subject to certain claims and legal actions arising in
the ordinary course of business. In addition, Southern Companys business
activities are subject to extensive governmental regulation related to public
health and the environment. Litigation over environmental issues and claims of
various types, including property damage, personal injury and citizen
enforcement of environmental requirements, has increased generally throughout
the United States. In particular, personal injury claims for damages caused by
alleged exposure to hazardous materials have become more frequent. The
ultimate outcome of such litigation against Southern Company and its
subsidiaries cannot be predicted at this time; however, management does not
anticipate that the liabilities, if any, arising from such current proceedings
would have a material adverse effect on Southern Companys financial
statements. See the Notes to the Condensed Financial Statements herein for discussion
of various contingencies and other matters which may affect future earnings
potential. ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates Southern Company prepares its financial statements in accordance with
accounting principles generally accepted in the United States. Significant
accounting policies are described in Note 1 to the financial statements of
Southern Company in Item 8 of the Form 10-K. In the application of these
policies, certain estimates are made that may have a material impact on
Southern Companys results of operations and related disclosures. Different
assumptions and measurements could produce estimates that are significantly
different from those recorded in the financial statements. See MANAGEMENTS
DISCUSSION AND ANALYSIS  ACCOUNTING POLICIES  Application of Critical
Accounting Policies and Estimates of Southern Company in Item 7 of the Form
10-K for a complete discussion of Southern Companys critical accounting
policies and estimates related to Electric Utility Regulation, Contingent
Obligations, and Plant Daniel Capacity. Also see Note (K) to the Condensed
Financial Statements herein for additional information related to Mississippi
Powers request to include the Plant Daniel capacity in jurisdictional cost of
service and the related Mississippi PSC order. 21




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION New Accounting Standards On March 31, 2004, Southern Company prospectively adopted FASB Interpretation
No. 46R, Consolidation of Variable Interest Entities, which requires the
primary beneficiary of a variable interest entity to consolidate the related
assets and liabilities. The adoption of FASB Interpretation No. 46R had no
impact on Southern Companys net income. However, as a result of the adoption,
Southern Company and the retail operating companies deconsolidated certain
wholly-owned trusts established to issue preferred securities since Southern
Company and the retail operating companies do not meet the definition of
primary beneficiary established by FASB Interpretation No. 46R. In addition,
Southern Company consolidated its 85% limited partnership investment in an
energy/telecom venture capital fund that was previously accounted for under the
equity method. See Note (D) to the Condensed Financial Statements herein for
additional information related to the adoption of FASB Interpretation No. 46R. In May 2004, the FASB approved Staff Position (FSP) No. 106-2, Accounting
and Disclosure Requirements related to the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (the Medicare Act). FSP No.
106-2 requires recognition of the impacts of the Medicare Act in the
accumulated post-retirement benefit obligation and future cost of service for
post-retirement medical plans and may be applied retroactively to the enactment
of the Medicare Act in December 2003 or prospectively effective for the third
quarter 2004. Southern Company has elected to apply this treatment
prospectively. Pending the finalization of federal regulations governing the
subsidy effected in the Medicare Act, Southern Company does not anticipate a
material impact on its financial statements from the adoption of FSP No. 106-2. FINANCIAL CONDITION AND LIQUIDITY Overview Major changes in Southern Companys financial condition during the first six
months of 2004 included $1.0 billion used for gross property additions to
utility plant. The funds for these additions and other capital requirements
were primarily obtained from net proceeds from short- and long-term security
issuances of approximately $685 million and operating activities. See Southern
Companys Condensed Consolidated Statements of Cash Flows and Financing
Activities herein for further details. Capital Requirements and Contractual Obligations See MANAGEMENTS
DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY  Capital Requirements and Contractual Obligations of Southern Company in Item
7 of the Form 10-K for a description of Southern Companys capital requirements
for its construction program and other funding requirements associated with
scheduled maturities of long-term debt, as well as the related interest,
preferred stock dividends, leases, trust funding requirements and other
purchase commitments. Approximately $924 million will be required by June 30,
2005 for redemptions and maturities of long-term debt. Sources of Capital Southern Company intends to meet its future capital needs through internal cash
flow and external security issuances. The amounts and timing of additional
equity capital to be raised will be contingent on Southern Companys investment
opportunities. The retail operating companies and Southern Power plan to
obtain the funds required for construction and other purposes from sources
similar to those used in the past, which were primarily from operating cash
flows, security issuances and term loan and short-term borrowings. However,
the amount, type and timing of any financings, if needed, will depend upon
market conditions and regulatory approval. See BUSINESS  Financing Programs
in Item 1 and MANAGEMENTS DISCUSSION AND 22




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY  Sources of Capital of Southern
Company in Item 7 of the Form 10-K for additional information. Southern Companys current liabilities exceed current assets because of
the continued use of short-term debt as a funding source to meet cash needs, as
well as scheduled maturities of long-term debt. To meet short term cash needs
and contingencies, the Southern Company system had at June 30, 2004
approximately $191 million of cash and cash equivalents and approximately $3.5
billion of unused credit arrangements with banks, of which $251 million expire
in 2004, $1.5 billion expire in 2005 and $1.7 billion expire in 2006 and
beyond. Of the facilities maturing in 2004 and 2005, $1.22 billion contain
provisions allowing two-year term loans executable at the expiration date and
$215 million contain provisions allowing one-year term loans executable at the
expiration date. These unused credit arrangements also provide liquidity
support to variable rate pollution control bonds and commercial paper programs.
Southern Company expects to renew its credit facilities, as needed, prior to
expiration. The retail operating companies may also meet short-term cash needs
through a Southern Company subsidiary organized to issue and sell commercial
paper and extendible commercial notes at the request and for the benefit of
each of the retail operating companies. At June 30, 2004, the Southern Company
system had outstanding commercial paper of $727 million and extendible
commercial notes of $10.9 million. Management believes that the need for working capital can be adequately
met by utilizing commercial paper programs and lines of credit without
maintaining large cash balances. Off-Balance Sheet Financing Arrangements See MANAGEMENTS
DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND
LIQUIDITY  Off-Balance Sheet Financing Arrangements of Southern Company in Item 7 and
Note 7 to the financial statements of Southern Company under Operating Leases
in Item 8 of the Form 10-K for information related to Mississippi Powers lease
of a combined cycle generating facility at Plant Daniel. Credit Rating Risk Southern Company and its subsidiaries do not have any credit agreements that
would require material changes in payment schedules or terminations as a result
of a credit rating downgrade. There are certain contracts that could require
collateral  but not accelerated payment  in the event of a credit rating
change to below investment grade. These contracts are primarily for physical
electricity purchases and sales, fixed-price physical gas purchases and
agreements covering interest rate swaps. At June 30, 2004, the maximum
potential collateral requirements were approximately $429.8 million.
Generally, collateral may be provided for by a Southern Company guaranty,
letter of credit or cash. Market Price Risk Southern Companys market risk exposures relative to interest rate changes have
not changed materially compared with the December 31, 2003 reporting period.
In addition, Southern Company is not aware of any facts or circumstances that
would significantly affect such exposures in the near term. Due to cost-based rate regulations, the retail operating companies have
limited exposure to market volatility in interest rates, commodity fuel prices
and prices of electricity. To mitigate residual risks relative to movements in
electricity prices, the retail operating companies and Southern Power enter
into fixed price contracts for the purchase and sale of electricity through the
wholesale electricity market and, to a lesser extent, similar contracts for gas
purchases. Also, the retail operating companies have each implemented
fuel-hedging 23




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION programs at the instruction of their respective PSCs. The fair value of
derivative energy contracts at June 30, 2004 was as follows: Second Quarter2004
    
    Year-to-DateChanges
    
    ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    43,512
    
    
    $
    15,825Contracts realized or settled
    
    
    (19,702
    )
    
    
    (25,349
    )New contracts at inception
    
    
    
    
    
    
    Changes in valuation techniques
    
    
    
    
    
    
    Current period changes
    
    
    2,808
    
    
    
    36,142Contracts at June 30, 2004
    
    $
    26,618
    
    
    $
    26,618
 Source of June 30, 2004Valuation PricesTotal
    
    MaturityFair Value
    
    Year 1
    
    1-3 Years(in thousands)Actively quoted
    
    $
    26,618
    
    
    $
    23,155
    
    
    $
    3,463External sources
    
    
    
    
    
    
    
    
    
    
    Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at June 30, 2004
    
    $
    26,618
    
    
    $
    23,155
    
    
    $
    3,463
 For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS 
FINANCIAL CONDITION AND LIQUIDITY  Market Price Risk of Southern Company in
Item 7 and Notes 1 and 6 to the financial statements of Southern Company under
Financial Instruments in Item 8 of the Form 10-K and Note (F) to the
Condensed Financial Statements herein. Financing Activities In the first six months of 2004, Southern Company subsidiaries issued $775
million of senior notes, $265 million of other long-term debt, $175 million of
preferred stock and $62 million of common stock through employee and director
stock plans. The issuances were primarily used to refund senior notes and
other long-term debt and to fund ongoing construction projects. The remainder
was used to repay short-term debt. See Southern Companys Condensed
Consolidated Statements of Cash Flows herein for further details on financing
activities during the first six months of 2004. In January 2004, Georgia Power issued $100 million of Series S 4.00%
Senior Notes due January 15, 2011 and $100 million of Series T 5.75% Senior
Public Income Notes due January 15, 2044. The proceeds from these sales were
used in March 2004 to redeem all of its outstanding Series H 6.70% Senior
Insured Quarterly Notes due March 1, 2011 and Series D 6 5/8% Senior Notes due
March 31, 2039. Further in January 2004, Georgia Power Capital Trust VII, a statutory
trust, sold $200 million of its 5 7/8% Trust Preferred Securities, which are
guaranteed by Georgia Power. The net proceeds from this issuance were used to
redeem 6.85% Trust Preferred Securities of Georgia Power Capital Trust IV. In
connection with this transaction, Georgia Power issued $206 million of its junior subordinated
debentures to Georgia Power Capital Trust VII. 24




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##### Table of Contents



THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION In February 2004, Alabama Power issued 4,000,000 shares ($100 million
aggregate stated capital) of 5.30% Class A Preferred Stock, Cumulative, Par
Value $1 Per Share (Stated Capital $25 Per Share) and $200 million of Series Z
5.125% Senior Notes due February 15, 2019. The proceeds from these sales were
used to repay a portion of Alabama Powers outstanding short-term indebtedness
and for other general corporate purposes, including Alabama Powers continuous
construction program. Also in February 2004, Georgia Power issued $150 million of Series U
Floating Rate Senior Notes due February 17, 2009. The proceeds of this sale
were used for general corporate purposes. In March 2004, Mississippi Power issued $40 million of Series F Floating
Rate Senior Notes due March 9, 2009. The proceeds from this sale, along with
other monies of Mississippi Power were used to repay $80
million aggregate principal amount of Mississippi Powers Series D Floating
Rate Senior Notes due March 12, 2004. Additionally, in April 2004, Alabama Power issued $150 million of Series
AA 5 5/8% Senior Notes due April 15, 2034 and terminated $150 million of swaps
at a gain of $6 million. The proceeds from the sale were used together with
other funds to redeem, in May 2004, $200 million in aggregate principal amount
of the Series J 6.75% Senior Notes due June 30, 2039. The gain from the
terminated swaps was deferred in Other Comprehensive Income and will be
amortized to income over the life of the Series AA Senior Notes. Also in April 2004, Gulf Power issued $35 million of Series J 5.875%
Senior Notes due April 1, 2044. The proceeds from this issue were used for
general corporate purposes, including Gulf Powers continuous construction
program. Also, in April 2004, Mississippi Power issued 1,200,000 Depositary Shares
($30 million aggregate stated capital) each representing one-fourth of a share
of 5.25% Series Preferred Stock, cumulative, par value $100 per share. The
proceeds from this sale were primarily used to redeem various issues of
preferred stock and the remainder was used for general corporate purposes. Further, in June, 2004, Savannah Electric issued 1,800,000 shares ($45
million aggregate par value) of 6.00% Series Preferred Stock, non-cumulative,
par value $25 per share. The proceeds from this sale were used to repay a
portion of its outstanding short-term indebtedness that had been incurred
primarily to finance the purchase of its share of Units 10 and 11 of Plant
McIntosh. Subsequent to June 30, 2004, Alabama Power has entered into interest rate
hedging transactions related to the anticipated issuance of senior notes
totaling approximately $125 million. The notes are expected to be issued in
2005. Southern Company and its subsidiaries plan to continue, to the extent
possible, a program to retire higher-cost debt and replace these securities
with lower-cost capital. The market price of Southern Companys common stock at June 30, 2004 was
$29.15 per share and the book value was $13.43 per share, representing a
market-to-book ratio of 217%, compared to $30.25, $13.13 and 230%,
respectively, at the end of 2003. The dividend for the second quarter 2004 was
$0.35 per share compared to $0.3425 per share in the second quarter 2003. 25




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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. As of the end of the period covered by this quarterly report, Southern Company,
the retail operating companies and Southern Power conducted separate
evaluations under the supervision and with the participation of each companys
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the disclosure controls and procedures (as
defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934). Based upon those evaluations, the Chief Executive Officer and the Chief
Financial Officer, in each case, concluded that the disclosure controls and
procedures are effective in alerting them in a timely manner to material
information relating to each company (including its consolidated subsidiaries)
required to be included in periodic filings with the SEC. (b)     Changes in internal controls. There have been no changes in Southern Companys, the retail operating
companies or Southern Powers internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934) during the second quarter of 2004 that have materially
affected or are reasonably likely to materially affect, Southern Companys, the
retail operating companies or Southern Powers internal control over financial
reporting. 26




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ALABAMA POWER COMPANY



27




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ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Operating Revenues:Retail sales
    
    $
    847,148
    
    
    $
    748,906
    
    
    $
    1,591,781
    
    
    $
    1,419,735Sales for resale Non-affiliates
    
    
    120,491
    
    
    
    116,212
    
    
    
    232,436
    
    
    
    235,493Affiliates
    
    
    53,945
    
    
    
    54,741
    
    
    
    119,733
    
    
    
    116,728Other revenues
    
    
    37,233
    
    
    
    30,287
    
    
    
    74,561
    
    
    
    68,311Total operating revenues
    
    
    1,058,817
    
    
    
    950,146
    
    
    
    2,018,511
    
    
    
    1,840,267Operating Expenses:Fuel
    
    
    277,110
    
    
    
    240,791
    
    
    
    549,089
    
    
    
    480,535Purchased power Non-affiliates
    
    
    65,508
    
    
    
    27,476
    
    
    
    94,150
    
    
    
    56,306Affiliates
    
    
    60,400
    
    
    
    52,613
    
    
    
    120,332
    
    
    
    94,109Other operations
    
    
    160,889
    
    
    
    159,642
    
    
    
    307,275
    
    
    
    294,185Maintenance
    
    
    90,718
    
    
    
    81,646
    
    
    
    171,105
    
    
    
    156,221Depreciation and amortization
    
    
    106,146
    
    
    
    104,505
    
    
    
    211,499
    
    
    
    204,716Taxes other than income taxes
    
    
    59,328
    
    
    
    56,482
    
    
    
    123,775
    
    
    
    116,567Total operating expenses
    
    
    820,099
    
    
    
    723,155
    
    
    
    1,577,225
    
    
    
    1,402,639Operating Income
    
    
    238,718
    
    
    
    226,991
    
    
    
    441,286
    
    
    
    437,628Other Income and (Expense):Allowance for equity funds used during construction
    
    
    3,914
    
    
    
    3,062
    
    
    
    8,024
    
    
    
    7,799Interest income
    
    
    3,890
    
    
    
    4,270
    
    
    
    8,329
    
    
    
    7,546Interest expense, net of amounts capitalized
    
    
    (52,367
    )
    
    
    (58,941
    )
    
    
    (102,446
    )
    
    
    (113,514
    )Interest expense to affiliate trusts
    
    
    (4,181
    )
    
    
    
    
    
    
    (4,181
    )
    
    
    Distributions on mandatorily redeemable preferred securities
    
    
    
    
    
    
    (3,939
    )
    
    
    (3,938
    )
    
    
    (7,380
    )Other income (expense), net
    
    
    (6,415
    )
    
    
    (4,315
    )
    
    
    (10,753
    )
    
    
    (10,034
    )Total other income and (expense)
    
    
    (55,159
    )
    
    
    (59,863
    )
    
    
    (104,965
    )
    
    
    (115,583
    )Earnings Before Income Taxes
    
    
    183,559
    
    
    
    167,128
    
    
    
    336,321
    
    
    
    322,045Income taxes
    
    
    72,567
    
    
    
    55,758
    
    
    
    129,835
    
    
    
    114,831Net Income
    
    
    110,992
    
    
    
    111,370
    
    
    
    206,486
    
    
    
    207,214Dividends on Preferred Stock
    
    
    6,705
    
    
    
    4,747
    
    
    
    11,452
    
    
    
    8,772Net Income After Dividends on Preferred Stock
    
    $
    104,287
    
    
    $
    106,623
    
    
    $
    195,034
    
    
    $
    198,442
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Net Income After Dividends on Preferred Stock
    
    $
    104,287
    
    
    $
    106,623
    
    
    $
    195,034
    
    
    $
    198,442Other comprehensive income:Change in fair value of marketable securities, net of tax
of $285 and $285, respectively
    
    
    470
    
    
    
    
    
    
    
    470
    
    
    
    Changes in fair value of qualifying hedges, net of tax
of $11,847, $(627), $5,685 and $(1,423), respectively
    
    
    19,486
    
    
    
    (686
    )
    
    
    9,350
    
    
    
    (1,994
    )Less: Reclassification adjustment for amounts included in net income,
net of tax of $718, $893, $1,572 and $1,645, respectively
    
    
    1,180
    
    
    
    1,808
    
    
    
    2,585
    
    
    
    3,044COMPREHENSIVE INCOME
    
    $
    125,423
    
    
    $
    107,745
    
    
    $
    207,439
    
    
    $
    199,492
 The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements. 28




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




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##### Table of Contents



ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At June 30,
    
    At December 31,Assets
    
    2004
    
    2003(in thousands)Current Assets:Cash and cash equivalents
    
    $
    27,800
    
    
    $
    42,752Receivables Customer accounts receivable
    
    
    244,269
    
    
    
    223,865Unbilled revenues
    
    
    117,483
    
    
    
    95,953Under recovered regulatory clause revenues
    
    
    98,155
    
    
    
    16,697Other accounts and notes receivable
    
    
    44,064
    
    
    
    53,547Affiliated companies
    
    
    41,346
    
    
    
    48,876Accumulated provision for uncollectible accounts
    
    
    (5,688
    )
    
    
    (4,756
    )Fossil fuel stock, at average cost
    
    
    88,624
    
    
    
    86,993Vacation pay
    
    
    35,530
    
    
    
    35,530Materials and supplies, at average cost
    
    
    215,490
    
    
    
    211,690Prepaid expenses
    
    
    63,342
    
    
    
    44,608Other
    
    
    36,308
    
    
    
    19,454Total current assets
    
    
    1,006,723
    
    
    
    875,209Property, Plant, and Equipment:In service
    
    
    14,389,837
    
    
    
    14,224,117Less accumulated provision for depreciation
    
    
    4,984,801
    
    
    
    4,905,9209,405,036
    
    
    
    9,318,197Nuclear fuel, at amortized cost
    
    
    94,076
    
    
    
    93,611Construction work in progress
    
    
    402,384
    
    
    
    321,316Total property, plant, and equipment
    
    
    9,901,496
    
    
    
    9,733,124Other Property and Investments:Equity investments in unconsolidated subsidiaries
    
    
    47,995
    
    
    
    47,811Nuclear decommissioning trusts, at fair value
    
    
    404,223
    
    
    
    384,574Other
    
    
    26,211
    
    
    
    16,992Total other property and investments
    
    
    478,429
    
    
    
    449,377Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    319,255
    
    
    
    321,077Prepaid pension costs
    
    
    467,081
    
    
    
    446,256Unamortized loss on reacquired debt
    
    
    113,520
    
    
    
    110,946Other
    
    
    140,394
    
    
    
    134,635Total deferred charges and other assets
    
    
    1,040,250
    
    
    
    1,012,914Total Assets
    
    $
    12,426,898
    
    
    $
    12,070,624
 The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements. 30




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ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At June 30,
    
    At December 31,Liabilities
and Stockholders Equity
    
2004
    
    2003(in thousands)Current Liabilities:Securities due within one year
    
    $
    525,015
    
    
    $
    526,019Notes payable
    
    
    45,978
    
    
    
    Accounts payable Affiliated
    
    
    113,263
    
    
    
    135,017Other
    
    
    87,781
    
    
    
    162,314Customer deposits
    
    
    49,828
    
    
    
    47,507Accrued taxes Income taxes
    
    
    86,242
    
    
    
    83,544Other
    
    
    67,639
    
    
    
    22,273Accrued interest
    
    
    51,089
    
    
    
    46,489Accrued vacation pay
    
    
    35,530
    
    
    
    35,530Accrued compensation
    
    
    43,404
    
    
    
    75,620Other
    
    
    33,218
    
    
    
    34,513Total current liabilities
    
    
    1,138,987
    
    
    
    1,168,826Long-term Debt
    
    
    3,529,766
    
    
    
    3,377,148Long-term Debt Payable to Affiliated Trusts
    
    
    309,279
    
    
    
    Mandatorily Redeemable Preferred Securities
    
    
    
    
    
    
    300,000Deferred Credits and Other Liabilities:Accumulated deferred income taxes
    
    
    1,687,565
    
    
    
    1,571,076Deferred credits related to income taxes
    
    
    154,943
    
    
    
    162,168Accumulated deferred investment tax credits
    
    
    210,830
    
    
    
    216,309Employee benefit obligations
    
    
    181,923
    
    
    
    180,960Deferred capacity revenues
    
    
    31,015
    
    
    
    36,567Asset retirement obligations
    
    
    370,892
    
    
    
    358,759Asset retirement obligation regulatory liability
    
    
    133,777
    
    
    
    127,346Other cost of removal obligations
    
    
    585,849
    
    
    
    574,445Miscellaneous regulatory liabilities
    
    
    74,952
    
    
    
    86,323Other
    
    
    31,582
    
    
    
    37,525Total deferred credits and other liabilities
    
    
    3,463,328
    
    
    
    3,351,478Total Liabilities
    
    
    8,441,360
    
    
    
    8,197,452Cumulative Preferred Stock
    
    
    472,512
    
    
    
    372,512Common Stockholders Equity:Common stock, par value $40 per share Authorized  15,000,000 sharesOutstanding  June 30, 2004: 7,750,000
Shares December 31, 2003: 7,250,000 Shares
    
    
    310,000
    
    
    
    290,000Paid-in capital
    
    
    1,932,387
    
    
    
    1,926,970Premium on preferred stock
    
    
    99
    
    
    
    99Retained earnings
    
    
    1,266,102
    
    
    
    1,291,558Accumulated other comprehensive income (loss)
    
    
    4,438
    
    
    
    (7,967
    )Total common stockholders equity
    
    
    3,513,026
    
    
    
    3,500,660Total Liabilities and Stockholders Equity
    
    $
    12,426,898
    
    
    $
    12,070,624
 The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements. 31




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2004 vs. SECOND QUARTER 2003
AND
YEAR-TO-DATE 2004 vs. YEAR-TO-DATE 2003 RESULTS OF OPERATIONS Earnings Alabama Powers net income after dividends on preferred stock for the second
quarter and year-to-date 2004 was $104.3 million and $195.0 million,
respectively, compared to $106.6 million and $198.4 million, respectively, for
the corresponding periods of 2003. Earnings in the second quarter of 2004
decreased by $2.3 million, or 2.2%, primarily due to higher maintenance
expenses and income and other taxes, partially offset by an increase in retail
base-rate revenues and a decrease in interest expense. Earnings year-to-date
2004 decreased by $3.4 million, or 1.7%, principally due to higher maintenance
expense, depreciation expense, and income and other taxes. These increases
were partially offset by an increase in base rate revenues and a decrease in
interest expense. Significant income statement items appropriate for discussion include the
following: Increase (Decrease)Second Quarter
    
    Year-To-Date(in thousands)
    
    %
    
    (in thousands)
    
    %Retail sales
    
    $
    98,242
    
    
    
    13.1
    
    
    $
    172,046
    
    
    
    12.1Other revenues
    
    
    6,946
    
    
    
    22.9
    
    
    
    6,250
    
    
    
    9.1Fuel expense
    
    
    36,319
    
    
    
    15.1
    
    
    
    68,554
    
    
    
    14.3Purchased power  non-affiliates
    
    
    38,032
    
    
    
    138.4
    
    
    
    37,844
    
    
    
    67.2Purchased power  affiliates
    
    
    7,787
    
    
    
    14.8
    
    
    
    26,223
    
    
    
    27.9Maintenance expense
    
    
    9,072
    
    
    
    11.1
    
    
    
    14,884
    
    
    
    9.5Depreciation and amortization
    
    
    1,641
    
    
    
    1.6
    
    
    
    6,783
    
    
    
    3.3Taxes other than income taxes
    
    
    2,846
    
    
    
    5.0
    
    
    
    7,208
    
    
    
    6.2Interest expense, net of
amounts capitalized
    
    
    (6,574
    )
    
    
    (11.2
    )
    
    
    (11,068
    )
    
    
    (9.8
    )Income taxes
    
    
    16,809
    
    
    
    30.1
    
    
    
    15,004
    
    
    
    13.1Dividends on preferred stock
    
    
    1,958
    
    
    
    41.2
    
    
    
    2,680
    
    
    
    30.6
 Retail sales. Excluding energy cost recovery revenues and revenues
associated with PPAs certificated by the Alabama PSC, which generally do not
affect net income, retail sales revenues increased by $25.5 million, or 4.6%,
for the second quarter 2004 and $47.1 million, or 4.5%, year-to-date 2004 when
compared to the corresponding periods in 2003. See Note 3 to the financial
statements of Alabama Power under Retail Rate Adjustment Procedures in Item 8
of the Form 10-K for additional information. Kilowatt-hour energy sales to
residential, commercial, and industrial customers increased 7.1%, 4.2%, and
3.0%, respectively, for the second quarter 2004 and increased 5.7%, 3.4% and
5.8%, respectively, year-to-date 2004 when compared to the corresponding
periods of 2003 primarily due to more favorable weather conditions and improved
industrial sales mainly in the coal mining, primary metal and automotive
sectors. 32




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Other revenues.The increases in other revenues for the second quarter
and year-to-date 2004 are attributed to a $3.4 million increase in revenues
from cogeneration steam facilities due to increased fuel revenue resulting from
higher gas prices, a $1.6 million increase in rent from pole attachments and a
$1.0 million increase in transmission revenues when compared to the same
periods in 2003. Since cogeneration steam fuel revenues are generally offset
by fuel expense, these revenues do not have a significant impact on earnings. Fuel expense.Fuel expense was higher in the second quarter 2004 when
compared to the corresponding period in 2003 mainly due to a 35.7% increase in
natural gas prices and a 10.8% increase in generation from natural gas-fired
generating facilities. The year-to-date 2004 increase in fuel expense when
compared to the same period in 2003 is mainly due to a 30.6% increase in
natural gas prices and a 24.0% increase in generation from gas-fired generating
facilities. These increases in generation from gas-fired facilities in the
second quarter and year-to-date 2004 when compared to the corresponding periods
in 2003 are mainly due to an increased energy demand coupled with a 68.4%
decrease and a 48.4% decrease, respectively, in generation from Alabama Powers
hydroelectric facilities. Since energy expenses are generally offset by energy
revenues, these expenses do not have a significant impact on earnings. See
Future Earnings Potential  FERC and Alabama PSC Matters  Retail Fuel Cost
Recovery herein for additional information. Purchased power  non-affiliates. In the second quarter and year-to-date
2004, purchased power from non-affiliates increased when compared to the same
periods in 2003 primarily due to a 99.5% increase in energy purchased during
the second quarter 2004 even though purchased power prices decreased by 31.0%
during the second quarter 2004. Increased purchases were used to help meet the
increased energy demand for retail sales. These transactions did not have a
significant impact on earnings since energy purchases are generally offset by
energy revenues through Alabama Powers energy cost recovery clause. Purchased power  affiliates. Purchased power from affiliates increased
in the second quarter and year-to-date 2004 over the same periods in 2003 due
to a PPA between Alabama Power and Southern Power that began in June 2003. The
capacity component of these transactions was $13.0 million in the second
quarter 2004 and $22.4 million year-to-date 2004. Purchases of energy will
vary depending on demand and the availability and cost of generating resources
at each company. These transactions did not have a significant impact on
earnings since energy purchases are generally offset by energy revenues through
Alabama Powers energy cost recovery clause. See Note 3 to the financial
statements of Alabama Power under Retail Rate Adjustment Procedures in Item 8
of the Form 10-K for additional information on base rate adjustments for
certificated PPA expenses. Maintenance expense.The increase in maintenance expense for the second
quarter 2004 when compared to the same period in 2003 is attributed to a $3.3
million increase in distribution expense, a $2.1 million increase in Washington
County combined cycle turbine expense primarily due to caustic water damage and
a $1.9 million increase in transmission expense. The year-to-date 2004
increase in maintenance expense is mainly due to a $6.6 million increase in
distribution expense and a $3.7 million increase in transmission expense.
These increases in transmission and distribution are mainly related to
scheduled work performed on overhead lines. Depreciation and amortization expense.The increases in depreciation and
amortization expense for the second quarter and year-to-date 2004 are
attributed to an increase in utility plant in service when compared to the same
periods in 2003. See Note 7 to the financial statements of Alabama Power under
Construction Program in Item 8 of the Form 10-K for additional information. Taxes other than income taxes. The second quarter 2004 increase in taxes
other than income taxes is mainly due to a $1.3 million increase in property
tax expense as a result of a higher assessed property values when compared to
the corresponding period in 2003. The year-to-date 2004 increase in taxes
other than income 33




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION taxes when compared to the same period in 2003 is primarily due to a $2.7
million increase in payroll taxes, a $2.7 million increase in property tax
expense and a $1.7 million increase in the state public utility license tax
because of increased retail revenues. Interest expense, net of amounts capitalized. The decrease in interest
expense, net of amounts capitalized, during the second quarter and year-to-date
2004 when compared to the same periods in 2003 is the result of refinancing
higher cost debt. For additional information, see FINANCIAL CONDITION AND
LIQUIDITY  Financing Activities herein. Income taxes. Income tax expense increased for the second quarter and
year-to-date of 2004 due primarily to greater taxable income in the second
quarter of 2004 compared to 2003, resulting in an additional $6.5 million tax
expense. Income tax expense increased an additional $4.2 million in the second
quarter of 2004 due to a state income tax actualization adjustment. Also, an
income tax settlement which was recorded in 2003 resulted in a $4.7 million
increase to net income in the second quarter of 2003. Dividends on preferred stock. Dividends on preferred stock increased for
the second quarter and year-to-date 2004 due to the issuance of 4,000,000
shares ($100 million aggregate stated capital) of 5.30% Class A Preferred
Stock, Cumulative, Par Value $1 Per Share (Stated Capital $25 Per Share) in
February 2004. Future Earnings Potential The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including Alabama Powers ability to maintain a stable regulatory
environment, to achieve energy sales growth while containing costs and to
recover costs related to growing demand and increasingly stricter environmental
standards. Growth in energy sales is subject to a number of factors. These
factors include weather, competition, new energy contracts with neighboring
utilities, energy conservation practiced by customers, the price of
electricity, the price elasticity of demand and the rate of economic growth in
Alabama Powers service area. For additional information relating to these
issues, see BUSINESS  The SOUTHERN System  Risk Factors in Item 1 and
MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future Earnings
Potential of Alabama Power in Item 7 of the Form 10-K. Environmental Matters New Source Review
Actions Compliance costs related to the Clean Air Act and other environmental
regulations could affect earnings if such costs cannot be recovered. For
additional information about these issues, including the EPA litigation, see
MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future Earnings
Potential  Environmental Matters of Alabama Power in Item 7 and Note 3 to the
financial statements of Alabama Power under New Source Review Actions in Item
8 of the Form 10-K. As of March 15, 2004, civil penalties under the Clean Air
Act were increased prospectively to a maximum of $32,500 per day, per
violation. To the extent alleged violations under the New Source Review
litigation are deemed to be continuing, this increased civil penalty amount
could apply to such violations found to continue after that date. On May 3, 2004, the U.S. Supreme Court denied the EPAs petition to review
the Eleventh Circuit Court of Appeals decision in the EPAs similar New Source
Review enforcement action against the TVA. The case
against Alabama Power had been effectively stayed pending final resolution of
the TVA case. With the denial of the EPAs petition for review, the Court of
Appeals decision became final. Alabama Power and the EPA 34




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION jointly notified the District Court for the Northern District of Alabama, where
the case against Alabama Power is pending and requested that the stay be
lifted. On June 16, 2004, the District Court lifted the stay, placing the case
back onto the District Courts active docket. An adverse outcome in this case
could require substantial capital expenditures that cannot be determined at
this time and could possibly require payment of substantial penalties. This
could affect future results of operations, cash flows, and possibly financial
condition if such costs are not recovered through regulated rates. Global Warming
Litigation On July 21, 2004, attorneys general from eight states, each outside of Southern
Companys service territory, and the corporation counsel for New York City
filed a complaint in U.S. District Court for the Southern District of New York
against Southern Company and four other electric power companies. A nearly
identical complaint was filed by three environmental groups in the same court.
The complaints allege that the companies emissions of carbon dioxide, a
greenhouse gas, contribute to global warming, which the plaintiffs assert is a
public nuisance. Plaintiffs seek relief under the federal common law or, in the
alternative, under state law, of public nuisance. The environmental groups
also seek relief under common law private nuisance theories. The plaintiffs
seek a judicial order (1) holding each defendant jointly and severally liable
for creating, contributing to, and/or maintaining an ongoing public nuisance,
global warming and (2) permanently enjoining each of the defendants to abate
its contribution to the nuisance by capping its emissions of carbon dioxide and
then reducing those emissions by a specified percentage each year for at least
a decade. Plaintiffs have not, however, requested that damages be awarded in
connection with their claims. Southern Company believes these claims are
without merit and notes that the complaint cites no statutory or regulatory
basis for the claims. Southern Company has not yet responded to the suits;
however, it intends to vigorously defend against these claims. While the
outcome cannot be determined at this time, an adverse judgment could result in
substantial capital expenditures. Other Environmental
Matters On March 12, 2004, the EPA redesignated the Birmingham, Alabama area from
nonattainment to attainment under the one-hour ozone national ambient air
quality standard. On April 30, 2004, the EPA published its eight-hour ozone
nonattainment designations and a portion of the rules implementing the new
eight-hour standard. Within Alabama Powers service area, Birmingham has been
designated as nonattainment under the eight-hour ozone standard. Under the
implementation provisions of the new rule, the EPA announced that the one-hour
ozone standard will be revoked on June 15, 2005. The impact of the eight-hour
designations and the new standards will depend on the development and
implementation of applicable state regulations and therefore cannot be
determined at this time. Additionally, on May 5, 2004, the EPA published proposed amendments to its
Regional Haze rules with respect to Best Available Retrofit Technology
guidelines and requirements. The impact of these regulations will depend on the
development and implementation of the final rules and implementation by the
states, and therefore cannot be determined at this time. In June 2004, the EPA issued its recommendations for areas to be
designated nonattainment for the fine particle national ambient air quality
standard. Areas within the Alabama Powers service area that were included in
the EPAs proposed fine particulate matter designations include counties
surrounding Birmingham, Alabama.
Alabama Power owns several plants located within the counties proposed for the
nonattainment designation. The EPA plans to make final nonattainment
designations for fine particulate matter by the end of 2004. 35




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION FERC and Alabama PSC Matters Market-Based Rate
Authority See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  FERC Matters  Market-Based Rate Authority of Alabama
Power in Item 7 of the Form 10-K and Note 3 to the financial statements of
Alabama Power under FERC Matters in Item 8 of the Form 10-K. On April 14,
2004, the FERC issued an order that abandoned the SMA test and adopted a new
interim analysis for measuring generation market power. This new interim
approach includes a pivotal supplier analysis and a wholesale market share
analysis, the results of which provide a rebuttable presumption regarding
generation market power. The FERCs order also sets forth procedures for
rebutting these presumptions and addresses mitigation measures for those
entities that are found to have market power. In the absence of specific
mitigation measures, the order includes several cost-based mitigation measures
that would apply by default. The FERC also initiated a new rulemaking
proceeding that, among other things, will adopt a final methodology for
assessing generation market power. Southern Company, the retail operating
companies, including Alabama Power, and Southern Power believe that it may be
difficult for a traditional utility company, or an affiliate thereof, with a
significant load service obligation and generation to satisfy that obligation,
and that is not a member of a large, FERC-approved RTO, to pass all aspects of
the market power screens as currently designed. However, each of the companies
believes that it has an appropriate basis to rebut the generation market power
presumption. On July 8, 2004, the FERC denied Southern Companys request for rehearing,
along with a number of others, and reaffirmed the interim tests that it adopted
in April. Southern Company will submit the required analyses by August 9, 2004.
In the event that the FERCs default mitigation measures are ultimately
applied, Southern Power and the retail operating companies may be required to
charge cost-based rates, which may be lower than negotiated market-based rates.
The final outcome of this matter will depend on the form in which the final
methodology for assessing generation market power and mitigation rules may be
ultimately adopted and cannot be determined at this time. Transmission See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  FERC Matters  Transmission of Alabama Power in Item 7 of
the Form 10-K for information on the FERCs order related to RTOs and the
FERCs notice of proposed rulemaking regarding open access transmission service
and standard electricity market design. Environmental Rate
Filing On August 2, 2004, Alabama Power made a filing with the Alabama PSC to
establish a specific rate mechanism for the recovery of retail costs associated
with environmental laws, regulations or other such mandates. If approved, the
rate mechanism would begin operation in January 2005 and provide for the
recovery of these costs pursuant to a factor that will be calculated annually.
It is anticipated that for the first two years of the increase, retail rates
would increase under the proposed mechanism by approximately 1% ($33 million)
in 2005 and approximately an additional 1% ($30 million) in 2006. Such
environmental cost recovery would include
operations and maintenance expense, depreciation and a return on invested
capital. The outcome of this matter cannot now be determined. 36




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Retail Fuel Cost Recovery In March 2002, the Alabama PSC issued a consent order establishing the current
customer fuel rates, which Alabama Power began collecting in April 2002. In
recent months, Alabama Power has experienced higher than expected fuel costs
for coal and gas. Those higher fuel costs have increased the under recovered
fuel costs included in the Condensed Balance Sheets herein. Alabama Power will
continue to monitor the under recovered fuel cost balance in light of these
higher fuel costs. See Note 3 to the financial statements of Alabama Power
under Retail Rate Adjustment Procedures in Item 8 of the Form 10-K for
additional information. Other Matters See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  Other Matters of Alabama Power in Item 7 of the Form 10-K
for information on nuclear security measures. Implementation plans for the
measures ordered by the NRC to be in effect by October 29, 2004 have been
finalized based on current interpretations of the requirements. Alabama Power
currently estimates its expenditures related to these security measures to
total $9.6 million, of which $9.3 million will be capitalized. These estimates
are subject to change in the event additional NRC guidance is provided. Alabama Power is subject to certain claims and legal actions arising in
the ordinary course of business. In addition, Alabama Powers business
activities are subject to extensive governmental regulation related to public
health and the environment. Litigation over environmental issues and claims of
various types, including property damage, personal injury and citizen
enforcement of environmental requirements, has increased generally throughout
the United States. In particular, personal injury claims for damages caused by
alleged exposure to hazardous materials have become more frequent. The
ultimate outcome of such litigation against Alabama Power cannot be predicted
at this time; however, management does not anticipate that the liabilities, if
any, arising from such current proceedings would have a material adverse effect
on Alabama Powers financial statements. See the Notes to the Condensed Financial Statements herein for discussion
of various contingencies and other matters which may affect future earnings
potential. ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates Alabama Power prepares its financial statements in accordance with accounting
principles generally accepted in the United States. Significant accounting
policies are described in Note 1 to the financial statements of Alabama Power
in Item 8 of the Form 10-K. In the application of these policies, certain
estimates are made that may have a material impact on Alabama Powers results
of operations and related disclosures. Different assumptions and measurements
could produce estimates that are significantly different from those recorded in
the financial statements. See MANAGEMENTS DISCUSSION AND ANALYSIS -
ACCOUNTING POLICIES  Application of Critical Accounting Policies and
Estimates of Alabama Power in Item 7 of the Form 10-K for a complete
discussion of Alabama Powers critical accounting policies and estimates
related to Electric Utility Regulation and Contingent Obligations. 37




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION New Accounting Standards On March 31, 2004, Alabama Power prospectively adopted FASB Interpretation No.
46R, Consolidation of Variable Interest Entities, which requires the primary
beneficiary of a variable interest entity to consolidate the related assets and
liabilities. The adoption of FASB Interpretation No. 46R had no impact on
Alabama Powers net income. However, as a result of the adoption, Alabama
Power deconsolidated certain wholly-owned trusts established to issue preferred
securities since Alabama Power does not meet the definition of primary
beneficiary established by FASB Interpretation No. 46R. See Note (D) to the
Condensed Financial Statements herein for additional information related to the
adoption of FASB Interpretation No. 46R. In May 2004, the FASB approved Staff Position (FSP) No. 106-2, Accounting
and Disclosure Requirements related to the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (the Medicare Act). FSP No.
106-2 requires recognition of the impacts of the Medicare Act in the
accumulated post-retirement benefit obligation and future cost of service for
post-retirement medical plans and may be applied retroactively to the enactment
of the Medicare Act in December 2003 or prospectively effective for the third
quarter 2004. Alabama Power has elected to apply this treatment prospectively.
Pending the finalization of federal regulations governing the subsidy effected
in the Medicare Act, Alabama Power does not anticipate a material impact on its
financial statements from the adoption of FSP No. 106-2. FINANCIAL CONDITION AND LIQUIDITY Overview Major changes in Alabama Powers financial condition during the first six
months of 2004 included the addition of approximately $376 million to utility
plant. The funds for these additions and other capital requirements were
derived primarily from operating activities and net proceeds from security
issuances of $269 million. See Alabama Powers Condensed Statements of Cash
Flows herein for further details. Capital Requirements and Contractual Obligations See MANAGEMENTS DISCUSSION AND
ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY   Capital Requirements and
Contractual Obligations of Alabama Power in Item 7 of the Form 10-K for a
description of Alabama Powers capital requirements for its construction
program, lease obligations, purchase commitments and trust funding
requirements. Approximately $525 million will be required by June 30, 2005 for
maturities of long-term debt. Sources of Capital In addition to the financing activities described below,
Alabama Power plans to obtain the funds required for construction and other
purposes from sources similar to those used in the past. The amount, type and
timing of any financings  if needed  will depend upon maintenance of
adequate earnings, regulatory approval, prevailing market conditions and other
factors. See BUSINESS  Financing Programs in Item 1 of the Form 10-K for
additional information. Alabama Powers current liabilities exceed current assets primarily
because of scheduled maturities of long-term debt. To meet short-term cash
needs and contingencies, at June 30, 2004 Alabama Power had $28 million of cash
and cash equivalents, unused committed lines of credit of approximately $808
million (including $504
million of such lines which are dedicated to funding purchase obligations
relating to variable rate pollution control bonds) and an extendible commercial
note program. These lines of credit will expire at various times during 2004
($165 million), 2005 ($418 million) and 2007 ($225 million). Alabama Power 38




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION expects to renew its credit facilities, as needed, prior to expiration.
Alabama Power may also meet short-term cash needs through a Southern Company
subsidiary organized to issue and sell commercial paper and extendible
commercial notes at the request and for the benefit of Alabama Power and other
Southern Company subsidiaries. Alabama Power has regulatory authority for up
to $1 billion of short-term borrowings. At June 30, 2004, Alabama Power had
$46 million of commercial paper outstanding. Management believes that the need
for working capital can be adequately met by issuing commercial paper or
utilizing lines of credit without maintaining large cash balances. Credit Rating Risk Alabama Power does not have any credit agreements that would require material
changes in payment schedules or terminations as a result of a credit rating
downgrade. There are contracts that could require collateral  but not
accelerated payment  in the event of a credit rating change to below
investment grade. These contracts are primarily for physical electricity
purchases and sales, fixed price physical gas purchases and agreements covering
interest rate swaps. At June 30, 2004, the maximum potential collateral
requirements were approximately $27 million. Generally, collateral may be
provided for by a Southern Company guaranty, letter of credit or cash. Market Price Risk Alabama Powers market risk exposures relative to interest rate changes have
not changed materially compared with the December 31, 2003 reporting period.
In addition, Alabama Power is not aware of any facts or circumstances that
would significantly affect such exposures in the near term. Due to cost-based rate regulations, Alabama Power has limited exposure to
market volatility in interest rates, commodity fuel prices and prices of
electricity. To mitigate residual risks relative to movements in electricity
prices, Alabama Power enters into fixed price contracts for the purchase and
sale of electricity
through the wholesale electricity market and, to a lesser extent, similar
contracts for gas purchases. Alabama Power has also implemented a retail fuel
hedging program at the instruction of the Alabama PSC. The fair value of
derivative energy contracts at June 30, 2004 was as follows: Second Quarter2004
    
    Year-to-DateChanges
    
    ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    17,858
    
    
    $
    6,413Contracts realized or settled
    
    
    (8,593
    )
    
    
    (11,782
    )New contracts at inception
    
    
    
    
    
    
    Changes in valuation techniques
    
    
    
    
    
    
    Current period changes
    
    
    2,282
    
    
    
    16,916Contracts at June 30, 2004
    
    $
    11,547
    
    
    $
    11,547
 39




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Source of June 30, 2004Valuation PricesTotal
    
    MaturityFair Value
    
    Year 1
    
    1-3 Years(in thousands)Actively quoted
    
    $
    11,547
    
    
    $
    10,715
    
    
    $
    832External sources
    
    
    
    
    
    
    
    
    
    
    Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at June 30, 2004
    
    $
    11,547
    
    
    $
    10,715
    
    
    $
    832
 For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS 
FINANCIAL CONDITION AND LIQUIDITY  Market Price Risk of Alabama Power in
Item 7 of the Form 10-K and Notes 1 and 6 to the financial statements of
Alabama Power under Financial Instruments in Item 8 of the Form 10-K and Note
(F) to the Condensed Financial Statements herein. Financing Activities In February 2004, Alabama Power issued 4,000,000 shares ($100 million aggregate
stated capital) of 5.30% Class A Preferred Stock, Cumulative, Par Value $1 Per
Share (Stated Capital $25 Per Share) and $200 million of Series Z 5.125% Senior
Notes due February 15, 2019. The proceeds from these sales were used to repay
a portion of Alabama Powers outstanding short-term indebtedness and for other
general corporate purposes, including Alabama Powers continuous construction
program. In April 2004, Alabama Power issued $150 million of Series AA 5 5/8%
Senior Notes due April 15, 2034 and terminated $150 million of swaps at a gain
of $6 million. The proceeds from the sale were used together with other funds
to redeem, in May 2004, $200 million in aggregate principal amount of the
Series J 6.75% Senior Notes due June 30, 2039. The gain from the terminated
swaps was deferred in Other Comprehensive Income and will be amortized to
income over the life of the Series AA Senior Notes. Subsequent to June 30, 2004, Alabama Power has entered into interest rate
hedging transactions related to the anticipated issuance of senior notes
totaling approximately $125 million. The notes are expected to be issued in
2005. Alabama Power plans to continue, when economically feasible, a program to
retire higher-cost debt and replace these obligations with lower-cost capital
if market conditions permit. 40




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GEORGIA POWER COMPANY 41




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GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Operating Revenues:Retail sales
    
    $
    1,199,220
    
    
    $
    1,041,604
    
    
    $
    2,237,015
    
    
    $
    2,007,311Sales for resale Non-affiliates
    
    
    61,597
    
    
    
    59,452
    
    
    
    127,053
    
    
    
    133,438Affiliates
    
    
    48,950
    
    
    
    46,365
    
    
    
    103,092
    
    
    
    93,851Other revenues
    
    
    43,395
    
    
    
    42,672
    
    
    
    85,391
    
    
    
    81,931Total operating revenues
    
    
    1,353,162
    
    
    
    1,190,093
    
    
    
    2,552,551
    
    
    
    2,316,531Operating Expenses:Fuel
    
    
    324,220
    
    
    
    271,428
    
    
    
    609,434
    
    
    
    513,931Purchased power Non-affiliates
    
    
    97,392
    
    
    
    62,052
    
    
    
    160,081
    
    
    
    134,088Affiliates
    
    
    139,319
    
    
    
    121,605
    
    
    
    274,461
    
    
    
    235,448Other operations
    
    
    220,799
    
    
    
    199,487
    
    
    
    419,192
    
    
    
    385,477Maintenance
    
    
    124,675
    
    
    
    107,628
    
    
    
    233,143
    
    
    
    218,572Depreciation and amortization
    
    
    68,542
    
    
    
    86,003
    
    
    
    136,279
    
    
    
    171,745Taxes other than income taxes
    
    
    56,488
    
    
    
    49,290
    
    
    
    112,920
    
    
    
    102,465Total operating expenses
    
    
    1,031,435
    
    
    
    897,493
    
    
    
    1,945,510
    
    
    
    1,761,726Operating Income
    
    
    321,727
    
    
    
    292,600
    
    
    
    607,041
    
    
    
    554,805Other Income and (Expense):Allowance for equity funds used during construction
    
    
    4,700
    
    
    
    846
    
    
    
    8,047
    
    
    
    3,802Interest income
    
    
    1,768
    
    
    
    14,970
    
    
    
    4,120
    
    
    
    15,085Interest expense, net of amounts capitalized
    
    
    (48,293
    )
    
    
    (47,925
    )
    
    
    (93,943
    )
    
    
    (92,288
    )Interest expense to affiliate trusts
    
    
    (14,810
    )
    
    
    
    
    
    
    (14,810
    )
    
    
    Distributions on mandatorily redeemable preferred securities
    
    
    
    
    
    
    (14,919
    )
    
    
    (15,839
    )
    
    
    (29,838
    )Other income (expense), net
    
    
    (5,613
    )
    
    
    9,353
    
    
    
    (10,008
    )
    
    
    12,265Total other income and (expense)
    
    
    (62,248
    )
    
    
    (37,675
    )
    
    
    (122,433
    )
    
    
    (90,974
    )Earnings Before Income Taxes
    
    
    259,479
    
    
    
    254,925
    
    
    
    484,608
    
    
    
    463,831Income taxes
    
    
    103,597
    
    
    
    96,231
    
    
    
    184,717
    
    
    
    171,699Net Income
    
    
    155,882
    
    
    
    158,694
    
    
    
    299,891
    
    
    
    292,132Dividends on Preferred Stock
    
    
    167
    
    
    
    167
    
    
    
    335
    
    
    
    335Net Income After Dividends on Preferred Stock
    
    $
    155,715
    
    
    $
    158,527
    
    
    $
    299,556
    
    
    $
    291,797
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Net Income After Dividends on Preferred Stock
    
    $
    155,715
    
    
    $
    158,527
    
    
    $
    299,556
    
    
    $
    291,797Other comprehensive income (loss):Changes in fair value of qualifying hedges, net of tax
of $4,590, $(380), $3,710 and $(1,346), respectively
    
    
    7,277
    
    
    
    (1,015
    )
    
    
    5,882
    
    
    
    (2,547
    )Less: Reclassification adjustment for amounts included in net income,
net of tax of $558, $79, $1,237 and $79, respectively
    
    
    884
    
    
    
    134
    
    
    
    1,961
    
    
    
    127COMPREHENSIVE INCOME
    
    $
    163,876
    
    
    $
    157,646
    
    
    $
    307,399
    
    
    $
    289,377
 The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements. 42




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GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six MonthsEnded June 30,2004
    
    2003(in thousands)Operating Activities:Net income
    
    $
    299,891
    
    
    $
    292,132Adjustments to reconcile net income
to net cash provided from operating activities Depreciation and amortization
    
    
    177,927
    
    
    
    220,465Deferred income taxes and investment tax credits, net
    
    
    127,958
    
    
    
    93,581Pension, postretirement, and other employee benefits
    
    
    (11,339
    )
    
    
    (17,271
    )Tax benefit of stock options
    
    
    5,570
    
    
    
    9,590Other, net
    
    
    (18,859
    )
    
    
    7,115Changes in certain current assets and liabilities Receivables, net
    
    
    (146,027
    )
    
    
    33,395Fossil fuel stock
    
    
    (6,309
    )
    
    
    (22,658
    )Materials and supplies
    
    
    (2,680
    )
    
    
    (8,000
    )Other current assets
    
    
    29,779
    
    
    
    31,641Accounts payable
    
    
    63,354
    
    
    
    (72,695
    )Accrued taxes
    
    
    (78,952
    )
    
    
    16,600Accrued compensation
    
    
    (67,828
    )
    
    
    (68,314
    )Other current liabilities
    
    
    25,648
    
    
    
    2,201Net cash provided from operating activities
    
    
    398,133
    
    
    
    517,782Investing Activities:Gross property additions
    
    
    (672,424
    )
    
    
    (370,727
    )Cost of removal net of salvage
    
    
    (14,236
    )
    
    
    (10,786
    )Change in construction payables, net of joint owner portion
    
    
    (23,743
    )
    
    
    (59,455
    )Other
    
    
    10,899
    
    
    
    (2,334
    )Net cash used for investing activities
    
    
    (699,504
    )
    
    
    (443,302
    )Financing Activities:Increase (decrease) in notes payable, net
    
    
    234,749
    
    
    
    (17,633
    )Proceeds Senior notes
    
    
    350,000
    
    
    
    700,000Mandatorily redeemable preferred securities
    
    
    200,000
    
    
    
    Capital contributions from parent company
    
    
    223,000
    
    
    
    158Redemptions Senior notes
    
    
    (200,000
    )
    
    
    (465,000
    )Mandatorily redeemable preferred securities
    
    
    (200,000
    )
    
    
    Payment of common stock dividends
    
    
    (282,750
    )
    
    
    (282,900
    )Other
    
    
    (12,069
    )
    
    
    (15,179
    )Net cash provided from (used for) financing activities
    
    
    312,930
    
    
    
    (80,554
    )Net Change in Cash and Cash Equivalents
    
    
    11,559
    
    
    
    (6,074
    )Cash and Cash Equivalents at Beginning of Period
    
    
    8,699
    
    
    
    16,873Cash and Cash Equivalents at End of Period
    
    $
    20,258
    
    
    $
    10,799Supplemental Cash Flow Information:Cash paid during the period for Interest (net of $2,804 and $2,852 capitalized for 2004 and 2003, respectively)
    
    $
    120,449
    
    
    $
    107,940Income taxes (net of refunds)
    
    $
    35,078
    
    
    $
    (21,958
    )
 The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements. 43




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GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At June 30,
    
    At December 31,Assets
    
    2004
    
    2003(in thousands)Current Assets:Cash and cash equivalents
    
    $
    20,258
    
    
    $
    8,699Receivables Customer accounts receivable
    
    
    300,311
    
    
    
    261,771Unbilled revenues
    
    
    167,852
    
    
    
    117,327Under recovered regulatory clause revenues
    
    
    254,428
    
    
    
    151,447Other accounts and notes receivable
    
    
    77,475
    
    
    
    101,783Affiliated companies
    
    
    30,935
    
    
    
    52,413Accumulated provision for uncollectible accounts
    
    
    (6,025
    )
    
    
    (5,350
    )Fossil fuel stock, at average cost
    
    
    143,846
    
    
    
    137,537Vacation pay
    
    
    54,928
    
    
    
    50,150Materials and supplies, at average cost
    
    
    273,720
    
    
    
    271,040Prepaid expenses
    
    
    10,850
    
    
    
    46,157Other
    
    
    11,010
    
    
    
    83Total current assets
    
    
    1,339,588
    
    
    
    1,193,057Property, Plant, and Equipment:In service
    
    
    18,472,477
    
    
    
    18,171,862Less accumulated provision for depreciation
    
    
    7,068,465
    
    
    
    6,898,72511,404,012
    
    
    
    11,273,137Nuclear fuel, at amortized cost
    
    
    116,191
    
    
    
    129,056Construction work in progress
    
    
    639,952
    
    
    
    341,783Total property, plant, and equipment
    
    
    12,160,155
    
    
    
    11,743,976Other Property and Investments:Equity investments in unconsolidated subsidiaries
    
    
    68,703
    
    
    
    38,714Nuclear decommissioning trusts, at fair value
    
    
    437,441
    
    
    
    423,319Other
    
    
    64,891
    
    
    
    37,142Total other property and investments
    
    
    571,035
    
    
    
    499,175Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    504,470
    
    
    
    509,887Prepaid pension costs
    
    
    426,899
    
    
    
    405,164Unamortized debt issuance expense
    
    
    74,852
    
    
    
    75,245Unamortized loss on reacquired debt
    
    
    182,286
    
    
    
    177,707Other
    
    
    160,596
    
    
    
    177,817Total deferred charges and other assets
    
    
    1,349,103
    
    
    
    1,345,820Total Assets
    
    $
    15,419,881
    
    
    $
    14,782,028
 The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements. 44




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GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At June 30,
    
    At December 31,Liabilities and Stockholders
Equity
    
    2004
    
    2003(in thousands)Current Liabilities:Securities due within one year
    
    $
    302,401
    
    
    $
    2,304Notes payable
    
    
    372,027
    
    
    
    137,277Accounts payable Affiliated
    
    
    154,541
    
    
    
    121,928Other
    
    
    236,621
    
    
    
    238,069Customer deposits
    
    
    109,204
    
    
    
    103,756Accrued taxes Income taxes
    
    
    172,250
    
    
    
    107,532Other
    
    
    104,271
    
    
    
    166,892Accrued interest
    
    
    71,861
    
    
    
    70,844Accrued vacation pay
    
    
    42,749
    
    
    
    38,206Accrued compensation
    
    
    66,176
    
    
    
    134,004Other
    
    
    129,009
    
    
    
    105,234Total current liabilities
    
    
    1,761,110
    
    
    
    1,226,046Long-term Debt
    
    
    3,611,092
    
    
    
    3,762,333Long-term Debt Payable to Affiliated Trusts
    
    
    969,073
    
    
    
    Mandatorily Redeemable Preferred Securities
    
    
    
    
    
    
    940,000Deferred Credits and Other Liabilities:Accumulated deferred income taxes
    
    
    2,358,072
    
    
    
    2,303,085Deferred credits related to income taxes
    
    
    178,986
    
    
    
    186,625Accumulated deferred investment tax credits
    
    
    306,262
    
    
    
    312,506Employee benefit obligations
    
    
    306,543
    
    
    
    295,788Asset retirement obligations
    
    
    490,164
    
    
    
    475,585Other cost of removal obligations
    
    
    405,433
    
    
    
    412,161Miscellaneous regulatory liabilities
    
    
    158,333
    
    
    
    249,687Other
    
    
    66,813
    
    
    
    63,432Total deferred credits and other liabilities
    
    
    4,270,606
    
    
    
    4,298,869Total Liabilities
    
    
    10,611,881
    
    
    
    10,227,248Cumulative Preferred Stock
    
    
    14,569
    
    
    
    14,569Common Stockholders Equity:Common
stock, without par value  Authorized
  15,000,000 sharesOutstanding    7,761,500 shares
    
    
    344,250
    
    
    
    344,250Paid-in capital
    
    
    2,437,069
    
    
    
    2,208,498Premium on preferred stock
    
    
    40
    
    
    
    40Retained earnings
    
    
    2,027,103
    
    
    
    2,010,297Accumulated other comprehensive loss
    
    
    (15,031
    )
    
    
    (22,874
    )Total common stockholders equity
    
    
    4,793,431
    
    
    
    4,540,211Total Liabilities and Stockholders Equity
    
    $
    15,419,881
    
    
    $
    14,782,028
 The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements. 45




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2004 vs. SECOND QUARTER 2003
AND
YEAR-TO-DATE 2004 vs. YEAR-TO-DATE 2003 RESULTS OF OPERATIONS Earnings Georgia Powers net income after dividends on preferred stock for the
second quarter and year-to-date 2004 was $155.7 million and $299.6 million,
respectively, compared to $158.5 million and $291.8 million, respectively, for
the corresponding periods in 2003. Earnings in the second quarter decreased by
$2.8 million, or 1.8%, primarily due to higher non-fuel operating expenses
partially offset by higher retail base revenues when compared to the same
period in 2003. Earnings for year-to-date 2004 increased $7.8 million, or
2.7%, primarily due to higher retail base revenues partially offset by higher
non-fuel operating expenses. Significant income statement items appropriate for discussion include the
following: Increase (Decrease)Second Quarter
    
    Year-To-Date(in thousands)
    
    %
    
    (in thousands)
    
    %Retail sales
    
    $
    157,616
    
    
    
    15.1
    
    
    $
    229,704
    
    
    
    11.4Fuel expense
    
    
    52,792
    
    
    
    19.4
    
    
    
    95,503
    
    
    
    18.6Purchased
power 
non-affiliates
    
    
    35,340
    
    
    
    57.0
    
    
    
    25,993
    
    
    
    19.4Purchased
power  affiliates
    
    
    17,714
    
    
    
    14.6
    
    
    
    39,013
    
    
    
    16.6Other operations
    
    
    21,312
    
    
    
    10.7
    
    
    
    33,715
    
    
    
    8.7Maintenance
    
    
    17,047
    
    
    
    15.8
    
    
    
    14,571
    
    
    
    6.7Depreciation and
amortization
    
    
    (17,461
    )
    
    
    (20.3
    )
    
    
    (35,466
    )
    
    
    (20.7
    )Allowance for funds
used during construction
    
    
    3,854
    
    
    
    N/M
    
    
    
    4,245
    
    
    
    N/MInterest income
    
    
    (13,202
    )
    
    
    (88.2
    )
    
    
    (10,965
    )
    
    
    (72.7
    )Other income (expense),
net
    
    
    (14,966
    )
    
    
    N/M
    
    
    
    (22,273
    )
    
    
    N/M
   N/M Not meaningful Retail sales.Excluding fuel revenues, which generally do not affect net
income, retail sales revenue increased by $70.9 million, or 9.7%, in the second
quarter 2004 compared to the corresponding period in 2003. In the second
quarter 2004, kilowatt-hour energy sales to residential, commercial and
industrial customers increased by 13.2%, 6.2% and 3.4%, respectively, when
compared to the same period in 2003. Year-to-date 2004 base retail sales
revenue increased by $102.8 million, or 7.3%, compared to the corresponding
period in 2003. Year-to-date kilowatt-hour energy sales to residential,
commercial and industrial customers increased by 9.1%, 5.1% and 2.8%,
respectively, when compared to the same period in 2003. These increases in the
retail sectors during the second quarter and year-to-date 2004 are mainly due
to customer growth of 2%, more favorable weather, and an improving economy when
compared to the same periods in 2003. 46




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Fuel expense.
During the second quarter and year-to-date 2004, fuel
expense was higher due to increases of 14.0% and 14.1%, respectively, in the
average cost of fuel and increases of 1.7% and 1.8%, respectively, in
generation due to increased retail sales. These expenses do not have a
significant impact on earnings since fuel expenses are generally offset by fuel
revenues through Georgia Powers fuel cost recovery clause. See Future
Earnings Potential  FERC and Georgia PSC Matters  Retail Fuel Cost Recovery
herein for additional information. Purchased
power  non-affiliates.The second quarter and year-to-date
2004 increases in purchased power from non-affiliates are primarily due to
fluctuations in off-system energy purchases used to meet off-system sales
commitments. These expenses do not have a significant impact on earnings since
energy expenses are generally offset by energy revenues through Georgia Powers
fuel cost recovery clause. Purchased power  affiliates. Purchased power from
affiliates increased in the second quarter and year-to-date 2004 when compared
to the corresponding periods in 2003 due to a PPA between Georgia Power and
Southern Power that began in June 2003. The capacity component of these
transactions increased $15.6 million and $25.8 million in the second quarter
and year-to-date 2004, respectively, over the same periods in 2003. The energy
component of power purchased from affiliated companies within the Southern
Company system will vary depending on demand and the availability and cost of
generating resources at each company and will have no significant impact on
earnings since energy expenses are generally offset by energy revenues through
Georgia Powers fuel cost recovery clause. Other operations expense.Other operations expense in the second quarter
and year-to-date 2004 was higher when compared to the same periods in 2003 due
to increased administrative and general expenses of $8.0 million and $13.8
million, respectively, related to increased employee benefit expenses and $3.2
million in workers compensation expenses for year-to-date 2004. Maintenance expense. Maintenance expense was higher in the second quarter
and year-to-date 2004 when compared to the same periods in 2003 due to the
timing of scheduled generating plant maintenance of $8.7 million and $4.2
million, respectively, and scheduled transmission and distribution maintenance
of $10.2 million and $13.2 million, respectively. Depreciation and amortization.In the second quarter and year-to-date
2004, depreciation and amortization expense was lower compared to the
corresponding periods in 2003. These decreases were caused primarily by lower
regulatory charges needed to levelize purchased power capacity costs under the
terms of the retail rate order effective January 1, 2002. These decreases were
offset by increases in affiliated purchased power costs discussed above. See
Note 1 to the financial statements of Georgia Power under Depreciation and
Amortization in Item 8 of the Form 10-K for additional information. Allowance for equity funds used during construction. The second quarter
and year-to-date 2004 increases result primarily from the acquisition of the
McIntosh combined cycle units 10 and 11 construction project from Southern
Power. See FERC Matters herein and Note (J) to the Condensed Financial
Statements herein for additional information. Interest income. The second quarter and year-to-date 2004 decreases result
from $14.5 million of interest on a favorable tax settlement received in the
second quarter of 2003. 47




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION Other income (expense), net.The second quarter and year-to-date
2004 decreases in other income (expense), net reflect decreased rental income of $4.0
million and $2.5 million, respectively, as well as the impact of the ESOP
contribution in June 2004 of $3.4 million when compared to the same periods in
2003. The year-to-date 2004 decrease in other income (expense), net also
reflects a $5.0 million decrease related to the 2003 favorable resolution of a
loss contingency. Future Earnings Potential The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including Georgia Powers ability to maintain a stable regulatory
environment, to achieve energy sales growth while containing costs, and to
recover costs related to growing demand and increasingly stricter environmental
standards. Growth in energy sales is subject to a number of factors, which
include weather, competition, new energy contracts with neighboring utilities,
energy conservation practiced by customers, the price of electricity, the price
elasticity of demand, and the rate of economic growth in the service area. For
additional information relating to these issues, see BUSINESS  The SOUTHERN
System  Risk Factors in Item 1 and MANAGEMENTS DISCUSSION AND ANALYSIS 
RESULTS OF OPERATIONS  Future Earnings Potential of Georgia Power in Item 7
of the Form 10-K. Environmental Matters New Source Review Actions and
Plant Wansley Environmental Litigation Compliance costs related to the Clean Air Act and other environmental
regulations could affect earnings if such costs cannot be recovered. For
additional information, including information on certain environmental
litigation, see MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS -
Future Earnings Potential  Environmental Matters of Georgia Power in Item 7 and Note 3 to the
financial statements of Georgia Power under New Source Review Actions and Plant Wansley
Environmental Litigation in Item
8 of the Form 10-K. As of March 15, 2004, civil penalties under the Clean Air
Act were increased prospectively to a maximum of $32,500 per day, per
violation. To the extent alleged violations under either the New Source Review
litigation or Plant Wansley environmental litigation are deemed to be
continuing, this increased civil penalty amount could apply to such violations
found to continue after that date. On May 3, 2004, the U.S. Supreme Court denied the EPAs petition to review
the Eleventh Circuit Court of Appeals decision in the EPAs similar New Source
Review enforcement action against the TVA. The case against Georgia Power had
been effectively stayed pending final resolution of the TVA case. With the
denial of the EPAs petition for review, the Court of Appeals decision became
final. At this time, no party to the case against Georgia Power has sought to
reopen the case, which remains administratively closed in the District Court
for the Northern District of Georgia. On June 10, 2004, the U.S. District Court for the Northern District of
Georgia granted Georgia Powers motion in the Plant Wansley environmental
litigation for partial summary judgment regarding emissions offsets. The case
has been removed from the courts trial calendar due to pending motions for
summary judgment, and a new trial date has not been scheduled. An adverse
outcome in either of these cases could require substantial capital expenditures
that cannot be determined at this time and could possibly require payment of
substantial
penalties. This could affect future results of operations, cash flows and
possibly financial condition if such costs are not recovered through regulated
rates. 48




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION Global Warming
Litigation On July 21, 2004, attorneys general from eight states, each outside of Southern
Companys service territory, and the corporation counsel for New York City
filed a complaint in U.S. District Court for the Southern District of New York
against Southern Company and four other electric power companies. A nearly
identical complaint was filed by three environmental groups in the same court.
The complaints allege that the companies emissions of carbon dioxide, a
greenhouse gas, contribute to global warming, which the plaintiffs assert is a
public nuisance. Plaintiffs seek relief under the federal common law or, in the
alternative, under state law, of public nuisance. The environmental groups
also seek relief under common law private nuisance theories. The plaintiffs
seek a judicial order (1) holding each defendant jointly and severally liable
for creating, contributing to, and/or maintaining an ongoing public nuisance,
global warming and (2) permanently enjoining each of the defendants to abate
its contribution to the nuisance by capping its emissions of carbon dioxide and
then reducing those emissions by a specified percentage each year for at least
a decade. Plaintiffs have not, however, requested that damages be awarded in
connection with their claims. Southern Company believes these claims are
without merit and notes that the complaint cites no statutory or regulatory
basis for the claims. Southern Company has not yet responded to the suits;
however, it intends to vigorously defend against these claims. While the
outcome cannot be determined at this time, an adverse judgment could result in
substantial capital expenditures. Other Environmental
Matters On April 30, 2004, the EPA published its eight-hour ozone nonattainment
designations and a portion of the rules implementing the new eight-hour
standard. Areas within Georgia Powers service area that have been designated
as nonattainment under the eight-hour ozone standard include Macon (Georgia)
and a 20-county area within metropolitan Atlanta. Under the implementation
provisions of the new rule, the EPA announced that the one-hour ozone standard
will be revoked on June 15, 2005. Areas classified as severe nonattainment
areas under the one-hour standard will not be required to impose emissions fees
as a result of nonattainment. Georgia Power, therefore, will no longer be
subject to imposition of emissions fees if the Atlanta area does not come into
attainment with the one-hour standard. The impact of the eight-hour
designations and the new standards will depend on the development and
implementation of applicable state regulations and therefore cannot be
determined at this time. In June 2004, the EPA issued its recommendations for areas to be
designated nonattainment for the fine particle national ambient air quality
standard. Areas within Georgia Powers service area that were included in the
EPAs proposed fine particulate matter designations include 24 counties in the
metro-Atlanta area; counties surrounding Macon, Athens and Columbus, Georgia;
and counties in Georgia near Chattanooga, Tennessee.
Georgia Power owns several plants located within the counties proposed for the
nonattainment designations. The EPA plans to make final nonattainment
designations for fine particulate matter by the end of 2004. On April 21, 2004, the EPA published the final regional nitrogen oxide
reduction rules applicable to Georgia. These rules specify that the State of
Georgia must submit a revised state implementation plan by April 2005, and
affected sources must comply with the reduction requirements by May 1, 2007.
The impact of these regulations
will depend on the development and approval of Georgias state implementation
plan and cannot be determined at this time. 49




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION Additionally, on May 5, 2004, the EPA published proposed amendments to its
Regional Haze rules with respect to Best Available Retrofit Technology
guidelines and requirements. The impact of these regulations will depend on the
development and implementation of the final rules and implementation by the
states, and therefore cannot be determined at this time. FERC and Georgia PSC Matters Market-Based Rate
Authority See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  FERC Matters  Market-Based Rate Authority of Georgia
Power in Item 7 and Note 3 to the financial statements of Georgia Power under
FERC Matters in Item 8 of the Form 10-K. On April 14, 2004, the FERC issued
an order that abandoned the SMA test and adopted a new interim analysis for
measuring generation market power. This new interim approach includes a
pivotal supplier analysis and a wholesale market share analysis, the results of
which provide a rebuttable presumption regarding generation market power. The
FERCs order also sets forth procedures for rebutting these presumptions and
addresses mitigation measures for those entities that are found to have market
power. In the absence of specific mitigation measures, the order includes
several cost-based mitigation measures that would apply by default. The FERC
also initiated a new rulemaking proceeding that, among other things, will adopt
a final methodology for assessing generation market power. Southern Company,
the retail operating companies, including Georgia Power, and Southern Power
believe that it may be difficult for a traditional utility company, or an
affiliate thereof, with a significant load service obligation and generation to
satisfy that obligation, and that is not a member of a large, FERC-approved
RTO, to pass all aspects of the market power screens as currently designed.
However, each of the companies believes that it has an appropriate basis to
rebut the generation market power presumption. On July 8, 2004, the FERC denied Southern Companys request for rehearing,
along with a number of others, and reaffirmed the interim tests that it adopted
in April. Southern Company will submit the required analyses by August 9, 2004.
In the event that the FERCs default mitigation measures are ultimately
applied, Southern Power and the retail operating companies may be required to
charge cost-based rates, which may be lower than negotiated market-based rates.
The final outcome of this matter will depend on the form in which the final
methodology for assessing generation market power and mitigation rules may be
ultimately adopted and cannot be determined at this time. Transmission See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  FERC Matters  Transmission of Georgia Power in Item 7 of
the Form 10-K for information on the FERCs order related to RTOs and the
FERCs notice of proposed rulemaking regarding open access transmission service
and standard electricity market design. Plant McIntosh
Construction Project See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATION  Future
Earnings Potential  FERC Matters of Georgia Power in Item 7 and Note 3 to the
financial statements of Georgia Power
under FERC Matters in Item 8 of the Form 10-K for information regarding PPAs
between Southern Power and Savannah Electric and Georgia Power for Plant
McIntosh capacity. In April 2003, Southern Power applied for
FERC approval of these PPAs. In July 2003, the FERC accepted the PPAs to
become effective June 1, 2005, subject to refund and ordered that hearings be
held. To ensure the timely completion of 50




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION construction on McIntosh units 10 and 11 and their availability in the summer
of 2005 as supply side resources for the retail customers in the State of
Georgia, on May 7, 2004, Savannah Electric and Georgia Power requested the
Georgia PSC to direct them to acquire the McIntosh construction project.
Savannah Electric and Georgia Power proposed to place the units in rate base at
a cost approved by the Georgia PSC and to recover the unit operation and
maintenance costs as retail service expenses as may be approved by the Georgia
PSC. The Georgia PSC issued such an order on May 18, 2004 and the transfer
occurred on May 24, 2004. On May 20, 2004, Southern Power
filed a request to withdraw the PPAs and to terminate the ongoing
FERC proceedings. On August 4, 2004, the FERC issued a notice
that it allowed the request to withdraw the PPAs to be accepted and
to become effective by operation of law on July 20, 2004.
However, the FERC made no determination on what additional steps may
need to be taken with respect to testimony provided in the proceedings. The
ultimate outcome of this matter cannot now be determined. The May 18, 2004 Georgia PSC order also directed Georgia Power and
Savannah Electric to file an application within 10 days of completing such
purchase to amend the resource certificate granted by the Georgia PSC in 2002
to describe the capacity resource as being the McIntosh units 10 and 11 (as
opposed to the McIntosh PPAs), the approximate construction schedule (which is
not expected to change) and the proposed rate base treatment. The application
was filed on June 3, 2004 and the Georgia PSC will have 180 days to respond.
The Georgia PSC is expected to review the application in accordance with its
affiliate transaction guidelines, which require a lower of cost or market
approach unless otherwise determined by the Georgia PSC. Georgia Power and
Savannah Electric have submitted information showing that the book cost of the
McIntosh construction project is lower than its market value. However, full
recovery of the project costs depends on the outcome of the Georgia PSCs
review. In the event the Georgia PSC does not allow full recovery of the
project costs, then part of such costs may have to be written off in accordance
with FASB Statement No. 90, Accounting for Abandonments and Disallowed Plant
Costs. At June 30, 2004, the investment in the McIntosh construction project
totaled approximately $353.2 million for Georgia Power. The ultimate outcome of
the Georgia PSCs review cannot now be determined. Retail Rate Case On July 1, 2004, Georgia Power filed a request with the Georgia PSC for an
approximate 7 percent increase in retail revenues, effective January 1, 2005.
The requested increase is based on a future test year ending July 31, 2005 and
a proposed retail return on common equity of 12.5 percent. Georgia Power is
currently operating under a three-year retail rate order that expires December
31, 2004. Under the terms of the existing order, earnings are evaluated
annually against a retail return on common equity range of 10 percent to 12.95
percent. Two-thirds of any earnings above the 12.95 percent return are applied
to rate refunds, with the remaining one-third retained by Georgia Power. The
order required Georgia Power to file a general rate case by July 1, 2004. The increase in retail revenues is being requested to cover the higher
costs of purchased power; operating and maintenance expenses; environmental
compliance; and continued investment in new generation, transmission and
distribution facilities to support growth and ensure reliability. Georgia Power
expects the Georgia PSC to issue a final order in this matter during December
2004. The final outcome of this matter cannot now be determined. See
MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future Earnings
Potential  Other Matters of Georgia Power in Item 7 and Note 3 to the
financial statements of Georgia Power under Retail Rate Orders in Item 8 of
the Form 10-K and Note (I) to the Condensed Financial Statements herein for
additional information. 51




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION Retail Fuel Cost
Recovery In August 2003, the Georgia PSC issued an order allowing Georgia Power to
increase customer fuel rates to collect existing under recovered fuel costs
over the period October 1, 2003 through March 31, 2005. Georgia Power has
experienced higher than expected fuel costs since the order was issued. Those
higher fuel costs have increased the under recovered fuel costs included in the
Condensed Balance Sheets herein. Georgia Power will continue to monitor the
under recovered fuel cost balance in light of these higher fuel costs. See Note
3 to the financial statements of Georgia Power under Fuel Cost Recovery in
Item 8 of the Form 10-K for additional information. Other Matters See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATION  Future
Earnings Potential  Other Matters of Georgia Power in Item 7 of the Form 10-K
for information on nuclear security measures. Implementation plans for the
measures ordered by the NRC to be in effect by October 29, 2004 have been
finalized based on current interpretations of the requirements. Georgia Power,
based on its ownership interest, currently estimates its expenditures related
to these security measures will total $9.3 million, of which 1.3 million will
be capitalized. These estimates are subject to change in the event additional
NRC guidance is provided. Georgia Power is subject to certain claims and legal actions arising in
the ordinary course of business. In addition, Georgia Powers business
activities are subject to extensive governmental regulation related to public
health and the environment. Litigation over environmental issues and claims of
various types, including property damage, personal injury and citizen
enforcement of environmental requirements, has increased generally throughout
the United States. In particular, personal injury claims for damages caused by
alleged exposure to hazardous materials have become more frequent. The ultimate
outcome of such litigation against Georgia Power cannot be predicted at this
time; however, management does not anticipate that the liabilities, if any,
arising from such current proceedings would have a material adverse effect on
Georgia Powers financial statements. See the Notes to the Condensed Financial Statements herein for discussion
of various contingencies and other matters which may affect future earnings
potential. ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates Georgia Power prepares its financial statements in accordance with accounting
principles generally accepted in the United States. Significant accounting
policies are described in Note 1 to the financial statements of Georgia Power
in Item 8 of the Form 10-K. In the application of these policies, certain
estimates are made that may have a material impact on Georgia Powers results
of operations and related disclosures. Different assumptions and measurements
could produce estimates that are significantly different from those recorded in
the financial statements. See MANAGEMENTS DISCUSSION AND ANALYSIS 
ACCOUNTING POLICIES  Application of Critical Accounting Policies and
Estimates of Georgia Power in Item 7 of the Form 10-K for a
complete discussion of Georgia Powers critical accounting policies and
estimates related to Electric Utility Regulation and Contingent Obligations. 52




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION New Accounting Standards On March 31, 2004, Georgia Power prospectively adopted FASB Interpretation No.
46R, Consolidation of Variable Interest Entities, which requires the primary
beneficiary of a variable interest entity to consolidate the related assets and
liabilities. The adoption of FASB Interpretation No. 46R had no impact on
Georgia Powers net income. However, as a result of the adoption, Georgia
Power deconsolidated certain wholly-owned trusts established to issue preferred
securities since Georgia Power does not meet the definition of primary
beneficiary established by FASB Interpretation No. 46R. See Note (D) to the
Condensed Financial Statements herein for additional information related to the
adoption of FASB Interpretation No. 46R. In May 2004, the FASB approved Staff Position (FSP) No. 106-2, Accounting
and Disclosure Requirements related to the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (the Medicare Act). FSP No.
106-2 requires recognition of the impacts of the Medicare Act in the
accumulated post-retirement benefit obligation and future cost of service for
post-retirement medical plans and may be applied retroactively to the enactment
of the Medicare Act in December 2003 or prospectively effective for the third
quarter 2004. Georgia Power has elected to apply this treatment prospectively.
Pending the finalization of federal regulations governing the subsidy effected
in the Medicare Act, Georgia Power does not anticipate a material impact on its
financial statements from the adoption of FSP No. 106-2. FINANCIAL CONDITION AND LIQUIDITY Overview Major changes in Georgia Powers
financial condition during the first six months of 2004 included the addition
of approximately $672.4 million to utility plant. The funds for these
additions and other capital requirements were derived primarily from operating
activities, short-term borrowings and equity funds from Southern Company. See
Georgia Powers Condensed Statements of Cash Flows herein for further details. Capital Requirements and Contractual Obligations See MANAGEMENTS DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY 
Capital Requirements and Contractual Obligations of Georgia Power in Item 7
of the Form 10-K for a description of Georgia Powers capital requirements for
its construction program, lease obligations, purchase commitments and trust
funding requirements. Approximately $302 million will be required by June 30,
2005 for redemptions and maturities of long-term debt. The purchase of the
McIntosh construction project is expected to temporarily increase short-term
borrowings under the commercial paper program. The temporary increase will be
replaced with additional long-term debt. The projected construction program
will increase by $437.8 million and $27.4 million in 2004 and 2005,
respectively, for the Plant McIntosh combined cycle construction project and
the projected purchased power commitments will decrease by $133.2 million in
2005-2006, $147.5 million in 2007-2008 and $885.2 million beyond 2008 as a
result of the purchase of the construction project. Sources of Capital Georgia Power plans to obtain the funds required for construction and other
purposes from sources similar to those used in the past, including funds from
operations and new security issuances. The amount, type and timing of
additional security issuances  if needed  will depend upon maintenance of
adequate earnings, regulatory approval, prevailing market conditions and other
factors. See BUSINESS  Financing Programs in Item 1 of the Form 10-K for
additional information. 53




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION Georgia Powers current liabilities exceed current assets because of the
continued use of short-term debt as a funding source to meet cash needs, which
can fluctuate significantly due to the seasonality of the business. To meet
short-term cash needs and contingencies, Georgia Power had at June 30, 2004
approximately $20.3 million of cash and cash equivalents and $773 million of
unused credit arrangements with banks. Of these facilities, $423 million expire
in 2005 and contain provisions allowing two-year term loans executable at
expiration; with the remaining $350 million expiring in 2007. The credit
arrangements provide liquidity support to Georgia Powers obligations with
respect to variable rate pollution control bonds and commercial paper. Georgia
Power expects to renew its credit facilities, as needed, prior to expiration.
Georgia Power may also meet short-term cash needs through a Southern Company
subsidiary organized to issue and sell commercial paper and extendible
commercial notes at the request and for the benefit of Georgia Power and other
Southern Company subsidiaries. At June 30, 2004, Georgia Power had $372
million of commercial paper outstanding. Management believes that the need for
working capital can be adequately met by utilizing commercial paper programs
and lines of credit without maintaining large cash balances. Credit Rating Risk Georgia Power does not have any credit agreements that would require material
changes in payment schedules or terminations as a result of a credit rating
downgrade. There are contracts that could require collateral  but not
accelerated payment  in the event of a credit rating change to below
investment grade. These contracts are primarily for physical electricity
purchases and sales, fixed-price physical gas purchases and agreements covering
interest rate swaps. At June 30, 2004, the maximum potential collateral
requirements were approximately $226 million. Generally, collateral may be
provided for by a Southern Company guaranty, letter of credit or cash. Market Price Risk Georgia Powers market risk exposures relative to interest
rate changes have not changed materially compared with the December 31, 2003
reporting period. In addition, Georgia Power is not aware of any facts or
circumstances that would significantly affect such exposures in the near term. Due to cost-based rate regulations, Georgia Power has limited exposure to
market volatility in interest rates, commodity fuel prices and prices of
electricity. To mitigate residual risks relative to movements in electricity
prices, Georgia Power enters into fixed price contracts for the purchase and
sale of electricity through the wholesale electricity market and, to a lesser
extent, similar contracts for gas purchases. Georgia Power has also
implemented a retail fuel hedging program at the instruction of the Georgia
PSC. The fair value of derivative energy contracts at June 30, 2004 was as
follows: Second Quarter2004
    
    Year-to-DateChanges
    
    ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    10,533
    
    
    $
    3,155Contracts realized or settled
    
    
    (4,680
    )
    
    
    (4,778
    )New contracts at inception
    
    
    
    
    
    
    Changes in valuation techniques
    
    
    
    
    
    
    Current period changes
    
    
    2,102
    
    
    
    9,578Contracts at June 30, 2004
    
    $
    7,955
    
    
    $
    7,955
 54




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION Source of June 30, 2004Valuation PricesTotal
    
    MaturityFair Value
    
    Year 1
    
    1-3 Years(in thousands)Actively quoted
    
    $
    7,955
    
    
    $
    6,136
    
    
    $
    1,819External sources
    
    
    
    
    
    
    
    
    
    
    Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at June 30, 2004
    
    $
    7,955
    
    
    $
    6,136
    
    
    $
    1,819
 For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS 
FINANCIAL CONDITION AND LIQUIDITY   Market Price Risk of Georgia Power in
Item 7 and Notes 1 and 6 to the financial statements of Georgia Power under
Financial Instruments in Item 8 of the Form 10-K and Note (F) to the
Condensed Financial Statements herein. Financing Activities In January 2004, Georgia Power issued $100 million of
Series S 4.00% Senior Notes due January 15, 2011 and $100 million of Series T
5.75% Senior Public Income Notes due January 15, 2044. The proceeds from these
sales were used in March 2004 to redeem all of its outstanding Series H 6.70%
Senior Insured Quarterly Notes due March 1, 2011 and Series D 6 5/8% Senior
Notes due March 31, 2039. In February 2004, Georgia Power issued $150 million
of Series U Floating Rate Senior Notes due February 17, 2009. The proceeds of
this sale were used for general corporate purposes. Further in January 2004, Georgia Power Capital Trust VII, a statutory
trust, sold $200 million of its 5 7/8% Trust Preferred Securities, which are
guaranteed by Georgia Power. The net proceeds from this issuance were used to
redeem the 6.85% Trust Preferred Securities of Georgia Power Capital Trust IV.
In connection with this transaction, Georgia Power issued $206 million of its
junior subordinated debentures to Georgia Power Capital Trust VII. Georgia Power plans to continue, when economically feasible, a program to
retire higher-cost securities and replace these obligations with lower-cost
capital if market conditions permit. 55




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GULF POWER COMPANY 56




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GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Operating Revenues:Retail sales
    
    $
    191,189
    
    
    $
    175,669
    
    
    $
    356,273
    
    
    $
    335,462Sales for resale Non-affiliates
    
    
    18,470
    
    
    
    17,908
    
    
    
    37,958
    
    
    
    36,633Affiliates
    
    
    21,964
    
    
    
    12,414
    
    
    
    42,659
    
    
    
    22,631Other revenues
    
    
    9,547
    
    
    
    9,218
    
    
    
    19,199
    
    
    
    18,321Total operating revenues
    
    
    241,170
    
    
    
    215,209
    
    
    
    456,089
    
    
    
    413,047Operating Expenses:Fuel
    
    
    90,778
    
    
    
    77,798
    
    
    
    169,194
    
    
    
    141,065Purchased power Non-affiliates
    
    
    11,724
    
    
    
    3,929
    
    
    
    18,157
    
    
    
    9,885Affiliates
    
    
    7,843
    
    
    
    5,079
    
    
    
    15,271
    
    
    
    17,666Other operations
    
    
    36,430
    
    
    
    33,426
    
    
    
    69,448
    
    
    
    63,437Maintenance
    
    
    16,773
    
    
    
    17,257
    
    
    
    32,979
    
    
    
    33,837Depreciation and amortization
    
    
    20,722
    
    
    
    20,324
    
    
    
    41,274
    
    
    
    40,576Taxes other than income taxes
    
    
    17,076
    
    
    
    16,728
    
    
    
    34,139
    
    
    
    33,116Total operating expenses
    
    
    201,346
    
    
    
    174,541
    
    
    
    380,462
    
    
    
    339,582Operating Income
    
    
    39,824
    
    
    
    40,668
    
    
    
    75,627
    
    
    
    73,465Other Income and (Expense):Interest expense, net of amounts capitalized
    
    
    (8,138
    )
    
    
    (8,252
    )
    
    
    (16,032
    )
    
    
    (16,307
    )Interest expense to affiliate trusts
    
    
    (1,147
    )
    
    
    
    
    
    
    (1,147
    )
    
    
    Distributions on mandatorily redeemable
preferred securities
    
    
    
    
    
    
    (1,894
    )
    
    
    (1,113
    )
    
    
    (3,922
    )Other income (expense), net
    
    
    (91
    )
    
    
    (256
    )
    
    
    (73
    )
    
    
    (679
    )Total other income and (expense)
    
    
    (9,376
    )
    
    
    (10,402
    )
    
    
    (18,365
    )
    
    
    (20,908
    )Earnings Before Income Taxes
    
    
    30,448
    
    
    
    30,266
    
    
    
    57,262
    
    
    
    52,557Income taxes
    
    
    11,392
    
    
    
    11,427
    
    
    
    21,313
    
    
    
    19,692Net Income
    
    
    19,056
    
    
    
    18,839
    
    
    
    35,949
    
    
    
    32,865Dividends on Preferred Stock
    
    
    54
    
    
    
    54
    
    
    
    108
    
    
    
    108Net Income After Dividends on Preferred Stock
    
    $
    19,002
    
    
    $
    18,785
    
    
    $
    35,841
    
    
    $
    32,757
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Net Income After Dividends on Preferred Stock
    
    $
    19,002
    
    
    $
    18,785
    
    
    $
    35,841
    
    
    $
    32,757Other comprehensive income (loss):Change in fair value of marketable securities, net of tax
of $40 and $40, respectively
    
    
    63
    
    
    
    
    
    
    
    63
    
    
    
    Changes in fair value of qualifying hedges, net of tax
of $(1,426) and $(1,426), respectively
    
    
    
    
    
    
    (2,270
    )
    
    
    
    
    
    
    (2,270
    )Less: Reclassification adjustment for amounts included in net income,
net of tax of $31 and $62, respectively
    
    
    51
    
    
    
    
    
    
    
    101
    
    
    
    COMPREHENSIVE INCOME
    
    $
    19,116
    
    
    $
    16,515
    
    
    $
    36,005
    
    
    $
    30,487
 The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements. 57




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GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six MonthsEnded June 30,2004
    
    2003(in thousands)Operating Activities:Net income
    
    $
    35,949
    
    
    $
    32,865Adjustments to reconcile net income
to net cash provided from operating activities Depreciation and amortization
    
    
    44,278
    
    
    
    43,382Deferred income taxes
    
    
    4,097
    
    
    
    (112
    )Pension, postretirement, and other employee benefits
    
    
    425
    
    
    
    3,808Tax benefit of stock options
    
    
    988
    
    
    
    1,596Other, net
    
    
    (1,880
    )
    
    
    (3,025
    )Changes in certain current assets and liabilities Receivables, net
    
    
    (7,591
    )
    
    
    (7,598
    )Fossil fuel stock
    
    
    (6,235
    )
    
    
    (2,822
    )Materials and supplies
    
    
    781
    
    
    
    (2,797
    )Other current assets
    
    
    338
    
    
    
    24,945Accounts payable
    
    
    6,155
    
    
    
    (13,390
    )Accrued taxes
    
    
    17,684
    
    
    
    4,297Accrued compensation
    
    
    (3,457
    )
    
    
    (6,323
    )Other current liabilities
    
    
    6,602
    
    
    
    14,065Net cash provided from operating activities
    
    
    98,134
    
    
    
    88,891Investing Activities:Gross property additions
    
    
    (66,828
    )
    
    
    (40,654
    )Cost of removal net of salvage
    
    
    (3,935
    )
    
    
    (4,842
    )Investment in property damage fund
    
    
    (6,700
    )
    
    
    (1,100
    )Other
    
    
    (1,103
    )
    
    
    (5,552
    )Net cash used for investing activities
    
    
    (78,566
    )
    
    
    (52,148
    )Financing Activities:Increase (decrease) in notes payable, net
    
    
    (32,671
    )
    
    
    23,227Proceeds Pollution control bonds
    
    
    
    
    
    
    61,625Senior notes
    
    
    35,000
    
    
    
    65,000Capital contributions from parent company
    
    
    25,000
    
    
    
    10,016Redemptions Pollution control bonds
    
    
    
    
    
    
    (61,625
    )Senior notes
    
    
    
    
    
    
    (45,037
    )Other long-term debt
    
    
    
    
    
    
    (20,000
    )Mandatorily redeemable preferred securities
    
    
    
    
    
    
    (40,000
    )Payment of preferred stock dividends
    
    
    (108
    )
    
    
    (108
    )Payment of common stock dividends
    
    
    (35,000
    )
    
    
    (35,100
    )Other
    
    
    (1,509
    )
    
    
    (4,504
    )Net cash used for financing activities
    
    
    (9,288
    )
    
    
    (46,506
    )Net Change in Cash and Cash Equivalents
    
    
    10,280
    
    
    
    (9,763
    )Cash and Cash Equivalents at Beginning of Period
    
    
    2,548
    
    
    
    13,278Cash and Cash Equivalents at End of Period
    
    $
    12,828
    
    
    $
    3,515Supplemental Cash Flow Information:Cash paid during the period for Interest (net of $385 and $66 capitalized for 2004 and 2003, respectively)
    
    $
    15,652
    
    
    $
    18,525Income taxes (net of refunds)
    
    $
    5,008
    
    
    
    $(5,393
    )
 The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements. 58




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GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At June 30,
    
    At December 31,Assets
    
    2004
    
    2003(in thousands)Current Assets:Cash and cash equivalents
    
    $
    12,828
    
    
    $
    2,548Receivables Customer accounts receivable
    
    
    50,852
    
    
    
    44,001Unbilled revenues
    
    
    39,013
    
    
    
    31,548Under recovered regulatory clause revenues
    
    
    22,177
    
    
    
    21,812Other accounts and notes receivable
    
    
    4,166
    
    
    
    6,179Affiliated companies
    
    
    4,832
    
    
    
    9,826Accumulated provision for uncollectible accounts
    
    
    (1,030
    )
    
    
    (947
    )Fossil fuel stock, at average cost
    
    
    41,589
    
    
    
    35,354Vacation pay
    
    
    5,254
    
    
    
    5,254Materials and supplies, at average cost
    
    
    35,149
    
    
    
    35,930Prepaid expenses
    
    
    4,211
    
    
    
    6,310Other
    
    
    6,248
    
    
    
    4,985Total current assets
    
    
    225,289
    
    
    
    202,800Property, Plant, and Equipment:In service
    
    
    2,338,654
    
    
    
    2,306,959Less accumulated provision for depreciation
    
    
    843,611
    
    
    
    847,5191,495,043
    
    
    
    1,459,440Construction work in progress
    
    
    44,664
    
    
    
    49,438Total property, plant, and equipment
    
    
    1,539,707
    
    
    
    1,508,878Other Property and Investments
    
    
    21,708
    
    
    
    12,597Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    18,468
    
    
    
    18,263Prepaid pension costs
    
    
    43,604
    
    
    
    42,014Unamortized debt issuance expense
    
    
    6,830
    
    
    
    6,877Unamortized premium on reacquired debt
    
    
    18,535
    
    
    
    19,389Other
    
    
    31,646
    
    
    
    28,235Total deferred charges and other assets
    
    
    119,083
    
    
    
    114,778Total Assets
    
    $
    1,905,787
    
    
    $
    1,839,053
 The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements. 59




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GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At June 30,
    
    At December 31,Liabilities and Stockholders
Equity
    
    2004
    
    2003(in thousands)Current
Liabilities:Securities due within one year
    
    $
    50,000
    
    
    $
    50,000Notes payable
    
    
    4,995
    
    
    
    37,666Accounts payable Affiliated
    
    
    33,452
    
    
    
    26,945Other
    
    
    19,959
    
    
    
    21,952Customer deposits
    
    
    19,150
    
    
    
    18,271Accrued taxes Income taxes
    
    
    16,003
    
    
    
    6,405Other
    
    
    15,089
    
    
    
    8,621Accrued interest
    
    
    8,435
    
    
    
    8,077Accrued vacation pay
    
    
    5,254
    
    
    
    5,254Accrued compensation
    
    
    9,999
    
    
    
    13,456Other
    
    
    15,664
    
    
    
    9,694Total current liabilities
    
    
    198,000
    
    
    
    206,341Long-term Debt
    
    
    549,969
    
    
    
    515,827Long-term Debt Payable to Affiliated Trusts
    
    
    72,166
    
    
    
    Mandatorily Redeemable Preferred Securities
    
    
    
    
    
    
    70,000Deferred Credits and Other Liabilities:Accumulated deferred income taxes
    
    
    183,166
    
    
    
    175,685Deferred credits related to income taxes
    
    
    25,086
    
    
    
    26,545Accumulated deferred investment tax credits
    
    
    19,470
    
    
    
    20,451Employee benefit obligations
    
    
    54,410
    
    
    
    52,395Other cost of removal obligations
    
    
    156,111
    
    
    
    151,229Miscellaneous regulatory liabilities
    
    
    29,070
    
    
    
    27,903Other
    
    
    25,752
    
    
    
    27,083Total deferred credits and other liabilities
    
    
    493,065
    
    
    
    481,291Total Liabilities
    
    
    1,313,200
    
    
    
    1,273,459Cumulative Preferred Stock
    
    
    4,236
    
    
    
    4,236Common Stockholders Equity:Common stock, without par valueAuthorized - 992,717 sharesOutstanding - 992,717 shares
    
    
    38,060
    
    
    
    38,060Paid-in capital
    
    
    390,840
    
    
    
    364,852Premium on preferred stock
    
    
    12
    
    
    
    12Retained earnings
    
    
    162,049
    
    
    
    161,208Accumulated other comprehensive loss
    
    
    (2,610
    )
    
    
    (2,774
    )Total common stockholders equity
    
    
    588,351
    
    
    
    561,358Total Liabilities and Stockholders Equity
    
    $
    1,905,787
    
    
    $
    1,839,053
 The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements. 60




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2004 vs. SECOND QUARTER 2003
AND
YEAR-TO-DATE 2004 vs. YEAR-TO-DATE 2003 RESULTS OF OPERATIONS Earnings Gulf Powers net income after dividends on preferred stock for the second
quarter and year-to-date 2004 was $19.0 million and $35.8 million,
respectively, compared to $18.8 million and $32.8 million, respectively, for
the corresponding periods in 2003. Earnings in the second quarter and
year-to-date 2004 increased by $0.2 million, or 1.2%, and $3.1 million, or
9.4%, respectively, as a result of higher operating revenues that were only
partially offset with higher operating expenses. Significant income statement items appropriate for discussion include the
following: Increase (Decrease)Second Quarter
    
    Year-To-Date(in thousands)
    
    %
    
    (in thousands)
    
    %Retail sales
    
    $
    15,520
    
    
    
    8.8
    
    
    $
    20,811
    
    
    
    6.2Sale for resale  affiliates
    
    
    9,550
    
    
    
    76.9
    
    
    
    20,028
    
    
    
    88.5Fuel expense
    
    
    12,980
    
    
    
    16.7
    
    
    
    28,129
    
    
    
    19.9Purchased power  non-affiliates
    
    
    7,795
    
    
    
    198.4
    
    
    
    8,272
    
    
    
    83.7Purchased power  affiliates
    
    
    2,764
    
    
    
    54.4
    
    
    
    (2,395
    )
    
    
    (13.6
    )Other operations expense
    
    
    3,004
    
    
    
    9.0
    
    
    
    6,011
    
    
    
    9.5Taxes other than income taxes
    
    
    348
    
    
    
    2.1
    
    
    
    1,023
    
    
    
    3.1Other income (expense), net
    
    
    165
    
    
    
    64.5
    
    
    
    606
    
    
    
    89.2
 Retail sales.Excluding the recovery of fuel expense and certain other
expenses that do not affect net income, retail sales increased by $0.8 million,
or 0.8%, for the second quarter 2004 and by $4.9 million, or 2.5%, year-to-date
2004 when compared to the corresponding periods in 2003. For both of the
reporting periods, retail sales revenues were higher than the corresponding
periods in 2003 primarily due to an increase in the number of customers and
more favorable weather. During the second quarter 2004, retail energy sales to
residential and industrial customers decreased by 0.3% and 5.2%, respectively,
while energy sales to commercial customers increased by 2.9% as compared to the
same period in 2003. For year-to-date 2004 as compared to 2003, retail energy
sales to residential and commercial customers increased by 2.3% and 3.2%,
respectively, while energy sales to industrial customers decreased by 1.5%. The
decreases in industrial sales for the second quarter and year-to-date 2004 are
primarily the result of permanent load reductions and customer operational
issues, which vary from period to period. Sales for resale  affiliates and Purchased power  affiliates. Revenues
from sales for resale to affiliates and purchases of energy from affiliates
will vary depending on demand and the availability and cost of generating
resources at each company within the Southern Company system. These
transactions do not have a significant impact on earnings since this energy is
generally sold at marginal cost and energy purchases are generally offset by
energy revenues through Gulf Powers fuel cost recovery mechanism. The
increases in the second quarter and year-to-date 2004 sales for resale to
affiliates are due to increased sales of available 61




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION generation to affiliate companies at a higher unit cost resulting from higher
fuel prices. The increase in purchased power from affiliates in the second
quarter 2004 is primarily due to higher priced peak hour energy purchases that
resulted from increased fuel prices. The decrease in purchased power from
affiliates for year-to-date 2004 is primarily due to an increase in Gulf Power
generation to meet its load requirements. Fuel expense.During the second quarter and year-to-date 2004, fuel
expense increased from the corresponding periods in 2003 primarily due to a
significant increase in the use of gas generation to meet additional demand for
energy. Since energy expenses are generally offset by energy revenues through
Gulf Powers fuel cost recovery mechanism, these expenses do not have a
material impact on net income. Purchased power  non-affiliates.The increases for the second quarter
and year-to-date 2004, when compared to the corresponding periods in 2003, are
primarily attributed to Gulf Powers increased purchase of off-system power
from merchant generation resources in order to reduce total system energy
production costs. Since energy expenses are generally offset by energy
revenues, these expenses do not have a significant impact on net income. Other operations expense.The increase in other operations expense during
the second quarter 2004 is primarily due to a $2.0 million increase in employee
benefit expenses and a $1.2 million increase in accrued expenses for uninsured
litigation and workers compensation claims. The increase in other operations
expense for year-to-date 2004 when compared to the corresponding period in 2003
is primarily due to a $3.4 million increase in employee benefit expenses, a
$1.3 million increase in expenses related to marketing conservation programs
and a $1.2 million increase in accrued expenses for uninsured litigation and
workers compensation claims. Taxes other than income taxes.The increases in taxes other than income
taxes for the second quarter and year-to-date 2004 are primarily due to
increased franchise fees and gross receipts taxes resulting from increased
revenues. Other income (expense), net.The increases in other income (expense), net
for the second quarter and year-to-date 2004 when compared to the same periods
in 2003 are primarily due to higher AFUDC related to the environmental controls project at Plant
Crist. Future Earnings Potential The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors, including Gulf Powers ability to maintain a stable regulatory
environment, to achieve energy sales growth while containing costs and to
recover costs related to growing demand and increasingly stringent
environmental standards. Growth in energy sales is subject to a number of
factors, which include weather, competition, new energy contracts with
neighboring utilities, energy conservation practiced by customers, the price of
electricity, the price elasticity of demand, and the rate of economic growth in
the service area. For additional information relating to these issues, see
BUSINESS  The SOUTHERN System  Risk Factors in Item 1 and MANAGEMENTS
DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future Earnings Potential
of Gulf Power in Item 7 of the Form 10-K. 62




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Environmental Matters Compliance costs related to the Clean Air Act and other environmental
regulations could affect earnings if such costs are not fully recovered through
Gulf Powers Environmental Cost Recovery Clause. See MANAGEMENTS DISCUSSION
AND ANALYSIS  RESULTS OF OPERATIONS  Future Earnings Potential 
Environmental Matters in Item 7 of Gulf Power and Note 3 to the financial
statements of Gulf Power under New Source Review Actions in Item 8 of the
Form 10-K. As of March 15, 2004, civil penalties under the Clean Air Act were
increased prospectively to a maximum of $32,500 per day, per violation. To the
extent alleged violations under the New Source Review litigation are deemed to
be continuing, this increased civil penalty amount could apply to such
violations found to continue after that date. On May 3, 2004, the U.S. Supreme Court denied the EPAs petition to review
the Eleventh Circuit Court of Appeals decision in the EPAs similar New Source
Review enforcement action against TVA. With the denial of the EPAs petition
for review, the Court of Appeals decision is now final. An adverse outcome in
the New Source Review litigation described in Item 8 of the Form 10-K could
require substantial capital expenditures and could possibly require substantial
penalties. This could affect future results of operations, cash flows, and
possibly financial condition if such costs are not recovered through regulated
rates. On July 21, 2004, attorneys general from eight states, each outside of
Southern Companys service territory, and the corporation counsel for New York
City filed a complaint in U.S. District Court for the Southern District of New
York against Southern Company and four other electric power companies. A
nearly identical complaint was filed by three environmental groups in the same
court. The complaints allege that the companies emissions of carbon dioxide, a
greenhouse gas, contribute to global warming, which the plaintiffs assert is a
public nuisance. Plaintiffs seek relief under the federal common law or, in the
alternative, under state law, of public nuisance. The environmental groups
also seek relief under common law private nuisance theories. The plaintiffs
seek a judicial order (1) holding each defendant jointly and severally liable
for creating, contributing to, and/or maintaining an ongoing public nuisance,
global warming and (2) permanently enjoining each of the defendants to abate
its contribution to the nuisance by capping its emissions of carbon dioxide and
then reducing those emissions by a specified percentage each year for at least
a decade. Plaintiffs have not, however, requested that damages be awarded in
connection with their claims. Southern Company believes these claims are
without merit and notes that the complaint cites no statutory or regulatory
basis for the claims. Southern Company has not yet responded to the suits;
however, it intends to vigorously defend against these claims. While the
outcome cannot be determined at this time, an adverse judgment could result in
substantial capital expenditures. On May 5, 2004, the EPA published proposed amendments to its Regional Haze
rules with respect to Best Available Retrofit Technology guidelines and
requirements. The impact of these regulations will depend on the development
and implementation of the final rules and implementation by the states, and
therefore cannot be determined at this time. FERC Matters Market-Based Rate Authority See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  FERC Matters  Market Based Rate Authority in Item 7 and
Note 3 to the financial statements of
Gulf Power under FERC Matters in Item 8 of the Form 10-K. On April 14, 2004,
the FERC issued an order that abandoned the SMA test and adopted a new interim analysis for measuring generation 63




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION market power.
This new interim approach includes a pivotal supplier analysis and a wholesale
market share analysis, the results of which provide a rebuttable presumption
regarding generation market power. The FERCs order also sets forth procedures
for rebutting these presumptions and addresses mitigation measures for those
entities that are found to have market power. In the absence of specific
mitigation measures, the order includes several cost-based mitigation measures
that would apply by default. The FERC also initiated a new rulemaking
proceeding that, among other things, will adopt a final methodology for
assessing generation market power. Southern Company, the retail operating
companies, including Gulf Power, and Southern Power believe that it may be
difficult for a traditional utility company, or an affiliate thereof, with a
significant load service obligation and generation to satisfy that obligation,
and that is not a member of a large, FERC-approved RTO, to pass all aspects of
the market power screens as currently designed. However, each of the companies
believes that it has an appropriate basis to rebut the generation market power
presumption. On July 8, 2004, the FERC denied Southern Companys request for rehearing,
along with a number of others, and reaffirmed the interim tests that it adopted
in April. Southern Company will submit the required analyses by August 9, 2004.
In the event that the FERCs default mitigation measures are ultimately
applied, Southern Power and the retail operating companies may be required to
charge cost-based rates, which may be lower than negotiated market-based rates.
The final outcome of this matter will depend on the form in which the final
methodology for assessing generation market power and mitigation rules may be
ultimately adopted and cannot be determined at this time. Transmission See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  FERC Matters  Transmission of Gulf Power in Item 7 of
the Form 10-K for information on the FERCs order related to RTOs and notice of
proposed rulemaking regarding open access transmission service and standard
electricity market design. Other Matters Gulf Power is subject to certain claims and legal actions arising in the
ordinary course of business. In addition, Gulf Powers business activities are
subject to extensive governmental regulation related to public health and the
environment. Litigation over environmental issues and claims of various types,
including property damage, personal injury and citizen enforcement of
environmental requirements, has increased generally throughout the United
States. In particular, personal injury claims for damages caused by alleged
exposure to hazardous materials have become more frequent. The ultimate
outcome of such litigation against Gulf Power cannot be predicted at this time;
however, management does not anticipate that the liabilities, if any, arising
from such current proceedings would have a material adverse effect on Gulf
Powers financial statements. See the Notes to the Condensed Financial Statements herein for discussion
of various contingencies and other matters which may affect future earnings
potential. 64




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates Gulf Power prepares its financial statements in accordance with accounting
principles generally accepted in the United States. Significant accounting
policies are described in Note 1 to the financial statements of Gulf Power in
Item 8 of the Form 10-K. In the application of these policies, certain
estimates are made that may have a material impact on Gulf Powers results of
operations and related disclosures. Different assumptions and measurements
could produce estimates that are significantly different from those recorded in
the financial statements. See MANAGEMENTS DISCUSSION AND ANALYSIS 
ACCOUNTING POLICIES  Application of Critical Accounting Policies and
Estimates of Gulf Power in Item 7 of the Form 10-K for a complete discussion
of Gulf Powers critical accounting policies and estimates related to Electric
Utility Regulation and Contingent Obligations. New Accounting Standards On March 31, 2004, Gulf Power prospectively adopted FASB Interpretation No.
46R, Consolidation of Variable Interest Entities, which requires the primary
beneficiary of a variable interest entity to consolidate the related assets and
liabilities. The adoption of FASB Interpretation No. 46R had no impact on Gulf
Powers net income. However, as a result of the adoption, Gulf Power
deconsolidated certain wholly-owned trusts established to issue preferred
securities since Gulf Power does not meet the definition of primary beneficiary
established by FASB Interpretation No. 46R. See Note (D) to the Condensed
Financial Statements herein for additional information related to the adoption
of FASB Interpretation No. 46R. In May 2004, the FASB approved Staff Position (FSP) No. 106-2, Accounting
and Disclosure Requirements related to the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (the Medicare Act). FSP No.
106-2 requires recognition of the impacts of the Medicare Act in the
accumulated post-retirement benefit obligation and future cost of service for
post-retirement medical plans and may be applied retroactively to the enactment
of the Medicare Act in December 2003 or prospectively effective for the third
quarter 2004. Gulf Power has elected to apply this treatment prospectively.
Pending the finalization of federal regulations governing the subsidy effected
in the Medicare Act, Gulf Power does not anticipate a material impact on its
financial statements from the adoption of FSP No. 106-2. FINANCIAL CONDITION AND LIQUIDITY Overview Major changes in Gulf Powers financial condition during the first six months
of 2004 included the addition of approximately $70.2 million to utility plant.
The funds for these additions and other capital requirements were derived
primarily from operating activities. See Gulf Powers Condensed Statements of
Cash Flows herein for further details. 65




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Capital Requirements and Contractual Obligations Reference is made to MANAGEMENTS DISCUSSION AND ANALYSIS  FINANCIAL CONDITION
AND LIQUIDITY  Capital Requirements and Contractual Obligations of Gulf
Power in Item 7 of the Form 10-K
for a description of Gulf Powers capital requirements for its construction
program, lease obligations, purchase commitments and trust funding
requirements. Sources of Capital In addition to the financing activities described herein, Gulf Power plans to
obtain the funds required for construction and other purposes from sources
similar to those used in the past. These sources include cash flows from
operating activities and issuances of unsecured debt, trust preferred
securities, preferred stock and pollution control bonds issued for Gulf Powers
benefit by public authorities. The amount, type and timing of any future
financings, if needed, will depend upon market conditions and regulatory
approval. See BUSINESS  Financing Programs in Item 1 of the Form 10-K for
additional information. To meet short-term cash needs and contingencies, Gulf Power has various
internal and external sources of liquidity. In addition, Gulf Power has
substantial cash flow from operating activities. At June 30, 2004, Gulf Power
had approximately $12.8 million of cash and cash equivalents and $56.3 million
of unused committed lines of credit with banks. Of these facilities, $10
million expire in 2004 and the remaining $46.3 million expire in 2005. Gulf
Power expects to renew its credit facilities, as needed, prior to expiration.
The credit arrangements provide liquidity support to Gulf Powers obligations
with respect to variable rate pollution control bonds and commercial paper.
Gulf Power may also meet short-term cash needs through a Southern Company
subsidiary organized to issue and sell commercial paper and extendible
commercial notes at the request and for the benefit of Gulf Power and other
Southern Company subsidiaries. At June 30, 2004, Gulf Power had $5.0 million
of commercial paper outstanding. Management believes that the need for working
capital can be adequately met by utilizing lines of credit without maintaining
large cash balances. Credit Rating Risk Gulf Power does not have any credit agreements that would require material
changes in payment schedules or terminations as a result of a credit rating
downgrade. Market Price Risk Gulf Powers market risk exposures relative to interest rate changes have not
changed materially compared with the December 31, 2003 reporting period. In
addition, Gulf Power is not aware of any facts or circumstances
that would significantly affect such exposures in the near term. 66




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Due to cost-based rate regulations, Gulf Power has limited exposure to
market volatility in interest rates, commodity fuel prices and prices of
electricity. To mitigate residual risks relative to movements in electricity
prices, Gulf Power enters into fixed price contracts for the purchase of coal
supplies, the purchase and sale of electricity through the wholesale
electricity market and, to a lesser extent, similar contracts for gas
purchases. Gulf Power has received approval from the Florida PSC to recover
prudently incurred costs related to its fuel hedging program through the fuel
cost recovery mechanism. The fair value of derivative energy contracts at June
30, 2004 was as follows: Second Quarter2004
    
    Year-to-DateChanges
    
    ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    5,674
    
    
    $
    2,504Contracts realized or settled
    
    
    (2,720
    )
    
    
    (3,799
    )New contracts at inception
    
    
    
    
    
    
    Changes in valuation techniques
    
    
    
    
    
    
    Current period changes
    
    
    439
    
    
    
    4,688Contracts at June 30, 2004
    
    $
    3,393
    
    
    $
    3,393
 Source of June 30, 2004Valuation PricesTotal
    
    MaturityFair Value
    
    Year 1
    
    1-3 Years(in thousands)Actively quoted
    
    $
    3,393
    
    
    $
    3,202
    
    
    $
    191External sources
    
    
    
    
    
    
    
    
    
    
    Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at June 30, 2004
    
    $
    3,393
    
    
    $
    3,202
    
    
    $
    191
 See MANAGEMENTS DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND
LIQUIDITY  Market Price Risk of Gulf Power in Item 7 of the Form 10-K and
Notes 1 and 6 to the financial statements of Gulf Power under Financial
Instruments in Item 8 of the Form 10-K and Note (F) to the Condensed Financial
Statements herein for further information. Financing Activities In April 2004, Gulf Power issued $35 million of Series J 5.875% Senior Notes
due April 1, 2044. The proceeds from this issue were used for general corporate
purposes, including Gulf Powers continuous construction program. In addition to any financings that may be necessary to meet Gulf Powers
capital requirements and contractual obligations, Gulf Power plans to continue,
when economically feasible, a program to retire higher-cost debt and replace
these obligations with lower-cost capital if market conditions permit. 67




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MISSISSIPPI POWER COMPANY 68




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MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Operating Revenues:Retail sales
    
    $
    151,861
    
    
    $
    134,058
    
    
    $
    280,416
    
    
    $
    248,028Sales for resale Non-affiliates
    
    
    68,935
    
    
    
    59,320
    
    
    
    134,735
    
    
    
    129,745Affiliates
    
    
    8,558
    
    
    
    5,665
    
    
    
    20,367
    
    
    
    11,888Contract termination
    
    
    
    
    
    
    62,111
    
    
    
    
    
    
    
    62,111Other revenues
    
    
    3,431
    
    
    
    3,206
    
    
    
    6,995
    
    
    
    6,474Total operating revenues
    
    
    232,785
    
    
    
    264,360
    
    
    
    442,513
    
    
    
    458,246Operating Expenses:Fuel
    
    
    76,365
    
    
    
    55,596
    
    
    
    152,890
    
    
    
    106,720Purchased power Non-affiliates
    
    
    13,093
    
    
    
    4,511
    
    
    
    20,048
    
    
    
    11,328Affiliates
    
    
    22,837
    
    
    
    17,755
    
    
    
    40,153
    
    
    
    38,087Other operations
    
    
    39,132
    
    
    
    49,743
    
    
    
    74,110
    
    
    
    84,906Maintenance
    
    
    18,144
    
    
    
    18,751
    
    
    
    33,216
    
    
    
    33,011Depreciation and amortization
    
    
    5,874
    
    
    
    13,902
    
    
    
    20,017
    
    
    
    26,975Taxes other than income taxes
    
    
    14,050
    
    
    
    13,716
    
    
    
    27,189
    
    
    
    27,083Total operating expenses
    
    
    189,495
    
    
    
    173,974
    
    
    
    367,623
    
    
    
    328,110Operating Income
    
    
    43,290
    
    
    
    90,386
    
    
    
    74,890
    
    
    
    130,136Other Income and (Expense):Interest expense
    
    
    (3,048
    )
    
    
    (3,767
    )
    
    
    (5,851
    )
    
    
    (7,537
    )Interest expense to affiliate trusts
    
    
    (649
    )
    
    
    
    
    
    
    (649
    )
    
    
    Distributions on mandatorily redeemable
preferred securities
    
    
    
    
    
    
    (630
    )
    
    
    (630
    )
    
    
    (1,260
    )Other income (expense), net
    
    
    (188
    )
    
    
    753
    
    
    
    383
    
    
    
    765Total other income and (expense)
    
    
    (3,885
    )
    
    
    (3,644
    )
    
    
    (6,747
    )
    
    
    (8,032
    )Earnings Before Income Taxes
    
    
    39,405
    
    
    
    86,742
    
    
    
    68,143
    
    
    
    122,104Income taxes
    
    
    15,051
    
    
    
    33,179
    
    
    
    25,967
    
    
    
    46,642Net Income
    
    
    24,354
    
    
    
    53,563
    
    
    
    42,176
    
    
    
    75,462Dividends on Preferred Stock
    
    
    2,463
    
    
    
    504
    
    
    
    2,966
    
    
    
    1,007Net Income After Dividends on Preferred Stock
    
    $
    21,891
    
    
    $
    53,059
    
    
    $
    39,210
    
    
    $
    74,455
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Net Income After Dividends on Preferred Stock
    
    $
    21,891
    
    
    $
    53,059
    
    
    $
    39,210
    
    
    $
    74,455Other comprehensive income (loss):Change in fair value of marketable securities, net of tax
of $49 and $49, respectively
    
    
    80
    
    
    
    
    
    
    
    80
    
    
    
    Changes in fair value of qualifying hedges, net of tax
of $(926) and $(1,400), respectively
    
    
    (1,495
    )
    
    
    
    
    
    
    (2,260
    )
    
    
    COMPREHENSIVE INCOME
    
    $
    20,476
    
    
    $
    53,059
    
    
    $
    37,030
    
    
    $
    74,455
 The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements. 69




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MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six MonthsEnded June 30,2004
    
    2003(in thousands)Operating Activities:Net income
    
    $
    42,176
    
    
    $
    75,462Adjustments to reconcile net income
to net cash provided from operating activities Depreciation and amortization
    
    
    22,227
    
    
    
    31,046Deferred income taxes and investment tax credits, net
    
    
    19,142
    
    
    
    1,623Pension, postretirement, and other employee benefits
    
    
    447
    
    
    
    779Tax benefit of stock options
    
    
    474
    
    
    
    1,876Other, net
    
    
    (1,324
    )
    
    
    11,897Changes in certain current assets and liabilities Receivables, net
    
    
    (18,606
    )
    
    
    12,950Fossil fuel stock
    
    
    (1,567
    )
    
    
    (6,723
    )Materials and supplies
    
    
    (864
    )
    
    
    143Other current assets
    
    
    (3,157
    )
    
    
    (484
    )Accounts payable
    
    
    (18,507
    )
    
    
    (40,330
    )Accrued taxes
    
    
    (14,649
    )
    
    
    14,463Accrued compensation
    
    
    (9,546
    )
    
    
    (13,701
    )Other current liabilities
    
    
    (15,697
    )
    
    
    (2,324
    )Net cash provided from operating activities
    
    
    549
    
    
    
    86,677Investing Activities:Gross property additions
    
    
    (32,023
    )
    
    
    (26,566
    )Cost of removal net of salvage
    
    
    (3,606
    )
    
    
    (2,268
    )Other
    
    
    (1,547
    )
    
    
    951Net cash used for investing activities
    
    
    (37,176
    )
    
    
    (27,883
    )Financing Activities:Increase in notes payable, net
    
    
    44,830
    
    
    
    Proceeds Senior notes
    
    
    40,000
    
    
    
    90,000Preferred stock
    
    
    30,000
    
    
    
    Capital contributions from parent company
    
    
    
    
    
    
    79Redemptions First mortgage bonds
    
    
    
    
    
    
    (33,350
    )Pollution control bonds
    
    
    
    
    
    
    (850
    )Senior notes
    
    
    (80,000
    )
    
    
    (86,628
    )Preferred stock
    
    
    (28,388
    )
    
    
    Payment of preferred stock dividends
    
    
    (962
    )
    
    
    (1,007
    )Payment of common stock dividends
    
    
    (33,100
    )
    
    
    (33,000
    )Other
    
    
    (931
    )
    
    
    (1,184
    )Net cash used for financing activities
    
    
    (28,551
    )
    
    
    (65,940
    )Net Change in Cash and Cash Equivalents
    
    
    (65,178
    )
    
    
    (7,146
    )Cash and Cash Equivalents at Beginning of Period
    
    
    69,120
    
    
    
    62,695Cash and Cash Equivalents at End of Period
    
    $
    3,942
    
    
    $
    55,549Supplemental Cash Flow Information:Cash paid during the period for Interest
    
    $
    5,836
    
    
    $
    10,413Income taxes (net of refunds)
    
    $
    1,615
    
    
    $
    6,073
 The accompanying notes as they relate to Mississippi Power are an integral part of these condensed
financial statements. 70




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MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At June 30,
    
    At December 31,Assets
    
    2004
    
    2003(in thousands)Current Assets:Cash and cash equivalents
    
    $
    3,942
    
    
    $
    69,120Receivables Customer accounts receivable
    
    
    34,652
    
    
    
    30,514Unbilled revenues
    
    
    22,776
    
    
    
    19,278Under recovered regulatory clause revenues
    
    
    21,905
    
    
    
    14,607Other accounts and notes receivable
    
    
    6,772
    
    
    
    8,088Affiliated companies
    
    
    16,783
    
    
    
    12,160Accumulated provision for uncollectible accounts
    
    
    (531
    )
    
    
    (897
    )Fossil fuel stock, at average cost
    
    
    26,800
    
    
    
    25,233Vacation pay
    
    
    5,766
    
    
    
    5,766Materials and supplies, at average cost
    
    
    24,534
    
    
    
    23,670Prepaid income taxes
    
    
    17,490
    
    
    
    27,415Prepaid expenses
    
    
    4,437
    
    
    
    4,517Other
    
    
    6,092
    
    
    
    2,857Total current assets
    
    
    191,418
    
    
    
    242,328Property, Plant, and Equipment:In service
    
    
    1,853,607
    
    
    
    1,841,668Less accumulated provision for depreciation
    
    
    672,291
    
    
    
    672,7301,181,316
    
    
    
    1,168,938Construction work in progress
    
    
    33,029
    
    
    
    25,844Total property, plant, and equipment
    
    
    1,214,345
    
    
    
    1,194,782Other Property and Investments
    
    
    3,990
    
    
    
    2,750Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    11,757
    
    
    
    12,125Prepaid pension costs
    
    
    18,582
    
    
    
    18,167Unamortized debt issuance expense
    
    
    6,852
    
    
    
    6,993Unamortized loss on reacquired debt
    
    
    9,812
    
    
    
    10,201Prepaid rent
    
    
    13,816
    
    
    
    14,758Other
    
    
    8,489
    
    
    
    16,280Total deferred charges and other assets
    
    
    69,308
    
    
    
    78,524Total Assets
    
    $
    1,479,061
    
    
    $
    1,518,384
 The accompanying notes as they relate to Mississippi Power are an integral part of these condensed
financial statements. 71




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MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At June 30,
    
    At December 31,Liabilities and
Stockholders Equity
    
    2004
    
    2003(in thousands)Current Liabilities:Securities due within one year
    
    $
    
    
    
    $
    80,000Notes payable
    
    
    44,830
    
    
    
    Accounts payable Affiliated
    
    
    22,456
    
    
    
    21,259Other
    
    
    36,446
    
    
    
    55,309Customer deposits
    
    
    8,282
    
    
    
    11,863Accrued taxes Income taxes
    
    
    5,822
    
    
    
    1,696Other
    
    
    24,059
    
    
    
    42,834Accrued interest
    
    
    3,149
    
    
    
    3,223Accrued vacation pay
    
    
    5,766
    
    
    
    5,766Accrued compensation
    
    
    14,286
    
    
    
    23,832Regulatory clauses over recovery
    
    
    14,204
    
    
    
    31,118Other
    
    
    9,712
    
    
    
    4,867Total current liabilities
    
    
    189,012
    
    
    
    281,767Long-term Debt
    
    
    242,493
    
    
    
    202,488Long-term Debt Payable to Affiliated Trusts
    
    
    36,082
    
    
    
    Mandatorily Redeemable Preferred Securities
    
    
    
    
    
    
    35,000Deferred Credits and Other Liabilities:Accumulated deferred income taxes
    
    
    151,106
    
    
    
    142,088Deferred credits related to income taxes
    
    
    22,510
    
    
    
    23,279Accumulated deferred investment tax credits
    
    
    19,234
    
    
    
    19,841Employee benefit obligations
    
    
    53,431
    
    
    
    54,830Plant Daniel lease guarantee obligation, at fair value
    
    
    13,816
    
    
    
    14,758Plant Daniel capacity
    
    
    52,046
    
    
    
    60,300Other cost of removal obligations
    
    
    86,003
    
    
    
    80,588Miscellaneous regulatory liabilities
    
    
    14,519
    
    
    
    11,899Other
    
    
    27,564
    
    
    
    27,248Total deferred credits and other liabilities
    
    
    440,229
    
    
    
    434,831Total Liabilities
    
    
    907,816
    
    
    
    954,086Cumulative Preferred Stock
    
    
    33,421
    
    
    
    31,809Common Stockholders Equity:Common stock, without par value Authorized - 1,130,000 sharesOutstanding - 1,121,000 shares
    
    
    37,691
    
    
    
    37,691Paid-in capital
    
    
    292,990
    
    
    
    292,515Premium on preferred stock
    
    
    23
    
    
    
    326Retained earnings
    
    
    210,762
    
    
    
    203,419Accumulated other comprehensive loss
    
    
    (3,642
    )
    
    
    (1,462
    )Total common stockholders equity
    
    
    537,824
    
    
    
    532,489Total Liabilities and Stockholders Equity
    
    $
    1,479,061
    
    
    $
    1,518,384
 The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial
statements. 72




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2004 vs. SECOND QUARTER 2003
AND
YEAR-TO-DATE 2004 vs. YEAR-TO-DATE 2003 RESULTS OF OPERATIONS Earnings Mississippi Powers net income after dividends on preferred stock for the
second quarter and year-to-date 2004 was $21. 9 million and $39.2 million,
respectively, compared to $53.1 million and $74.5 million, respectively, for
the corresponding periods of 2003. Earnings in the second quarter and
year-to-date 2004 decreased by $31.2 million or 58.8%, and $35.3 million, or
47.4%, respectively, primarily as a result of the 2003 gain of $38 million
after tax related to the termination of a PPA with
Dynegy. This decrease was partially offset by the net impact of an $11 million
decrease in other operations expense related to costs incurred in the second
quarter of 2003 to restructure the lease agreement for the combined cycle
generating units at Plant Daniel, and an increase of $11.8 million in pretax
earnings in the second quarter of 2004 resulting from the impact of the
Mississippi PSCs order approving the inclusion of the Plant Daniel capacity in
jurisdictional cost of service. See Note 3 to the financial statements of
Mississippi Power under Contract Termination and Retail Regulatory Filing
in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements
herein for additional information. Significant income statement items appropriate for discussion include the
following: Increase (Decrease)Second Quarter
    
    Year-To-Date(in thousands)
    
    %
    
    (in thousands)
    
    %Retail sales
    
    $
    17,803
    
    
    
    13.3
    
    
    $
    32,388
    
    
    
    13.1Sales for resale  non-affiliates
    
    
    9,615
    
    
    
    16.2
    
    
    
    4,990
    
    
    
    3.8Sale for
resale  affiliates
    
    
    2,893
    
    
    
    51.1
    
    
    
    8,479
    
    
    
    71.3Fuel expense
    
    
    20,769
    
    
    
    37.4
    
    
    
    46,170
    
    
    
    43.3Purchased power  non-affiliates
    
    
    8,582
    
    
    
    190.2
    
    
    
    8,720
    
    
    
    77.0Purchased
power  affiliates
    
    
    5,082
    
    
    
    28.6
    
    
    
    2,066
    
    
    
    5.4Other operations expense
    
    
    (10,611
    )
    
    
    (21.3
    )
    
    
    (10,796
    )
    
    
    (12.7
    )Depreciation and amortization
    
    
    (8,028
    )
    
    
    (57.7
    )
    
    
    (6,958
    )
    
    
    (25.8
    )Interest expense
    
    
    (719
    )
    
    
    (19.1
    )
    
    
    (1,686
    )
    
    
    (22.4
    )Income taxes
    
    
    (18,128
    )
    
    
    (54.6
    )
    
    
    (20,675
    )
    
    
    (44.3
    )Dividends on preferred stock
    
    
    1,959
    
    
    
    388.7
    
    
    
    1,959
    
    
    
    194.5
 Retail sales.Retail sales
revenue increased $17.8 million, or 13.3%, in
the second quarter 2004 and $32.4 million or 13.1% year-to-date 2004 when
compared to the same periods in 2003. The increases in retail sales revenues
are primarily as a result of an increase of $18.6 million in the second quarter
2004 and $32.2 million year-to-date 2004 in fuel revenues, which generally do
not have an effect on income. Retail sales revenues, excluding fuel revenues,
for the second quarter 2004 to residential, commercial and industrial customers
decreased 2.4%, 1.3% and 0.4%, respectively, primarily as a result of mild
weather when compared to the same
period in 2003. Retail sales revenues, excluding fuel revenues, for
year-to-date 2004 from residential, commercial and industrial customers
remained mostly constant as compared to the same period in 2003. 73




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Sales for resale  non-affiliates.The increase in sales for resale to
non-affiliates in the second quarter 2004 as compared to the same period in
2003 is primarily due to the increased fuel revenue from wholesale territorial
customers and increased energy sales to non-territorial customers. Sales for resale  affiliates and Purchased power  affiliates. Revenues
from sales for resale to affiliates, as well as purchases of energy from
affiliates, will vary depending on demand and the availability and cost of
generating resources at each company within the Southern Company system. These
transactions do not have a significant impact on earnings since the energy is
generally sold at marginal cost and energy purchases are generally offset by
energy revenues through Mississippi Powers retail and wholesale fuel cost
recovery clauses. The increase in sales for resale to affiliates is primarily
a result of Mississippi Powers more economical generating costs when compared
to others. The increase in purchased power from affiliates is primarily due to
the increase in the cost of fuel. Fuel expense.In the second quarter and year-to-date 2004, fuel expense
increased when compared to the same periods in 2003 as a result of 4.2% and
10.1% increases in generation, respectively, and a 42.5% and 50.6% increase in
cost of oil and gas, respectively. Since energy expenses are generally offset
by energy revenues through Mississippi Powers retail and wholesale fuel cost
recovery clauses, these expenses do not have a significant impact on earnings. Purchased power  non-affiliates. The second quarter and year-to-date
2004 increases in purchased power from non-affiliates when compared to the same
periods in 2003 are a result of increased purchased power demand as a result of
planned outages at generating units for maintenance purposes in 2004. Other operations expense.The second quarter and year-to-date 2004
decreases in other operation expense when compared to the same periods in 2003
are a result of approximately $11 million incurred during the second quarter
2003 to restructure the lease agreement for the combined cycle generating units
at Plant Daniel. See Note 7 to the financial statements of Mississippi Power
under Operating Leases  Plant Daniel Combined Cycle Generating Units in Item
8 of the Form 10-K for additional information. Depreciation and amortization.The second quarter and year-to-date 2004
decreases in depreciation and amortization expense when compared to the same
periods in 2003 are primarily the result of the amortization of a regulatory
liability as approved by the Mississippi PSC. The Mississippi PSC issued an
interim accounting order in December 2003 directing Mississippi Power to
expense and record in 2003 a regulatory liability in the amount of
approximately $60 million. Based on the final Mississippi PSC order issued May
25, 2004 that approved this treatment, Mississippi Power recorded during the
second quarter a credit to expense in the amount of $8.3 million to amortize
the regulatory liability retroactive to January 1, 2004. See Note 3 to the
financial statements of Mississippi Power under Retail Regulatory Filing in
Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements and
Future Earnings Potential  FERC and Mississippi PSC Matters  Retail Rate
Filing herein for additional information. Interest expense.The decreases in interest expense for the second
quarter and year-to-date 2004 as compared to the same periods in 2003 are a
result of lower interest rates. See MANAGEMENTS DISCUSSION AND ANALYSIS 
FINANCIAL CONDITION AND LIQUIDITY  Financing Activities of Mississippi Power
in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY  Financing
Activities herein for further information on efforts to reduce interest rates. 74




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Income taxes.The second quarter and year-to-date decreases in income
taxes of $18.1 million, or 54.6%, and $20.7 million, or 44.3%, respectively,
are a result of the $47.3 million and $53.9 million, respectively, reduction in
earnings before income taxes when compared to the same periods in 2003. Dividends on preferred stock.The second quarter and year-to-date 2004
increases in dividends on preferred stock are the result of a $2.0 million loss
on the redemption of preferred stock recognized in the second quarter of 2004. Future Earnings Potential The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including Mississippi Powers ability to maintain a stable regulatory
environment, to achieve energy sales growth while containing costs and to
recover costs related to growing demand and increasingly stricter environmental
standards. Growth in energy sales is subject to a number of factors, which
include weather, competition, new energy contracts with neighboring utilities,
energy conservation practiced by customers, the price of electricity, the price
elasticity of demand and the rate of economic growth in the service area. For
additional information relating to these issues, see BUSINESS  The SOUTHERN
System  Risk Factors in Item 1 and MANAGEMENTS DISCUSSION AND ANALYSIS 
RESULTS OF OPERATIONS  Future Earnings Potential in Item 7 of Mississippi
Power in the Form 10-K. Environmental Matters Mississippi Powers 2004 ECO Plan filing was approved, as filed, by the
Mississippi PSC on March 15, 2004, and resulted in a slight decrease in rates
effective April 2004. Compliance costs related to the Clean Air Act and other
environmental regulations could affect earnings if such costs cannot continue
to be recovered. See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF
OPERATIONS  Future Earnings Potential  Environmental Matters in Item 7 and
Note 3 to the financial statements of Mississippi Power under New Source
Review Actions in Item 8 of the Form 10-K. As of March 15, 2004, civil
penalties under the Clean Air Act were increased prospectively to a maximum of
$32,500 per day, per violation. To the extent alleged violations under the New
Source Review litigation are deemed to be continuing, this increased civil
penalty amount could apply to such violations found to continue after that
date. On May 3, 2004, the U.S. Supreme Court denied the EPAs petition to review the
Eleventh Circuit Court of Appeals decision in the EPAs similar New Source
Review action against the TVA. With the denial of the EPAs petition for
review, the Court of Appeals decision is now final. An adverse outcome in the
New Source Review litigation described in Item 8 of the Form 10-K could require
substantial capital expenditures and could possibly require substantial
penalties. This could affect future results of operations, cash flows, and
possibly financial condition if such costs are not recovered through regulated
rates. On July 21, 2004, attorneys general from eight states, each outside of
Southern Companys service territory, and the corporation counsel for New York
City filed a complaint in U.S. District Court for the Southern District of New
York against Southern Company and four other electric power companies. A
nearly identical complaint was filed by three environmental groups in the same
court. The complaints allege that the companies emissions of carbon dioxide, a
greenhouse gas, contribute to global warming, which the plaintiffs assert is a
public nuisance.
Plaintiffs seek relief under the federal common law or, in the alternative,
under state law, of public nuisance. The environmental groups also seek relief
under common law private nuisance theories. The plaintiffs seek a judicial
order (1) holding each defendant jointly and severally liable for creating,
contributing to, and/or maintaining an ongoing public nuisance, global warming
and (2) permanently enjoining each of the 75




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION defendants to abate its contribution to the nuisance by capping its emissions
of carbon dioxide and then reducing those emissions by a specified percentage
each year for at least a decade. Plaintiffs have not, however, requested that
damages be awarded in connection with their claims. Southern Company believes
these claims are without merit and notes that the complaint cites no statutory
or regulatory basis for the claims. Southern Company has not yet responded to the suits; however, it intends to
vigorously defend against these claims. While the outcome cannot be determined
at this time, an adverse judgment could result in substantial capital
expenditures. On May 5, 2004, the EPA published proposed amendments to its Regional Haze
rules with respect to Best Available Retrofit Technology guidelines and
requirements. The impact of these regulations will depend on the development
and implementation of the final rules and implementation by the states, and
therefore cannot be determined at this time. FERC and Mississippi PSC Matters Market-Based Rate
Authority See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  FERC Matters  Market-Based Rate Authority of Mississippi
Power in Item 7 and Note 3 to the financial statements of Mississippi Power
under FERC Matters in Item 8 of the Form 10-K. On April 14, 2004, the FERC
issued an order that abandoned the SMA test and adopted a new interim analysis
for measuring generation market power. The FERC also initiated a new
rulemaking proceeding that, among other things, will adopt a final methodology
for assessing generation market power. Southern Company, the retail operating
companies, including Mississippi Power, and Southern Power believe that it may
be difficult for a traditional utility company, or an affiliate thereof, with a
significant load service obligation and generation to satisfy that obligation,
and that is not a member of a large, FERC-approved RTO, to pass all aspects of
the market power screens as currently designed. However, each of the companies
believes that it has an appropriate basis to rebut the generation market power
presumption. On July 8, 2004, the FERC denied Southern Companys request for rehearing,
along with a number of others, and reaffirmed the interim tests that it adopted
in April. Southern Company will submit the required analyses by August 9, 2004.
In the event that the FERCs default mitigation measures are ultimately
applied, Southern Power and the retail operating companies may be required to
charge cost-based rates, which may be lower than negotiated market-based rates.
The final outcome of this matter will depend on the form in which the final
methodology for assessing generation market power and mitigation rules may be
ultimately adopted and cannot be determined at this time. See Note (B) to the
Condensed Financial Statements under FERC Matters herein for additional
information. Transmission See MANAGEMENTS DISCUSSION AND ANALYSIS   RESULTS OF OPERATIONS  Future
Earnings Potential  FERC Matters of Mississippi Power in Item 7 of the Form
10-K for information on the FERCs order
related to RTOs and the notice of proposed rulemaking regarding open access
transmission service and standard electricity market design. Retail Rate Filing On December 5, 2003, Mississippi Power filed a request with the Mississippi PSC
to reclassify 266 megawatts 76




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION of Plant Daniel Units 3 and 4 generating capacity not currently included in
jurisdictional cost of service. As part of Mississippi Powers proposal to
include the additional Plant Daniel capacity in retail rates, the Mississippi
PSC issued an interim accounting order in December 2003 directing Mississippi
Power to expense and record in 2003 a regulatory liability in the amount of
approximately $60 million while the Mississippi PSC fully considered the entire
request. On May 25, 2004, the Mississippi PSC issued an order related to this
matter. The Mississippi PSC approved Mississippi Powers request to reclassify
the 266 megawatts of Plant Daniel unit 3 and 4 capacity to jurisdictional cost
of service effective January 1, 2004, and authorized Mississippi Power to
include the related costs and revenue credits in jurisdictional rate base, cost
of service and revenue requirement calculations for purposes of retail rate
recovery. As directed by the Mississippi PSC, Mississippi Power will amortize
the regulatory liability established pursuant to the Mississippi PSCs interim
order in December 2003 as an increase to earnings as follows: $16.5 million in
2004, $25.1 million in 2005, $13.0 million in 2006 and $5.7 million in 2007.
The impact of the order on earnings for the period January 1, 2004 through June
30, 2004 is an increase of $7.3 million after tax and is reflected in the
second quarter 2004 financial statements of Mississippi Power. See Note 3 to
the financial statements of Mississippi Power under Retail Regulatory Filing
in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements
herein. In addition, the Mississippi PSC also approved Mississippi Powers
requested changes to its PEP including the use of a forward-looking test year,
with appropriate oversight; annual, rather than semi-annual, filings; and
certain changes to the performance indicator mechanisms. Rate changes will be
limited to 4% of retail revenues annually under the revised PEP. The
Mississippi PSC will review all aspects of PEP in 2007. Other Matters Mississippi Power is subject to certain claims and legal actions arising in the
ordinary course of business. In addition, Mississippi Powers business
activities are subject to extensive governmental regulation related to public
health and the environment. Litigation over environmental issues and claims of
various types, including property damage, personal injury and citizen
enforcement of environmental requirements, has increased generally throughout
the United States. In particular, personal injury claims for damages caused by
alleged exposure to hazardous materials have become more frequent. The
ultimate outcome of such litigation against Mississippi Power cannot be
predicted at this time; however, management does not anticipate that the
liabilities, if any, arising from any such current proceedings would have a
material adverse effect on Mississippi Powers financial statements. See the Notes to the Condensed Financial Statements herein for discussion
of various contingencies and other matters which may affect future earnings
potential. ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates Mississippi Power prepares its financial statements in accordance with
accounting principles generally accepted in the United States. Significant
accounting policies are described in Note 1 to the financial statements of
Mississippi Power in Item 8 of the Form 10-K. In the application of these
policies, certain estimates are made that may have a material impact on
Mississippi Powers results of operations and related disclosures. Different
assumptions and measurements could produce estimates that are significantly
different from those recorded in the financial statements. See MANAGEMENTS
DISCUSSION AND ANALYSIS  ACCOUNTING POLICIES  Application of Critical
Accounting Policies and Estimates of Mississippi Power in Item 7 of the 77




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Form 10-K for a complete discussion of Mississippi Powers critical accounting
policies and estimates related to Electric Utility Regulation, Contingent
Obligations, Plant Daniel Capacity and Plant Daniel Operating Lease. Also see
Note (K) to the Condensed Financial Statements herein for additional
information related to Plant Daniel capacity. New Accounting Standards On March 31, 2004, Mississippi Power prospectively adopted FASB Interpretation
No. 46R, Consolidation of Variable Interest Entities, which requires the
primary beneficiary of a variable interest entity to consolidate the related
assets and liabilities. The adoption of FASB Interpretation No. 46R had no
impact on Mississippi Powers net income. However, as a result of the
adoption, Mississippi Power deconsolidated certain wholly-owned trusts
established to issue preferred securities since Mississippi Power does not meet
the definition of primary beneficiary established by FASB Interpretation No.
46R. See Note (D) to the Condensed Financial Statements herein for additional
information related to the adoption of FASB Interpretation No. 46R. In May 2004, the FASB approved Staff Position (FSP) No. 106-2, Accounting
and Disclosure Requirements related to the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (the Medicare Act). FSP No.
106-2 requires recognition of the impacts of the Medicare Act in the
accumulated post-retirement benefit obligation and future cost of service for
post-retirement medical plans and may be applied retroactively to the enactment
of the Medicare Act in December 2003 or prospectively effective for the third
quarter 2004. Mississippi Power has elected to apply this treatment
prospectively. Pending the finalization of federal regulations governing the
subsidy effected in the Medicare Act, Mississippi Power does not anticipate a
material impact on its financial statements from the adoption of FSP No. 106-2. FINANCIAL CONDITION AND LIQUIDITY Overview Major changes in Mississippi Powers financial condition during the first six
months of 2004 included the addition of approximately $32 million to utility
plant, a reduction in current liabilities of $93 million, an increase of $40
million in long-term debt and a decrease of $65 million in cash. See
Mississippi Powers Condensed Statements of Cash Flows and Financing
Activities herein for further details. Capital Requirements and Contractual Obligations See MANAGEMENTS DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY 
Capital Requirements and Contractual Obligations of Mississippi Power in Item
7 in the Form 10-K for a description of Mississippi Powers capital
requirements for its construction program, lease obligations, purchase
commitments and trust funding requirements. Sources of Capital In addition to the financing activities described herein, Mississippi Power
plans to obtain the funds required for
construction and other purposes from sources similar to those used in the past.
The amount, type and timing of any financings  if needed  will depend upon
maintenance of adequate earnings, regulatory approval,
prevailing market conditions and other factors. See BUSINESS  Financing
Programs in Item 1 of the Form 10-K for additional information. 78




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION To meet short-term cash needs and contingencies, Mississippi Power had at
June 30, 2004, approximately $3.9 million of cash and cash equivalents and $100
million of unused committed credit arrangements with banks. Of these
facilities, $35 million expire in 2004 and the remaining $65 million expire in
2005. Approximately $37.5 million of these credit arrangements contain
provisions allowing two-year term loans executable at the expiration date.
Mississippi Power expects to renew its credit facilities, as needed, prior to
expiration. The credit arrangements provide liquidity support to Mississippi
Powers obligations with respect to variable rate pollution control bonds and
commercial paper. Mississippi Power may also meet short-term cash needs
through a Southern Company subsidiary organized to issue and sell commercial
paper and extendible commercial notes at the request and for the benefit of
Mississippi Power and other Southern Company subsidiaries. At June 30, 2004,
Mississippi Power had $44.8 million in outstanding notes payable. Management
believes that the need for working capital can be adequately met by utilizing
lines of credit without maintaining large cash balances. Off-Balance Sheet Financing Arrangements See MANAGEMENTS
DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY

Off-Balance Sheet Financing Arrangements in Item 7 and Note 7 to the
financial statements of Mississippi Power under Operating Leases in Item 8 of
the Form 10-K for information related to Mississippi Powers lease of a
combined cycle generating facility at Plant Daniel. Credit Rating Risk Mississippi Power does not have any credit agreements that would require
material changes in payment schedules or terminations as a result of a credit
rating downgrade. Market Price Risk Mississippi Powers market risk exposures relative to interest rate changes
have not changed materially compared with the December 31, 2003 reporting
period. In addition, Mississippi Power is not aware of any facts or
circumstances that would significantly affect such exposures in the near term. Due to cost-based rate regulation, Mississippi Power has limited exposure
to market volatility in interest rates, commodity fuel prices and prices of
electricity. To mitigate residual risks relative to movements in electricity
prices, Mississippi Power enters into fixed price contracts for the purchase
and sale of electricity through the wholesale electricity market. Mississippi
Power has also implemented retail fuel hedging programs at the instruction of
the Mississippi PSC and wholesale fuel hedging programs under agreements with
wholesale customers. The fair values of derivative, fuel and energy contracts
at June 30, 2004 were as follows: Second Quarter2004
    
    Year-to-DateChanges
    
    ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    5,621
    
    
    $
    2,470Contracts realized or settled
    
    
    (2,723
    )
    
    
    (3,456
    )New contracts at inception
    
    
    
    
    
    
    Changes in valuation techniques
    
    
    
    
    
    
    Current period changes
    
    
    (1,732
    )
    
    
    2,152Contracts at June 30, 2004
    
    $
    1,166
    
    
    $
    1,166
 79




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Source of June 30, 2004Valuation PricesTotal
    
    MaturityFair Value
    
    Year 1
    
    1-3 Years(in thousands)Actively quoted
    
    $
    1,166
    
    
    $
    788
    
    
    $
    378External sources
    
    
    
    
    
    
    
    
    
    
    Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at June 30, 2004
    
    $
    1,166
    
    
    $
    788
    
    
    $
    378
 For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS -
FINANCIAL CONDITION AND LIQUIDITY  Market Price Risk of Mississippi Power in
Item 7 and Notes 1 and 6 to the financial statements of Mississippi Power under
Financial Instruments in Item 8 of the Form 10-K and Note (F) to the
Condensed Financial Statements herein. Financing Activities In March 2004, Mississippi Power issued $40 million of Series F Floating Rate
Senior Notes due March 9, 2009. The proceeds from this sale, along with other
monies of Mississippi Power, were used to repay at maturity $80 million
aggregate principal amount of Mississippi Powers Series D Floating Rate Senior
Notes due March 12, 2004. In April 2004, Mississippi Power issued 1,200,000 Depositary Shares ($30
million aggregate stated capital) each representing one-fourth of a share of
5.25% Series Preferred Stock, cumulative, par value $100 per share. The
proceeds from this sale were primarily used to redeem various issues of higher
cost preferred stock and the remainder was used for general corporate purposes. Mississippi Power plans to continue, when economically feasible, a program
to retire higher-cost debt and replace these obligations with lower-cost
capital if market conditions permit. 80




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SAVANNAH ELECTRIC
AND
POWER COMPANY 81




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SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Operating Revenues:Retail sales
    
    $
    88,437
    
    
    $
    75,468
    
    
    $
    156,460
    
    
    $
    139,014Sales for resale Non-affiliates
    
    
    1,294
    
    
    
    1,106
    
    
    
    2,704
    
    
    
    3,032Affiliates
    
    
    1,653
    
    
    
    912
    
    
    
    4,090
    
    
    
    3,236Other revenues
    
    
    686
    
    
    
    757
    
    
    
    1,651
    
    
    
    1,835Total operating revenues
    
    
    92,070
    
    
    
    78,243
    
    
    
    164,905
    
    
    
    147,117Operating Expenses:Fuel
    
    
    14,123
    
    
    
    12,594
    
    
    
    24,607
    
    
    
    24,019Purchased power Non-affiliates
    
    
    4,387
    
    
    
    723
    
    
    
    6,729
    
    
    
    2,627Affiliates
    
    
    27,145
    
    
    
    22,080
    
    
    
    49,275
    
    
    
    41,093Other operations
    
    
    15,577
    
    
    
    13,882
    
    
    
    29,678
    
    
    
    26,981Maintenance
    
    
    6,905
    
    
    
    6,689
    
    
    
    13,336
    
    
    
    12,599Depreciation and amortization
    
    
    5,246
    
    
    
    5,088
    
    
    
    10,450
    
    
    
    10,149Taxes other than income taxes
    
    
    3,795
    
    
    
    3,652
    
    
    
    7,392
    
    
    
    7,099Total operating expenses
    
    
    77,178
    
    
    
    64,708
    
    
    
    141,467
    
    
    
    124,567Operating Income
    
    
    14,892
    
    
    
    13,535
    
    
    
    23,438
    
    
    
    22,550Other Income and (Expense):Interest expense, net of amounts capitalized
    
    
    (2,988
    )
    
    
    (2,473
    )
    
    
    (6,132
    )
    
    
    (5,094
    )Distributions on mandatorily redeemable preferred securities
    
    
    
    
    
    
    (685
    )
    
    
    (109
    )
    
    
    (1,370
    )Other income (expense), net
    
    
    (74
    )
    
    
    (361
    )
    
    
    (421
    )
    
    
    (570
    )Total other income and (expense)
    
    
    (3,062
    )
    
    
    (3,519
    )
    
    
    (6,662
    )
    
    
    (7,034
    )Earnings Before Income Taxes
    
    
    11,830
    
    
    
    10,016
    
    
    
    16,776
    
    
    
    15,516Income taxes
    
    
    4,331
    
    
    
    3,720
    
    
    
    6,129
    
    
    
    5,711Net Income
    
    
    7,499
    
    
    
    6,296
    
    
    
    10,647
    
    
    
    9,805Dividends on Preferred Stock
    
    
    150
    
    
    
    
    
    
    
    150
    
    
    
    Net Income After Dividends on Preferred Stock
    
    $
    7,349
    
    
    $
    6,296
    
    
    $
    10,497
    
    
    $
    9,805
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Net Income After Dividends on Preferred Stock
    
    $
    7,349
    
    
    $
    6,296
    
    
    $
    10,497
    
    
    $
    9,805Other comprehensive income (loss):Changes in fair value of qualifying hedges, net of tax
of $10 and $(10), respectively
    
    
    18
    
    
    
    
    
    
    
    (15
    )
    
    
    Less: Reclassification adjustment for amounts included
in net income, net of tax of $15 and $30, respectively
    
    
    23
    
    
    
    
    
    
    
    47
    
    
    
    COMPREHENSIVE INCOME
    
    $
    7,390
    
    
    $
    6,296
    
    
    $
    10,529
    
    
    $
    9,805
 The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements. 82




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SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six MonthsEnded June 30,2004
    
    2003(in thousands)Operating Activities:Net income
    
    $
    10,647
    
    
    $
    9,805Adjustments to reconcile net income
to net cash provided from operating activities Depreciation and amortization
    
    
    11,550
    
    
    
    11,197Deferred income taxes and investment tax credits, net
    
    
    5,716
    
    
    
    521Pension, postretirement, and other employee benefits
    
    
    3,538
    
    
    
    3,203Tax benefit of stock options
    
    
    611
    
    
    
    860Other, net
    
    
    (6,904
    )
    
    
    4,085Changes in certain current assets and liabilities Receivables, net
    
    
    (13,678
    )
    
    
    (3,986
    )Fossil fuel stock
    
    
    (486
    )
    
    
    (1,951
    )Materials and supplies
    
    
    (750
    )
    
    
    (278
    )Other current assets
    
    
    (1,442
    )
    
    
    2,469Accounts payable
    
    
    2,604
    
    
    
    (4,261
    )Accrued taxes
    
    
    2,766
    
    
    
    2,044Accrued compensation
    
    
    (2,588
    )
    
    
    (3,404
    )Other current liabilities
    
    
    (1,631
    )
    
    
    (2,285
    )Net cash provided from operating activities
    
    
    9,953
    
    
    
    18,019Investing Activities:Gross property additions
    
    
    (95,854
    )
    
    
    (19,557
    )Other
    
    
    (1,889
    )
    
    
    272Net cash used for investing activities
    
    
    (97,743
    )
    
    
    (19,285
    )Financing Activities:Increase in notes payable, net
    
    
    17,586
    
    
    
    29,054Proceeds Pollution control bonds
    
    
    
    
    
    
    13,870Other long-term debt
    
    
    10,179
    
    
    
    Preferred stock
    
    
    45,000
    
    
    
    Capital contributions from parent company
    
    
    31,000
    
    
    
    5,000Redemptions Pollution control bonds
    
    
    
    
    
    
    (13,870
    )Senior notes
    
    
    
    
    
    
    (20,000
    )Other long-term debt
    
    
    
    
    
    
    (463
    )Mandatorily redeemable preferred securities
    
    
    (40,000
    )
    
    
    Payment of common stock dividends
    
    
    (11,600
    )
    
    
    (11,500
    )Other
    
    
    109
    
    
    
    (149
    )Net cash provided from financing activities
    
    
    52,274
    
    
    
    1,942Net Change in Cash and Cash Equivalents
    
    
    (35,516
    )
    
    
    676Cash and Cash Equivalents at Beginning of Period
    
    
    37,943
    
    
    
    3,978Cash and Cash Equivalents at End of Period
    
    $
    2,427
    
    
    $
    4,654Supplemental Cash Flow Information:Cash paid during the period for Interest (net of $409 and $113 capitalized for 2004
and 2003, respectively)
    
    $
    5,295
    
    
    $
    5,946Income taxes (net of refunds)
    
    $
    774
    
    
    $
    403
 The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements. 83




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SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At June 30,
    
    At December 31,Assets
    
    2004
    
    2003(in thousands)Current Assets:Cash and cash equivalents
    
    $
    2,427
    
    
    $
    37,943Receivables Customer accounts receivable
    
    
    24,514
    
    
    
    19,674Unbilled revenues
    
    
    15,152
    
    
    
    11,288Under recovered regulatory clause revenues
    
    
    8,897
    
    
    
    Other accounts and notes receivable
    
    
    686
    
    
    
    1,138Affiliated companies
    
    
    1,553
    
    
    
    4,872Accumulated provision for uncollectible accounts
    
    
    (793
    )
    
    
    (641
    )Fossil fuel stock, at average cost
    
    
    9,137
    
    
    
    8,652Materials and supplies, at average cost
    
    
    9,821
    
    
    
    9,070Prepaid income taxes
    
    
    23,152
    
    
    
    24,419Prepaid expenses
    
    
    1,526
    
    
    
    1,377Other
    
    
    1,914
    
    
    
    623Total current assets
    
    
    97,986
    
    
    
    118,415Property, Plant, and Equipment:In service
    
    
    926,205
    
    
    
    912,504Less accumulated provision for depreciation
    
    
    411,317
    
    
    
    402,394514,888
    
    
    
    510,110Construction work in progress
    
    
    95,854
    
    
    
    14,121Total property, plant, and equipment
    
    
    610,742
    
    
    
    524,231Other Property and Investments
    
    
    2,312
    
    
    
    2,248Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    9,313
    
    
    
    9,611Cash surrender value of life insurance for deferred compensation plans
    
    
    24,071
    
    
    
    23,866Unamortized debt issuance expense
    
    
    4,414
    
    
    
    5,652Unamortized loss on reacquired debt
    
    
    8,298
    
    
    
    7,488Other
    
    
    16,295
    
    
    
    18,410Total deferred charges and other assets
    
    
    62,391
    
    
    
    65,027Total Assets
    
    $
    773,431
    
    
    $
    709,921
 The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements. 84




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SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At June 30,
    
    At December 31,Liabilities and
Stockholders Equity
    
    2004
    
    2003(in thousands)Current Liabilities:Securities due within one year
    
    $
    954
    
    
    $
    40,910Notes payable
    
    
    17,586
    
    
    
    Accounts payable Affiliated
    
    
    18,044
    
    
    
    13,797Other
    
    
    10,605
    
    
    
    13,147Customer deposits
    
    
    7,101
    
    
    
    6,922Accrued taxes Income taxes
    
    
    766
    
    
    
    1,172Other
    
    
    4,645
    
    
    
    1,473Accrued interest
    
    
    2,886
    
    
    
    2,802Accrued vacation pay
    
    
    2,564
    
    
    
    2,530Accrued compensation
    
    
    3,063
    
    
    
    5,652Other
    
    
    3,272
    
    
    
    5,107Total current liabilities
    
    
    71,486
    
    
    
    93,512Long-term Debt
    
    
    232,628
    
    
    
    222,493Deferred Credits and Other Liabilities:Accumulated deferred income taxes
    
    
    88,142
    
    
    
    83,852Deferred credits related to income taxes
    
    
    9,295
    
    
    
    9,804Accumulated deferred investment tax credits
    
    
    8,293
    
    
    
    8,625Employee benefit obligations
    
    
    43,371
    
    
    
    39,833Other cost of removal obligations
    
    
    39,207
    
    
    
    36,843Miscellaneous regulatory liabilities
    
    
    13,230
    
    
    
    12,932Other
    
    
    6,944
    
    
    
    15,735Total deferred credits and other liabilities
    
    
    208,482
    
    
    
    207,624Total Liabilities
    
    
    512,596
    
    
    
    523,629Non-Cumulative Preferred Stock
    
    
    45,000
    
    
    
    Common Stockholders Equity:Common
stock, par value $5 per share 
Authorized - 16,000,000 shares
Outstanding - 10,844,635 shares
    
    
    54,223
    
    
    
    54,223Paid-in capital
    
    
    56,027
    
    
    
    24,417Retained earnings
    
    
    107,757
    
    
    
    109,856Accumulated other comprehensive loss
    
    
    (2,172
    )
    
    
    (2,204
    )Total common stockholders equity
    
    
    215,835
    
    
    
    186,292Total Liabilities and Stockholders Equity
    
    $
    773,431
    
    
    $
    709,921
 The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements. 85




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2004 vs. SECOND QUARTER 2003
AND
YEAR-TO-DATE 2004 vs. YEAR-TO-DATE 2003 RESULTS OF OPERATIONS Earnings Savannah Electrics net income for the second quarter and year-to-date 2004 was
$7.3 million and $10.5 million, respectively, compared to $6.3 million and $9.8
million, respectively, for the corresponding periods of 2003. Earnings
increased by $1.1 million, or 16.7%, in the second quarter 2004 primarily due
to higher operating revenues and other income, net, partially offset by higher
operating expenses. Year-to-date 2004 earnings were up by $0.7 million, or
7.1%, as a result of higher operating revenues, also partially offset by higher
operating expenses. Significant income statement items appropriate for discussion include the
following: Increase (Decrease)Second Quarter
    
    Year-To-Date(in thousands)
    
    %
    
    (in thousands)
    
    %Retail sales
    
    $
    12,969
    
    
    
    17.2
    
    
    $
    17,446
    
    
    
    12.5Sale for
resale  affiliates
    
    
    741
    
    
    
    81.3
    
    
    
    854
    
    
    
    26.4Fuel expense
    
    
    1,529
    
    
    
    12.1
    
    
    
    588
    
    
    
    2.4Purchased power  non-affiliates
    
    
    3,664
    
    
    
    506.8
    
    
    
    4,102
    
    
    
    156.1Purchased power  affiliates
    
    
    5,065
    
    
    
    22.9
    
    
    
    8,182
    
    
    
    19.9Other operations expense
    
    
    1,695
    
    
    
    12.2
    
    
    
    2,697
    
    
    
    10.0Maintenance expense
    
    
    216
    
    
    
    3.2
    
    
    
    737
    
    
    
    5.8Interest expense, net of amounts
capitalized
    
    
    515
    
    
    
    20.8
    
    
    
    1,038
    
    
    
    20.4
 Retail sales. Excluding fuel revenues, which do not affect net income,
retail sales revenue increased by $4.5 million, or 10.2%, in the second quarter
2004 and increased by $6.5 million, or 7.9%, year-to-date 2004 when compared to
the corresponding periods in 2003. The second quarter 2004 increase in retail
sales revenue is mainly attributed to an 11.7% increase in retail kilowatt-hour
energy sales. Energy sales to residential and commercial customers were higher
by 12.0% and 12.5%, respectively, mainly due to more favorable weather
conditions and growth in the number of customers when compared to the same
period in 2003. Energy sales to industrial customers increased by 9.3% in the
second quarter 2004 compared to the second quarter 2003 primarily due to
increased usage by several industrial customers as a result of the improving
economy. The year-to-date 2004 increase in retail revenues is primarily a
result of more favorable weather conditions and growth in the number of
customers. Year-to-date 2004, energy sales to residential and commercial
customers were higher by 14.1% and 7.4%, respectively. Energy sales to
industrial customers year-to-date 2004 were down 4.4% when compared to the
prior year mainly due to the installation of a cogeneration facility by one
customer in late 2003. Sales for resale  affiliates.Revenues from sales for resale to
affiliated companies within the Southern Company system will vary depending on
demand and the availability and cost of generating resources at each company.
Sales for resale to affiliates increased in the second quarter and year-to-date
2004 primarily due to an increase in demand. These transactions do not have a
significant impact on net income. 86




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Fuel expense.Fuel expense increased in the second quarter and
year-to-date 2004 primarily as a result of increased generation to meet demand
for energy and increases in the price of fuel. Generation increased 4.8% for
second quarter and 3.2% for year-to-date 2004 when compared to the prior year.
Fuel costs increased 7.1% for second quarter 2004. Since fuel expenses are
generally offset by fuel revenues through Savannah Electrics fuel cost
recovery clause, these expenses do not have a significant impact on net income.
See Future Earnings Potential  FERC and Georgia PSC
Matters  Fuel Cost
Recovery Rate Filings and Note (L) to the Condensed Financial Statements
herein for additional information. Purchased power  non-affiliates.In the second quarter and year-to-date
2004, the increases in purchased power from non-affiliates are primarily due to
higher demand and the opportunity to purchase this energy at a cost lower than
self-generation or available from affiliates. These transactions do not have a
significant impact on earnings, as energy costs are generally recovered through
Savannah Electrics fuel cost recovery clause. Purchased power  affiliates. Purchased power from affiliates increased
in the second quarter and year-to-date 2004 as compared to the same periods in
the prior year primarily due to the availability of system generation at prices
below self generation to meet increased sales demand and also as the result of
an accounting order approved by the Georgia PSC in December 2002 which allows
Savannah Electric to write-down a portion of the approximately $3.8 million
annual deferral in Plant Wansley purchased power costs.
See Note 3 to the financial statements of Savannah Electric under Retail
Regulatory Matters in Item 8 of the Form 10-K for additional information. The
net impact of these transactions compared to the prior year was a $0.6 million
increase to expense for the second quarter and a $0.9 million increase
year-to-date. Purchased power from affiliates also includes energy purchases
which will vary depending on demand and cost of generation resources at each
company and higher energy costs. These energy costs are recovered through the
fuel cost recovery clause and have no significant impact on earnings. Other operations expense. The increases for the second quarter and
year-to-date 2004 as compared to the same periods in the prior year in other
operations expense are attributed to an increase in administrative and general
expenses primarily relating to accounting and auditing services, legal and
employee benefit expenses. Maintenance expense.The increases in the second quarter and year-to-date
2004 as compared to the same periods in the prior year are mainly due to an
unscheduled coal mill repair at Plant Kraft. Interest expense, net of amounts capitalized.The second quarter and
year-to-date 2004 increases in this expense as compared to the same period in
the prior year are mainly due to an increase in long term debt outstanding.
These increases were more than offset by decreases in distributions on
mandatorily redeemable preferred securities. These preferred securities were
redeemed in January 2004 with proceeds from the issuance of senior notes in
late 2003. Future Earnings Potential The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including Savannah Electrics ability to maintain a stable regulatory
environment, to achieve energy sales growth while containing costs and to
recover costs related to growing demand and increasingly stricter environmental
standards. Growth in energy sales is subject to a number of factors, which
include weather, competition, new energy contracts with neighboring utilities,
energy conservation
practiced by customers, the price of electricity, the price elasticity of
demand and the rate of economic growth in the service area. For additional
information relating to these issues, see BUSINESS  The 87




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION SOUTHERN System  Risk Factors in Item 1 and MANAGEMENTS DISCUSSION AND
ANALYSIS  RESULTS OF OPERATIONS  Future Earnings Potential of Savannah
Electric in Item 7 of the Form 10-K. Environmental Matters Compliance costs related to the Clean Air Act and other environmental
regulations could affect earnings if such costs cannot be recovered. See
MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future Earnings
Potential  Environmental Matters of Savannah Electric in Item 7 and Note 3 to
the financial statements of Savannah Electric under New Source Review Actions
in Item 8 of the Form 10-K. As of March 15, 2004, civil penalties under the
Clean Air Act were increased prospectively to a maximum of $32,500 per day, per
violation. To the extent alleged violations under either the New Source Review
litigation or Plant Wansley environmental litigation are deemed to be
continuing, this increased civil penalty amount could apply to such violations
found to continue after that date. On May 3, 2004, the U.S. Supreme Court
denied the EPAs petition to review the Eleventh Circuit Court of Appeals
decision in the EPAs similar New Source Review enforcement action against the
TVA. The case against Savannah Electric has been effectively stayed pending
final resolution of the TVA case. With the denial of the EPAs petition for
review, the Court of Appeals decision became final. At this time, no party to
the case against Savannah Electric has sought to reopen that case, which
remains administratively closed in the District Court for the Northern District
of Georgia. An adverse outcome in this case could require substantial capital
expenditures that cannot be determined at this time and could possibly require
payment of substantial penalties. This could affect future results of
operations, cash flows, and possibly financial condition if such costs are not
recovered through regulated rates. On July 21, 2004, attorneys general from eight states, each outside of
Southern Companys service territory, and the corporation counsel for New York
City filed a complaint in U.S. District Court for the Southern District of New
York against Southern Company and four other electric power companies. A
nearly identical complaint was filed by three environmental groups in the same
court. The complaints allege that the companies emissions of carbon dioxide, a
greenhouse gas, contribute to global warming, which the plaintiffs assert is a
public nuisance. Plaintiffs seek relief under the federal common law or, in the
alternative, under state law, of public nuisance. The environmental groups
also seek relief under common law private nuisance theories. The plaintiffs
seek a judicial order (1) holding each defendant jointly and severally liable
for creating, contributing to, and/or maintaining an ongoing public nuisance,
global warming and (2) permanently enjoining each of the defendants to abate
its contribution to the nuisance by capping its emissions of carbon dioxide and
then reducing those emissions by a specified percentage each year for at least
a decade. Plaintiffs have not, however, requested that damages be awarded in
connection with their claims. Southern Company believes these claims are
without merit and notes that the complaint cites no statutory or regulatory
basis for the claims. Southern Company has not yet responded to the suits;
however, it intends to vigorously defend against these claims. While the
outcome cannot be determined at this time, an adverse judgment could result in
substantial capital expenditures. On April 21, 2004, the EPA published the final regional nitrogen oxide
reduction rules applicable to the State of Georgia. These rules specify that
Georgia must submit a revised state implementation plan by April 2005, and
affected sources must comply with the reduction requirements by May 1, 2007.
The impact of these regulations will depend on the development and approval of
Georgias state implementation plan and cannot be determined at this time. Additionally, on May 5, 2004, the EPA published proposed amendments to its
Regional Haze rules with respect to Best Available Retrofit Technology
guidelines and requirements. The impact of these regulations will
depend on the development and implementation of the final rules and
implementation by the states, and therefore cannot be determined at this time. 88




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION FERC and Georgia PSC Matters Market-Based Rate
Authority See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  FERC Matters  Market-Based Rate Authority in Item 7 and
Note 3 to the financial statements of Savannah Electric under FERC Matters in
Item 8 of the Form 10-K. On April 14, 2004, the FERC issued an order that
abandoned the SMA test and adopted a new interim analysis for measuring
generation market power. This new interim approach includes a pivotal supplier
analysis and a wholesale market share analysis, the results of which provide a
rebuttable presumption regarding generation market power. The FERCs order
also sets forth procedures for rebutting these presumptions and addresses
mitigation measures for those entities that are found to have market power. In
the absence of specific mitigation measures, the order includes several
cost-based mitigation measures that would apply by default. The FERC also
initiated a new rulemaking proceeding that, among other things, will adopt a
final methodology for assessing generation market power. Southern Company, the
retail operating companies, including Savannah Electric, and Southern Power
believe that it may be difficult for a traditional utility company, or an
affiliate thereof, with a significant load service obligation and generation to
satisfy that obligation, and that is not a member of a large, FERC-approved
RTO, to pass all aspects of the market power screens as currently designed.
However, each of the companies believes that it has an appropriate basis to
rebut the generation market power presumption. On July 8, 2004, the FERC denied Southern Companys request for rehearing,
along with a number of others, and reaffirmed the interim tests that it adopted
in April. Southern Company will submit the required analyses by August 9, 2004.
In the event that the FERCs default mitigation measures are ultimately
applied, Southern Power and the retail operating companies may be required to
charge cost-based rates, which may be lower than negotiated market-based rates.
The final outcome of this matter will depend on the form in which the final
methodology for assessing generation market power and mitigation rules may be
ultimately adopted and cannot be determined at this time. Transmission See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  FERC Matters  Transmission of Savannah Electric in Item
7 of the Form 10-K for information on the FERCs order related to RTOs and the
FERCs notice of proposed rulemaking regarding open access transmission service
and standard electricity market design. Plant McIntosh
Construction Project See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  FERC Matters  Southern Power PPAs of Savannah Electric
in Item 7 and Note 3 to the financial statements of Savannah Electric under
FERC Matters in Item 8 of the Form 10-K for information regarding PPAs
between Southern Power and Savannah Electric and Georgia Power for Plant
McIntosh capacity. In April 2003, Southern Power applied for
FERC approval of these PPAs. In July 2003, the FERC accepted the PPAs to
become effective June 1, 2005, subject to refund and ordered that hearings be
held. To ensure the timely completion of construction on McIntosh units 10 and
11 and their availability in the summer of 2005 as supply side resources for
the retail customers in the State of Georgia, on May 7, 2004, Savannah Electric
and Georgia Power requested the Georgia PSC to direct them to acquire the
McIntosh construction project.
Savannah Electric and Georgia Power proposed to place the units in rate base at
a cost approved by the Georgia PSC and to recover the unit operation and
maintenance costs as retail service expenses as may be approved by the Georgia
PSC. The Georgia PSC issued such an order on May 18, 2004 and the transfer 89




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION occurred on May 24,
2004. On May 20, 2004, Southern Power filed a request to
withdraw the PPAs and to terminate the ongoing FERC proceedings. On
August 4, 2004, the FERC issued a notice that it allowed the
request to withdraw the PPAs to be accepted and to become effective
by operation of law on July 20, 2004. However, the FERC made no
determination on what additional steps may need to be taken with
respect to testimony provided in the proceedings. The ultimate outcome of this
matter cannot now be determined. The May 18, 2004 Georgia PSC order also directed Georgia Power and
Savannah Electric to file an application within 10 days of completing such
purchase to amend the resource certificate granted by the Georgia PSC in 2002
to describe the capacity resource as being the McIntosh units 10 and 11 (as
opposed to the McIntosh PPAs), the approximate construction schedule (which is
not expected to change) and the proposed rate base treatment. The application
was filed on June 3, 2004 and the Georgia PSC will have 180 days to respond.
The Georgia PSC is expected to review the application in accordance with its
affiliate transaction guidelines, which require a lower of cost or market
approach unless otherwise determined by the Georgia PSC. Georgia Power and
Savannah Electric have submitted information showing that the book cost of the
McIntosh construction project is lower than its market value. However, full
recovery of the project costs depends on the outcome of the Georgia PSCs
review. In the event the Georgia PSC does not allow full recovery of the
project costs, then part of such costs may have to be written off in accordance
with FASB Statement No. 90, Accounting for Abandonments and Disallowed Plant
Costs. At June 30, 2004, the investment in the McIntosh construction project
totaled approximately $69.7 million for Savannah Electric. The ultimate outcome
of the Georgia PSCs review cannot now be determined. Fuel Cost Recovery Rate Filings On March 23, 2004, Savannah Electric submitted a request to the Georgia PSC for
an accounting order which, if approved by the Georgia PSC, would have allowed
for the cost of a coal transloader then under construction to be amortized over
twenty-four months through fuel expense and recovered through Savannah
Electrics fuel cost recovery clause. The transloader allows foreign coal to
be off-loaded from ships at Savannah Electrics Plant Kraft dock, and then
transferred by rail to Plant McIntosh. On June 24, 2004, the Georgia PSC denied
Savannah Electrics request for this accounting order. Consequently,
accumulated project costs of $2.7 million were recorded as construction work in
progress in June 2004 and will be depreciated over the projects estimated
useful life of 35 years once placed in service. On July 30, 2004, Savannah Electric filed for a fuel cost recovery rate
increase with the Georgia PSC. The increase will allow for the recovery of fuel
costs based on an estimate of future costs, as well as the collection of the
existing under recovery of fuel expenses, over a two-year period. The amount
under recovered at June 30, 2004 is approximately $8.9 million and is included
in Savannah Electrics Condensed Balance Sheets herein. The Georgia PSC is
expected to rule on this matter by late October 2004. The outcome of the
filing cannot be determined at this time. Retail Rate Case Savannah Electric anticipates filing a base rate case in late 2004. Other Matters Savannah Electric is subject to certain claims and legal actions arising in the
ordinary course of business. In addition, Savannah Electrics business
activities are subject to extensive governmental regulation related to public
health and the environment. Litigation over environmental issues and claims of
various types, including property damage, personal injury and citizen
enforcement of environmental requirements, has increased generally throughout
the United States. In particular, personal injury claims for damages caused by
alleged 90




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION exposure to hazardous materials have become more frequent. The ultimate
outcome of such litigation against Savannah Electric cannot be predicted at
this time; however, management does not anticipate that the liabilities, if
any, arising from such current proceedings would have a material adverse effect
on Savannah Electrics financial statements. See the Notes to the Condensed Financial Statements herein for discussion
of various contingencies and other matters which may affect future earnings
potential. ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates Savannah Electric prepares its financial statements in accordance with
accounting principles generally accepted in the United States. Significant
accounting policies are described in Note 1 to the financial statements of
Savannah Electric in Item 8 of the Form 10-K. In the application of these
policies, certain estimates are made that may have a material impact on
Savannah Electrics results of operations and related disclosures. Different
assumptions and measurements could produce estimates that are significantly
different from those recorded in the financial statements. See MANAGEMENTS
DISCUSSION AND ANALYSIS  ACCOUNTING POLICIES  Application of Critical
Accounting Policies and Estimates of Savannah Electric in Item 7 of the Form
10-K for a complete discussion of Savannah Electrics critical accounting
policies and estimates related to Electric Utility Regulation and Contingent
Obligations. New Accounting Standards On March 31, 2004, Savannah Electric prospectively adopted FASB Interpretation
No. 46R, Consolidation of Variable Interest Entities, which requires the
primary beneficiary of a variable interest entity to consolidate the related
assets and liabilities. See Note 6 to the financial statements of Savannah
Electric under Mandatorily Redeemable Preferred Securities in Item 8 of the
Form 10-K regarding Savannah Electrics redemption of all outstanding preferred
securities in January 2004 and the dissolution of the issuing trust.
Therefore, the adoption of Interpretation No. 46R had no impact on Savannah
Electrics financial statements. In May 2004, the FASB approved Staff Position (FSP) No. 106-2, Accounting
and Disclosure Requirements related to the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (the Medicare Act). FSP No.
106-2 requires recognition of the impacts of the Medicare Act in the
accumulated post-retirement benefit obligation and future cost of service for
post-retirement medical plans and may be applied retroactively to the enactment
of the Medicare Act in December 2003 or prospectively effective for the third
quarter 2004. Savannah Electric has elected to apply this treatment
prospectively. Pending the finalization of federal regulations governing the
subsidy effected in the Medicare Act, Savannah Electric does not anticipate a
material impact on its financial statements from the adoption of FSP No. 106-2. FINANCIAL CONDITION AND LIQUIDITY Overview Major changes in Savannah Electrics financial condition during the first six
months of 2004 included the addition of approximately $95.9 million to utility
plant, which include the Plant McIntosh combined cycle construction project.
See Note (J) to the Condensed Financial Statements herein for additional
information. The funds for these additions and other capital requirements were
derived primarily from operating activities, issuance of securities, capital
contributions from Southern Company and short-term debt. See Savannah
Electrics Condensed Statements of Cash Flows herein for further details. 91




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Capital Requirements and Contractual Obligations Reference is made to
MANAGEMENTS DISCUSSION AND ANALYSIS  FINANCIAL CONDITION
AND LIQUIDITY  Capital Requirements and Contractual Obligations of Savannah
Electric in Item 7 of the Form 10-K for a description of Savannah Electrics
capital requirements for its construction program, lease obligations, purchase
commitments and trust funding requirements. The projected construction program
will increase by $83.1 million and $7.6 million in 2004 and 2005, respectively,
for the Plant McIntosh combined cycle construction project and the projected
purchased power commitments will decrease by $25.3 million in 2005-2006, $28.2
million in 2007-2008 and $158.0 million beyond 2008 as a result of the purchase
of the construction project. Sources of Capital Savannah Electric plans to obtain the funds required for construction and other
purposes from sources similar to those used in the past including both internal
and external funds. The amount, type and timing of any future financings  if
needed  will depend upon market conditions and regulatory approval. See
BUSINESS  Financing Programs in Item 1 of the Form 10-K for additional
information. To meet short-term cash needs and contingencies, Savannah Electric had at
June 30, 2004 approximately $2.4 million of cash and cash equivalents and $50
million of unused committed credit arrangements with banks, of which $31
million expires in 2004, $9 million expires in 2005 and $10 million expires in
2007. Of the unused credit arrangements expiring in 2004 and 2005, $40 million
include two year term loan options executable at the expiration date. The
credit arrangements provide liquidity support to some of Savannah Electrics
obligations with respect to its variable rate debt and its commercial paper.
Savannah Electric expects to renew its credit facilities, as needed, prior to
expiration. Savannah Electric may also meet short-term cash needs through a
Southern Company subsidiary organized to issue and sell commercial paper and
extendible commercial notes at the request and for the benefit of Savannah
Electric and other Southern Company subsidiaries. At June 30, 2004, Savannah
Electric had $10.7 million of commercial paper and $6.9 million of extendible
commercial notes outstanding. Management believes that the need for working
capital can be adequately met by utilizing lines of credit and access to the
financial markets. Credit Rating Risk Savannah Electric does not have any credit agreements that would require
material changes in payment schedules or terminations as a result of a credit
rating downgrade. Market Price Risk Savannah Electrics market risk exposures relative to interest rate changes
have not changed materially compared with the December 31, 2003 reporting
period. In addition, Savannah Electric is not aware of any facts or
circumstances that would significantly affect such exposures in the near term. 92




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Due to cost-based rate regulations, Savannah Electric has limited exposure
to market volatility in interest rates, commodity fuel prices and prices of
electricity. To mitigate residual risks relative to movements in electricity
prices, Savannah Electric enters into fixed price contracts for the purchase
and sale of electricity through the wholesale electricity market and, to a
lesser extent, similar contracts for gas and oil purchases. Savannah Electric
has also implemented a retail fuel hedging program at the instruction of the
Georgia PSC.
The fair value of derivative energy contracts at June 30, 2004 was as follows: Second Quarter2004
    
    Year-to-DateChanges
    
    ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    1,959
    
    
    $
    463Contracts realized or settled
    
    
    (781
    )
    
    
    (782
    )New contracts at inception
    
    
    
    
    
    
    Changes in valuation techniques
    
    
    
    
    
    
    Current period changes
    
    
    405
    
    
    
    1,902Contracts at June 30, 2004
    
    $
    1,583
    
    
    $
    1,583
 Source of June 30, 2004Valuation PricesTotal
    
    MaturityFair Value
    
    Year 1
    
    1-3 Years(in thousands)Actively quoted
    
    $
    1,583
    
    
    $
    1,341
    
    
    $
    242External sources
    
    
    
    
    
    
    
    
    
    
    Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at June 30, 2004
    
    $
    1,583
    
    
    $
    1,341
    
    
    $
    242
 For
additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS
 FINANCIAL CONDITION AND LIQUIDITY  Market Price Risk of Savannah Electric in
Item 7 and Notes 1 and 6 to the financial statements of Savannah Electric under
Financial Instruments in Item 8 of the Form 10-K and Note (F) to the
Condensed Financial Statements herein. Financing Activities Savannah Electric received contributions to capital from Southern in May 2004
in the amount of $31 million to help finance the purchase of the Plant McIntosh
construction project. See Note (J) to the Condensed Financial Statements
herein for additional information. In June 2004, Savannah Electric issued 1,800,000 shares ($45 million
aggregate par value) of 6.00% Series Preferred Stock, Non-Cumulative, Par Value
$25 Per Share. The proceeds from this sale were used to repay a portion of its
outstanding short-term indebtedness that had been incurred primarily to finance
the purchase of the Plant McIntosh construction project. Savannah Electric plans to continue, when economically feasible, a program
to retire higher-cost securities and replace these obligations with lower-cost
capital if market conditions permit. 93




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SOUTHERN POWER COMPANY 94




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SOUTHERN POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Operating Revenues:Sales for resale Non-affiliates
    
    $
    73,032
    
    
    $
    68,997
    
    
    $
    159,731
    
    
    $
    119,266Affiliates
    
    
    107,218
    
    
    
    86,079
    
    
    
    194,013
    
    
    
    141,369Contract termination
    
    
    
    
    
    
    80,000
    
    
    
    
    
    
    
    80,000Other revenues
    
    
    2,499
    
    
    
    3,205
    
    
    
    4,610
    
    
    
    5,085Total Operating Revenues
    
    
    182,749
    
    
    
    238,281
    
    
    
    358,354
    
    
    
    345,720Operating Expenses:Fuel
    
    
    43,998
    
    
    
    35,198
    
    
    
    74,333
    
    
    
    55,236Purchased power Non-affiliates
    
    
    25,813
    
    
    
    16,237
    
    
    
    39,418
    
    
    
    31,560Affiliates
    
    
    28,926
    
    
    
    31,670
    
    
    
    70,982
    
    
    
    49,602Other operations
    
    
    13,529
    
    
    
    12,327
    
    
    
    28,254
    
    
    
    18,235Maintenance
    
    
    4,407
    
    
    
    303
    
    
    
    7,419
    
    
    
    2,480Depreciation and amortization
    
    
    12,796
    
    
    
    8,062
    
    
    
    25,574
    
    
    
    14,606Taxes other than income taxes
    
    
    2,718
    
    
    
    2,063
    
    
    
    5,397
    
    
    
    3,363Total operating expenses
    
    
    132,187
    
    
    
    105,860
    
    
    
    251,377
    
    
    
    175,082Operating Income
    
    
    50,562
    
    
    
    132,421
    
    
    
    106,977
    
    
    
    170,638Other Income and (Expense):Interest expense, net of amounts
capitalized
    
    
    (14,323
    )
    
    
    (2,944
    )
    
    
    (26,909
    )
    
    
    (4,343
    )Other income (expense), net
    
    
    1,271
    
    
    
    (174
    )
    
    
    1,764
    
    
    
    129Total other income and (expense)
    
    
    (13,052
    )
    
    
    (3,118
    )
    
    
    (25,145
    )
    
    
    (4,214
    )Earnings Before Income Taxes
    
    
    37,510
    
    
    
    129,303
    
    
    
    81,832
    
    
    
    166,424Income taxes
    
    
    15,093
    
    
    
    50,013
    
    
    
    32,230
    
    
    
    64,376Earnings Before Cumulative Effect of
Accounting Change
    
    
    22,417
    
    
    
    79,290
    
    
    
    49,602
    
    
    
    102,048Cumulative effect of accounting change 
less income taxes of $231 thousand
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    367Net Income
    
    $
    22,417
    
    
    $
    79,290
    
    
    $
    49,602
    
    
    $
    102,415
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Net Income
    
    $
    22,417
    
    
    $
    79,290
    
    
    $
    49,602
    
    
    $
    102,415Other comprehensive income (loss):Changes in fair value of qualifying hedges, net of tax
of $104, $(6,164), $(418) and $(8,564), respectively
    
    
    166
    
    
    
    (10,154
    )
    
    
    (762
    )
    
    
    (13,987
    )Less: Reclassification adjustment for amounts
included in net income, net of tax of $886, $(50),
$1,873 and $116, respectively
    
    
    1,414
    
    
    
    440
    
    
    
    2,983
    
    
    
    704COMPREHENSIVE INCOME
    
    $
    23,997
    
    
    $
    69,576
    
    
    $
    51,823
    
    
    $
    89,132
 The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements. 95




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SOUTHERN POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six MonthsEnded June 30,2004
    
    2003(in thousands)Operating Activities:Net income
    
    $
    49,602
    
    
    $
    102,415Adjustments
to reconcile net incometo net cash provided from operating activities Depreciation and amortization
    
    
    30,561
    
    
    
    13,924Deferred income taxes and investment tax credits, net
    
    
    20,281
    
    
    
    10,514Deferred capacity revenues
    
    
    (14,972
    )
    
    
    (10,159
    )Tax benefit of stock options
    
    
    100
    
    
    
    131Other, net
    
    
    483
    
    
    
    878Changes in certain current assets and liabilities Receivables, net
    
    
    (32,912
    )
    
    
    (34,680
    )Fossil fuel stock
    
    
    2,880
    
    
    
    4,678Materials and supplies
    
    
    (1,493
    )
    
    
    (324
    )Other current assets
    
    
    10,480
    
    
    
    (7,287
    )Accounts payable
    
    
    (21,417
    )
    
    
    23,023Accrued taxes
    
    
    5,577
    
    
    
    46,627Accrued interest
    
    
    (291
    )
    
    
    (3,781
    )Net cash provided from operating activities
    
    
    48,879
    
    
    
    145,959Investing Activities:Gross property additions
    
    
    (94,991
    )
    
    
    (231,396
    )Sale of property to affiliates
    
    
    400,346
    
    
    
    Change in construction payables, net
    
    
    (9,463
    )
    
    
    (19,587
    )Other
    
    
    778
    
    
    
    1,079Net cash provided from (used for) investing activities
    
    
    296,670
    
    
    
    (249,904
    )Financing Activities:Decrease in notes payable, net  affiliated
    
    
    
    
    
    
    (4,025
    )Increase (decrease) in notes payable, net
    
    
    (90,218
    )
    
    
    492,351Proceeds Capital contributions from parent company
    
    
    
    
    
    
    254Redemptions Other long-term debt
    
    
    
    
    
    
    (380,163
    )Capital distributions to parent company
    
    
    (225,000
    )
    
    
    Other
    
    
    1,960
    
    
    
    (2,540
    )Net cash provided from (used for) financing activities
    
    
    (313,258
    )
    
    
    105,877Net Change in Cash and Cash Equivalents
    
    
    32,291
    
    
    
    1,932Cash and Cash Equivalents at Beginning of Period
    
    
    2,798
    
    
    
    19,474Cash and Cash Equivalents at End of Period
    
    $
    35,089
    
    
    $
    21,406Supplemental Cash Flow Information:Cash paid during the period for Interest (net of $15,544 and $23,890 capitalized for 2004 and 2003, respectively)
    
    $
    19,839
    
    
    $
    Income taxes (net of refunds)
    
    $
    2,201
    
    
    $
    10,831
 The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements. 96




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SOUTHERN POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At June 30,
    
    At December 31,Assets
    
    2004
    
    2003(in thousands)Current Assets:Cash and cash equivalents
    
    $
    35,089
    
    
    $
    2,798Receivables Customer accounts receivable
    
    
    12,617
    
    
    
    10,772Other accounts receivable
    
    
    7
    
    
    
    270Accumulated provision for uncollectible accounts
    
    
    (350
    )
    
    
    (350
    )Affiliated companies
    
    
    45,460
    
    
    
    14,130Fossil fuel stock, at average cost
    
    
    2,918
    
    
    
    5,798Materials and supplies, at average cost
    
    
    9,616
    
    
    
    8,123Prepaid income taxes
    
    
    2,539
    
    
    
    11,222Prepaid expenses
    
    
    4,428
    
    
    
    2,528Other
    
    
    330
    
    
    
    1,174Total current assets
    
    
    112,654
    
    
    
    56,465Property, Plant, and Equipment:In service
    
    
    1,823,448
    
    
    
    1,831,139Less accumulated provision for depreciation
    
    
    85,617
    
    
    
    60,0051,737,831
    
    
    
    1,771,134Construction work in progress
    
    
    200,319
    
    
    
    504,097Total property, plant, and equipment
    
    
    1,938,150
    
    
    
    2,275,231Deferred Charges and Other Assets:Unamortized debt issuance expense
    
    
    16,457
    
    
    
    18,315Accumulated deferred income taxes
    
    
    1,259
    
    
    
    21,911Prepaid long-term service agreements
    
    
    31,660
    
    
    
    21,728Prepaid transmission expenses  affiliated
    
    
    
    
    
    
    12,790Other
    
    
    4,077
    
    
    
    2,845Total deferred charges and other assets
    
    
    53,453
    
    
    
    77,589Total Assets
    
    $
    2,104,257
    
    
    $
    2,409,285
 The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements. 97




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SOUTHERN POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At June 30,
    
    At December 31,Liabilities and Stockholders
Equity
    
    2004
    
    2003(in thousands)Current Liabilities:Securities due within one year
    
    $
    200
    
    
    $
    200Notes payable
    
    
    24,131
    
    
    
    114,347Accounts payable Affiliated
    
    
    22,556
    
    
    
    51,442Other
    
    
    4,597
    
    
    
    6,591Accrued taxes other than income taxes
    
    
    6,866
    
    
    
    1,289Accrued interest
    
    
    29,722
    
    
    
    30,012Other
    
    
    349
    
    
    
    489Total current liabilities
    
    
    88,421
    
    
    
    204,370Long-term Debt
    
    
    1,149,214
    
    
    
    1,149,112Deferred Credits and Other Liabilities:Deferred capacity revenues Affiliated
    
    
    14,098
    
    
    
    28,799Other
    
    
    (15
    )
    
    
    256Other Affiliated
    
    
    13,999
    
    
    
    15,061Other
    
    
    140
    
    
    
    211Total deferred credits and other liabilities
    
    
    28,222
    
    
    
    44,327Total Liabilities
    
    
    1,265,857
    
    
    
    1,397,809Common Stockholders Equity:Common stock, par value $.01 per share Authorized  1,000,000 sharesOutstanding  1,000 sharesPaid-in capital
    
    
    737,413
    
    
    
    850,312Retained earnings
    
    
    155,228
    
    
    
    217,626Accumulated other comprehensive loss
    
    
    (54,241
    )
    
    
    (56,462
    )Total common stockholders equity
    
    
    838,400
    
    
    
    1,011,476Total Liabilities and Stockholders Equity
    
    $
    2,104,257
    
    
    $
    2,409,285
 The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements. 98




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SOUTHERN POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2004 vs. SECOND QUARTER 2003
AND
YEAR-TO-DATE 2004 vs. YEAR-TO-DATE 2003 RESULTS OF OPERATIONS Earnings Southern Powers net income for the second quarter and year-to-date 2004 was
$22.4 million and $49.6 million, respectively, compared to $79.3 million and
$102.4 million for the corresponding periods of 2003. The decreases in second
quarter 2004 earnings of $56.9 million, or 71.7%, and $52.8 million, or 51.6%,
year-to-date 2004 are primarily attributed to a one-time gain of $50 million
recognized in May 2003 upon termination of PPAs with Dynegy, as well as a
reduction in the earnings from sales of uncontracted capacity as new PPAs have
become effective. PPAs with Alabama Power and Georgia Power for Plants Harris
Unit 1 and Franklin Unit 2 that began in June 2003, and with the Stanton joint
owners for Stanton Unit A that began in October 2003, increased both affiliated
and non-affiliated revenues, while significantly reducing uncontracted
capacity. A new PPA with Georgia Power for Plant Harris Unit 2 began in June
2004 and further reduced uncontracted capacity. The previously uncontracted
capacity that was available to the market from June 2003 through May 2004
consisted of approximately 800 MWs; 600 MWs from Plant Harris Unit 2 and 200 MW
from Plant Franklin Unit 2. Significant income statement items appropriate for discussion include the
following: Increase (Decrease)Second Quarter
    
    Year-To-Date(in thousands)
    
    %
    
    (in thousands)
    
    %Sales for resale  non-affiliates
    
    $
    4,035
    
    
    
    5.8
    
    
    $
    40,465
    
    
    
    33.9Sale for resale  affiliates
    
    
    21,139
    
    
    
    24.6
    
    
    
    52,644
    
    
    
    37.2Fuel expense
    
    
    8,800
    
    
    
    25.0
    
    
    
    19,097
    
    
    
    34.6Purchased power  non-affiliates.
    
    
    9,576
    
    
    
    59.0
    
    
    
    7,858
    
    
    
    24.9Purchased power  affiliates
    
    
    (2,744
    )
    
    
    (8.7
    )
    
    
    21,380
    
    
    
    43.1Other operations expense
    
    
    1,202
    
    
    
    9.8
    
    
    
    10,019
    
    
    
    54.9Depreciation and amortization
    
    
    4,734
    
    
    
    58.7
    
    
    
    10,968
    
    
    
    75.1Interest expense, net of amounts
capitalized
    
    
    11,379
    
    
    
    N/M
    
    
    
    22,566
    
    
    
    N/MIncome taxes
    
    
    (34,920
    )
    
    
    N/M
    
    
    
    (32,146
    )
    
    
    N/M
   N/M Not meaningful Sales for resale  non-affiliates. In the second quarter and year-to-date
2004, revenues from sales for resale to non-affiliates were higher when
compared to the corresponding periods in 2003. These increases were primarily
due to additional wholesale capacity and energy sales to non-affiliates as a
result of commercial operation of Plant Harris Unit 2 in June 2003 and Plant
Stanton A in October 2003. Sales for resale  affiliates.During the second quarter and year-to-date
2004, sales for resale to affiliates increased primarily due to energy and
capacity sales through PPAs with Alabama Power and Georgia Power that commenced
in June 2003. A new PPA with Georgia Power for Plant Harris Unit 2 that began
in June 2004 also contributed to the increases. Revenues from sales to
affiliated companies through the Southern Company system power pool and energy
sales under PPAs will vary depending on demand and the availability and cost of
generating resources accessible throughout the Southern Company system. 99




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SOUTHERN POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Fuel expense. Fuel expense for the second quarter and year-to-date 2004
increased significantly when compared to the same periods in 2003. The second
quarter 2004 increase resulted primarily from commercial operation of Plant
Harris Unit 2, and natural gas prices that averaged 14% higher than in the same
period of 2003. For year-to-date 2004, the increase over the same period in
2003 was 6%. Southern Powers existing PPAs generally provide that the
purchasers are responsible for substantially all of the cost of fuel relating
to the energy delivered under such PPAs; therefore, these cost increases do not
have a significant impact on net income. Purchased power  non-affiliates. The increases in purchased power from
non-affiliates during the second quarter and year-to-date 2004 when compared to
the same periods in 2003 are primarily due to higher purchase volumes and
pricing related to day-ahead peak-hour purchases in 2004. These purchases
minimize daily cycling of Southern Powers generating units or the need to
operate those units during off-peak hours when cheaper energy is available from
affiliates. These purchases reduce overall costs when long-term maintenance of
the units is considered. Purchased power  affiliates. The decrease in purchased power from
affiliates during the second quarter 2004 compared to the same period in the
prior year is due to the availability of power at prices lower than from
affiliates. The availability of power at prices lower than Southern Powers
self-generation, which is primarily natural gas-fired, accounted for the
year-to-date 2004 increase in purchased power from affiliates when compared to
the same period in the prior year. Expenses from purchased power transactions
will vary depending on demand, availability and the cost of generating
resources accessible throughout the Southern Company system. Other operations expense.During the second quarter and year-to-date
2004, other operations expense increased when compared to the same periods in
the prior year due mainly to expenses associated with the commercial operation
of Plant Franklin Unit 2 and Plant Harris Units 1 and 2, which were all placed
into commercial operation in June 2003, and Plant Stanton A, which was placed
into commercial operation in October 2003. Depreciation and amortization.New generating units placed into service
in June and October 2003 are the main drivers for the increases in depreciation
and amortization in the second quarter and year-to-date 2004 as compared to the
corresponding periods in the prior year. Interest expense, net of amounts capitalized.In the second quarter and
year-to-date 2004, interest expense, net of amounts capitalized increased when
compared to the same periods in 2003 due to an increase in the amount of senior
notes outstanding and a lower percentage of interest costs being capitalized as
projects have reached completion. In addition, see Note (J) to the Condensed
Financial Statements herein for information regarding the transfer of the
Plant McIntosh Unit 10 and 11 construction project to Georgia Power and
Savannah Electric on May 24, 2004. Income taxes.The decreases in income taxes for the second quarter and
year-to-date 2004 correspond to the decrease in pre-tax earnings due to the
Dynegy settlement recorded in the second quarter of 2003. There were no audit
adjustments or settlements related to income taxes through June 30, 2004. Future Earnings Potential The results of operations are not necessarily indicative of future earnings.
The level of future earnings depends on numerous factors including completion
of construction on new generating facilities, regulatory matters including
those related to affiliate contracts, energy sales, creditworthiness of
customers, total generating 100




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SOUTHERN POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION capacity available in the Super Southeast and the remarketing of capacity.
Another major factor is federal regulatory policy, which may impact Southern
Powers level of participation in the wholesale energy market. For additional
information relating to these issues, see Business  The
SOUTHERN System  Risk Factors
in Item 1 and MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS 
Future Earnings Potential of Southern Power in Item 7 of the Form 10-K. FERC Matters Market-Based Rate Authority See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future Earnings
Potential  FERC Matters  Market-Based Rate Authority of Southern Power in
Item 7 and Note 3 to the financial statements of Southern Power under FERC
Matters in Item 8 of the Form 10-K. On April 14, 2004, the FERC issued an
order that abandoned the SMA test and adopted a new interim analysis for
measuring generation market power. This new interim approach includes a
pivotal supplier analysis and a wholesale market share analysis, the results of
which provide a rebuttable presumption regarding generation market power. The
FERCs order also sets forth procedures for rebutting these presumptions and
addresses mitigation measures for those entities that are found to have market
power. In the absence of specific mitigation measures, the order includes
several cost-based mitigation measures that would apply by default. The FERC
also initiated a new rulemaking proceeding that, among other things, will adopt
a final methodology for assessing generation market power. Southern Company,
the retail operating companies and Southern Power believe that it may be
difficult for a traditional utility company, or an affiliate thereof, with a
significant load service obligation and generation to satisfy that obligation,
and that is not a member of a large, FERC-approved RTO, to pass all aspects of
the market power screens as currently designed. However, each of the companies
believes that it has an appropriate basis to rebut the generation market power
presumption. On July 8, 2004, the FERC denied Southern Companys request for rehearing,
along with a number of others, and reaffirmed the interim tests that it adopted
in April. Southern Company will submit the required analyses by August 9, 2004.
In the event that the FERCs default mitigation measures are ultimately
applied, Southern Power and the retail operating companies may be required to
charge cost-based rates, which may be lower than negotiated market-based rates.
The final outcome of this matter will depend on the form in which the final
methodology for assessing generation market power and mitigation rules may be
ultimately adopted and cannot be determined at this time. Plant McIntosh Construction Project See Note 3 to the financial statements of Southern Power under FERC Matters
in Item 8 of the Form 10-K for information regarding PPAs between Southern
Power and Georgia Power and Savannah Electric for Plant McIntosh Units 10 and 11 capacity. In
April 2003, Southern Power applied for FERC approval of these PPAs. In July
2003, the FERC accepted the PPAs to become effective June 1, 2005, subject to
refund, and ordered that hearings be held. To ensure the timely completion of
construction on McIntosh units 10 and 11 and their availability in the summer
of 2005 as supply side resources for the retail customers in the State of
Georgia, on May 7, 2004, Savannah Electric and Georgia Power requested the
Georgia PSC to direct them to acquire the McIntosh construction project.
Savannah Electric and Georgia Power proposed to place the units in rate base at
a cost approved by the Georgia PSC and to recover the unit operation and
maintenance costs as retail service expenses as may be approved by the Georgia
PSC. The Georgia PSC issued such an order on May 18, 2004 and the transfer
occurred on May 24, 2004. On May 20, 2004, Southern Power filed a request to
withdraw the PPAs and to terminate the ongoing FERC proceedings. On
August 4, 2004, the FERC issued a notice that it allowed the
request to withdraw the PPAs to be accepted and to become effective
by operation of law on July 20, 2004. However, the FERC made no
determination on what additional steps may need to be taken with
respect to testimony provided in the proceedings. The ultimate outcome of this
matter cannot now be determined. 101




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SOUTHERN POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Transmission See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  FERC Matters of Southern Company in Item 7 the Form 10-K
for information on the FERCs order related to RTOs and the FERCs notice of
proposed rulemaking regarding open access transmission service and standard
electricity market design. Other Matters See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  General and
 Power Sales Agreements of Southern Power
in Item 7 of the Form 10-K for additional information on long-term power sales
agreements and PPAs. Southern Powers PPAs with non-affiliated counterparties
have provisions that require the posting of collateral or an acceptable
substitute guarantee in the event that S&P or Moodys downgrades the credit
ratings of such counterparty to below-investment grade, or, if the counterparty
is not rated, fails to maintain a minimum coverage ratio. The PPAs are
expected to provide Southern Power with a stable source of revenue during their
respective terms. In June 2003, Southern Power placed Plant Franklin Unit 2 and Plant Harris
Units 1 and 2 into commercial operation. In October 2003, Southern Power placed
Plant Stanton A into commercial operation. In June 2004, sales under the PPA
with Georgia Power for the remaining 200 MW of uncontracted capacity at Plant
Franklin Unit 2 began. Also, in June 2004, sales under the PPA with Georgia
Power for Plant Harris Unit 2 began. Sales under PPAs for the other units
became effective upon commercial operation. The opportunity for non-affiliate
sales from uncontracted capacity has declined significantly since these PPAs
became effective. Southern Power is also completing limited construction activities on Plant
Franklin Unit 3 to preserve the long-term viability of the project but has
deferred final completion until the 2008-2011 period. See Note 3 to the
financial statements of Southern Power under Uncontracted Generating Capacity
in Item 8 of the Form 10-K for additional information. The final outcome of
these matters cannot now be determined. Southern Power is subject to certain claims and legal actions arising in
the ordinary course of business. In addition, Southern Powers business
activities are subject to extensive governmental regulation related to public
health and the environment. Litigation over environmental issues and claims of
various types, including property damage, personal injury and citizen
enforcement of environmental requirements, has increased generally throughout
the United States. In particular, personal injury claims for damages caused by
alleged exposure to hazardous materials have become more frequent. The ultimate
outcome of such litigation against Southern Power cannot be predicted at this
time; however, management does not anticipate that the liabilities, if any,
arising from such current proceedings would have a material adverse effect on
Southern Powers financial statements. See also the Notes to the Condensed Financial Statements herein for
discussion of various contingencies and other matters which may affect future
earnings potential. Environmental Matters See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  Environmental Matters of Southern Power in Item 7 of the
Form 10-K for information on the development by federal and state environmental
regulatory agencies of additional control strategies for emission of air
pollution from industrial sources, including electric generating facilities.
Compliance costs related to current and future environmental laws and
regulations could affect earnings if such costs are not fully recovered. 102




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SOUTHERN POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates Southern Power prepares its financial statements in accordance with accounting
principles generally accepted in the United States. Significant accounting
policies are described in Note 1 to the financial statements of Southern Power
in Item 8 of the Form 10-K. In the application of these policies, certain
estimates are made that may have a material impact on Southern Powers results
of operations and related disclosures. Different assumptions and measurements
could produce estimates that are significantly different from those recorded in
the financial statements. See MANAGEMENTS DISCUSSION AND ANALYSIS 
ACCOUNTING POLICIES  Application of Critical Accounting Policies and
Estimates of Southern Power in Item 7 of the Form 10-K for a complete
discussion of Southern Powers critical accounting policies and estimates
related to Revenue Recognition and Asset Impairments. FINANCIAL CONDITION AND LIQUIDITY Overview The major change in Southern Powers financial condition during the first six
months of 2004 was the sale of the Plant McIntosh Units 10 and 11 combined
cycle construction project to Georgia Power and Savannah Electric on May 24,
2004 at book cost of $429 million. See Note (J) to the Condensed Financial
Statements herein for additional information. As a result of the sale,
Southern Power repaid its note payable to Southern Company of $89 million,
declared dividends of $225 million to Southern Company ($113 million from
capital surplus and $112 million from retained earnings) and repaid $114
million in commercial paper borrowings. In September 2003, the SEC had
approved, under the PUHCA, Southern Powers payment of dividends in an amount
up to $190 million to Southern Company from capital surplus. Capital Requirements and Contractual Obligations Reference is made to
MANAGEMENTS DISCUSSION AND ANALYSIS  FINANCIAL CONDITION
AND LIQUIDITY  Capital Requirements and Contractual Obligations of Southern
Power in Item 7 of the Form 10-K for a description of Southern Powers capital
requirements for its construction program, maturing debt, purchase commitments
and long-term service agreements. The sale of the Plant McIntosh Units 10 and
11 construction project and the suspension of construction activities at Plant
Franklin Unit 3 will significantly reduce short-term borrowings under the
commercial paper program. Sources of Capital In February 2003, Southern Power initiated a commercial paper program to fund a
portion of the construction costs of new generating facilities. The amount of
commercial paper initially represented approximately 45% of total debt, but
proceeds from the sale of the Plant McIntosh Units 10 and 11 construction
project were used to repay $24 million of outstanding commercial paper early in
the third quarter of 2004. Southern Powers strategy has been to refinance most
of such short-term borrowings with long-term securities following commercial
operation of the generating facilities. See Note 6 to the financial statements
of Southern Power under Commercial Paper in Item 8 of the Form 10-K for
additional information. To meet liquidity and capital resource requirements, Southern Power had at
June 30, 2004 approximately $650 million of an unused committed credit
arrangement with banks expiring in 2006. This arrangement also
provides liquidity support for Southern Powers commercial paper program.
Amounts drawn under the arrangements may be used to finance acquisition and
construction costs related to gas-fired electric generating 103




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SOUTHERN POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION facilities and for general corporate purposes, subject to borrowing limitations
for each generating facility. The arrangements permit Southern Power to fund
construction of future generating facilities upon meeting certain requirements.
Southern Power expects to renew its credit facility, as needed, prior to
expiration. Credit Rating Risk Southern Power does not have any credit agreements that would require material
changes in payment schedules or terminations as a result of a credit rating
downgrade. There are contracts that could require collateral  but not
accelerated payment  in the event of a credit rating change to below
investment grade. These contracts are primarily for physical electricity
purchases and sales, fixed-price physical gas purchases and agreements covering
interest rate swaps. Generally, collateral may be provided by a Southern
Company guaranty, letter of credit or cash. At June 30, 2004, the maximum
potential collateral requirements were approximately $177 million. Market Price Risk Southern Powers market risk exposures relative to interest rate changes have
not changed materially compared with the December 31, 2003 reporting period.
In addition, Southern Power is not aware of any facts or circumstances that
would significantly affect such exposures in the near term. Because energy from Southern Powers generating facilities is primarily
sold under long-term PPAs with tolling agreements and provisions shifting
substantially all of the responsibility for fuel cost to the purchasers,
Southern Powers exposure to market volatility in commodity fuel prices and
prices of electricity is limited. To mitigate residual risks in those areas,
Southern Power enters into fixed-price contracts for the sale of electricity.
Unrealized gains and losses on electric and gas contracts qualifying as cash
flow hedges of anticipated purchases and sales are deferred in Other
Comprehensive Income. The fair values of derivative energy contracts at June
30, 2004 were as follows: Second Quarter2004
    
    Year-to-DateChanges
    
    ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    (203
    )
    
    $
    665Contracts realized or settled
    
    
    166
    
    
    
    (499
    )New contracts at inception
    
    
    
    
    
    
    Changes in valuation techniques
    
    
    
    
    
    
    Current period changes
    
    
    (2
    )
    
    
    (205
    )Contracts at June 30, 2004
    
    $
    (39
    )
    
    $
    (39
    )
 At June 30, 2004, all of these contracts mature within one year and are
based on actively quoted market prices. For additional information, see
MANAGEMENTS DISCUSSION AND ANALYSIS  FINANCIAL CONDITION
AND LIQUIDITY 
Market Price Risk of Southern Power in Item 7 and Notes 1 and 6 to the
financial statements of Southern Power under Financial Instruments in Item 8
of the Form 10-K and Note (F) to the Condensed Financial Statements herein. 104




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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, K, M, NAlabama Power
    
    A, B, C, D, F, G, MGeorgia Power
    
    A, B, C, D, F, G, I, JGulf Power
    
    A, B, C, D, F, GMississippi Power
    
    A, B, C, D, F, G, KSavannah Electric
    
    A, B, C, D, F, G, J, LSouthern Power
    
    A, B, F, J
 105




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SAVANNAH ELECTRIC AND POWER COMPANY
SOUTHERN POWER COMPANY NOTES TO THE CONDENSED FINANCIAL STATEMENTS:  (A)
    
    The condensed financial statements of the registrants included herein
have been prepared by each registrant, without audit, pursuant to the
rules and regulations of the SEC. In the opinion of each registrants
management, the information regarding such registrant furnished herein
reflects all adjustments necessary to present fairly the results of
operations for the periods ended June 30, 2004 and 2003. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to
such rules and regulations, although each registrant believes that the
disclosures regarding such registrant are adequate to make the
information presented not misleading. Disclosure which would
substantially duplicate the disclosure in the Form 10-K and details
which have not changed significantly in amount or composition since the
filing of the Form 10-K are omitted from this Form
10-Q. Therefore, these condensed financial statements should be read in
conjunction with the financial statements and the notes thereto included
in the Form 10-K. Certain prior period amounts have been reclassified to
conform to current period presentation. Due to seasonal variations in the
demand for energy, operating results for the periods presented do not
necessarily indicate operating results for the entire year.(B)
    
    See Note 3 to the financial statements of each of the registrants in
Item 8 and Legal Proceedings in Item 3 of the Form 10-K for
information relating to various lawsuits and other contingencies.NEW SOURCE REVIEW ACTIONS AND PLANT WANSLEY ENVIRONMENTAL LITIGATIONSee Note 3 to the financial statements of Southern Company, Alabama Power,
Georgia Power, Gulf Power, Mississippi Power and Savannah Electric under
New Source Review Actions and of Southern Company and Georgia Power
under Plant Wansley Environmental Litigation in Item 8 of the Form 10-K.
As of March 15, 2004, civil penalties under the Clean Air Act were
increased prospectively to a maximum of $32,500 per day, per violation.
To the extent alleged violations under either the New Source Review
litigation or Plant Wansley environmental litigation are deemed to be
continuing, this increased civil penalty amount could apply to such
violations found to continue after that date.On May 3, 2004, the U.S. Supreme Court denied the EPAs petition to review
the Eleventh Circuit Court of Appeals decision in the EPAs similar New
Source Review enforcement action against the TVA. The cases against
Alabama Power, Georgia Power and Savannah Electric have been effectively
stayed pending final resolution of the TVA case. With the denial of the
EPAs petition for review, the Court of Appeals decision became final.
Alabama Power and the EPA jointly notified the District Court for the
Northern District of Alabama, where the case against Alabama Power is
pending and requested that the stay be lifted. On June 16, 2004, the
District Court lifted the stay, placing the case back onto the District
Courts active docket. At this time, no party to the case against Georgia
Power and Savannah Electric has sought to reopen that case, which remains
administratively closed in the District Court for the Northern District of
Georgia. On June 10, 2004, the U.S. District Court for the Northern
District of Georgia granted Georgia Powers motion in the Plant Wansley
environmental litigation for partial summary judgment regarding emission
offsets. The case has been removed from the courts trial calendar due to
pending motions for summary judgment, and a new trial date has not been
scheduled. An 106




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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  adverse outcome in any one of these cases could require substantial
capital expenditures that cannot be determined at this time and could
possibly require payment of substantial penalties. This could affect
future results of operations, cash flows, and possibly financial condition
if such costs are not recovered through regulated rates.MIRANT RELATED MATTERSSouthern Company Employee Savings Plan LitigationOn June 30, 2004, an employee of a subsidiary of Southern Company filed a
complaint in the United States District Court for the Northern District of
Georgia alleging violations of the Employee Retirement Income Security Act
of 1974, as amended (ERISA), and naming as defendants Southern Company,
Southern Company Services, Inc., the Employee Savings Plan Committee, the
Pension Fund Investment Review Committee, certain current and former
members of those committees, Merrill Lynch Trust Company, FSB and Unknown
Defendants 1-100. The plaintiff seeks to represent a purported class of
individuals who were participants in or beneficiaries of The Southern
Company Employee Savings Plan (the Plan) at any time since April 2, 2001
whose Plan accounts included investments in Mirant common stock.The complaint alleges that the defendants breached their fiduciary duties
under ERISA by, among other things, failing to investigate whether Mirant
stock was an appropriate investment option for the Plan and by failing to
inform Plan participants that Mirant stock was not an appropriate
investment for their retirement assets based on Mirants alleged improper
energy trading and accounting practices, mismanagement and dire
circumstances. The plaintiff seeks class-wide equitable and monetary
relief.
Southern Company denies any wrongdoing and intends to defend this action
vigorously. The final outcome of this matter cannot now be determined.Under certain circumstances, Southern Company will be obligated under its
Bylaws to indemnify the current and former officers who served as members
of the Employee Savings Plan Committee and/or the Pension Fund Investment
Review Committee at or since the date of the spin-off and are named as
defendants in the lawsuit.Mirant BankruptcySee Note 3 to the financial statements of Southern Company under Mirant
Related Matters  Mirant Bankruptcy in Item 8 of the Form 10-K. On April
7, 2004, the U.S. Bankruptcy Court judge presiding over Mirants
proceedings ordered that an examiner be appointed and identified a number
of duties for the examiner, including preliminary investigation of
potential causes of action against insiders, past or present, of Mirant.
On April 13, 2004, the judge approved the appointment of William K. Snyder
as examiner. In an April 29, 2004 order, the judge further defined the
duties of the examiner, including the investigation of any potential
causes of action or any basis for objecting to or subordinating any claim
that may be available to Mirant against any past or present insider or any
member of a committee appointed in Mirants bankruptcy proceeding. As a
former shareholder of Mirant, Southern Company could be considered a past
insider. On June 14, 2004, Mirants bankruptcy counsel notified Southern
Company that it is investigating potential claims against Southern
Company. The final outcome of these matters cannot now be determined.See Note 3 to the financial statements of Southern Company under Mirant
Bankruptcy in Item 8 of the Form 10-K and Note 5 to the financial
statements of Southern Company in Item 8 of the Form 10-K for 107




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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  information related to potential contingent liabilities as a result
of Mirants inclusion in the consolidated federal income tax return prior
to the spin-off. In connection with the audit of tax years 2000 and 2001,
the IRS has preliminarily indicated that they may challenge certain tax
deductions arising from Mirants operations prior to the spin-off. The
ultimate outcome of this matter cannot now be determined.Mobile Energy Services Petition for BankruptcySee Note 3 to the financial statements of Southern Company under Mirant
Related Matters  Mobile Energy Services Petition for Bankruptcy in
Item 8 of the Form 10-K. On April 29, 2004, Mobile Energy Services
Holdings (MESH) sold the electric generating facility. In connection with
the sale, the pulp and paper complex owners released Southern Company from
its contingent obligations associated
with the guarantee of certain potential environmental obligations and with
the potential obligation to fund a maintenance reserve account. Southern
Company simultaneously released MESH from its indemnification obligations.FERC MATTERSSee Note 3 to the financial statements of Southern Company, Alabama Power,
Georgia Power, Gulf Power, Mississippi Power, Savannah Electric and
Southern Power under FERC Matters in Item 8 of the Form 10-K. On April
14, 2004, the FERC issued an order that abandoned the SMA test and adopted
a new interim analysis for measuring generation market power. This new
interim approach includes a pivotal supplier analysis and a wholesale
market share analysis, the results of which provide a rebuttable
presumption regarding generation market power. The FERCs order also sets
forth procedures for rebutting these presumptions and addresses mitigation
measures for those entities that are found to have market power. In the
absence of specific mitigation measures, the order includes several
cost-based mitigation measures that would apply by default. The FERC also
initiated a new rulemaking proceeding that, among other things, will adopt
a final methodology for assessing generation market power. Southern
Company, the retail operating companies and Southern Power believe that it
may be difficult for a traditional utility company, or an affiliate
thereof, with a significant load service obligation and generation to
satisfy that obligation, and that is not a member of a large,
FERC-approved RTO, to pass all aspects of the market power screens as
currently designed. However, each of the companies believes that it has an
appropriate basis to rebut the generation market power presumption.On July 8, 2004, the FERC denied Southern Companys request for rehearing
and reaffirmed the interim tests that it adopted in April. Southern
Company will submit the required analyses by August 9, 2004. In the event
that the FERCs default mitigation measures are ultimately applied,
Southern Power and the retail operating companies may be required to
charge cost-based rates, which may be lower than negotiated market-based
rates. The final outcome of this matter will depend on the form in which
the final methodology for assessing generation market power and mitigation
rules may be ultimately adopted and cannot be determined at this time.INCOME TAX MATTERSSee Note 3 to the financial statements of Southern Company under Income
Tax Issues  Leveraged Lease Transactions in Item 8 of the Form 10-K. In
connection with their current audits of Southern Companys consolidated
federal income tax returns for the 2000 and 2001 tax years, the IRS has
indicated that they intend to propose a similar adjustment of $18 million
to disallow the tax losses associated with the international leveraged
lease transaction originally challenged in their 1996-1999 audits. The
IRS has also preliminarily indicated that they may challenge Southern
Companys other three international leveraged lease transactions
(so-called SILO or sale-in-lease-out transactions). See 108




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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  Note 1 to the financial statements of Southern Company under Leveraged
Leases in Item 8 of the Form 10-K for additional details of the deferred
taxes related to these transactions. If the IRS is ultimately successful
in disallowing the tax deductions related to all four international
leveraged lease transactions beginning with the 2000 tax year, Southern
Company could be subject to significant additional interest charges.
Additionally, although the payment of the actual tax liability would not
affect Southern Companys results of operations, it could have a material
impact on cash flow. The ultimate outcome of these matters cannot now be
determined.GULF POWER PERSONAL INJURY LITIGATIONSee Note 3 to the financial statements of Gulf Power under Personal
Injury Litigation in Item 8 of the Form 10-K for additional information.
This matter was the subject of an appeal to Floridas First District Court
of Appeal. In May 2004, the court affirmed the result of the jurys
verdict without submitting a written opinion, thereby preempting Gulf
Powers right to appeal the case to the Florida Supreme Court. Therefore,
in June 2004 Gulf Power paid the judgment amount and accrued interest. As
a result of insurance coverage, there was no material impact on Gulf
Powers financial statements.(C)
    
    See Note 1 to the financial statements of Southern Company, Alabama
Power, Georgia Power, Gulf Power, Mississippi Power and Savannah
Electric under Asset Retirement Obligations and Other Costs of Removal
in Item 8 of the Form 10-K. The following table reflects the details of
the Asset Retirement Obligations included in the Condensed Balance
Sheets. Balance at
    
    Liabilities
    
    Liabilities
    
    
    
    
    
    Cash Flow
    
    Balance at12/31/03
    
    Incurred
    
    Settled
    
    Accretion
    
    Revisions
    
    06/30/04(in millions)Alabama Power
    
    $
    359
    
    
    $
    
    
    
    $
    
    
    
    $
    12
    
    
    $
    
    
    
    $
    371Georgia Power
    
    
    476
    
    
    
    
    
    
    
    (1
    )
    
    
    15
    
    
    
    
    
    
    
    490Gulf Power
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    5Mississippi Power
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    3Savannah Electric
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Southern Company
    
    $
    845
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    27
    
    
    $
    2
    
    
    $
    873
  (D)
    
    On March 31, 2004, Southern Company and the retail operating
companies prospectively adopted FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities, which requires the
primary beneficiary of a variable interest entity to consolidate the
related assets and liabilities. The adoption of FASB Interpretation No.
46R had no impact on the net income of Southern Company or the retail
operating companies. However, as a result of the adoption, Southern
Company and the retail operating companies deconsolidated certain
wholly-owned trusts established to issue preferred securities since
Southern Company and the retail operating companies do not meet the
definition of primary beneficiary established by FASB Interpretation No.
46R. Therefore, the investments in these trusts are reflected as Equity
Investments in Unconsolidated Subsidiaries for Alabama Power and Georgia
Power and as Other Investments for Southern Company, Gulf Power and
Mississippi Power. The related loans from the trusts to Southern
Company and the retail operating companies are reflected as Long-term
Debt Payable to Affiliated Trusts on the accompanying Balance Sheets. 109




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##### Table of Contents



NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  This treatment resulted in the following increases in both total assets
and total liabilities as of March 31, 2004 (in millions): Alabama Power
    
    $
    9Georgia Power
    
    
    29Gulf Power
    
    
    2Mississippi Power
    
    
    1Southern Company
    
    
    60
  In addition, Southern Company consolidated its 85% limited partnership
investment in an
energy/telecom venture capital fund that was previously accounted for
under the equity method. At June
30, 2004, Southern Companys investment totaled $27.9 million; Southern
Company has committed to a maximum investment of $75 million. The assets
of the venture capital fund are included in Cash and Other Investments on
the accompanying Condensed Balance Sheets.In May 2004, the FASB approved Staff Position (FSP) No. 106-2, Accounting
and Disclosure Requirements related to the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (the Medicare Act). FSP No. 106-2
requires recognition of the impacts of the Medicare Act in the
accumulated post-retirement benefit obligation and future cost of service
for post-retirement medical plans and may be applied retroactively to the
enactment of the Medicare Act in December 2003 or prospectively effective
for the third quarter 2004. Southern Company and the retail operating
companies have elected to apply this treatment prospectively. Pending the
finalization of federal regulations governing the subsidy effected in the
Medicare Act, Southern Company and its subsidiaries do not anticipate a material impact on
their respective financial statements from the adoption of FSP No. 106-2.(E)
    
    See Note 1 to the financial statements of Southern Company under
Stock Options and Note 8 to the financial statements of Southern
Company under Stock Option Plan in Item 8 of the Form 10-K for
information regarding non-qualified employee stock options provided by
Southern Company. Southern Company accounts for options granted in
accordance with Accounting Principles Board Opinion No. 25; thus, no
compensation expense is recognized because the exercise price of all
options granted equaled the fair market value on the date of the grant.
The estimated fair values of stock options granted during
the three-month and six-month periods ending June 30, 2004 and 2003 have
been derived using the Black-Scholes stock option pricing model. The
following table shows the assumptions and the weighted average fair values
of these stock options: Three
    
    Three
    
    Six
    
    SixMonths
    
    Months
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended
    
    EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Interest rate
    
    
    3.7
    %
    
    
    2.6
    %
    
    
    3.1
    %
    
    
    2.7
    %Average expected life of stock
options (in years)
    
    
    5.0
    
    
    
    4.3
    
    
    
    5.0
    
    
    
    4.3Expected volatility of common stock
    
    
    19.6
    %
    
    
    22.7
    %
    
    
    19.7
    %
    
    
    23.6
    %Expected annual dividends on
common stock
    
    $
    1.40
    
    
    $
    1.37
    
    
    $
    1.40
    
    
    $
    1.37Weighted average fair value of
stock options granted
    
    $
    3.41
    
    
    $
    3.51
    
    
    $
    3.29
    
    
    $
    3.59
 110




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##### Table of Contents



NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  The pro forma impact of fair-value accounting for options granted on net
income is as follows: As Reported
    
    Pro FormaThree Months Ended June 30, 2004Net income (in millions)
    
    $
    352
    
    
    $
    348Earnings per share (dollars):Basic
    
    $
    0.48
    
    
    $
    0.47Diluted
    
    $
    0.47
    
    
    $
    0.46Three Months Ended June 30, 2003Net income (in millions)
    
    $
    432
    
    
    $
    427Earnings per share (dollars):Basic
    
    $
    0.60
    
    
    $
    0.60Diluted
    
    $
    0.59
    
    
    $
    0.59Six Months Ended June 30, 2004Net income (in millions)
    
    $
    683
    
    
    $
    674Earnings per share (dollars):Basic
    
    $
    0.93
    
    
    $
    0.91Diluted
    
    $
    0.92
    
    
    $
    0.90Six Months Ended June 30, 2003Net income (in millions)
    
    $
    730
    
    
    $
    721Earnings per share (dollars):Basic
    
    $
    1.01
    
    
    $
    1.00Diluted
    
    $
    1.00
    
    
    $
    0.99
  Diluted Earnings Per Share Three Months
    
    Three Months
    
    Six Months
    
    Six MonthsEnded
    
    Ended
    
    Ended
    
    Ended(in thousands)
    
    June 30, 2004
    
    June 30, 2003
    
    June 30, 2004
    
    June 30, 2003As Reported Shares
    
    
    738,185
    
    
    
    724,627
    
    
    
    737,411
    
    
    
    721,785Effect of options
    
    
    4,268
    
    
    
    5,659
    
    
    
    4,509
    
    
    
    5,354Diluted Shares
    
    
    742,452
    
    
    
    730,286
    
    
    
    741,920
    
    
    
    727,139
  (F)
    
    See Note 6 to the financial statements of Southern Company, Alabama
Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric
and Southern Power under Financial Instruments in Item 8 of the Form
10-K. At June 30, 2004, the fair value of derivative energy contracts
was reflected in the financial statements as follows: Southern
    
    Alabama
    
    Georgia
    
    Gulf
    
    Mississippi
    
    Savannah
    
    SouthernCompany
    
    Power
    
    Power
    
    Power
    
    Power
    
    Electric
    
    PowerAmounts(in thousands)Regulatory liabilities, net
    
    $
    29,788
    
    
    $
    12,005
    
    
    $
    7,951
    
    
    $
    3,392
    
    
    $
    4,825
    
    
    $
    1,615
    
    
    $
    Other comprehensive income
(loss)
    
    
    (3,129
    )
    
    
    (462
    )
    
    
    
    
    
    
    
    
    
    
    (3,660
    )
    
    
    (32
    )
    
    
    (40
    )Net income
    
    
    (41
    )
    
    
    4
    
    
    
    4
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    1Total fair value
    
    $
    26,618
    
    
    $
    11,547
    
    
    $
    7,955
    
    
    $
    3,393
    
    
    $
    1,166
    
    
    $
    1,583
    
    
    $
    (39
    )
 111




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##### Table of Contents



NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  For the three months and six months ended June 30, 2004 and 2003, the
amounts recognized in income for Southern Company, Alabama Power, Georgia
Power, Gulf Power, Mississippi Power, Savannah Electric and Southern Power
were immaterial.In addition, approximately $2 million in pre-tax gains will be
reclassified from Other Comprehensive Income to Fuel Expense by Southern
Company for the twelve month period ended June 30, 2005.At June 30, 2004, Southern Company had $3.3 billion notional amount of
interest rate swaps outstanding with net fair value gains of $48.4 million
as follows:Fair Value Hedges Fair Value Gain (Loss)Notional
    
    Fixed Rate
    
    Variable Rate
    
    Maturity
    
    June 30, 2004Amount
    
    Received
    
    Paid
    
    Date
    
    (in millions)Southern Company
    
    $400 million
    
    
    5.3
    %
    
    6-month LIBOR (in
arrears)
less 0.103%
    
    February 2007
    
    $
    19.5Southern Company
    
    $40 million
    
    
    7.625
    %
    
    6-month LIBOR (in
arrears) plus
2.9225%
    
    December 2009
    
    $
    (0.4
    )
  Cash Flow Hedges Fair ValueWeighted Average
    
    
    
    Gain (Loss)Notional
    
    Variable Rate
    
    Fixed Rate
    
    Maturity
    
    June 30, 2004Amount
    
    Received
    
    Paid
    
    Date
    
    (in millions)Variable Rate
SecuritiesAlabama Power
    
    $536 million
    
    BMA Index
    
    
    2.007
    %
    
    January 2007
    
    $
    6.7Alabama Power
    
    $195 million
    
    3-month LIBOR
    
    
    1.89
    %
    
    April 2006
    
    $
    3.3Alabama Power
    
    $250 million
    
    3-month LIBOR
    
    
    3.9198
    %
    
    September 2009
    
    $
    5.4Alabama Power
    
    $220 million
    
    3-month LIBOR
    
    
    3.4145
    %
    
    November 2007
    
    $
    3.3Georgia Power
    
    $250 million
    
    3-month LIBOR plus
0.125%
    
    
    1.96
    %
    
    February 2005
    
    $
    0.1Georgia Power
    
    $50 million
    
    3-month LIBOR plus
0.10%
    
    
    1.5625
    %
    
    January 2005
    
    $
    0.1Georgia Power
    
    $873 million
    
    BMA Index
    
    
    1.3878
    %
    
    December 2004
    
    $
    0.5Georgia Power
    
    $250 million
    
    3-month LIBOR
    
    
    4.6629
    %
    
    February 2015
    
    $
    14.0Georgia Power
    
    $250 million
    
    3-month LIBOR
    
    
    5.3621
    %
    
    September 2014
    
    $
    (4.1
    )Savannah Electric
    
    $20 million
    
    3-month LIBOR plus
0.375%
    
    
    2.055
    %
    
    December 2004
    
    $
    0.0
 112




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##### Table of Contents



NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  For the twelve month period ended June 30, 2005, the following table
reflects the estimated pre-tax losses that will be reclassified from Other
Comprehensive Income to Interest Expense. (in Millions)Alabama Power
    
    $
    (2.9
    )Georgia Power
    
    
    (0.3
    )Gulf Power
    
    
    (0.3
    )Mississippi Power
    
    
    Savannah Electric
    
    
    (0.1
    )Southern Power
    
    
    (10.8
    )Southern Company
    
    $
    (14.4
    )
  (G)
    
    See Note 2 to the financial statements of Southern Company, Alabama
Power, Georgia Power, Gulf Power, Mississippi Power and Savannah
Electric in Item 8 of the Form 10-K. Components of the pension plans
and postretirement plans net periodic costs for the three-month and
six-month periods ending June 30, 2004 and 2003 are as follows: Southern
    
    Alabama
    
    Georgia
    
    Gulf
    
    Mississippi
    
    SavannahPENSION PLANS (in millions)
    
    Company
    
    Power
    
    Power
    
    Power
    
    Power
    
    ElectricThree Months Ended
June 30, 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
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Net amortization
    
    
    4
    
    
    
    1
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Net cost (income)
    
    $
    (10
    )
    
    $
    (9
    )
    
    $
    (8
    )
    
    $
    (1
    )
    
    $
    
    
    
    $
    1Six Months Ended
June 30, 2004Service cost
    
    $
    64
    
    
    $
    16
    
    
    $
    20
    
    
    $
    2
    
    
    $
    4
    
    
    $
    2Interest cost
    
    
    136
    
    
    
    36
    
    
    
    52
    
    
    
    6
    
    
    
    6
    
    
    
    2Expected return on plan assets
    
    
    (226
    )
    
    
    (70
    )
    
    
    (90
    )
    
    
    (10
    )
    
    
    (10
    )
    
    
    (2
    )Recognized net gain
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    Net amortization
    
    
    8
    
    
    
    2
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Net cost (income)
    
    $
    (20
    )
    
    $
    (18
    )
    
    $
    (16
    )
    
    $
    (2
    )
    
    $
    
    
    
    $
    2Three Months Ended
June 30, 2003Service cost
    
    $
    29
    
    
    $
    7
    
    
    $
    10
    
    
    $
    1
    
    
    $
    1
    
    
    $
    1Interest cost
    
    
    65
    
    
    
    17
    
    
    
    25
    
    
    
    3
    
    
    
    3
    
    
    
    1Expected return on plan assets
    
    
    (112
    )
    
    
    (35
    )
    
    
    (45
    )
    
    
    (5
    )
    
    
    (4
    )
    
    
    (1
    )Recognized net gain
    
    
    (11
    )
    
    
    (3
    )
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    Net amortization
    
    
    4
    
    
    
    1
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Net cost (income)
    
    $
    (25
    )
    
    $
    (13
    )
    
    $
    (13
    )
    
    $
    (1
    )
    
    $
    
    
    
    $
    1Six Months Ended
June 30, 2003Service cost
    
    $
    58
    
    
    $
    14
    
    
    $
    20
    
    
    $
    2
    
    
    $
    2
    
    
    $
    2Interest cost
    
    
    130
    
    
    
    34
    
    
    
    50
    
    
    
    6
    
    
    
    6
    
    
    
    2Expected return on plan assets
    
    
    (224
    )
    
    
    (70
    )
    
    
    (90
    )
    
    
    (10
    )
    
    
    (8
    )
    
    
    (2
    )Recognized net gain
    
    
    (22
    )
    
    
    (6
    )
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    Net amortization
    
    
    8
    
    
    
    2
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Net cost (income)
    
    $
    (50
    )
    
    $
    (26
    )
    
    $
    (26
    )
    
    $
    (2
    )
    
    $
    
    
    
    $
    2
 113




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##### Table of Contents



NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) Southern
    
    Alabama
    
    Georgia
    
    Gulf
    
    Mississippi
    
    SavannahPENSION PLANS (in millions)
    
    Company
    
    Power
    
    Power
    
    Power
    
    Power
    
    ElectricThree Months Ended
June 30, 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
    
    
    $
    1Six Months Ended
June 30, 2004Service cost
    
    $
    14
    
    
    $
    4
    
    
    $
    4
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest cost
    
    
    48
    
    
    
    12
    
    
    
    22
    
    
    
    2
    
    
    
    2
    
    
    
    2Expected return on plan assets
    
    
    (24
    )
    
    
    (8
    )
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    Net amortization
    
    
    18
    
    
    
    4
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    Net cost (income)
    
    $
    56
    
    
    $
    12
    
    
    $
    24
    
    
    $
    2
    
    
    $
    2
    
    
    $
    2Three Months Ended
June 30, 2003Service cost
    
    $
    6
    
    
    $
    2
    
    
    $
    2
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest cost
    
    
    23
    
    
    
    6
    
    
    
    10
    
    
    
    1
    
    
    
    1
    
    
    
    1Expected return on plan assets
    
    
    (12
    )
    
    
    (4
    )
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    Net amortization
    
    
    8
    
    
    
    2
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Net cost (income)
    
    $
    25
    
    
    $
    6
    
    
    $
    10
    
    
    $
    1
    
    
    $
    1
    
    
    $
    1Six Months Ended
June 30, 2003Service cost
    
    $
    12
    
    
    $
    4
    
    
    $
    4
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest cost
    
    
    46
    
    
    
    12
    
    
    
    20
    
    
    
    2
    
    
    
    2
    
    
    
    2Expected return on plan assets
    
    
    (24
    )
    
    
    (8
    )
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    Net amortization
    
    
    16
    
    
    
    4
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    Net cost (income)
    
    $
    50
    
    
    $
    12
    
    
    $
    20
    
    
    $
    2
    
    
    $
    2
    
    
    $
    2
  (H)
    
    See Note 1 to Southern Companys financial statements under
Leveraged Leases in Item 8 of the Form 10-K. In June 2004, Southern
Company completed the purchase from Keyspan Corporation and subsequent
leaseback of the Ravenswood Expansion Facility, a 250 megawatt combined
cycle gas turbine facility in New York, New York. The cost of the
facility was approximately $385 million. Southern Companys net
investment in the leveraged lease is approximately $68 million.(I)
    
    On July 1, 2004, Georgia Power filed a request with the Georgia PSC
for an approximate 7 percent increase in retail revenues, effective
January 1, 2005. The requested increase is based on a future test year
ending July 31, 2005 and a proposed retail return on common equity of
12.5 percent.Georgia Power is currently operating under a three-year retail rate order
that expires December 31, 2004. Under the terms of the existing order,
earnings are evaluated annually against a retail return on common equity
range of 10 percent to 12.95 percent. Two-thirds of any earnings above
the 12.95 percent return are applied to rate refunds, with the remaining
one-third retained by Georgia Power. The order required Georgia Power to
file a general rate case on July 1, 2004. See Note 3 to the financial
statements of Southern Company under Georgia Power Retail Rate Orders
and of Georgia Power under Retail Rate Orders in Item 8 of the Form 10-K
for additional information. Georgia Power expects the Georgia PSC to
issue a final order in this matter during December 2004. The final outcome
of this matter cannot now be determined. 114




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##### Table of Contents



NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  (J)
    
    See Note 3 to the financial statements of Georgia Power, Savannah
Electric and Southern Power under FERC Matters in Item 8 of the Form
10-K for information regarding PPAs between Southern Power and Georgia
Power and Savannah Electric for Plant McIntosh capacity.In April 2003, Southern Power applied for FERC approval of these PPAs. In
July 2003, the FERC accepted the PPAs to become effective June 1, 2005,
subject to refund and ordered that hearings be held. To ensure the timely
completion of construction on McIntosh units 10 and 11 and their
availability in the summer of 2005 as supply side resources for the retail
customers in the State of Georgia, on May 7, 2004, Savannah Electric and
Georgia Power requested the Georgia PSC to direct them to acquire the
McIntosh construction project. Savannah Electric and Georgia Power
proposed to place the units in rate base at a cost approved by the Georgia
PSC and to recover the unit operation and maintenance costs as retail
service expenses as may be approved by the Georgia PSC. The Georgia PSC
issued such an order on May 18, 2004 and the transfer occurred on May 24,
2004. On May 20, 2004, Southern Power
filed a request to withdraw the PPAs and to terminate the ongoing
FERC proceedings. On August 4, 2004, the FERC issued a notice
that it allowed the request to withdraw the PPAs to be accepted and
to become effective by operation of law on July 20, 2004.
However, the FERC made no determination on what additional steps may
need to be taken with respect to testimony provided in the proceedings. The
ultimate outcome of this matter cannot now be determined.The May 18, 2004 Georgia PSC order also directed Georgia Power and
Savannah Electric to file an application within 10 days of completing such
purchase to amend the resource certificate granted by the Georgia PSC in
2002 to describe the capacity resource as being the McIntosh units 10 and
11 (as opposed to the McIntosh PPAs), the approximate construction
schedule (which is not expected to change) and the proposed rate base
treatment. The application was filed on June 3, 2004 and the Georgia PSC
will have 180 days to respond. The Georgia PSC is expected to review the
application in accordance with its affiliate transaction guidelines, which
require a lower of cost or market approach unless otherwise determined by
the Georgia PSC. Georgia Power and Savannah Electric have submitted
information showing that the book cost of the McIntosh construction
project is lower than its market value. However, full recovery of the
project costs depends on the outcome of the Georgia PSCs review. In the
event the Georgia PSC does not allow full recovery of the project costs,
then part of such costs may have to be written off in accordance with FASB
Statement No. 90, Accounting for Abandonments and Disallowed Plant
Costs. At June 30, 2004, the investment in the McIntosh construction
project totaled approximately $353.2 million and $69.7 million for Georgia
Power and Savannah Electric, respectively. The ultimate outcome of the
Georgia PSCs review cannot now be determined.(K)
    
    See Note 3 to the financial statements of Southern Company under
Mississippi Power Regulatory Filing and Mississippi Power under
Retail Regulatory Filing in Item 8 of the Form 10-K regarding
Mississippi Powers request with the Mississippi PSC to include 266
megawatts of Plant Daniel Units 3 and 4 generating capacity not
currently included in jurisdictional cost of service and to modify
certain provisions of the PEP used to set Mississippi Powers retail
base rates and the Mississippi PSCs interim order creating a $60.3
million regulatory liability issued in December 2003. The Mississippi
PSC held hearings on these matters in April 2004 and a final decision
was issued on May 25, 2004. The Mississippi PSC approved Mississippi
Powers request to reclassify the 266 megawatts of Plant Daniel unit 3
and 4 capacity to jurisdictional cost of service effective January 1,
2004 and authorized Mississippi Power to include the related costs and
revenue credits in jurisdictional rate base, cost of service and revenue
requirement calculations for purposes of retail rate recovery.
Mississippi Power will amortize the regulatory liability established
pursuant to the Mississippi PSCs interim order in December to earnings
as follows: $16.5 million in 2004, $25.1 million in 2005, $13.0 million
in 2006 and $5.7 million in 2007, resulting in increases to earnings in
each of those years.In addition, the Mississippi PSC also approved Mississippi Powers
requested changes to PEP, including the use of a forward-looking test
year, with appropriate oversight; annual, rather than semi-annual, 115




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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  filings; and certain changes to the performance indicator mechanisms.
Rate changes will be limited to 4% of retail revenues annually under the
revised PEP. The Mississippi PSC will review all aspects of PEP in 2007.(L)
    
    On March 23, 2004, Savannah Electric submitted a request to the
Georgia PSC for an accounting order which, if approved by the Georgia
PSC, would have allowed for the cost of a coal transloader then under
construction to be amortized over twenty-four months through fuel
expense and recovered through
Savannah Electrics fuel cost recovery clause. The transloader allows
foreign coal to be off-loaded from
ships at Savannah Electrics Plant Kraft dock, and then transferred by
rail to Plant McIntosh. On June 24, 2004, the Georgia PSC denied Savannah
Electrics request for this accounting order. Consequently, accumulated
project costs of $2.7 million were recorded as construction work in
progress in June 2004 and will be depreciated over the projects estimated
useful life of 35 years once placed in service.In a separate action, on July 30, 2004, Savannah Electric filed for a fuel
cost recovery rate increase with the Georgia PSC. The increase will allow
for the recovery of fuel costs based on an estimate of future costs, as
well as the collection of the existing under recovery of fuel expenses,
over a two-year period. The amount under recovered at June 30, 2004 is
approximately $8.9 million. The Georgia PSC is expected to rule on this
matter by late October 2004. The outcome of the filing cannot be
determined at this time.(M)
    
    On August 2, 2004, Alabama Power made a filing with the Alabama PSC
to establish a specific rate mechanism for the recovery of retail costs
associated with environmental laws, regulations or other such mandates.
If approved, the rate mechanism would begin operation in January 2005
and provide for the recovery of these costs pursuant to a factor that
will be calculated annually. It is anticipated that for the first two
years of the increase, retail rates would increase under the proposed
mechanism by approximately 1% ($33 million) in 2005 and approximately an
additional 1% ($30 million) in 2006. Such environmental cost recovery
would include operation and maintenance expense, depreciation and a
return on invested capital. The outcome of this matter cannot now be
determined. 116




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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  (N)
    
    Southern Companys reportable business segment is the sale of
electricity in the Southeast by the retail operating companies and
Southern Power. The All Other column includes parent Southern Company,
which does not allocate operating expenses to business segments. Also,
this category includes segments below the quantitative threshold for
separate disclosure. These segments include investments in synthetic
fuels and leveraged lease projects, telecommunications, energy-related
services and natural gas marketing. Intersegment revenues are not
material. Financial data for business segments and products and
services for the periods covered in the Form 10-Q are as follows: Electric UtilitiesRetailOperating
    
    
    
    
    
    
    
    
    
    
    
    
    
    All
    
    ReconcilingCompanies
    
    Southern Power
    
    Eliminations
    
    Total
    
    Other
    
    Eliminations
    
    Consolidated(in millions)Three Months Ended June 30, 2004:Operating revenues
    
    $
    2,868
    
    
    $
    182
    
    
    $
    (134
    )
    
    $
    2,916
    
    
    $
    119
    
    
    $
    (26
    )
    
    $
    3,009Segment net income (loss)
    
    
    308
    
    
    
    23
    
    
    
    
    
    
    
    331
    
    
    
    21
    
    
    
    
    
    
    
    352Six Months Ended June 30, 2004:Operating revenues
    
    
    5,410
    
    
    
    358
    
    
    
    (264
    )
    
    
    5,504
    
    
    
    292
    
    
    
    (55
    )
    
    
    5,741Segment net income (loss)
    
    
    580
    
    
    
    50
    
    
    
    
    
    
    
    630
    
    
    
    54
    
    
    
    (1
    )
    
    
    683Total assets at June 30, 2004
    
    $
    32,497
    
    
    $
    2,104
    
    
    $
    (97
    )
    
    $
    34,504
    
    
    $
    1,833
    
    
    $
    (402
    )
    
    $
    35,935Three Months Ended June 30, 2003:Operating revenues
    
    $
    2,606
    
    
    $
    239
    
    
    $
    (118
    )
    
    $
    2,727
    
    
    $
    123
    
    
    $
    (26
    )
    
    $
    2,824Segment net income (loss)
    
    
    344
    
    
    
    79
    
    
    
    
    
    
    
    423
    
    
    
    9
    
    
    
    
    
    
    
    432Six Months Ended June 30, 2003:Operating revenues
    
    
    4,972
    
    
    
    346
    
    
    
    (191
    )
    
    
    5,127
    
    
    
    276
    
    
    
    (38
    )
    
    
    5,365Segment net income (loss)
    
    
    608
    
    
    
    102
    
    
    
    
    
    
    
    710
    
    
    
    20
    
    
    
    
    
    
    
    730Total assets at December 31, 2003
    
    $
    31,412
    
    
    $
    2,409
    
    
    $
    (122
    )
    
    $
    33,699
    
    
    $
    1,671
    
    
    $
    (325
    )
    
    $
    35,045
  Products and Services Electric Utilities RevenuesPeriod
    
    Retail
    
    Wholesale
    
    Other
    
    Total(in millions)Three Months Ended June 30, 2004
    
    $
    2,478
    
    
    $
    344
    
    
    $
    94
    
    
    $
    2,916Three Months Ended June 30, 2003
    
    
    2,176
    
    
    
    324
    
    
    
    227
    
    
    
    2,727Six Months Ended June 30, 2004
    
    
    4,622
    
    
    
    695
    
    
    
    187
    
    
    
    5,504Six Months Ended June 30, 2003
    
    
    4,150
    
    
    
    658
    
    
    
    319
    
    
    
    5,127
 117




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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 4.
    
    
    Submission of Matters to a Vote of Security Holders.Southern CompanySouthern Company held its annual meeting of shareholders on May 26,
2004. Each nominee for director of Southern Company received the
requisite plurality of votes for election. The vote tabulation was
as follows: Nominees
    
    Shares For
    Shares Withhold VoteDaniel P. Amos
    
    
    561,096,823
    
    
    
    9,213,597Dorrit J. Bern
    
    
    559,474,911
    
    
    
    10,835,509Francis S. Blake
    
    
    559,207,630
    
    
    
    11,102,790Thomas F. Chapman
    
    
    561,058,059
    
    
    
    9,252,361H. Allen Franklin
    
    
    557,021,653
    
    
    
    13,288,767Bruce S. Gordon
    
    
    560,732,936
    
    
    
    9,577,484Donald M. James
    
    
    529,323,267
    
    
    
    40,987,153Zack T. Pate
    
    
    559,607,842
    
    
    
    10,702,578J. Neal Purcell
    
    
    559,547,359
    
    
    
    10,763,061David M. Ratcliffe
    
    
    559,718,258
    
    
    
    10,592,162Gerald J. St. Pé
    
    
    560,734,357
    
    
    
    9,576,063
  In addition, at the annual meeting, shareholders were asked to vote
for the ratification of the appointment of auditors. The vote
tabulation was 556,104,768 shares for, 8,549,577 shares against and
5,656,066 shares abstaining. As a result of this vote the audit
appointment was ratified. Shareholders were also entitled to vote on
the Outside Directors Stock Plan. The vote tabulation was
375,820,740 shares for, 37,899,402 shares against and 11,935,860
shares abstaining. As a result of this vote, the Outside Directors
Stock Plan was approved.Alabama PowerAlabama Power held its annual meeting of common shareholders and
preferred shareholders on April 23, 2004, and the following persons
were elected to serve as directors of Alabama Power: Whit Armstrong
    
    Wallace D. Malone, Jr.David J. Cooper, Sr.
    
    Charles D. McCraryH. Allen Franklin
    
    Malcolm PorteraR. Kent Henslee
    
    Robert D. PowersJohn D. Johns
    
    C. Dowd RitterCarl E. Jones, Jr.
    
    James H. SanfordPatricia M. King
    
    John C. Webb, IVJames K. Lowder
    
    James W. Wright
 118




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##### Table of Contents



Item 4.
    
    
    Submission of Matters to a Vote of Security Holders. (Continued)All 7,750,000 of the outstanding shares of Alabama Powers common
stock are owned by Southern Company and were voted in favor of the
nominees for directors. None of the shares of preferred stock or
Class A preferred stock were voted.Georgia PowerGeorgia Power held its annual meeting of common shareholders and
preferred shareholders on
May 19, 2004 and the following persons were elected to serve as
directors of Georgia Power: Juanita P. Baranco
    
    D. Gary ThompsonRobert L. Brown, Jr.
    
    Richard W. UsseryAnna R. Cablik
    
    William Jerry VereenMichael D. Garrett
    
    Carl WareDavid M. Ratcliffe
    
    E. Jenner Wood, III
  All of the 7,761,500 outstanding shares of Georgia Powers common
stock are owned by Southern Company and were voted in favor of the
nominees for directors. None of the shares of preferred stock were
voted.Gulf PowerGulf Power held its annual meeting of common shareholders and
preferred shareholders on
May 19, 2004 and the following persons were elected to serve as
directors of Gulf Power: C. LeDon Anchors
    
    William A. PullumWilliam C. Cramer, Jr.
    
    Winston E. ScottFred C. Donovan, Sr.
    
    Susan N. Story
  All of the 992,717 outstanding shares of Gulf Powers common stock
are owned by Southern Company and were voted in favor of the
nominees for directors. None of the shares of preferred stock were
voted.Mississippi PowerMississippi Power held its annual meeting of common shareholders and
preferred shareholders on May 19, 2004 and the following persons
were elected to serve as directors of Mississippi Power: Tommy E. Dulaney
    
    George A. SchloegelLinda T. Howard
    
    Philip J. TerrellRobert C. Khayat
    
    Anthony J. TopaziAubrey K. Lucas
    
    N. Eugene Warr
  All of the 1,121,000 outstanding shares of Mississippi Powers
common stock are owned by Southern Company and were voted in favor
of the nominees for directors. None of the shares of preferred
stock were voted. 119




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##### Table of Contents



Item 4.
    
    
    Submission of Matters to a Vote of Security Holders. (Continued)Savannah ElectricBy written consent, in lieu of the annual meeting of stockholders of
Savannah Electric, effective May 5, 2004, the following
persons were elected to serve as directors of Savannah Electric: Gus H. Bell, III
    
    Anthony R. JamesArchie H. Davis
    
    Robert B. Miller, IIIWalter D. Gnann
    
    Arnold M. Tenenbaum
  All of the 10,844,635 outstanding shares of Savannah Electrics
common stock are owned by Southern Company and were voted in favor
of the nominees for directors.Southern PowerBy written consent, in lieu of the annual meeting of stockholders of
Southern Power, effective April 1, 2004, the number of directors
constituting the board of directors was set at six and the following
persons were elected to serve as directors of Southern Power: W. Paul Bowers
    
    Michael D. GarrettH. Allen Franklin
    
    Charles D. McCraryThomas A. Fanning
    
    David M. Ratcliffe
  All of the 1,000 outstanding shares of Southern Powers common stock
are owned by Southern Company and were voted in favor of the
nominees for directors. 
 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. (10)
    
    Material ContractsSouthern Company(a)1
    
    -
    
    Southern Company Deferred Compensation Plan as amended and restated effective January 1, 2004.(a)2
    
    -
    
    Outside Directors Stock Plan for The Southern Company and its Subsidiaries, effective May 26, 2004.(a)3
    
    -
    
    Amended and Restated Change in Control Agreement between The Southern Company, Southern Company
Services, Inc. and David M. Ratcliffe, effective June 1, 2004.(a)4
    
    -
    
    Amended and Restated Change in Control Agreement between The Southern Company, Southern Company
Services, Inc. and Thomas A. Fanning, effective June 1, 2004.(a)5
    
    -
    
    Amended and Restated Change in Control Agreement between The Southern Company,
Alabama Power Company and Charles D. McCrary, effective June 1, 2004.(a)6
    
    -
    
    Amended and Restated Change in Control Agreement between The Southern Company,
Georgia Power Company and Michael D. Garrett, effective June 1, 2004.
 120




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##### Table of Contents



Item 6.
    
    Exhibits and Reports on Form 8-K.(10)
    
    Material Contracts (continued)(a)7
    
    -
    
    Amended and Restated Change in Control Agreement
between The Southern Company,
Southern Nuclear and William G. Hairston, III, effective June
1, 2004.Alabama Power(b)1
    
    -
    
    Southern Company Deferred Compensation Plan as
amended and restated effective January 1, 2004. (See
Exhibit 10(a)1 herein)(b)2
    
    -
    
    Outside Directors Stock Plan for The Southern
Company and its Subsidiaries, effective May 26,
2004. (See Exhibit 10(a)2 herein)(b)3
    
    -
    
    Amended and Restated Change in Control Agreement
between The Southern Company, Alabama Power Company
and Charles D. McCrary, effective June 1, 2004. (See
Exhibit 10(a)5 herein)(b)4
    
    -
    
    Amended and Restated Change in Control Agreement
between The Southern Company, Alabama Power Company
and C. Alan Martin, effective June 1, 2004.Georgia Power(c)1
    
    -
    
    Southern Company Deferred Compensation Plan as
amended and restated effective January 1, 2004. (See
Exhibit 10(a)1 herein)(c)2
    
    -
    
    Outside Directors Stock Plan for The Southern
Company and its Subsidiaries, effective May 26,
2004. (See Exhibit 10(a)2 herein)(c)3
    
    -
    
    Amended and Restated Change in Control Agreement
between The Southern Company, Georgia Power Company
and Michael D. Garrett, effective June 1, 2004. (See
Exhibit 10(a)6 herein)Gulf Power(d)1
    
    -
    
    Southern Company Deferred Compensation Plan as
amended and restated effective January 1, 2004. (See
Exhibit 10(a)1 herein)(d)2
    
    -
    
    Outside Directors Stock Plan for The Southern
Company and its Subsidiaries, effective May 26,
2004. (See Exhibit 10(a)2 herein)Mississippi Power(e)1
    
    -
    
    Southern Company Deferred Compensation Plan as
amended and restated effective January 1, 2004. (See Exhibit
10(a)1 herein)(e)2
    
    -
    
    Outside Directors Stock Plan for The Southern
Company and its Subsidiaries, effective May 26, 2004. (See Exhibit
10(a)2 herein)
 121




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##### Table of Contents



Item 6.
    
    Exhibits and Reports on Form 8-K.(10)
    
    Material Contracts (continued)Savannah Electric(f)1
    
    -
    
    Southern Company Deferred Compensation Plan as
amended and restated effective January 1, 2004. (See
Exhibit 10(a)1 herein)(f)2
    
    -
    
    Outside Directors Stock Plan for The Southern
Company and its Subsidiaries, effective May 26,
2004. (See Exhibit 10(a)2 herein)(24)
    
    Power of Attorney and ResolutionsSouthern Company(a)1
    
    -
    
    Power of Attorney and resolution. (Designated in
the Form 10-K for the year ended December 31, 2003, File No.
1-3526 as Exhibit 24(a) and incorporated herein by reference.)Alabama Power(b)1
    
    -
    
    Power of Attorney and resolution. (Designated in
the Form 10-K for the year ended December 31, 2003, File No.
1-3164 as Exhibit 24(b) and incorporated herein by reference.)Georgia Power(c)1
    
    -
    
    Power of Attorney and resolution. (Designated in
the Form 10-K for the year ended December 31, 2003, File No.
1-6468 as Exhibit 24(c) and incorporated herein by reference.)Gulf Power(d)1
    
    -
    
    Power of Attorney and resolution. (Designated in
the Form 10-K for the year ended December 31, 2003, File No.
0-2429 as Exhibit 24(d) and incorporated herein by reference.)Mississippi Power(e)1
    
    -
    
    Power of Attorney and resolution. (Designated in
the Form 10-K for the year ended December 31, 2003, File No.
001-11229 as Exhibit 24(e) and incorporated herein by
reference.)Savannah Electric(f)1
    
    -
    
    Power of Attorney and resolution. (Designated in
the Form 10-K for the year ended December 31, 2003, File No.
1-5072 as Exhibit 24(f) and incorporated herein by reference.)
 122




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##### Table of Contents



Item 6.
    
    Exhibits and Reports on Form 8-K.(24)
    
    Power of Attorney and Resolutions (continued)Southern Power(g)1
    
    -
    
    Power of Attorney and resolution. (Designated in
the Form 10-K for the year ended December 31, 2003, File No.
333-98553 as Exhibit 24(g) and incorporated herein by
reference.)(31)
    
    Section 302 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.
 123




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##### Table of Contents



Item 6.
    
    Exhibits and Reports on Form 8-K.(a)
    Exhibits. (Continued)(d)2
    
    -
    
    Certificate of Gulf Powers Chief Financial Officer
required by Section 302 of the Sarbanes-Oxley Act of 2002.Mississippi Power(e)1
    
    -
    
    Certificate of Mississippi Powers Chief Executive
Officer required by Section 302 of the Sarbanes-Oxley Act of
2002.(e)2
    
    -
    
    Certificate of Mississippi Powers Chief Financial
Officer required by Section 302 of the Sarbanes-Oxley Act of
2002.Savannah Electric(f)1
    
    -
    
    Certificate of Savannah Electrics Chief Executive
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.(f)2
    
    -
    
    Certificate of Savannah Electrics Chief Financial
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.Southern Power(g)1
    
    -
    
    Certificate of Southern Powers Chief Executive
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.(g)2
    
    -
    
    Certificate of Southern Powers Chief Financial
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.(32)
    
    Section 906 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.
 124




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##### Table of Contents



Item 6.
    
    Exhibits and Reports on Form 8-K.(a)
    Exhibits. (Continued)Mississippi Power(e)
    
    -
    
    Certificate of Mississippi Powers Chief Executive
Officer and Chief Financial Officer required by Section 906 of
the Sarbanes-Oxley Act of 2002.Savannah Electric(f)
    
    -
    
    Certificate of Savannah Electrics Chief Executive
Officer and Chief Financial Officer required by Section 906 of
the Sarbanes-Oxley Act of 2002.Southern Power(g)
    
    -
    
    Certificate of Southern Powers Chief Executive
Officer and Chief Financial Officer required by Section 906 of
the Sarbanes-Oxley Act of 2002.
 (b) Reports on Form 8-K.  The registrants collectively and separately furnished Current Reports
on Form 8-K dated April 28, 2004: Item reported:
    
    Item 12Financial statements filed:
    
    None
  Southern Company filed Current Reports on Form 8-K dated May 7, 2004,
May 18, 2004, May 25, 2004 and June 30, 2004: Items reported:
    
    Items 5Financial statements filed:
    
    None
  Southern Company filed an Amendment to a Current Report dated May 25,
2004 on Form 8-K/A filed July 14, 2004: Items reported:
    
    Items 5Financial statements filed:
    
    None
  Alabama Power filed Current Reports on Form 8-K dated April 7, 2004
(two reports): Items reported:
    
    Items 5 and 7Financial statements filed:
    
    None
  Georgia Power filed Current Reports on Form 8-K dated May 7, 2004 and
May 18, 2004: Items reported:
    
    Items 5Financial statements filed:
    
    None
  Gulf Power filed a Current Report on Form 8-K dated April 6, 2004: Items reported:
    
    Items 5 and 7Financial statements filed:
    
    None
 125




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Item 6. Exhibits and Reports on Form 8-K. (b) Reports on Form 8-K. (continued)  Mississippi Power filed Current Reports on Form
8-K dated March 3, 2004 (two reports), and May
25, 2004: Item reported:
    
    Items 5 and 7Financial statements filed:
    
    None
  Mississippi Power filed an Amendment to a Current
Report dated May 25, 2004 on Form 8-K/A filed
July 14, 2004: Items reported:
    
    Items 5Financial statements filed:
    
    None
  Savannah Electric filed Current Reports on Form
8-K dated May 7, 2004, May 18, 2004, and May 27,
2004: Items reported:
    
    Items 5 and 7Financial statements filed:
    
    None
  Southern Power filed Current Reports on Form 8-K
dated May 7, 2004 and May 18, 2004: Items reported:
    
    Items 5Financial statements filed:
    
    None
 126




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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 and Accounting Officer)By
    /s/ Wayne Boston(Wayne Boston, Attorney-in-fact) Date: August 5, 2004 127




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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
    William B. Hutchins, IIIExecutive Vice President, Chief Financial Officer and Treasurer(Principal Financial and Accounting Officer)By
    /s/ Wayne Boston(Wayne Boston, Attorney-in-fact) Date: August 5, 2004 128




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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
    C.B. HarreldExecutive Vice President, Chief Financial Officer and Treasurer(Principal Financial and Accounting Officer)By
    /s/ Wayne Boston(Wayne Boston, Attorney-in-fact) Date: August 5, 2004 129




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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: August 5, 2004 130




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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
    Michael W. SouthernVice President, Chief Financial Officer and Treasurer(Principal Financial and Accounting Officer)By
    /s/ Wayne Boston(Wayne Boston, Attorney-in-fact) Date: August 5, 2004 131




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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: August 5, 2004 132




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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
    William P. BowersPresident and Chief Executive Officer(Principal Executive Officer)By
    Cliff S. ThrasherSenior Vice President, Comptroller and Chief Financial Officer(Principal Financial and Accounting Officer)By
    /s/ Wayne Boston(Wayne Boston, Attorney-in-fact) Date: August 5, 2004 133