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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____
 Commission
    
    Registrant, State of Incorporation,
    
    I.R.S. EmployerFile Number
    
    Address and Telephone Number
    
    Identification No.1-3526
    
    The Southern Company
    
    58-0690070(A Delaware Corporation)270 Peachtree Street, N.W.Atlanta, Georgia 30303(404) 506-50001-3164
    
    Alabama Power Company
    
    63-0004250(An Alabama Corporation)600 North 18th StreetBirmingham, Alabama 35291(205) 257-10001-6468
    
    Georgia Power Company
    
    58-0257110(A Georgia Corporation)241 Ralph McGill Boulevard, N.E.Atlanta, Georgia 30308(404) 506-65260-2429
    
    Gulf Power Company
    
    59-0276810(A Maine Corporation)One Energy PlacePensacola, Florida 32520(850) 444-6111001-11229
    
    Mississippi Power Company
    
    64-0205820(A Mississippi Corporation)2992 West BeachGulfport, Mississippi 39501(228) 864-12111-5072
    
    Savannah Electric and Power Company
    
    58-0418070(A Georgia Corporation)600 East Bay StreetSavannah, Georgia 31401(912) 644-7171333-98553
    
    Southern Power Company
    
    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  o Indicate by
check mark whether the registrant is an accelerated filer (as defined
by Rule 12b-2 of the Securities Exchange Act of 1934). Registrant
    
    Yes
    
    NoThe Southern Company
    
    
    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 September 30, 2004The Southern Company
    
    Par Value $5 Per Share
    
    
    739,686,919Alabama Power Company
    
    Par Value $40 Per Share
    
    
    8,250,000Georgia Power Company
    
    Without Par Value
    
    
    7,761,500Gulf Power Company
    
    Without Par Value
    
    
    992,717Mississippi Power Company
    
    Without Par Value
    
    
    1,121,000Savannah Electric and Power Company
    
    Par Value $5 Per Share
    
    
    10,844,635Southern Power Company
    
    Par Value $0.01 Per Share
    
    
    1,000
 This
combined Form 10-Q is separately filed by The Southern Company,
Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi
Power Company, Savannah Electric and Power Company and Southern Power Company.
Information contained herein relating to any individual company is filed by
such company on its own behalf. Each company makes no representation as to
information relating to the other companies. 2




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INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2004 PageNumberDEFINITIONS
    
    
    5CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
    
    
    6PART 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
    
    
    29Condensed Statements of Comprehensive Income
    
    
    29Condensed Statements of Cash Flows
    
    
    30Condensed Balance Sheets
    
    
    31Managements Discussion and Analysis of Results of Operations and Financial Condition
    
    
    33Georgia Power CompanyCondensed Statements of Income
    
    
    45Condensed Statements of Comprehensive Income
    
    
    45Condensed Statements of Cash Flows
    
    
    46Condensed Balance Sheets
    
    
    47Managements Discussion and Analysis of Results of Operations and Financial Condition
    
    
    49Gulf Power CompanyCondensed Statements of Income
    
    
    61Condensed Statements of Comprehensive Income
    
    
    61Condensed Statements of Cash Flows
    
    
    62Condensed Balance Sheets
    
    
    63Managements Discussion and Analysis of Results of Operations and Financial Condition
    
    
    65Mississippi Power CompanyCondensed Statements of Income
    
    
    75Condensed Statements of Comprehensive Income
    
    
    75Condensed Statements of Cash Flows
    
    
    76Condensed Balance Sheets
    
    
    77Managements Discussion and Analysis of Results of Operations and Financial Condition
    
    
    79Savannah Electric and Power CompanyCondensed Statements of Income
    
    
    89Condensed Statements of Comprehensive Income
    
    
    89Condensed Statements of Cash Flows
    
    
    90Condensed Balance Sheets
    
    
    91Managements Discussion and Analysis of Results of Operations and Financial Condition
    
    
    93Southern Power CompanyCondensed Statements of Income
    
    
    103Condensed Statements of Comprehensive Income
    
    
    103Condensed Statements of Cash Flows
    
    
    104Condensed Balance Sheets
    
    
    105Managements Discussion and Analysis of Results of Operations and Financial Condition
    
    
    107Notes to the Condensed Financial Statements
    
    
    115Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27
  3




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INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2004 PageNumberPART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    129Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    InapplicableItem 3. Defaults Upon Senior Securities
    
    InapplicableItem 4. Submission of Matters to a Vote of Security Holders
    
    InapplicableItem 5. Other Information
    
    InapplicableItem 6. Exhibits
    
    
    129Signatures
    
    
    134
 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 Code of 1986, as amendedIRS
    
    Internal Revenue ServiceLIBOR
    
    London Interbank Offered RateMirant
    
    Mirant CorporationMississippi Power
    
    Mississippi Power CompanyMoodys
    
    Moodys Investors Service, Inc.MW
    
    MegawattsNRC
    
    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, storm damage cost recovery, completion of
construction projects and estimated construction and other expenditures. In
some cases, forward-looking statements can be identified by terminology such as
may, will, could, should, expects, plans, anticipates,
believes, estimates, projects, predicts, potential or continue or
the negative of these terms or other 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 
  For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Operating Revenues:Retail sales
    
    $
    2,915,085
    
    
    $
    2,757,014
    
    
    $
    7,537,030
    
    
    $
    6,906,564Sales for resale
    
    
    343,298
    
    
    
    376,002
    
    
    
    1,037,915
    
    
    
    1,033,609Other electric revenues
    
    
    99,635
    
    
    
    90,644
    
    
    
    287,339
    
    
    
    410,598Other revenues
    
    
    82,787
    
    
    
    77,187
    
    
    
    319,731
    
    
    
    315,077Total operating revenues
    
    
    3,440,805
    
    
    
    3,300,847
    
    
    
    9,182,015
    
    
    
    8,665,848Operating Expenses:Fuel
    
    
    982,511
    
    
    
    936,982
    
    
    
    2,691,261
    
    
    
    2,385,357Purchased power
    
    
    187,753
    
    
    
    137,860
    
    
    
    525,577
    
    
    
    385,108Other operations
    
    
    545,778
    
    
    
    519,899
    
    
    
    1,629,236
    
    
    
    1,556,460Maintenance
    
    
    209,497
    
    
    
    195,871
    
    
    
    715,453
    
    
    
    664,535Depreciation and amortization
    
    
    241,134
    
    
    
    260,623
    
    
    
    715,237
    
    
    
    763,908Taxes other than income taxes
    
    
    161,165
    
    
    
    155,263
    
    
    
    474,232
    
    
    
    446,826Total operating expenses
    
    
    2,327,838
    
    
    
    2,206,498
    
    
    
    6,750,996
    
    
    
    6,202,194Operating Income
    
    
    1,112,967
    
    
    
    1,094,349
    
    
    
    2,431,019
    
    
    
    2,463,654Other Income and (Expense):Allowance for equity funds used during construction
    
    
    14,333
    
    
    
    5,025
    
    
    
    31,984
    
    
    
    17,049Interest income
    
    
    6,174
    
    
    
    4,994
    
    
    
    20,283
    
    
    
    30,081Equity in losses of unconsolidated subsidiaries
    
    
    (21,624
    )
    
    
    (21,983
    )
    
    
    (68,193
    )
    
    
    (75,425
    )Leveraged lease income
    
    
    18,776
    
    
    
    16,168
    
    
    
    51,708
    
    
    
    49,581Interest expense, net of amounts capitalized
    
    
    (132,773
    )
    
    
    (129,153
    )
    
    
    (401,971
    )
    
    
    (387,102
    )Interest expense to affiliate trusts
    
    
    (31,930
    )
    
    
    
    
    
    
    (63,915
    )
    
    
    Distributions on mandatorily redeemable preferred
securities
    
    
    
    
    
    
    (36,393
    )
    
    
    (31,168
    )
    
    
    (115,930
    )Preferred dividends of subsidiaries
    
    
    (7,402
    )
    
    
    (5,473
    )
    
    
    (22,413
    )
    
    
    (15,695
    )Other income (expense), net
    
    
    (8,433
    )
    
    
    (29,483
    )
    
    
    (31,897
    )
    
    
    (31,314
    )Total other income and (expense)
    
    
    (162,879
    )
    
    
    (196,298
    )
    
    
    (515,582
    )
    
    
    (528,755
    )Earnings Before Income Taxes
    
    
    950,088
    
    
    
    898,051
    
    
    
    1,915,437
    
    
    
    1,934,899Income taxes
    
    
    305,615
    
    
    
    279,216
    
    
    
    587,690
    
    
    
    586,378Consolidated Net Income
    
    $
    644,473
    
    
    $
    618,835
    
    
    $
    1,327,747
    
    
    $
    1,348,521Common Stock Data:Consolidated basic earnings per share
    
    $
    0.87
    
    
    $
    0.85
    
    
    $
    1.80
    
    
    $
    1.86Consolidated diluted earnings per share
    
    $
    0.87
    
    
    $
    0.84
    
    
    $
    1.79
    
    
    $
    1.85Average number of basic shares of common
stock outstanding (in thousands)
    
    
    739,345
    
    
    
    729,816
    
    
    
    738,056
    
    
    
    724,462Average number of diluted shares of common
stock outstanding (in thousands)
    
    
    743,695
    
    
    
    734,855
    
    
    
    742,271
    
    
    
    729,671Cash dividends paid per share of common stock
    
    $
    0.3575
    
    
    $
    0.35
    
    
    $
    1.0575
    
    
    $
    1.035
 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 
  For the Nine MonthsEnded September 30,2004
    
    2003(in thousands)Operating Activities:Consolidated net income
    
    $
    1,327,747
    
    
    $
    1,348,521Adjustments to reconcile consolidated net income
to net cash provided from operating activities Depreciation and amortization
    
    
    866,839
    
    
    
    893,880Deferred income taxes and investment tax credits
    
    
    475,009
    
    
    
    282,798Allowance for equity funds used during construction
    
    
    (31,984
    )
    
    
    (17,049
    )Equity in losses of unconsolidated subsidiaries
    
    
    68,193
    
    
    
    75,425Leveraged lease income
    
    
    (51,708
    )
    
    
    (49,581
    )Pension, postretirement, and other employee benefits
    
    
    6,695
    
    
    
    (29,837
    )Tax benefit of stock options
    
    
    21,949
    
    
    
    25,917Hedge settlements
    
    
    (8,762
    )
    
    
    (120,483
    )Other, net
    
    
    (73,953
    )
    
    
    32,162Changes in certain current assets and liabilities Receivables, net
    
    
    (419,831
    )
    
    
    (82,678
    )Fossil fuel stock
    
    
    31,814
    
    
    
    (11,719
    )Materials and supplies
    
    
    (18,039
    )
    
    
    (20,202
    )Other current assets
    
    
    (36,373
    )
    
    
    26,758Accounts payable
    
    
    (77,340
    )
    
    
    (190,336
    )Accrued taxes
    
    
    118,811
    
    
    
    294,004Accrued compensation
    
    
    (105,807
    )
    
    
    (164,023
    )Other current liabilities
    
    
    (11,369
    )
    
    
    90,323Net cash provided from operating activities
    
    
    2,081,891
    
    
    
    2,383,880Investing Activities:Gross property additions
    
    
    (1,457,161
    )
    
    
    (1,452,870
    )Cost of removal net of salvage
    
    
    (47,420
    )
    
    
    (51,767
    )Construction receivables/payable, net
    
    
    (30,638
    )
    
    
    (55,280
    )Investment in unconsolidated subsidiaries
    
    
    (73,810
    )
    
    
    (81,238
    )Other
    
    
    (19,411
    )
    
    
    54,579Net cash used for investing activities
    
    
    (1,628,440
    )
    
    
    (1,586,576
    )Financing Activities:Decrease in notes payable, net
    
    
    (210,457
    )
    
    
    (539,091
    )Proceeds Long-term debt
    
    
    1,426,125
    
    
    
    2,880,495Mandatorily redeemable preferred securities
    
    
    200,000
    
    
    
    Preferred stock
    
    
    175,000
    
    
    
    125,000Common stock
    
    
    89,678
    
    
    
    370,305Redemptions Long-term debt
    
    
    (1,081,146
    )
    
    
    (2,294,303
    )Mandatorily redeemable preferred securities
    
    
    (240,000
    )
    
    
    (240,000
    )Preferred stock
    
    
    (28,388
    )
    
    
    Payment of common stock dividends
    
    
    (779,875
    )
    
    
    (748,111
    )Other
    
    
    (31,633
    )
    
    
    (41,682
    )Net cash used for financing activities
    
    
    (480,696
    )
    
    
    (487,387
    )Net Change in Cash and Cash Equivalents
    
    
    (27,245
    )
    
    
    309,917Cash and Cash Equivalents at Beginning of Period
    
    
    311,274
    
    
    
    273,032Cash and Cash Equivalents at End of Period
    
    $
    284,029
    
    
    $
    582,949Supplemental Cash Flow Information:Cash paid during the period for Interest (net of $29,785 and $39,673 capitalized for 2004 and 2003, respectively)
    
    $
    428,944
    
    
    $
    471,001Income taxes (net of refunds)
    
    $
    35,973
    
    
    $
    55,282
 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 
  At September 30,
    
    At December 31,Assets
    
    2004
    
    2003(in thousands)Current Assets:Cash and cash equivalents
    
    $
    284,029
    
    
    $
    311,274Receivables Customer accounts receivable
    
    
    870,838
    
    
    
    678,345Unbilled revenues
    
    
    321,292
    
    
    
    275,395Under recovered regulatory clause revenues
    
    
    449,432
    
    
    
    204,563Other accounts and notes receivable
    
    
    272,826
    
    
    
    338,557Accumulated provision for uncollectible accounts
    
    
    (31,363
    )
    
    
    (30,155
    )Fossil fuel stock, at average cost
    
    
    284,312
    
    
    
    316,126Vacation pay
    
    
    101,595
    
    
    
    96,700Materials and supplies, at average cost
    
    
    588,604
    
    
    
    570,787Prepaid expenses
    
    
    137,950
    
    
    
    125,477Other
    
    
    92,645
    
    
    
    30,196Total current assets
    
    
    3,372,160
    
    
    
    2,917,265Property, Plant, and Equipment:In service
    
    
    41,098,890
    
    
    
    40,339,785Less accumulated depreciation
    
    
    14,820,297
    
    
    
    14,310,72626,278,593
    
    
    
    26,029,059Nuclear fuel, at amortized cost
    
    
    202,581
    
    
    
    222,667Construction work in progress
    
    
    1,577,221
    
    
    
    1,274,888Total property, plant, and equipment
    
    
    28,058,395
    
    
    
    27,526,614Other Property and Investments:Nuclear decommissioning trusts, at fair value
    
    
    839,046
    
    
    
    807,893Leveraged leases
    
    
    957,539
    
    
    
    837,843Other
    
    
    346,175
    
    
    
    238,377Total other property and investments
    
    
    2,142,760
    
    
    
    1,884,113Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    866,481
    
    
    
    874,443Prepaid pension costs
    
    
    966,169
    
    
    
    911,442Unamortized debt issuance expense
    
    
    153,808
    
    
    
    151,558Unamortized loss on reacquired debt
    
    
    327,495
    
    
    
    326,389Other regulatory assets
    
    
    249,667
    
    
    
    121,676Other
    
    
    361,217
    
    
    
    324,474Total deferred charges and other assets
    
    
    2,924,837
    
    
    
    2,709,982Total Assets
    
    $
    36,498,152
    
    
    $
    35,037,974
 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 September 30,
    
    At December 31,Liabilities and Stockholders' Equity
    
    2004
    
    2003(in thousands)Current Liabilities:Securities due within one year
    
    $
    455,242
    
    
    $
    741,073Notes payable
    
    
    357,243
    
    
    
    567,771Accounts payable
    
    
    708,023
    
    
    
    698,758Customer deposits
    
    
    196,253
    
    
    
    189,000Accrued taxes Income taxes
    
    
    315,711
    
    
    
    153,757Other
    
    
    318,135
    
    
    
    248,937Accrued interest
    
    
    173,341
    
    
    
    186,935Accrued vacation pay
    
    
    132,640
    
    
    
    128,505Accrued compensation
    
    
    325,548
    
    
    
    436,854Other
    
    
    264,951
    
    
    
    264,688Total current liabilities
    
    
    3,247,087
    
    
    
    3,616,278Long-term Debt
    
    
    10,746,392
    
    
    
    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
    
    
    4,971,302
    
    
    
    4,586,377Deferred credits related to income taxes
    
    
    382,819
    
    
    
    409,339Accumulated deferred investment tax credits
    
    
    558,953
    
    
    
    579,490Employee benefit obligations
    
    
    830,839
    
    
    
    765,390Asset retirement obligations
    
    
    889,145
    
    
    
    845,392Other cost of removal obligations
    
    
    1,286,581
    
    
    
    1,261,519Miscellaneous regulatory liabilities
    
    
    433,347
    
    
    
    576,393Other
    
    
    319,895
    
    
    
    262,580Total deferred credits and other liabilities
    
    
    9,672,881
    
    
    
    9,286,480Total Liabilities
    
    
    25,627,004
    
    
    
    24,967,262Cumulative Preferred Stock of Subsidiaries
    
    
    569,738
    
    
    
    423,126Common Stockholders Equity:Common stock, par value $5 per share Authorized  1 billion sharesIssued   September 30, 2004: 739,918,278 Shares; December 31, 2003: 735,021,270 SharesTreasury   September 30, 2004: 231,359 Shares; December 31, 2003: 192,691 SharesPar value
    
    
    3,699,591
    
    
    
    3,675,106Paid-in capital
    
    
    833,332
    
    
    
    746,080Treasury, at cost
    
    
    (5,140
    )
    
    
    (4,066
    )Retained earnings
    
    
    5,889,918
    
    
    
    5,343,471Accumulated other comprehensive loss
    
    
    (116,291
    )
    
    
    (113,005
    )Total Common Stockholders Equity
    
    
    10,301,410
    
    
    
    9,647,586Total Liabilities and Stockholders Equity
    
    $
    36,498,152
    
    
    $
    35,037,974
 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 
  For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Consolidated Net Income
    
    $
    644,473
    
    
    $
    618,835
    
    
    $
    1,327,747
    
    
    $
    1,348,521Other comprehensive loss:Change in fair value of marketable securities, net of tax
of $(796), $-, $2,511 and $-, respectively
    
    
    (1,330
    )
    
    
    (284
    )
    
    
    4,572
    
    
    
    (188
    )Changes in fair value of qualifying hedges, net of tax
of $(17,897), $5,781, $(10,094) and $(4,325), respectively
    
    
    (30,658
    )
    
    
    (6,399
    )
    
    
    (18,088
    )
    
    
    (19,903
    )Less: Reclassification adjustment for amounts included in net income,
net of tax of $1,969, $2,723, $6,354 and $(1,937), respectively
    
    
    3,170
    
    
    
    4,401
    
    
    
    10,230
    
    
    
    (1,956
    )COMPREHENSIVE INCOME
    
    $
    615,655
    
    
    $
    616,553
    
    
    $
    1,324,461
    
    
    $
    1,326,474
 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 
 
 THIRD QUARTER 2004 vs. THIRD 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 third quarter and year-to-date 2004 earnings were
$644 million ($0.87 per share) and $1.33 billion ($1.80 per share),
respectively, compared with $619 million ($0.85 per share) and $1.35 billion
($1.86 per share) in the third quarter and year-to-date 2003. Earnings in the
third quarter 2004 increased despite mild weather, primarily due to increased
consumption of electricity by existing customers in the Southern Company
service area reflecting continued improvement in the economy and continued
customer growth. The decrease in year-to-date 2004 earnings is primarily
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.
Excluding the Dynegy contract termination, year-to-date 2004 earnings increased
primarily due to increased consumption of electricity by existing customers in
the Southern Company service area reflecting continued improvement in the
economy and continued customer growth. 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. Significant income statement items appropriate for discussion include the
following: Increase (Decrease)Third Quarter
    
    Year-To-Date(in thousands)
    
    %
    
    (in thousands)
    
    %Retail sales
    
    $
    158,071
    
    
    
    5.7
    
    
    $
    630,466
    
    
    
    9.1Sales for resale
    
    
    (32,704
    )
    
    
    (8.7
    )
    
    
    4,306
    
    
    
    0.4Other electric revenues
    
    
    8,991
    
    
    
    9.9
    
    
    
    (123,259
    )
    
    
    (30.0
    )Fuel expense
    
    
    45,529
    
    
    
    4.9
    
    
    
    305,904
    
    
    
    12.8Purchased power expense
    
    
    49,893
    
    
    
    36.2
    
    
    
    140,469
    
    
    
    36.5Other operations and maintenance
expenses
    
    
    39,505
    
    
    
    5.5
    
    
    
    123,694
    
    
    
    5.6Depreciation and amortization expense
    
    
    (19,489
    )
    
    
    (7.5
    )
    
    
    (48,671
    )
    
    
    (6.4
    )Taxes other than income taxes
    
    
    5,902
    
    
    
    3.8
    
    
    
    27,406
    
    
    
    6.1Interest income
    
    
    1,180
    
    
    
    23.6
    
    
    
    (9,798
    )
    
    
    (32.6
    )Other income (expense), net
    
    
    21,050
    
    
    
    71.4
    
    
    
    (583
    )
    
    
    (1.9
    )
 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 $47 million, or 2.4%, in the third
quarter 2004 and increased by $228 million, or 4.7%, year-to-date 2004 when
compared to the same periods in 2003. In the third quarter and year-to-date
2004, retail kilowatt-hour energy sales increased by 0.8% and 3.4%,
respectively, over the same periods in 2003, primarily due to growth in the
number of customers and demand and the continued improvement in the economy.
In the third quarter 2004, retail kilowatt-hour energy sales in the commercial
and industrial sectors were up by 0.8% and 2.7%, respectively, while the
residential sector was down slightly by 0.9%, reflecting the impact of
hurricane related outages, when compared to the same period in 2003.
Year-to-date 2004, retail kilowatt-hour energy sales to residential, commercial
and industrial customers were up by 3.7%, 3% and 3.5%, respectively, from the
amounts recorded in the corresponding period in 2003. The number of retail
customers increased by 1.7% for the year-to-date 2004 when compared to
year-to-date 2003. Sales for resale.In the third quarter 2004, sales for resale revenues
decreased when compared to the same period in 2003 primarily due to lower
opportunity sales in the wholesale generation business following the June 2004
start of a PPA for 618 megawatts, which significantly reduced the amount of
uncontracted capacity available for such sales. The level of opportunity sales
in 2003 was also higher as a result of an unusual combination of mild weather
in Southern Companys service territory making more coal-fired generation
available for sale to utilities outside the service territory that depend
heavily on gas-fired generation. Southern Power added 2,407 megawatts of
generating capacity in June and October 2003. A portion of this new capacity
contributed to the increase in sales for resale revenues year-to-date 2004 as a
result of increased energy revenues from PPAs with neighboring utilities.
These increases in sales for resale revenues 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.Other electric revenues increased $9 million, or
9.9%, in the third quarter 2004 when compared to the same period in 2003
primarily due to increases of $3 million in transmission revenue, $2 million in
rent from other electric property and $1.6 million in outdoor lighting revenue.
Year-to-date 2004, other electric revenues decreased from 2003 as a result of
the $142 million in contract termination revenues from Dynegy recorded 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. Excluding these contract
termination revenues, other electric revenues increased $18.8 million, or 7%,
year-to-date 2004 when compared to the same period in 2003 primarily as a
result of increases of $6 million in transmission revenue, $3.6 million in rent
from other electric property, $3.4 million in revenues from cogeneration sales
and $3.4 million in outdoor lighting revenue. Fuel expense. Fuel expense in the third quarter and year-to-date 2004
increased due to the higher average unit cost of fuel. The year-to-date 2004
increase in fuel expense was also impacted by increased generating capacity at
Southern Power. For the third quarter and year-to-date periods in 2004, the
average unit cost of fuel per kilowatt-hour generated increased 9.2% and 14%,
respectively, when compared to the corresponding periods in 2003. 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. In addition, Southern Powers PPAs generally provide that the
purchasers are responsible for substantially all of the costs of fuel. Purchased power expense.During the third quarter and year-to-date 2004,
purchased power expense increased when compared with the same periods in 2003
mainly due to increased demand for energy by retail customers and purchased
energy used to meet off-system sales commitments. In some instances, 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.Other operations and
maintenance expenses increased in the third quarter and year-to-date 2004 when
compared to the same periods in 2003 due to higher scheduled transmission and
distribution maintenance and other production expenses and year-to-date 2004
higher administrative expenses. Transmission and distribution expenses
increased $1.9 million, or 1.3%, and $32.2 million, or 8.2%, for the third
quarter and year-to-date 2004, respectively, due to completion of work
postponed in 2003. Other production expenses were up $45.6 million, or 19.2%,
and $60.1 million, or 7%, for the third quarter and year-to-date 2004,
respectively, due to increased expenses primarily resulting from the operation
of Southern Powers new generating facilities. Administrative and general
expenses increased $35 million, or 5.3%, year-to-date 2004 primarily as a
result of payroll and employee benefits costs. Depreciation and amortization expense.Depreciation and amortization
expense decreased in the third quarter and year-to-date 2004 as a direct result
of increased amortization of regulatory liabilities at Georgia Power and
Mississippi Power when compared to the corresponding periods in 2003. Georgia
Powers depreciation and amortization expenses decreased $19 million and $55
million for the third quarter and year-to-date 2004, respectively, primarily
due to 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.
Mississippi Powers decreases in depreciation and amortization expenses during
the third quarter and year-to-date 2004 of $4 million and $11 million for the
third quarter and year-to-date 2004, respectively, are primarily the result of
the amortization of a $60 million regulatory liability as approved by the
Mississippi PSC. See 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. The year-to-date 2004 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. Taxes other than income taxes.The third 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 year-to-date 2004 $9.8 million decrease in interest
income when compared to the same period last year is primarily the result of
$15.6 million of interest received from a federal income tax settlement in the
second quarter of 2003 partially offset by $3.2 million of interest received in
August 2004 from a state income tax settlement. Other income (expense), net.In the third quarter 2004, net expense
decreased primarily as a result of a $10 million increase in income from
customer growth, weather and changes in customer consumption related to a
Georgia Power electricity pricing program that was partially offset by
increased charitable donations and lower revenues from miscellaneous customer
contracts when compared to the same period in 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. 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 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 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 had been effectively stayed pending this
final resolution of the TVA case. On June 16, 2004, the
U.S. District Court for the
Northern District of Alabama lifted the stay of the New Source Review
litigation against Alabama Power, 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 and could possibly require payment of substantial penalties that
cannot be determined at this time. 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 the U.S. District Court for the Southern District of New
York against Southern Company and four other electric power companies. A nearly
identical complaint was filed 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 and the other defendants have filed
motions to dismiss both lawsuits. Southern Company intends to 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 vigorously defend against these claims. While the outcome of this matter
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. In any event, however, based on the last three years of data, the
State of Georgia believes that the Atlanta area has attained the one-hour
standard and is in the process of applying for redesignation from the EPA. 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. 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 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 specified 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.
However, on October 22, 2004, the EPA announced it was granting a petition for
reconsideration filed with the EPA by a coalition of Georgia industries. The EPA
will stay implementation of the rule, as it relates to Georgia, while it
initiates rulemakings to address the petition. The impact of the nitrogen oxide
reduction rules will depend on the outcome of the petition for reconsideration
and/or any subsequent development and approval of Georgias state
implementation plan and 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, 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 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 requires utilities to submit 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. 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 submitted the required analyses on August 9, 2004.
In that filing, Southern Company passed the pivotal supplier analysis for all
markets and the wholesale market share analysis for all markets except the
Southern Company control area. Southern Company also submitted other analyses
to demonstrate that it lacks generation market power. This filing remains
pending at the FERC. Southern Company, along with other utilities, has also
filed an appeal of the FERCs April 14, 2004 order with the Circuit Court of
Appeals in Washington, D.C. In the event that the FERCs default mitigation
measures are ultimately applied, Southern Power and the retail operating
companies may be required to charge cost-based rates for certain wholesale
sales, 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 Plant 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 18




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 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. In direct testimony filed on October 14, 2004, the Georgia PSC
staff proposed a different valuation that shows the market value for the Plant
McIntosh construction project is less than book value. Georgia Power and
Savannah Electric disagree with the proposed valuation methodology. Georgia
Power and Savannah Electric plan to file rebuttal testimony in November with
hearings being held in that same month. The Georgia PSC is expected to issue a
final order in this matter in December 2004. 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 September 30,
2004, the investment in the McIntosh construction project totaled approximately
$381.1 million and $74.2 million for Georgia Power and Savannah Electric,
respectively. The ultimate outcome of the Georgia PSCs review cannot now be
determined. See Note (J) to the Condensed Financial Statements herein for
additional information. 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 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. Hearings on
Georgia Powers filed testimony were held in September 2004. Testimony from
Georgia PSC staff was filed and hearings held in October 2004. Georgia Power
plans to file rebuttal testimony in November 2004 with hearings on that
testimony being held in the same month. 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. On October 5,
2004, the Alabama PSC voted to approve the rate mechanism as filed. The rate
mechanism will begin operation in January 2005 and provide for the recovery of
these costs pursuant to a factor that will be calculated annually.
Environmental costs to be recovered will include operation and maintenance
expense, depreciation and a return on invested capital. It is anticipated that
for the first two years of the increase, retail rates will increase by
approximately 1% ($33 million) in 2005 and approximately an additional 1% ($30
million) in 2006. In conjunction with the Alabama PSCs approval, Alabama Power
agreed to a moratorium until March 2007 on any retail rate increase under the
previously approved Rate Stabilization and Equalization 19




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Plan. Any increase in March 2007 would be based upon the earned return on
retail common equity at December 31, 2006. See Note 3 to the financial
statements of Southern Company under Alabama Power Retail Rate
Adjustment Procedures in Item 8 of the Form 10-K for further information on
Alabama Powers Rate Stabilization and Equalization Plan. 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
previously 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. 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.
This amortization increased after tax earnings for the third quarter
and year-to-date 2004 by $2.5 million and $7.7 million, respectively. In addition, the Mississippi PSC also approved Mississippi Powers
requested changes to its PEP rate schedule, 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 retail operating
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 retail operating companies will
continue to monitor the under recovered fuel cost balance in light of these
higher fuel costs. Storm Damage Cost Recovery On September 15 and 16, 2004, Hurricane Ivan hit the Gulf Coast of Florida and
Alabama and continued north through the Southern Companys service territory
causing substantial damage. Nearly 40% of Southern Companys 4 million
customers were without electric service immediately after the hurricane. Almost
95% of those without power had service restored within one week, and two weeks
after the storm, power had been restored to all who could receive service. Each retail operating company maintains a reserve for property damage to
cover the cost of damages from major storms to its transmission and
distribution lines and the cost of uninsured damages to its generation
facilities and other property. At Alabama Power, operation and maintenance
expenses associated with repairing the damage to its facilities and restoring
service to customers are preliminarily estimated to be $52 million. The 20




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION balance in Alabama Powers natural disaster reserve was not sufficient to cover
these costs. On October 19, 2004, Alabama Power received approval from the
Alabama PSC to record its hurricane related operation and
maintenance expenses in its natural disaster reserve, thereby deferring the
approximately $41 million negative balance for recovery in future periods in a
manner which minimizes the impact on customers. At Gulf Power, the estimated
total amount of damage related to Hurricane Ivan charged to the property damage
reserve as of September 30, 2004 was $75.5 million. Prior to Hurricane Ivan,
Gulf Powers reserve balance was approximately $28 million. Gulf Powers
current annual accrual to the property damage reserve, as approved by the
Florida PSC, is $3.5 million. The Florida PSC has also approved
additional accrual amounts at Gulf Powers discretion. Gulf
Power is currently reviewing alternatives that would potentially
allow for more rapid recovery of these costs. See Notes (K), (M)
and (O) to the Condensed Financial Statements herein for additional information
on these reserves. Mirant Related Matters 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 Mirant Related Matters in
Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements
herein under Mirant Related Matters. In July 2003, Mirant filed for
voluntary reorganization under Chapter 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 Leveraged Lease
Transactions See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  Income Tax Matters  Leveraged Lease Transactions of
Southern Company in Item 7 and Note 3 to the financial statements of Southern
Company under Income Tax Issues  Leveraged Lease Transactions in Item 8 of
the Form 10-K for information regarding IRS challenges to Southern Companys
transactions related to international leveraged leases. See Note (B) to the
Condensed Financial Statements herein under Income Tax Matters for
information on potential additional challenges and information 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. Synthetic Fuel Tax
Credits See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future
Earnings Potential  Income Tax Matters  Synthetic Fuel Tax Credits of
Southern Company in Item 7 and Note 3 to the financial statements of Southern
Company under Income Tax Matters  Synthetic Fuel Tax Credits in Item 8 of
the Form 10-K for information related to Southern Companys investments in two
entities that produce synthetic fuel and receive tax credits under Section 29
of the Internal Revenue Code. In accordance with Section 29, these tax credits
are subject to limitation as the annual average price of oil (as determined by
the Department of Energy) increases over a specified, inflation-adjusted,
dollar amount. Based on oil prices through October 31, 2004, Southern Company
does not expect the recent oil price increases to result in any limitation to
these credits in 2004. However, Southern Company, along with its partners in
these investments, will continue to monitor oil prices. Any indicated potential
limitation on these credits could affect either the timing or the amount of the
credit recognition and could also require an impairment analysis of these
investments by Southern Company. 21




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION American Jobs Creation Act
of 2004 On October 22, 2004, President Bush signed the American Jobs Creation Act of
2004 (Jobs Act) into law. The Jobs Act represents the most significant
revision to the Internal Revenue Code since 1986. Congress must still develop
the regulations that will implement the requirements of the Jobs Act. Southern
Company is currently assessing the impact of the Jobs Act on its taxable
income. However, Southern Company currently does not expect the Jobs Act to
have a material impact on its financial statements. Other Construction Projects In October 2004, a partnership between Southern Company and the Orlando
Utilities Commission (OUC) was selected by the U.S. Department of Energy (DOE)
to build and operate a 285 MW coal-gasification facility. The facility will be
located at OUCs Stanton Energy Center near Orlando, Florida, site of Plant
Stanton A, an existing gas-fired 630 megawatt unit co-owned by Southern Power,
OUC and others. Southern Power will own and operate the Southern Company
portion of the project. The project will demonstrate a coal gasification
technology that has been under development, in partnership with the DOE, at
Southern Companys power systems development facility near Birmingham, Alabama.
The project is scheduled to begin commercial operation in early 2010, with a
projected total cost of $557 million. The DOE will contribute approximately
$235 million of the cost. In August 2004 Southern Power completed limited construction activities on
Plant Franklin Unit 3 to preserve the long-term viability of the project. Final
completion is not anticipated 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. Power Sales Agreements On August 12, 2004, Georgia Power and Gulf Power entered into a PPA and
Southern Power entered into two PPAs with Florida Power & Light (FP&L). Under
the agreements, for the period from June 2010 through December 2015, Georgia
Power and Gulf Power will provide FP&L with 165 megawatts of capacity annually
from the jointly owned Plant Scherer Unit 3, and Southern Power will provide
FP&L with a total of 790 megawatts of capacity annually from Plant Harris Unit
1 and Plant Franklin Unit 1. The contracts provide for fixed capacity payments
and variable energy payments based on actual energy delivered. Additionally,
FP&L will make payments for firm gas transportation. These contracts are
contingent upon certain events, including approval of the Florida PSC. The
final outcome of this matter cannot now be determined. See MANAGEMENTS
DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Revenues of Southern
Company in Item 7 of the Form 10-K for information on long-term power sales
contracts. Other Matters 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. Both Alabama Power and
Georgia Power have implemented plans for the measures ordered by the NRC to be
in effect on October 29, 2004 and are in compliance with the requirements.
Alabama Power and Georgia Power  based on its ownership interest  currently
estimate their respective expenditures related to these security measures to
total $9.7 million and $9.8 million, of which $9.3 million and $1.4 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 22




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. 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 the third quarter 2004, Southern Company prospectively adopted FASB
Staff Position (FSP) 106-2, Accounting and Disclosure Requirements related to
the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the
Medicare Act). The Medicare Act provides a 28% prescription drug subsidy for
Medicare eligible retirees. FSP 106-2 requires recognition of the impacts of
the Medicare Act in the accumulated post-retirement benefit obligation (APBO)
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 elected
to apply this treatment prospectively. The effect of the subsidy reduced
Southern Companys expenses for the three months ended September 30, 2004 by
approximately $5 million and is expected to have a similar impact on future
expenses. The subsidys impact on the post-retirement medical plan APBO was a
reduction of approximately $182 23




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION million. However, the ultimate impact on future periods is subject to federal
regulations governing the subsidy created in the Medicare Act being finalized.
See Note (G) to the Condensed Financial Statements herein for additional
information. FINANCIAL CONDITION AND LIQUIDITY Overview Major changes in Southern Companys financial condition during the first nine
months of 2004 included $1.5 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 $331 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 $455 million will be required by September
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
ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY  Sources of Capital of Southern
Company in Item 7 of the Form 10-K for additional information. To meet short term cash needs and contingencies, the Southern Company
system had at September 30, 2004 approximately $284 million of cash and cash
equivalents and approximately $3.2 billion of unused credit arrangements with
banks, of which $73 million expire in 2004, $1.7 billion expire in 2005 and
$1.4 billion expire in 2006 and beyond. Of the facilities maturing in 2004 and
2005, $1.2 billion contain provisions allowing two-year term loans executable
at the expiration date and $275 million contain provisions allowing one-year
term loans executable at the expiration date. These unused credit arrangements
also provide liquidity support to variable rate pollution control bonds and
commercial paper programs. Southern Company expects to renew its credit
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
September 30, 2004, the Southern Company system had outstanding commercial
paper of $350 million and extendible commercial notes of $8 million. Management
believes that the need for working capital can be adequately met by utilizing
commercial paper programs and lines of credit without maintaining large cash
balances. 24




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 arrangements that
would require material changes in payment schedules or terminations as a result
of a credit rating downgrade. There are certain contracts that could require
collateral  but not accelerated payment  in the event of a credit rating
change to below investment grade. These contracts are primarily for physical
electricity purchases and sales and fixed-price physical gas purchases. At
September 30, 2004, the maximum potential collateral requirements were
approximately $433 million. Generally, collateral may be provided for by a
Southern Company guaranty, letter of credit or cash. Southern Company and its subsidiaries are also party to certain derivative
agreements that could require collateral and/or accelerated payment in the
event of a credit rating change to below investment grade. These agreements
are primarily for natural gas price and interest rate risk management
activities. At September 30, 2004, Southern Company and its subsidiaries
maximum potential exposure to these contracts was $9 million. 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 programs at the instruction of their respective PSCs. The fair value of derivative energy contracts at September 30, 2004 was as
follows: Third Quarter2004
    
    Year-to-DateChanges
    
    ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    26,618
    
    
    $
    15,825Contracts realized or settled
    
    
    (19,929
    )
    
    
    (45,278
    )New contracts at inception
    
    
    
    
    
    
    Changes in valuation techniques
    
    
    
    
    
    
    Current period changes (a)
    
    
    49,397
    
    
    
    85,539Contracts at September 30, 2004
    
    $
    56,086
    
    
    $
    56,086
 (a)
    
    Current period changes also include the changes in fair value of new
contracts entered into during the period. 25




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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Source of September 30, 2004Valuation PricesMaturityTotalFair Value
    
    Year 1
    
    1-3 Years(in thousands)Actively quoted
    
    $
    60,099
    
    
    $
    56,151
    
    
    $
    3,948External sources
    
    
    (4,013
    )
    
    
    (3,953
    )
    
    
    (60
    )Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at September
30, 2004
    
    $
    56,086
    
    
    $
    52,198
    
    
    $
    3,888
 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 nine months of 2004, Southern Company and its subsidiaries issued
$1.35 billion of senior notes, $276 million of other long-term debt, $175
million of preferred stock and $90 million of common stock through employee and
director stock plans. The proceeds were primarily used to refund senior notes
and other long-term debt and to fund ongoing construction projects. The
remainder was used to repay short-term indebtedness. See Southern Companys
Condensed Consolidated Statements of Cash Flows herein for further details on
financing activities during the first nine months of 2004. Subsequent to September 30, 2004, Gulf Power entered into loan agreements
for $50 million maturing October 21, 2005 and $100 million maturing October 28,
2005. Proceeds from these borrowings were used for general corporate purposes
and to finance repairs to its electric system for damage suffered as a result
of Hurricane Ivan. Also subsequent to September 30, 2004, Savannah Electric has entered into
interest rate hedging transactions related to the anticipated issuance of
senior notes totaling approximately $30 million. The notes are expected to be
issued in 2004. Further, Savannah Electric also entered into an interest rate
hedging transaction related to $13.9 million of its outstanding tax-exempt
auction rate securities. The interest rate swap will fix Savannah Electrics
interest rate cost related to these securities through 2007. In addition to any financings that may be necessary to meet capital
requirements and contractual obligations, Southern Company and its subsidiaries
plan to continue, when economically feasible, a program to retire higher-cost
debt and replace these obligations with lower-cost capital if market conditions
permit. The market price of Southern Companys common stock at September 30, 2004
was $29.98 per share and the book value was $13.93 per share, representing a
market-to-book ratio of 215%, compared to $30.25, $13.13 and 230%,
respectively, at the end of 2003. The dividend for the third quarter 2004 was
$0.3575 per share compared to $0.35 per share in the third quarter 2003. 26




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PART I 
 Item 3. Quantitative And Qualitative Disclosures About Market Risk. See MANAGEMENTS DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND
LIQUIDITY  Market Price Risk herein for each registrant 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 third 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. 27




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ALABAMA POWER COMPANY 28




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ALABAMA POWER COMPANY 
  For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Operating Revenues:Retail sales
    
    $
    979,768
    
    
    $
    951,612
    
    
    $
    2,571,549
    
    
    $
    2,371,347Sales for resale Non-affiliates
    
    
    134,068
    
    
    
    134,897
    
    
    
    366,504
    
    
    
    370,390Affiliates
    
    
    95,739
    
    
    
    96,840
    
    
    
    215,472
    
    
    
    213,568Other revenues
    
    
    36,798
    
    
    
    32,785
    
    
    
    111,359
    
    
    
    101,096Total operating revenues
    
    
    1,246,373
    
    
    
    1,216,134
    
    
    
    3,264,884
    
    
    
    3,056,401Operating Expenses:Fuel
    
    
    331,853
    
    
    
    330,189
    
    
    
    880,942
    
    
    
    810,724Purchased power Non-affiliates
    
    
    65,844
    
    
    
    33,719
    
    
    
    159,994
    
    
    
    90,025Affiliates
    
    
    51,259
    
    
    
    60,190
    
    
    
    171,591
    
    
    
    154,299Other operations
    
    
    156,179
    
    
    
    152,434
    
    
    
    463,454
    
    
    
    446,619Maintenance
    
    
    60,307
    
    
    
    68,143
    
    
    
    231,412
    
    
    
    224,364Depreciation and amortization
    
    
    106,860
    
    
    
    103,526
    
    
    
    318,359
    
    
    
    308,242Taxes other than income taxes
    
    
    59,124
    
    
    
    54,012
    
    
    
    182,899
    
    
    
    170,579Total operating expenses
    
    
    831,426
    
    
    
    802,213
    
    
    
    2,408,651
    
    
    
    2,204,852Operating Income
    
    
    414,947
    
    
    
    413,921
    
    
    
    856,233
    
    
    
    851,549Other Income and (Expense):Allowance for equity funds used during construction
    
    
    4,237
    
    
    
    2,159
    
    
    
    12,261
    
    
    
    9,958Interest income
    
    
    3,605
    
    
    
    3,702
    
    
    
    11,934
    
    
    
    11,248Interest expense, net of amounts capitalized
    
    
    (46,385
    )
    
    
    (50,068
    )
    
    
    (148,831
    )
    
    
    (163,582
    )Interest expense to affiliate trusts
    
    
    (4,059
    )
    
    
    
    
    
    
    (8,240
    )
    
    
    Distributions on mandatorily redeemable preferred securities
    
    
    
    
    
    
    (3,937
    )
    
    
    (3,938
    )
    
    
    (11,317
    )Other income (expense), net
    
    
    (7,682
    )
    
    
    (9,242
    )
    
    
    (18,435
    )
    
    
    (19,276
    )Total other income and (expense)
    
    
    (50,284
    )
    
    
    (57,386
    )
    
    
    (155,249
    )
    
    
    (172,969
    )Earnings Before Income Taxes
    
    
    364,663
    
    
    
    356,535
    
    
    
    700,984
    
    
    
    678,580Income taxes
    
    
    138,834
    
    
    
    135,271
    
    
    
    268,669
    
    
    
    250,102Net Income
    
    
    225,829
    
    
    
    221,264
    
    
    
    432,315
    
    
    
    428,478Dividends on Preferred Stock
    
    
    6,072
    
    
    
    4,748
    
    
    
    17,524
    
    
    
    13,520Net Income After Dividends on Preferred Stock
    
    $
    219,757
    
    
    $
    216,516
    
    
    $
    414,791
    
    
    $
    414,958
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Net Income After Dividends on Preferred Stock
    
    $
    219,757
    
    
    $
    216,516
    
    
    $
    414,791
    
    
    $
    414,958Other comprehensive income (loss):Change in fair value of marketable securities, net of tax
of $(285)
    
    
    (470
    )
    
    
    
    
    
    
    
    
    
    
    Changes in fair value of qualifying hedges, net of tax
of $(11,016), $1,343, $(5,331) and $(80), respectively
    
    
    (18,118
    )
    
    
    2,474
    
    
    
    (8,768
    )
    
    
    480Less: Reclassification adjustment for amounts included in net
income,
net of tax of $592, $1,514, $2,164 and $3,159, respectively
    
    
    975
    
    
    
    2,151
    
    
    
    3,560
    
    
    
    5,195COMPREHENSIVE INCOME
    
    $
    202,144
    
    
    $
    221,141
    
    
    $
    409,583
    
    
    $
    420,633
 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 
  For the Nine MonthsEnded September 30,2004
    
    2003(in thousands)Operating Activities:Net income
    
    $
    432,315
    
    
    $
    428,478Adjustments to reconcile net income
to net cash provided from operating activities Depreciation and amortization
    
    
    373,792
    
    
    
    354,519Deferred income taxes and investment tax credits, net
    
    
    120,554
    
    
    
    58,913Allowance for equity funds used during construction
    
    
    (12,261
    )
    
    
    (9,958
    )Pension, postretirement, and other employee benefits
    
    
    (14,744
    )
    
    
    (27,531
    )Tax benefit of stock options
    
    
    7,004
    
    
    
    8,029Hedge settlements
    
    
    3,594
    
    
    
    (12,668
    )Natural disaster reserve payments
    
    
    (19,992
    )
    
    
    (3
    )Other, net
    
    
    (35,423
    )
    
    
    (10,974
    )Changes in certain current assets and liabilities Receivables, net
    
    
    (203,743
    )
    
    
    (95,679
    )Fossil fuel stock
    
    
    18,193
    
    
    
    (5,844
    )Materials and supplies
    
    
    (9,060
    )
    
    
    (7,708
    )Other current assets
    
    
    (65
    )
    
    
    (12,028
    )Accounts payable
    
    
    (82,429
    )
    
    
    (32,415
    )Accrued taxes
    
    
    181,294
    
    
    
    169,083Accrued compensation
    
    
    (16,185
    )
    
    
    (15,677
    )Other current liabilities
    
    
    3,582
    
    
    
    47,864Net cash provided from operating activities
    
    
    746,426
    
    
    
    836,401Investing Activities:Gross property additions
    
    
    (533,563
    )
    
    
    (473,484
    )Cost of removal net of salvage
    
    
    (25,484
    )
    
    
    (23,707
    )Other
    
    
    12,850
    
    
    
    13,300Net cash used for investing activities
    
    
    (546,197
    )
    
    
    (483,891
    )Financing Activities:Increase (decrease) in notes payable, net
    
    
    130,791
    
    
    
    (36,991
    )Proceeds Senior notes
    
    
    600,000
    
    
    
    1,065,000Preferred stock
    
    
    100,000
    
    
    
    125,000Common stock
    
    
    40,000
    
    
    
    25,000Capital contributions from parent company
    
    
    
    
    
    
    133Redemptions Senior notes
    
    
    (725,000
    )
    
    
    (1,000,800
    )Other long-term debt
    
    
    (1,445
    )
    
    
    (707
    )Payment of preferred stock dividends
    
    
    (16,197
    )
    
    
    (11,747
    )Payment of common stock dividends
    
    
    (327,975
    )
    
    
    (322,650
    )Other
    
    
    (14,759
    )
    
    
    (4,328
    )Net cash used for financing activities
    
    
    (214,585
    )
    
    
    (162,090
    )Net Change in Cash and Cash Equivalents
    
    
    (14,356
    )
    
    
    190,420Cash and Cash Equivalents at Beginning of Period
    
    
    42,752
    
    
    
    22,685Cash and Cash Equivalents at End of Period
    
    $
    28,396
    
    
    $
    213,105Supplemental Cash Flow Information:Cash paid during the period for Interest (net of $5,118 and $5,037 capitalized for 2004 and 2003, respectively)
    
    $
    120,302
    
    
    $
    123,848Income taxes (net of refunds)
    
    $
    18,490
    
    
    $
    84,569
 The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements. 30




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##### Table of Contents



ALABAMA POWER COMPANY 
  At September 30,
    
    At December 31,Assets
    
    2004
    
    2003(in thousands)Current Assets:Cash and cash equivalents
    
    $
    28,396
    
    
    $
    42,752Receivables Customer accounts receivable
    
    
    302,077
    
    
    
    223,865Unbilled revenues
    
    
    97,880
    
    
    
    95,953Under recovered regulatory clause revenues
    
    
    118,889
    
    
    
    16,697Other accounts and notes receivable
    
    
    53,210
    
    
    
    53,547Affiliated companies
    
    
    60,576
    
    
    
    48,876Accumulated provision for uncollectible accounts
    
    
    (5,702
    )
    
    
    (4,756
    )Fossil fuel stock, at average cost
    
    
    68,800
    
    
    
    86,993Vacation pay
    
    
    35,530
    
    
    
    35,530Materials and supplies, at average cost
    
    
    220,751
    
    
    
    211,690Prepaid expenses
    
    
    52,942
    
    
    
    44,608Other
    
    
    30,452
    
    
    
    19,454Total current assets
    
    
    1,063,801
    
    
    
    875,209Property, Plant, and Equipment:In service
    
    
    14,486,018
    
    
    
    14,224,117Less accumulated provision for depreciation
    
    
    5,038,305
    
    
    
    4,905,9209,447,713
    
    
    
    9,318,197Nuclear fuel, at amortized cost
    
    
    95,859
    
    
    
    93,611Construction work in progress
    
    
    447,534
    
    
    
    321,316Total property, plant, and equipment
    
    
    9,991,106
    
    
    
    9,733,124Other Property and Investments:Equity investments in unconsolidated subsidiaries
    
    
    45,301
    
    
    
    47,811Nuclear decommissioning trusts, at fair value
    
    
    408,053
    
    
    
    384,574Other
    
    
    25,861
    
    
    
    16,992Total other property and investments
    
    
    479,215
    
    
    
    449,377Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    318,343
    
    
    
    321,077Prepaid pension costs
    
    
    478,459
    
    
    
    446,256Unamortized debt issuance expense
    
    
    27,919
    
    
    
    23,457Unamortized loss on reacquired debt
    
    
    111,461
    
    
    
    110,946Other regulatory assets
    
    
    54,805
    
    
    
    13,092Other
    
    
    132,836
    
    
    
    98,086Total deferred charges and other assets
    
    
    1,123,823
    
    
    
    1,012,914Total Assets
    
    $
    12,657,945
    
    
    $
    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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##### Table of Contents



ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At September 30,
    
    At December 31,Liabilities and Stockholder's Equity
    
    2004
    
    2003(in thousands)Current Liabilities:Securities due within one year
    
    $
    15
    
    
    $
    526,019Notes payable
    
    
    130,791
    
    
    
    Accounts payable Affiliated
    
    
    132,705
    
    
    
    141,940Other
    
    
    159,535
    
    
    
    162,314Customer deposits
    
    
    48,987
    
    
    
    47,507Accrued taxes Income taxes
    
    
    185,048
    
    
    
    83,544Other
    
    
    89,185
    
    
    
    22,273Accrued interest
    
    
    57,170
    
    
    
    46,489Accrued vacation pay
    
    
    35,530
    
    
    
    35,530Accrued compensation
    
    
    59,435
    
    
    
    75,620Other
    
    
    42,201
    
    
    
    34,514Total current liabilities
    
    
    940,602
    
    
    
    1,175,750Long-term Debt
    
    
    3,780,060
    
    
    
    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
    
    
    1,709,444
    
    
    
    1,571,076Deferred credits related to income taxes
    
    
    151,330
    
    
    
    162,168Accumulated deferred investment tax credits
    
    
    208,091
    
    
    
    216,309Employee benefit obligations
    
    
    198,721
    
    
    
    174,036Deferred capacity revenues
    
    
    28,281
    
    
    
    36,567Asset retirement obligations
    
    
    377,111
    
    
    
    358,759Asset retirement obligation regulatory liability
    
    
    135,380
    
    
    
    127,346Other cost of removal obligations
    
    
    594,923
    
    
    
    574,445Miscellaneous regulatory liabilities
    
    
    95,012
    
    
    
    86,323Other
    
    
    29,768
    
    
    
    37,525Total deferred credits and other liabilities
    
    
    3,528,061
    
    
    
    3,344,554Total Liabilities
    
    
    8,558,002
    
    
    
    8,197,452Cumulative Preferred Stock
    
    
    472,512
    
    
    
    372,512Common Stockholders Equity:Common stock, par value $40 per share Authorized  15,000,000 sharesOutstanding  September 30, 2004: 8,250,000 Shares December 31, 2003: 7,250,000 Shares
    
    
    330,000
    
    
    
    290,000Paid-in capital
    
    
    1,932,133
    
    
    
    1,926,970Premium on preferred stock
    
    
    99
    
    
    
    99Retained earnings
    
    
    1,378,374
    
    
    
    1,291,558Accumulated other comprehensive loss
    
    
    (13,175
    )
    
    
    (7,967
    )Total common stockholders equity
    
    
    3,627,431
    
    
    
    3,500,660Total Liabilities and Stockholders Equity
    
    $
    12,657,945
    
    
    $
    12,070,624
 The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements. 32




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##### Table of Contents



ALABAMA POWER COMPANY 
 
 THIRD QUARTER 2004 vs. THIRD 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 third
quarter and year-to-date 2004 was $219.7 million and $414.8 million,
respectively, compared to $216.5 million and $415.0 million, respectively, for
the corresponding periods of 2003. Earnings in the third quarter of 2004
increased by $3.2 million, or 1.5%, primarily due to an increase in industrial
base-rate revenues and other revenues, lower maintenance expenses and decreased
interest expense, partially offset by an increase in income and other taxes.
Earnings year-to-date 2004 remained relatively flat compared to
year-to-date 2003 principally due
to an increase in base rate revenues and a decrease in interest expense. These
increases to income were partially offset by higher maintenance expense,
depreciation expense and income and other taxes. Significant income statement items appropriate for discussion include the
following: Increase (Decrease)Third Quarter
    
    Year-To-Date(in thousands)
    
    
    %
    
    
    (in thousands)
    
    
    %Retail sales
    
    $
    28,156
    
    
    
    3.0
    
    
    $
    200,202
    
    
    
    8.4Other revenues
    
    
    4,013
    
    
    
    12.2
    
    
    
    10,263
    
    
    
    10.2Fuel expense
    
    
    1,664
    
    
    
    0.5
    
    
    
    70,218
    
    
    
    8.7Purchased power  non-affiliates
    
    
    32,125
    
    
    
    95.3
    
    
    
    69,969
    
    
    
    77.7Purchased power  affiliates
    
    
    (8,931
    )
    
    
    (14.8
    )
    
    
    17,292
    
    
    
    11.2Maintenance expense
    
    
    (7,836
    )
    
    
    (11.5
    )
    
    
    7,048
    
    
    
    3.1Depreciation and amortization expense
    
    
    3,334
    
    
    
    3.2
    
    
    
    10,117
    
    
    
    3.3Taxes other than income taxes
    
    
    5,112
    
    
    
    9.5
    
    
    
    12,320
    
    
    
    7.2Interest expense, net of amounts
capitalized
    
    
    (3,683
    )
    
    
    (7.4
    )
    
    
    (14,751
    )
    
    
    (9.0
    )Income taxes
    
    
    3,563
    
    
    
    2.6
    
    
    
    18,567
    
    
    
    7.4Dividends on preferred stock
    
    
    1,324
    
    
    
    27.9
    
    
    
    4,004
    
    
    
    29.6
 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 $1.7 million, or 0.2%,
for the third quarter 2004 and $48.7 million, or 2.8%, 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
commercial and industrial customers increased 0.3% and 5.8%, respectively, for
the third quarter 2004 and increased 2.3% and 5.8%, respectively, year-to-date
2004 when compared to the corresponding periods of 2003 primarily due to
improved industrial sales mainly in the primary metal, chemical and paper
sectors. Kilowatt-hour energy sales to residential customers decreased 3.5%
for the third quarter 2004 primarily due to Hurricane Ivan which struck Alabama
in September 2004; however, retail sales revenues lost as a result of power
outages from Hurricane Ivan did not have a material impact on Alabama Powers
net income for the third quarter 2004. For additional information, see Future
Earnings Potential  FERC and Alabama PSC Matters  Storm Damage Cost Recovery
herein. For the year, residential kilowatt-hour energy sales have increased
2.0% when compared to the same period in 2003 due to customer growth and a
slight increase in average consumption. 33




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##### Table of Contents



ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Other revenues.The increase in other revenues for the third quarter 2004
is primarily attributed to a $2.1 million increase in transmission revenues and
a $1.0 million increase in revenues from cogeneration steam facilities due to
increased fuel revenue resulting from higher gas prices when compared to the
same period in 2003. The increase for the year-to-date 2004 is mainly due to a
$5.7 million increase in transmission revenues, a $3.1 million increase in
revenues from cogeneration steam facilities and a $1.3 million increase in rent
from pole attachments when compared to the same period 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 third quarter 2004 when
compared to the corresponding period in 2003 mainly due to a 45.3% increase in
natural gas prices even though generation from natural gas-fired generating
facilities decreased by 32.1%. The year-to-date 2004 increase in fuel expense
when compared to the same period in 2003 is mainly due to a 27.6% increase in
natural gas prices and a 3.1% increase in generation from gas-fired generating
facilities. The increase in generation from gas-fired facilities for
year-to-date 2004 when compared to the corresponding period in 2003 is mainly
due to an increased energy demand coupled with a 43.5% decrease 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.Purchased power from non-affiliates
will vary depending on market cost of available energy being lower than
Southern Company system generated energy, demand for energy within the service
territory and availability of Southern Company system generation. In the third
quarter 2004, purchased power from non-affiliates increased when compared to
the same period in 2003 primarily due to a 101.1% increase in energy purchased
even though purchased power prices decreased by 2.9% during the same time
period. The increase in purchased power expense was also due to increased
capacity payments of $11.3 million associated with a PPA between Alabama Power
and a third party. See Note 7 to the financial statements in Item 8 of the Form
10-K for additional information. Year-to-date 2004 purchased
power-non-affiliates increased $70 million when compared to the same period in
2003 mainly due to a 96.7% increase in energy purchased even though purchased
power prices decreased by 9.7% during 2004. The increase in purchased power
expense year-to-date 2004 is also due to a $16.9 million increase in capacity
payments associated with a PPA between Alabama Power and a third party.
Increased purchases were used to help meet the increased energy demand for
retail sales since energy was available at prices lower than self-generation.
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 will vary
depending on demand and the availability and cost of generating resources at
each system company. Purchased power from affiliates decreased in the third
quarter 2004 over the same period in 2003 due to a 12.2% reduction in energy
purchased and a 4.4% decrease in purchased power prices. The year-to-date 2004
purchased power from affiliates increased when compared to year-to-date 2003,
mainly due to a 40.0% increase in purchased power prices as energy purchased
decreased by 20.3%. A component of the increase in purchased power expense in
2004 is due to a PPA between Alabama Power and Southern Power that began in
June 2003, thus resulting in an increase in the year-to-date 2004 capacity
component of $14.7 million. Due to the fact that the contract began in June
2003, year-to-date 2004 energy purchased associated with the PPA increased 51.1
% while the purchased power price associated with the contract decreased 5.0%.
See Note 1 to the financial statements of Alabama Power under Affiliate
Transactions in Item 8 of the Form 10-K for additional information on this
PPA. 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. 34




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##### Table of Contents



ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Maintenance expense.The decrease in maintenance expense for the third
quarter 2004 when compared to the same period in 2003 is primarily attributed
to a $4.7 million decrease in distribution expense and a $3.1 million decrease
in transmission expense. These decreases in distribution and transmission
expenses for the third quarter 2004 are mainly related to a reduction in
scheduled overhead line maintenance due to storm restoration efforts following
Hurricane Ivan in September 2004. For additional information, see Future
Earnings Potential  FERC and Alabama PSC Matters  Storm Damage Cost Recovery
herein. The year-to-date 2004 increase in maintenance expense is primarily
attributable to a $1.9 million increase in distribution expense for overhead
line maintenance, a $1.9 million increase in steam expense for supervision and
engineering expense and a $1.8 million increase in other power generation
expense for caustic water damage repairs at the Washington County combined
cycle facility. Depreciation and amortization expense.The increases in depreciation and
amortization expense for the third 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 third quarter 2004 increase in taxes
other than income taxes is mainly due to a $2.8 million increase in payroll
taxes and a $1.3 million increase in property tax expense as a result of higher
assessed property values when compared to the corresponding period in 2003.
The year-to-date 2004 increase in taxes other than income taxes when compared
to the same period in 2003 is primarily due to a $5.5 million increase in
payroll taxes, a $4.0 million increase in property tax expense and a $2.6
million increase in the state public utility license tax because of increased
retail revenues. Interest expense, net of amounts capitalized. The decreases in interest
expense, net of amounts capitalized during the third quarter and year-to-date
2004 when compared to the same periods in 2003 are 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 third quarter and
year-to-date of 2004 compared to the same periods in 2003 due primarily to an
increase in taxable income, resulting in an additional
$3.6 million and $9.0
million tax expense, respectively. Income tax expense increased an additional
$9.6 million year-to-date 2004 as a result of various income tax actualization
adjustments. Dividends on preferred stock. Dividends on preferred stock increased for
the third 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. 35




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 information on certain
environmental 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 this final resolution of the TVA case. On June
16, 2004, the U.S. District Court for the Northern District of Alabama lifted
the stay of the New Source Review litigation against Alabama Power, placing the
case back onto the District Courts active docket. An adverse outcome in this
case could require substantial capital expenditures and could possibly require
payment of substantial penalties that cannot be determined at this time. 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 the U.S. District Court for the Southern District of New
York against Southern Company and four other electric power companies. A
nearly identical complaint was filed 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 and the other defendants have filed
motions to dismiss both lawsuits. Southern Company intends to vigorously defend
against these claims. While the outcome of this matter 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 36




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION new standards will depend on the development and implementation of applicable
state regulations and therefore cannot be determined at this time. 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. For additional information concerning recoverable environmental costs, see
Future Earnings Potential  FERC and Alabama PSC Matters  Environmental Rate
Filing herein. 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 requires utilities to submit 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. 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 submitted the required analyses on August 9, 2004.
In that filing, Southern Company passed the pivotal supplier analysis for all
markets and the wholesale market share analysis for all markets except the
Southern Company control area. Southern Company also submitted other analyses
to demonstrate that it lacks generation market power. This filing remains
pending at the FERC. Southern Company, along with other utilities, has also
filed an appeal of the FERCs April 14, 2004 order with the Circuit Court of
Appeals in Washington, D.C. In the event that the FERCs default mitigation
measures are ultimately applied, Alabama Power may be required to charge
cost-based rates for certain wholesale sales, 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 37




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. On
October 5, 2004, the Alabama PSC voted to approve the rate mechanism as filed.
The rate mechanism will begin operation in January 2005 and provide for the
recovery of these costs pursuant to a factor that will be calculated annually.
Environmental costs to be recovered will include (1) applicable operation and
maintenance expenses, (2) depreciation and a return on invested capital
beginning with 2005 investments and (3) a true up of prior period over/under
recovery amounts. It is anticipated that for the first two years of the
increase, retail rates will increase by approximately 1% ($33 million) in 2005
and approximately an additional 1% ($30 million) in 2006. In conjunction with
the Alabama PSCs approval, Alabama Power agreed to a moratorium until March
2007 on any retail rate increase under the previously approved Rate
Stabilization and Equalization Plan. Any increase in March 2007 would be based
upon the earned return on retail common equity at December 31, 2006. See Note 3
to the financial statements of Alabama Power under Retail Rate Adjustment
Procedures in Item 8 of Form 10-K for further information on the Rate
Stabilization and Equalization Plan. 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 to determine if an adjustment to billing rates should be
requested from the Alabama PSC. See MANAGEMENTS DISCUSSION AND ANALYSIS -
RESULTS OF OPERATIONS  Revenues of Alabama Power in Item 7 of and 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. Storm Damage Cost
Recovery On September 15 and 16, 2004, Hurricane Ivan hit the Gulf Coast of Alabama and
Florida and continued north through the state of Alabama, causing substantial
damage in the service territory of Alabama Power. Approximately 826,000 of
Alabama Powers 1,370,000 customer accounts were without electrical service
immediately after the hurricane. See Note 1 to the financial statements of
Alabama Power under Natural Disaster Reserve in Item 8 of the Form 10-K for
information on how Alabama Power maintains a reserve to cover uninsured
expenses resulting from storms. At September 30, 2004, total operation and
maintenance expenses associated with repairing the damage to its facilities and
restoring service to its customers are preliminarily estimated to be $52
million. The balance in the natural disaster reserve was not sufficient to
cover these costs. On October 19, 2004, Alabama Power received approval from
the Alabama PSC to record its hurricane related operation and maintenance
expenses in the natural disaster reserve, thereby deferring the approximately
$41 million negative balance for recovery in future periods in a manner which
will minimize the impact on customers. See MANAGEMENTS
DISCUSSION AND ANALYSIS  ACCOUNTING POLICIES  Application of Critical Accounting Policies and
Estimates and Note (M) to the Condensed Financial Statements herein for
further information concerning the Alabama PSCs approval of deferring the
costs of the storm. In the event another natural disaster occurs while Alabama
Powers Natural Disaster Reserve balance remains negative, management will seek
approval from the Alabama PSC to defer and recover these costs over 38




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION time. Failure to receive such approval of such an accounting treatment could
affect the results of operations of Alabama Power. 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. Alabama Power has implemented
plans for the measures ordered by the NRC to be in effect on October 29, 2004
and is in compliance with the requirements. Alabama Power currently estimates
its expenditures related to these security measures to total $9.7 million, of
which $9.3 million will be capitalized. These estimates are subject to change
in the event additional NRC guidance is provided. On October 22, 2004, President Bush signed the American Jobs Creation Act
of 2004 (the Jobs Act) into law. The Jobs Act represents the most significant
revision to the Internal Revenue Code since 1986. Congress must still develop
the regulations that will set implement the requirements of the Jobs Act.
Alabama Power is currently assessing the impact of the Jobs Act on its taxable
income. However, Alabama Power currently does not expect the Jobs Act to have
a material impact on its financial statements. 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. In addition, see Future Earnings Potential  FERC and Alabama PSC
Matters  Storm Damage Cost Recovery and Note (M) to the Condensed Financial
Statements herein for information on the Alabama PSCs approval of the deferral
of approximately $41 million of costs in excess of Alabama Powers existing
natural disaster reserve associated with Hurricane Ivan storm restoration.
Alabama Power currently has Alabama PSC approval to accrue for a Natural
Disaster Reserve. Alabama Power will consider alternatives that minimize the
impact on customers and will develop a plan to recover these costs, subject to
Alabama PSC approval. 39




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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 the third quarter 2004, Alabama Power prospectively adopted FASB Staff
Position (FSP) 106-2, Accounting and Disclosure Requirements related to the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the
Medicare Act). The Medicare Act provides a 28% prescription drug subsidy for
Medicare eligible retirees. FSP 106-2 requires recognition of the impacts of
the Medicare Act in the accumulated post-retirement benefit obligation (APBO)
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 elected to
apply this treatment prospectively. The effect of the subsidy reduced Alabama
Powers expenses for the three months ended September 30, 2004 by approximately
$1.6 million and is expected to have a similar impact on future expenses. The
subsidys impact on the post-retirement medical plan APBO was a reduction of
approximately $60 million. However, the ultimate impact on future periods is
subject to federal regulations governing the subsidy created in the Medicare
Act being finalized. See Note (G) to the Condensed Financial Statements herein
for additional information. FINANCIAL CONDITION AND LIQUIDITY Overview Major changes in Alabama Powers financial condition during the first nine
months of 2004 included the addition of approximately $534 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. 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. The capital required by September 30, 2005 for maturities of
long-term debt is not a material amount. In October 2004, Alabama Power approved a new capital budget for 2005 and
2006. The construction program of Alabama Power is $902 million for 2005 and
$921 million for 2006. Over the next two years, Alabama Power estimates
spending $563 million on environmental related additions, $170 million on Plant
Farley, $511 million on distribution facilities and $249 million on
transmission additions. See Note 7 to the financial statements of Alabama
Power under Construction Program in Item 8 of the Form 10-K for additional
details. 40




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. To meet short-term cash needs and contingencies, at September 30, 2004
Alabama Power had $28 million of cash and cash equivalents, unused committed
lines of credit of approximately $868 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 ($50 million), 2005
($593 million) and 2007 ($225 million). Of the facilities maturing in 2004 and
2005, $225 million contain provisions allowing two-year term loans executable
at the expiration date and $245 million contain provisions allowing one-year
term loans executable at the expiration date. Alabama Power 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 September 30, 2004, Alabama Power had $131 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 arrangements that would require material
changes in payment schedules or terminations as a result of a credit rating
downgrade. There are certain contracts that could require collateral  but not
accelerated payment  in the event of a credit rating change to below
investment grade. These contracts are primarily for physical electricity
purchases and sales and fixed price physical gas purchases. At September 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. Alabama Power is also party to certain derivative agreements that could
require collateral and/or accelerated payment in the event of a credit rating
change to below investment grade. These agreements are primarily for natural
gas price and interest rate risk management activities. At September 30, 2004,
Alabama Powers maximum potential exposure under these contracts was $9
million. 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. 41




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION The fair value of
derivative energy contracts at September 30, 2004 was as follows: Third Quarter2004
    
    Year-to-DateChanges
    
    ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    11,547
    
    
    $
    6,413Contracts realized or settled
    
    
    (8,578
    )
    
    
    (20,361
    )New contracts at inception
    
    
    
    
    
    
    Changes in valuation techniques
    
    
    
    
    
    
    Current period changes (a)
    
    
    19,219
    
    
    
    36,136Contracts at September 30, 2004
    
    $
    22,188
    
    
    $
    22,188
   (a)
    
    Current period changes also include the changes in fair value of new
contracts entered into during the period. Source of September 30, 2004Valuation PricesTotal
    
    MaturityFair Value
    
    Year 1
    
    1-3 Years(in thousands)Actively quoted
    
    $
    22,562
    
    
    $
    21,659
    
    
    $
    903External sources
    
    
    (374
    )
    
    
    (374
    )
    
    
    Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at September 30, 2004
    
    $
    22,188
    
    
    $
    21,285
    
    
    $
    903
 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 the first quarter 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 the first quarter 2004, Alabama Power issued 500,000 shares of
common stock to Southern Company at $40.00 a share ($20 million aggregate
purchase price). The proceeds from the sale were used by Alabama Power for
general corporate purposes. In the second quarter 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. In August 2004, Alabama Power issued $250 million of Series BB Floating
Rate Senior Notes due August 25, 2009 and terminated a $250 million interest
rate swap at a loss of $0.1 million. The loss from the terminated swap was
deferred into Other Comprehensive Income and will be amortized to income over a
five year period. 42




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ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION The proceeds from the sale were used to repay a portion of Alabama Powers
outstanding short-term indebtedness and for other general corporate purposes,
including Alabama Powers continuous construction program. Additionally, in August 2004, Alabama Power issued 500,000 shares of
common stock to Southern Company at $40.00 a share ($20 million aggregate
purchase price). The proceeds from the sale were used by Alabama Power for
general corporate purposes. In August 2004, $250 million in aggregate principal amount of Series K
7.125% Senior Notes matured and also in September 2004, $275 million in
aggregate principal amount of Series N 4.875% Senior Notes matured. Short-term
borrowing, temporary cash investments and cash provided from operating
activities were utilized to repay the maturing debt. In addition to any financings that may be necessary to meet Alabama
Powers capital requirements and contractual obligations, 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. 43




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GEORGIA POWER COMPANY 44




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GEORGIA POWER COMPANY 
  For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Operating Revenues:Retail sales
    
    $
    1,450,148
    
    
    $
    1,353,851
    
    
    $
    3,687,163
    
    
    $
    3,361,162Sales for resale Non-affiliates
    
    
    58,789
    
    
    
    59,783
    
    
    
    185,842
    
    
    
    193,221Affiliates
    
    
    25,778
    
    
    
    31,805
    
    
    
    128,870
    
    
    
    125,656Other revenues
    
    
    46,773
    
    
    
    41,443
    
    
    
    132,164
    
    
    
    123,374Total operating revenues
    
    
    1,581,488
    
    
    
    1,486,882
    
    
    
    4,134,039
    
    
    
    3,803,413Operating Expenses:Fuel
    
    
    362,347
    
    
    
    335,058
    
    
    
    971,781
    
    
    
    848,989Purchased power Non-affiliates
    
    
    90,591
    
    
    
    72,439
    
    
    
    250,672
    
    
    
    206,527Affiliates
    
    
    188,568
    
    
    
    156,292
    
    
    
    463,029
    
    
    
    391,740Other operations
    
    
    216,782
    
    
    
    195,010
    
    
    
    635,974
    
    
    
    580,487Maintenance
    
    
    106,761
    
    
    
    88,774
    
    
    
    339,904
    
    
    
    307,346Depreciation and amortization
    
    
    69,588
    
    
    
    89,033
    
    
    
    205,867
    
    
    
    260,778Taxes other than income taxes
    
    
    60,381
    
    
    
    60,095
    
    
    
    173,301
    
    
    
    162,560Total operating expenses
    
    
    1,095,018
    
    
    
    996,701
    
    
    
    3,040,528
    
    
    
    2,758,427Operating Income
    
    
    486,470
    
    
    
    490,181
    
    
    
    1,093,511
    
    
    
    1,044,986Other Income and (Expense):Allowance for equity funds used during construction
    
    
    8,845
    
    
    
    2,509
    
    
    
    16,892
    
    
    
    6,311Interest income
    
    
    1,631
    
    
    
    128
    
    
    
    5,751
    
    
    
    15,213Interest expense, net of amounts capitalized
    
    
    (43,724
    )
    
    
    (44,182
    )
    
    
    (137,667
    )
    
    
    (136,470
    )Interest expense to affiliate trusts
    
    
    (14,878
    )
    
    
    
    
    
    
    (29,688
    )
    
    
    Distributions on mandatorily redeemable preferred securities
    
    
    
    
    
    
    (14,918
    )
    
    
    (15,839
    )
    
    
    (44,756
    )Other income (expense), net
    
    
    8,524
    
    
    
    (21,995
    )
    
    
    (1,484
    )
    
    
    (9,730
    )Total other income and (expense)
    
    
    (39,602
    )
    
    
    (78,458
    )
    
    
    (162,035
    )
    
    
    (169,432
    )Earnings Before Income Taxes
    
    
    446,868
    
    
    
    411,723
    
    
    
    931,476
    
    
    
    875,554Income taxes
    
    
    159,334
    
    
    
    146,625
    
    
    
    344,051
    
    
    
    318,324Net Income
    
    
    287,534
    
    
    
    265,098
    
    
    
    587,425
    
    
    
    557,230Dividends on Preferred Stock
    
    
    168
    
    
    
    168
    
    
    
    503
    
    
    
    503Net Income After Dividends on Preferred Stock
    
    $
    287,366
    
    
    $
    264,930
    
    
    $
    586,922
    
    
    $
    556,727
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Net Income After Dividends on Preferred Stock
    
    $
    287,366
    
    
    $
    264,930
    
    
    $
    586,922
    
    
    $
    556,727Other comprehensive loss:Changes in fair value of qualifying hedges, net of tax
of $(7,780), $(1,941), $(4,070) and $(3,287), respectively
    
    
    (13,980
    )
    
    
    (3,078
    )
    
    
    (8,098
    )
    
    
    (5,625
    )Less: Reclassification adjustment for amounts included in net income,
net of tax of $412, $444, $1,649 and $523, respectively
    
    
    654
    
    
    
    1,005
    
    
    
    2,615
    
    
    
    1,132COMPREHENSIVE INCOME
    
    $
    274,040
    
    
    $
    262,857
    
    
    $
    581,439
    
    
    $
    552,234
 The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements. 45




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##### Table of Contents



GEORGIA POWER COMPANY 
  For the Nine MonthsEnded September 30,2004
    
    2003(in thousands)Operating Activities:Net income
    
    $
    587,425
    
    
    $
    557,230Adjustments to reconcile net income
to net cash provided from operating activities Depreciation and amortization
    
    
    269,916
    
    
    
    315,495Deferred income taxes and investment tax credits, net
    
    
    199,113
    
    
    
    151,737Deferred capacity expenses  affiliates
    
    
    (30,549
    )
    
    
    (17,711
    )Allowance for equity funds used during construction
    
    
    (16,892
    )
    
    
    (6,311
    )Pension, postretirement, and other employee benefits
    
    
    (675
    )
    
    
    (28,270
    )Tax benefit of stock options
    
    
    7,203
    
    
    
    9,590Hedge settlements
    
    
    (12,394
    )
    
    
    (11,250
    )Other, net
    
    
    (23,788
    )
    
    
    25,685Changes in certain current assets and liabilities Receivables, net
    
    
    (231,421
    )
    
    
    (50,082
    )Fossil fuel stock
    
    
    3,018
    
    
    
    (15,799
    )Materials and supplies
    
    
    (5,696
    )
    
    
    (10,559
    )Other current assets
    
    
    19,064
    
    
    
    25,555Accounts payable
    
    
    65,072
    
    
    
    (43,546
    )Accrued taxes
    
    
    48,855
    
    
    
    100,903Accrued compensation
    
    
    (38,448
    )
    
    
    (36,850
    )Other current liabilities
    
    
    15,467
    
    
    
    8,886Net cash provided from operating activities
    
    
    855,270
    
    
    
    974,703Investing Activities:Gross property additions
    
    
    (856,037
    )
    
    
    (537,274
    )Cost of removal net of salvage
    
    
    (11,182
    )
    
    
    (16,475
    )Change in construction payables, net of joint owner portion
    
    
    (36,206
    )
    
    
    (52,841
    )Other
    
    
    26,111
    
    
    
    22,569Net cash used for investing activities
    
    
    (877,314
    )
    
    
    (584,021
    )Financing Activities:Decrease in notes payable, net
    
    
    (137,277
    )
    
    
    (287,222
    )Proceeds Senior notes
    
    
    600,000
    
    
    
    800,000Mandatorily redeemable preferred securities
    
    
    200,000
    
    
    
    Capital contributions from parent company
    
    
    226,400
    
    
    
    158Redemptions Senior notes
    
    
    (200,000
    )
    
    
    (465,000
    )Mandatorily redeemable preferred securities
    
    
    (200,000
    )
    
    
    Payment of common stock dividends
    
    
    (424,125
    )
    
    
    (424,350
    )Other
    
    
    (17,607
    )
    
    
    (16,602
    )Net cash provided from (used for) financing activities
    
    
    47,391
    
    
    
    (393,016
    )Net Change in Cash and Cash Equivalents
    
    
    25,347
    
    
    
    (2,334
    )Cash and Cash Equivalents at Beginning of Period
    
    
    8,699
    
    
    
    16,873Cash and Cash Equivalents at End of Period
    
    $
    34,046
    
    
    $
    14,539Supplemental Cash Flow Information:Cash paid during the period for Interest (net of $5,686 and $3,973 capitalized for 2004 and 2003, respectively)
    
    $
    177,167
    
    
    $
    160,344Income taxes (net of refunds)
    
    $
    38,170
    
    
    $
    58,812
 The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements. 46




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##### Table of Contents



GEORGIA POWER COMPANY 
  At September 30,
    
    At December 31,Assets
    
    2004
    
    2003(in thousands)Current Assets:Cash and cash equivalents
    
    $
    34,046
    
    
    $
    8,699Receivables Customer accounts receivable
    
    
    376,213
    
    
    
    261,771Unbilled revenues
    
    
    161,824
    
    
    
    117,327Under recovered regulatory clause revenues
    
    
    268,553
    
    
    
    151,447Other accounts and notes receivable
    
    
    81,405
    
    
    
    101,783Affiliated companies
    
    
    32,051
    
    
    
    52,413Accumulated provision for uncollectible accounts
    
    
    (7,825
    )
    
    
    (5,350
    )Fossil fuel stock, at average cost
    
    
    134,519
    
    
    
    137,537Vacation pay
    
    
    55,045
    
    
    
    50,150Materials and supplies, at average cost
    
    
    276,737
    
    
    
    271,040Prepaid expenses
    
    
    12,292
    
    
    
    46,157Other
    
    
    25,705
    
    
    
    83Total current assets
    
    
    1,450,565
    
    
    
    1,193,057Property, Plant, and Equipment:In service
    
    
    18,539,848
    
    
    
    18,171,862Less accumulated provision for depreciation
    
    
    7,150,579
    
    
    
    6,898,72511,389,269
    
    
    
    11,273,137Nuclear fuel, at amortized cost
    
    
    106,723
    
    
    
    129,056Construction work in progress
    
    
    720,314
    
    
    
    341,783Total property, plant, and equipment
    
    
    12,216,306
    
    
    
    11,743,976Other Property and Investments:Equity investments in unconsolidated subsidiaries
    
    
    66,020
    
    
    
    38,714Nuclear decommissioning trusts, at fair value
    
    
    430,994
    
    
    
    423,319Other
    
    
    54,174
    
    
    
    37,142Total other property and investments
    
    
    551,188
    
    
    
    499,175Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    505,298
    
    
    
    509,887Prepaid pension costs
    
    
    438,994
    
    
    
    405,164Unamortized debt issuance expense
    
    
    78,935
    
    
    
    75,245Unamortized loss on reacquired debt
    
    
    179,552
    
    
    
    177,707Other regulatory assets
    
    
    79,973
    
    
    
    84,901Other
    
    
    116,388
    
    
    
    92,916Total deferred charges and other assets
    
    
    1,399,140
    
    
    
    1,345,820Total Assets
    
    $
    15,617,199
    
    
    $
    14,782,028
 The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements. 47




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GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At September 30,
    
    At December 31,Liabilities and Stockholder's Equity
    
    2004
    
    2003(in thousands)Current Liabilities:Securities due within one year
    
    $
    302,449
    
    
    $
    2,304Notes payable
    
    
    
    
    
    
    137,277Accounts payable Affiliated
    
    
    185,878
    
    
    
    134,884Other
    
    
    206,201
    
    
    
    238,069Customer deposits
    
    
    112,188
    
    
    
    103,756Accrued taxes Income taxes
    
    
    272,103
    
    
    
    107,532Other
    
    
    152,003
    
    
    
    166,892Accrued interest
    
    
    75,049
    
    
    
    70,844Accrued vacation pay
    
    
    42,749
    
    
    
    38,206Accrued compensation
    
    
    95,557
    
    
    
    134,004Other
    
    
    89,175
    
    
    
    105,234Total current liabilities
    
    
    1,533,352
    
    
    
    1,239,002Long-term Debt
    
    
    3,860,472
    
    
    
    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
    
    
    2,401,145
    
    
    
    2,303,085Deferred credits related to income taxes
    
    
    175,167
    
    
    
    186,625Accumulated deferred investment tax credits
    
    
    303,140
    
    
    
    312,506Employee benefit obligations
    
    
    316,420
    
    
    
    282,833Asset retirement obligations
    
    
    496,777
    
    
    
    475,585Other cost of removal obligations
    
    
    415,732
    
    
    
    412,161Miscellaneous regulatory liabilities
    
    
    126,655
    
    
    
    249,687Other
    
    
    73,644
    
    
    
    63,431Total deferred credits and other liabilities
    
    
    4,308,680
    
    
    
    4,285,913Total Liabilities
    
    
    10,671,577
    
    
    
    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
    
    
    2,442,101
    
    
    
    2,208,498Premium on preferred stock
    
    
    40
    
    
    
    40Retained earnings
    
    
    2,173,019
    
    
    
    2,010,297Accumulated other comprehensive loss
    
    
    (28,357
    )
    
    
    (22,874
    )Total common stockholders equity
    
    
    4,931,053
    
    
    
    4,540,211Total Liabilities and Stockholders Equity
    
    $
    15,617,199
    
    
    $
    14,782,028
 The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements. 48




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GEORGIA POWER COMPANY 
 
 THIRD QUARTER 2004 vs. THIRD 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
third quarter and year-to-date 2004 was $287.4 million and $586.9 million,
respectively, compared to $264.9 million and $556.7 million, respectively, for
the corresponding periods in 2003. Earnings in the third quarter and
year-to-date 2004 increased by $22.5 million, or 8.5%, and $30.2 million, or
5.4%, respectively, 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)Third Quarter
    
    Year-To-Date(in thousands)
    
    %
    
    (in thousands)
    
    %Retail sales
    
    $
    96,297
    
    
    
    7.1
    
    
    $
    326,001
    
    
    
    9.7Sales for resale  affiliates
    
    
    (6,027
    )
    
    
    (18.9
    )
    
    
    3,214
    
    
    
    2.6Fuel expense
    
    
    27,289
    
    
    
    8.1
    
    
    
    122,792
    
    
    
    14.5Purchased power  non-affiliates
    
    
    18,152
    
    
    
    25.1
    
    
    
    44,145
    
    
    
    21.4Purchased power  affiliates
    
    
    32,276
    
    
    
    20.7
    
    
    
    71,289
    
    
    
    18.2Other operations expense
    
    
    21,772
    
    
    
    11.2
    
    
    
    55,487
    
    
    
    9.6Maintenance expense
    
    
    17,987
    
    
    
    20.3
    
    
    
    32,558
    
    
    
    10.6Depreciation and amortization
    
    
    (19,445
    )
    
    
    (21.8
    )
    
    
    (54,911
    )
    
    
    (21.1
    )Other income and (expense)
    
    
    38,856
    
    
    
    49.5
    
    
    
    7,397
    
    
    
    4.4
 Retail sales.Excluding fuel revenues, which generally do not affect net
income, retail sales revenue increased by $34.8 million, or 3.6%, in the third
quarter 2004 and $137.6 million, or 5.8%, for year-to-date 2004 compared to the
corresponding periods in 2003. During the third quarter 2004, kilowatt-hour
energy sales to residential, commercial and industrial customers were up by
0.9%, 1.3% and 1.5%, respectively, when compared to the same period in 2003.
Year-to-date 2004 kilowatt-hour energy sales increased by 5.7%, 3.7% and 2.3%,
respectively, in the residential, commercial and industrial sectors when
compared to the corresponding period in 2003. These increases in kilowatt-hour
energy sales in the third quarter and year-to-date 2004 are primarily
attributed to a 1.9% growth in the number of customers, more favorable weather
and continued improvement in the economy when compared to the same periods in
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.
During the third quarter and year-to-date 2004, energy sales to affiliates
decreased 25.6% and
6.8%, respectively, when compared to the corresponding periods in 2003. The
increase in year-to-date 2004 revenues for these sales resulted from higher
fuel prices. These transactions did not have a significant impact on earnings
since this energy is generally sold at marginal cost. 49




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Fuel expense. The increases in fuel expense during the third quarter and
year-to-date 2004 result from an increase in the average cost of fuel per
megawatt-hour of 13% in each period. Year-to-date 2004 fuel expense was also
affected by a 0.9% increase in fossil generation to meet retail sales demand.
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.Increases in purchased power from
non-affiliates in the third quarter and year-to-date 2004 are mainly due to
fluctuations in off-system energy purchases and 27% and 13.5% increases in the
average cost of fuel per megawatt-hour associated with these purchases,
respectively. 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. During the
third quarter and year-to-date 2004, purchased power from affiliates increased
to meet the demand for energy. Third quarter and year-to-date 2004 average cost
of fuel per megawatt-hour associated with these purchases increased 26% in each
period. In addition, year-to-date 2004 purchased power from affiliates
increased $71 million when compared to the corresponding period in 2003
primarily due to a PPA between Georgia Power and Southern Power that began in
June 2003. The capacity component of these transactions increased $44.5
million year-to-date 2004 over the same period 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.The increases in other operations expense in
the third quarter and year-to-date 2004 are primarily attributed to increases
of $2.0 million and $7.1 million in transmission and distribution,
respectively, increases of $4 million and $2.7 million in fossil power
generation, respectively, and increases of $12.8 million and $26.2 million in
administrative and general expenses related to increased employee benefit
expenses, respectively, and $3.8 million in workers compensation expenses for
year-to-date 2004. Maintenance expense. In the third quarter and year-to-date 2004,
maintenance expense was higher primarily due to the timing of scheduled
generating plant maintenance of $4.8 million and $9 million, respectively, and
scheduled transmission and distribution maintenance of $7.5 million and $16.1
million, respectively, when compared to the corresponding periods in 2003. Depreciation and amortization.Depreciation and amortization expenses in
the third quarter and year-to-date 2004 were 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. Other income and (expense). During the third quarter and year-to-date
2004, this net expense decreased primarily as a result of increased income from
customer growth, weather and changes in customer consumption related to an
electricity pricing program which contributed income of $10 million and $3.6
million, respectively. Also contributing to the decreases in other income and
(expense) is increased AFUDC equity of $6 million and $11 million for the third
quarter and year-to-date 2004, respectively, associated with Georgia Powers
acquisition of the McIntosh combined cycle units 10 and 11 construction project
from Southern Power. 50




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION See Future Earnings Potential  FERC and Georgia PSC Matters  Plant
McIntosh Construction Project herein and Note (J) to the Condensed Financial
Statements herein for additional information. These decreases in the
year-to-date 2004 net expense were partially offset by a reduction in interest
income from the same period in the prior year primarily resulting from $14.5
million of interest on a favorable tax settlement received in the second
quarter of 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 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 strict 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 Georgia Powers service
area. For additional information relating to these issues, see BUSINESS  The
SOUTHERN System  Risk Factors in Item 1 and MANAGEMENTS DISCUSSION AND
ANALYSIS  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 this final resolution of the TVA case. 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 and could possibly require payment of
substantial penalties that cannot be determined at this time. This could affect
future results of operations, cash flows and possibly financial condition if
such costs are not recovered through regulated rates. 51




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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 the U.S. District Court for the Southern District of New
York against Southern Company and four other electric power companies. A
nearly identical complaint was filed 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 and the other defendants have filed
motions to dismiss both lawsuits. Southern Company intends to vigorously defend
against these claims. While the outcome of this matter 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. In any event, however, based on the last
three years of data, the State of Georgia believes that the Atlanta area has
attained the one-hour standard and is in the process of applying for
redesignation from the EPA. 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 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 specified that the State of
Georgia must submit a revised state implementation plan by 52




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION April 2005, and affected sources must comply with the reduction requirements by
May 1, 2007. However, on October 22, 2004, the EPA announced it was granting a
petition for reconsideration filed with the EPA by a coalition of Georgia
industries. The EPA will stay implementation of the rule, as it relates to
Georgia, while it initiates rulemakings to address the petition. The impact of
the nitrogen oxide reduction rules will depend on the outcome of the petition
for reconsideration and/or any subsequent development and approval of Georgias
state implementation plan and 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 requires utilities to submit 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. 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 submitted the required analyses on August 9, 2004.
In that filing, Southern Company passed the pivotal supplier analysis for all
markets and the wholesale market share analysis for all markets except the
Southern Company control area. Southern Company also submitted other analyses
to demonstrate that it lacks generation market power. This filing remains
pending at the FERC. Southern Company, along with other utilities, has also
filed an appeal of the FERCs April 14, 2004 order with the Circuit Court of
Appeals in Washington, D.C. In the event that the FERCs default mitigation
measures are ultimately applied, Georgia Power may be required to charge
cost-based rates for certain wholesale sales, 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 53




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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
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. In direct
testimony filed on October 14, 2004, the Georgia PSC staff proposed a different
valuation that shows the market value for the Plant McIntosh construction
project is less than book value. Georgia Power and Savannah Electric disagree
with the proposed valuation methodology. Georgia Power and Savannah Electric
plan to file rebuttal testimony in November with hearings being held in that
same month. The Georgia PSC is expected to issue a final order in this matter
in December 2004. 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 September 30, 2004, the
investment in the McIntosh construction project totaled approximately $381.1
million for Georgia Power. The ultimate outcome of the Georgia PSCs review
cannot now be determined. See Note (J) to the Condensed Financial Statements
herein for additional information. 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 54




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION and distribution facilities to support growth and ensure reliability. Hearings
on Georgia Powers filed testimony were held in September 2004. Testimony from
Georgia PSC staff was filed and hearings held in October 2004. Georgia Power
plans to file rebuttal testimony in November 2004 with hearings on that
testimony being held in the same month. 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. 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. Storm Damage Cost Recovery During the month of September 2004, Georgia Powers service territory was
impacted by Hurricanes Frances, Ivan and Jeanne. Georgia Power maintains an
accumulated provision for property damage to cover the cost of damages from
major storms to its transmission and distribution lines and the cost of
uninsured damages to its generation facilities and other property as mandated
by the Georgia PSC. The total amount of damage related to these hurricanes was
estimated to be approximately $10 million and was charged to the storm damage
reserve in September 2004. These costs are expected to be recovered through
regular monthly accruals, which may be adjusted, if necessary, in connection
with Georgia Powers retail rate case. See Retail Rate Case herein for
additional information. Other Matters On August 12, 2004, Georgia Power and Gulf Power entered into a PPA with
Florida Power & Light (FP&L). Under the agreement, Georgia Power and Gulf Power
will provide FP&L with 165 megawatts of capacity annually from the jointly
owned Plant Scherer Unit 3 for the period from June 2010 through December 2015.
The contract provides for fixed capacity payments and variable energy payments
based on actual energy delivered. The contract is contingent upon certain
events, including approval of the Florida PSC. The final outcome of this matter
cannot now be determined. 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. Georgia Power has implemented
plans for the measures ordered by the NRC to be in effect on October 29, 2004
and is in compliance with the requirements. Georgia Power, based on its
ownership interest, currently estimates its expenditures related to these
security measures will total $9.8 million, of which $1.4 million will be
capitalized. These estimates are subject to change in the event additional NRC
guidance is provided. 55




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION On October 22, 2004, President Bush signed the American Jobs Creation Act
of 2004 (Jobs Act) into law. The Jobs Act represents the most significant
revision to the Internal Revenue Code since 1986. Congress must still develop
the regulations that will implement the requirements of the Jobs Act. Georgia
Power is currently assessing the impact of the Jobs Act on its taxable income.
However, Georgia Power currently does not expect the Jobs Act to have a
material impact on its financial statements. 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. 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 the third quarter 2004, Georgia Power prospectively adopted FASB Staff
Position (FSP) 106-2, Accounting and Disclosure Requirements related to the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the
Medicare Act). The Medicare Act provides a 28% prescription drug subsidy for
Medicare eligible retirees. FSP 106-2 requires recognition of the impacts of
the Medicare Act in the accumulated post-retirement benefit obligation (APBO)
and future cost of service for post-retirement medical 56




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 elected to apply this treatment prospectively. The effect of the subsidy
reduced Georgia Powers expenses for the three months ended September 30, 2004
by approximately $2.3 million and is expected to have a similar impact on
future expenses. The subsidys impact on the post-retirement medical plan APBO
was a reduction of approximately $72 million. However, the ultimate
impact on future periods is subject to federal regulations governing the
subsidy created in the Medicare Act being finalized. See Note (G) to the
Condensed Financial Statements herein for additional information. FINANCIAL CONDITION AND LIQUIDITY Overview Major changes in Georgia Powers financial condition during the first nine months of 2004 included the addition
of approximately $856 million to utility plant. The funds for these additions
and other capital requirements were derived primarily from operating activities
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 September
30, 2005 for redemptions and maturities of long-term debt. The purchase of the
McIntosh construction project temporarily increased short-term borrowings under
the commercial paper program in the second quarter. The temporary increase was
replaced by long-term debt in the third quarter. See Financing Activities
herein for additional information. The projected construction program will
increase by $437.8 million and $27.4 million in 2004 and 2005, respectively,
for the McIntosh 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. At September 30, 3004, Georgia Powers current liabilities exceeded
current assets as a result of $302 million principal amount of
current maturities of long-term notes
and lease obligations. Georgia Power plans to
obtain the funds required for redemption from new security issuances. To meet
short-term cash needs and contingencies, Georgia Power had at September 30,
2004 approximately $34 million of cash and cash equivalents and $773 million of
unused credit arrangements with banks. Of these facilities, $423 million expire
in 2005 and contain provisions allowing two-year term loans executable at
expiration; and the remaining $350 million expire in 2007. Georgia Power
expects to renew its credit facilities, as needed, prior to expiration. These
unused credit arrangements provide liquidity support to Georgia Powers
obligations with respect to variable rate pollution control bonds and
commercial paper. Georgia Power may also meet short-term cash needs through 57




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 September 30, 2004, Georgia Power
had no 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 arrangements that would require material
changes in payment schedules or terminations as a result of a credit rating
downgrade. There are certain contracts that could require collateral, but not
accelerated payment, in the event of a credit rating change to below investment
grade. These contracts are primarily for physical electricity purchases and
sales, fixed-price physical gas purchases and agreements covering interest rate
swaps. At September 30, 2004, the maximum potential collateral requirements
were approximately $228 million. Generally, collateral may be provided for by a
Southern Company guaranty, letter of credit or cash. Georgia Power is also party to certain derivative agreements that could
require collateral and/or accelerated payment in the event of a credit rating
change to below investment grade. These agreements are primarily for natural
gas price and interest rate risk management activities. At September 30, 2004,
Georgia Power had no material exposure related to these agreements. Market Price Risk Georgia Powers market risk exposures relative to interest
rate changes have not changed materially compared with the December 31, 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 September 30, 2004 was as
follows: Third Quarter2004
    
    Year-to-DateChanges
    
    ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    7,955
    
    
    $
    3,155Contracts realized or settled
    
    
    (4,754
    )
    
    
    (9,532
    )New contracts at inception
    
    
    
    
    
    
    Changes in valuation techniques
    
    
    
    
    
    
    Current period changes (a)
    
    
    12,193
    
    
    
    21,771Contracts at September 30, 2004
    
    $
    15,394
    
    
    $
    15,394
  (a)
    
    Current period changes also include the changes in fair value of new
contracts entered into during the period. 58




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GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Source of September 30, 2004Valuation PricesMaturityTotalFair Value
    
    Year 1
    
    1-3 Years(in thousands)Actively quoted
    
    $
    15,848
    
    
    $
    14,564
    
    
    $
    1,284External sources
    
    
    (454
    )
    
    
    (454
    )
    
    
    Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at September 30,
2004
    
    $
    15,394
    
    
    $
    14,110
    
    
    $
    1,284
 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. 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. 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 August 2004, Georgia Power issued $125 million of Series V 4.10% Senior
Notes due August 15, 2009 and $125 million of Series W 6% Senior Notes due
August 15, 2044. The proceeds from these sales were used to repay its
short-term indebtedness incurred in part to purchase the Plant McIntosh units
10 and 11 construction project and for its continuous construction program.
Upon the sale of the securities, interest rate swaps of $250 million were
terminated at a loss of $12.1 million. The loss from the terminated swaps was
deferred in Other Comprehensive Income and will be amortized to income over a
10-year period. In addition to any financings that may be necessary to meet Georgia
Powers capital requirements and contractual obligations, Georgia 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. 59




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GULF POWER COMPANY 60




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GULF POWER COMPANY 
  For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Operating Revenues:Retail sales
    
    $
    215,087
    
    
    $
    205,327
    
    
    $
    571,360
    
    
    $
    540,789Sales for resale Non-affiliates
    
    
    18,980
    
    
    
    19,608
    
    
    
    56,938
    
    
    
    56,241Affiliates
    
    
    24,488
    
    
    
    17,313
    
    
    
    67,147
    
    
    
    39,944Other revenues
    
    
    10,831
    
    
    
    10,641
    
    
    
    30,030
    
    
    
    28,962Total operating revenues
    
    
    269,386
    
    
    
    252,889
    
    
    
    725,475
    
    
    
    665,936Operating Expenses:Fuel
    
    
    100,649
    
    
    
    96,531
    
    
    
    269,843
    
    
    
    237,596Purchased power Non-affiliates
    
    
    6,478
    
    
    
    3,166
    
    
    
    24,635
    
    
    
    13,051Affiliates
    
    
    18,048
    
    
    
    10,194
    
    
    
    33,319
    
    
    
    27,860Other operations
    
    
    31,191
    
    
    
    30,737
    
    
    
    100,639
    
    
    
    94,174Maintenance
    
    
    13,612
    
    
    
    11,447
    
    
    
    46,591
    
    
    
    45,284Depreciation and amortization
    
    
    20,674
    
    
    
    20,373
    
    
    
    61,948
    
    
    
    60,949Taxes other than income taxes
    
    
    19,106
    
    
    
    18,896
    
    
    
    53,245
    
    
    
    52,012Total operating expenses
    
    
    209,758
    
    
    
    191,344
    
    
    
    590,220
    
    
    
    530,926Operating Income
    
    
    59,628
    
    
    
    61,545
    
    
    
    135,255
    
    
    
    135,010Other Income and (Expense):Interest expense, net of amounts capitalized
    
    
    (7,468
    )
    
    
    (7,191
    )
    
    
    (23,500
    )
    
    
    (23,498
    )Interest expense to affiliate trusts
    
    
    (1,148
    )
    
    
    
    
    
    
    (2,295
    )
    
    
    Distributions on mandatorily redeemable preferred
securities
    
    
    
    
    
    
    (1,901
    )
    
    
    (1,113
    )
    
    
    (5,823
    )Other income (expense), net
    
    
    (1,204
    )
    
    
    500
    
    
    
    (1,277
    )
    
    
    (179
    )Total other income and (expense)
    
    
    (9,820
    )
    
    
    (8,592
    )
    
    
    (28,185
    )
    
    
    (29,500
    )Earnings Before Income Taxes
    
    
    49,808
    
    
    
    52,953
    
    
    
    107,070
    
    
    
    105,510Income taxes
    
    
    17,854
    
    
    
    20,101
    
    
    
    39,167
    
    
    
    39,793Net Income
    
    
    31,954
    
    
    
    32,852
    
    
    
    67,903
    
    
    
    65,717Dividends on Preferred Stock
    
    
    54
    
    
    
    54
    
    
    
    162
    
    
    
    162Net Income After Dividends on Preferred Stock
    
    $
    31,900
    
    
    $
    32,798
    
    
    $
    67,741
    
    
    $
    65,555
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Net Income After Dividends on Preferred Stock
    
    $
    31,900
    
    
    $
    32,798
    
    
    $
    67,741
    
    
    $
    65,555Other comprehensive income (loss):Change in fair value of marketable securities, net of tax
of $(40)
    
    
    (63
    )
    
    
    
    
    
    
    
    
    
    
    Changes in fair value of qualifying hedges, net of tax
of $198 and $(1,228), respectively
    
    
    
    
    
    
    314
    
    
    
    
    
    
    
    (1,956
    )Less: Reclassification adjustment for amounts included in net income
net of tax of $32 and $94, respectively
    
    
    50
    
    
    
    
    
    
    
    151
    
    
    
    COMPREHENSIVE INCOME
    
    $
    31,887
    
    
    $
    33,112
    
    
    $
    67,892
    
    
    $
    63,599
 The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements. 61




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GULF POWER COMPANY 
  For the Nine MonthsEnded September 30,2004
    
    2003(in thousands)Operating Activities:Net income
    
    $
    67,903
    
    
    $
    65,717Adjustments to reconcile net incometo net cash provided from operating activities  Depreciation and amortization
    
    
    66,439
    
    
    
    65,161Deferred income taxes
    
    
    36,691
    
    
    
    3,890Pension, postretirement, and other employee benefits
    
    
    (714
    )
    
    
    4,579Tax benefit of stock options
    
    
    2,401
    
    
    
    1,596Other, net
    
    
    (901
    )
    
    
    (11,027
    )Changes in certain current assets and liabilities Receivables, net
    
    
    (8,915
    )
    
    
    (4,767
    )Fossil fuel stock
    
    
    4,629
    
    
    
    4,946Materials and supplies
    
    
    (2,345
    )
    
    
    (3,430
    )Other current assets
    
    
    (12,214
    )
    
    
    28,042Accounts payable
    
    
    7,847
    
    
    
    (5,594
    )Accrued taxes
    
    
    10,542
    
    
    
    15,019Accrued compensation
    
    
    (721
    )
    
    
    (2,253
    )Other current liabilities
    
    
    (1,040
    )
    
    
    8,707Net cash provided from operating activities
    
    
    169,602
    
    
    
    170,586Investing Activities:Gross property additions
    
    
    (106,660
    )
    
    
    (64,806
    )Cost of removal net of salvage
    
    
    (5,069
    )
    
    
    (5,628
    )Investment in property damage fund
    
    
    (6,700
    )
    
    
    (1,100
    )Other
    
    
    75
    
    
    
    (6,405
    )Net cash used for investing activities
    
    
    (118,354
    )
    
    
    (77,939
    )Financing Activities:Decrease in notes payable, net
    
    
    (37,666
    )
    
    
    (28,479
    )Proceeds Pollution control bonds
    
    
    
    
    
    
    61,625Senior notes
    
    
    110,000
    
    
    
    225,000Capital contributions from parent company
    
    
    25,000
    
    
    
    10,016Redemptions Pollution control bonds
    
    
    
    
    
    
    (61,625
    )Senior notes
    
    
    (50,000
    )
    
    
    (151,757
    )Other long-term debt
    
    
    
    
    
    
    (20,000
    )Mandatorily redeemable preferred securities
    
    
    
    
    
    
    (40,000
    )Payment of preferred stock dividends
    
    
    (162
    )
    
    
    (162
    )Payment of common stock dividends
    
    
    (52,500
    )
    
    
    (52,650
    )Other
    
    
    (2,066
    )
    
    
    (10,301
    )Net cash used for financing activities
    
    
    (7,394
    )
    
    
    (68,333
    )Net Change in Cash and Cash Equivalents
    
    
    43,854
    
    
    
    24,314Cash and Cash Equivalents at Beginning of Period
    
    
    2,548
    
    
    
    13,278Cash and Cash Equivalents at End of Period
    
    $
    46,402
    
    
    $
    37,592Supplemental Cash Flow Information:Cash paid during the period for Interest (net of $568 and $154 capitalized for 2004 and 2003, respectively)
    
    $
    25,170
    
    
    $
    30,647Income taxes (net of refunds)
    
    $
    11,226
    
    
    $
    8,377
 The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements. 62




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GULF POWER COMPANY 
  At September 30,
    
    At December 31,Assets
    
    2004
    
    2003(in thousands)Current Assets:Cash and cash equivalents
    
    $
    46,402
    
    
    $
    2,548Receivables Customer accounts receivable
    
    
    54,590
    
    
    
    44,001Unbilled revenues
    
    
    31,413
    
    
    
    31,548Under recovered regulatory clause revenues
    
    
    22,641
    
    
    
    21,812Other accounts and notes receivable
    
    
    5,215
    
    
    
    6,179Affiliated companies
    
    
    8,807
    
    
    
    9,826Accumulated provision for uncollectible accounts
    
    
    (1,332
    )
    
    
    (947
    )Fossil fuel stock, at average cost
    
    
    30,725
    
    
    
    35,354Vacation pay
    
    
    5,254
    
    
    
    5,254Materials and supplies, at average cost
    
    
    38,275
    
    
    
    35,930Prepaid income taxes
    
    
    11,153
    
    
    
    4Prepaid expenses
    
    
    3,858
    
    
    
    6,310Other
    
    
    11,612
    
    
    
    4,981Total current assets
    
    
    268,613
    
    
    
    202,800Property, Plant, and Equipment:In service
    
    
    2,353,208
    
    
    
    2,306,959Less accumulated provision for depreciation
    
    
    857,202
    
    
    
    847,5191,496,006
    
    
    
    1,459,440Construction work in progress
    
    
    66,088
    
    
    
    49,438Total property, plant, and equipment
    
    
    1,562,094
    
    
    
    1,508,878Other Property and Investments
    
    
    21,587
    
    
    
    12,597Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    18,571
    
    
    
    18,263Prepaid pension costs
    
    
    44,541
    
    
    
    42,014Unamortized debt issuance expense
    
    
    6,621
    
    
    
    6,877Unamortized premium on reacquired debt
    
    
    18,128
    
    
    
    19,389Other regulatory assets
    
    
    109,193
    
    
    
    19,058Other
    
    
    23,110
    
    
    
    9,177Total deferred charges and other assets
    
    
    220,164
    
    
    
    114,778Total Assets
    
    $
    2,072,458
    
    
    $
    1,839,053
 The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements. 63




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GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At September 30,
    
    At December 31,Liabilities and Stockholder's Equity
    
    2004
    
    2003(in thousands)Current Liabilities:Securities due within one year
    
    $
    75,000
    
    
    $
    50,000Notes payable
    
    
    
    
    
    
    37,666Accounts payable Affiliated
    
    
    33,761
    
    
    
    26,945Other
    
    
    105,354
    
    
    
    21,952Customer deposits
    
    
    19,634
    
    
    
    18,271Accrued taxes Income taxes
    
    
    7,514
    
    
    
    6,405Other
    
    
    19,164
    
    
    
    8,621Accrued interest
    
    
    6,816
    
    
    
    8,077Accrued vacation pay
    
    
    5,254
    
    
    
    5,254Accrued compensation
    
    
    12,735
    
    
    
    13,456Other
    
    
    11,231
    
    
    
    9,694Total current liabilities
    
    
    296,463
    
    
    
    206,341Long-term Debt
    
    
    549,559
    
    
    
    515,827Long-term Debt Payable to Affiliated Trusts
    
    
    72,166
    
    
    
    Mandatorily Redeemable Preferred Securities
    
    
    
    
    
    
    70,000Deferred Credits and Other Liabilities:Accumulated deferred income taxes
    
    
    213,855
    
    
    
    175,685Deferred credits related to income taxes
    
    
    24,357
    
    
    
    26,545Accumulated deferred investment tax credits
    
    
    18,979
    
    
    
    20,451Employee benefit obligations
    
    
    54,175
    
    
    
    52,395Other cost of removal obligations
    
    
    159,223
    
    
    
    151,229Miscellaneous regulatory liabilities
    
    
    2,195
    
    
    
    27,903Other
    
    
    73,100
    
    
    
    27,083Total deferred credits and other liabilities
    
    
    545,884
    
    
    
    481,291Total Liabilities
    
    
    1,464,072
    
    
    
    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
    
    
    392,253
    
    
    
    364,852Premium on preferred stock
    
    
    12
    
    
    
    12Retained earnings
    
    
    176,448
    
    
    
    161,208Accumulated other comprehensive loss
    
    
    (2,623
    )
    
    
    (2,774
    )Total common stockholders equity
    
    
    604,150
    
    
    
    561,358Total Liabilities and Stockholders Equity
    
    $
    2,072,458
    
    
    $
    1,839,053
 The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements. 64




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GULF POWER COMPANY 
 
 THIRD QUARTER 2004 vs. THIRD 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 third
quarter and year-to-date 2004 was $31.9 million and $67.7 million,
respectively, compared to $32.8 million and $65.6 million, respectively, for
the corresponding periods in 2003. Earnings in the third quarter 2004 decreased
by $0.9 million, or 2.7%, due to higher operating expenses and reduced revenues
as a result of outages from Hurricane Ivan. Earnings increased year-to-date
2004 by $2.2 million, or 3.3%, primarily due to a reduction in interest expense
arising from refinancing of higher cost debt. Significant income statement items appropriate for discussion include the
following: Increase (Decrease)Third Quarter
    
    Year-To-Date(in thousands)
    
    %
    
    (in thousands)
    
    %Retail sales
    
    $
    9,760
    
    
    
    4.8
    
    
    $
    30,571
    
    
    
    5.7Sale for resale  affiliates
    
    
    7,175
    
    
    
    41.4
    
    
    
    27,203
    
    
    
    68.1Fuel expense
    
    
    4,118
    
    
    
    4.3
    
    
    
    32,247
    
    
    
    13.6Purchased power  non-affiliates
    
    
    3,312
    
    
    
    104.6
    
    
    
    11,584
    
    
    
    88.8Purchased power  affiliates
    
    
    7,854
    
    
    
    77.0
    
    
    
    5,459
    
    
    
    19.6Other operations expense
    
    
    454
    
    
    
    1.5
    
    
    
    6,465
    
    
    
    6.9Maintenance expense
    
    
    2,165
    
    
    
    18.9
    
    
    
    1,307
    
    
    
    2.9Other income (expense), net
    
    
    1,704
    
    
    
    N/M
    
    
    
    1,098
    
    
    
    N/MIncome taxes
    
    
    (2,247
    )
    
    
    (11.2
    )
    
    
    (626
    )
    
    
    (1.6
    )
   N/M
    
    Not meaningful Retail sales.Excluding the recovery of fuel expense and certain other
expenses that do not affect net income, retail sales decreased by $0.4 million,
or 0.3%, for the third quarter 2004 and increased by $4.5 million, or 1.5%,
year-to-date 2004 when compared to the corresponding periods in 2003. Retail
sales revenues for the third quarter 2004 were lower than the corresponding
period in 2003 due primarily to the power outages resulting from Hurricane Ivan
in September 2004. Approximately 90% of Gulf Powers 405,000 customers were
without electrical service immediately after the hurricane struck. Almost 72%
of those without power had service restored within one week, and two weeks
after the storm, power had been restored to all who could receive service.
Based on current projections, retail sales revenues lost as a result of the
power outages from Hurricane Ivan are not expected to have a material impact on
net income of Gulf Power for the year ending December 31, 2004. For
year-to-date 2004, retail sales revenues were higher than the corresponding
period in 2003 primarily due to an increase in the number of customers and more
favorable weather in the first two quarters of 2004. During the third quarter
2004, retail energy sales to residential, commercial and industrial customers
decreased by 1.0%, 1.3% and 6.2%, respectively, 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 65




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 1.0% and 1.5%, respectively, while energy sales to industrial customers
decreased by 3.2%. The decreases in industrial sales for the third 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
revenues through Gulf Powers fuel cost recovery mechanism. The increases in
the third quarter and year-to-date 2004 sales for resale to affiliates are due
to increased sales of available generation to affiliate companies at a higher
unit cost resulting from higher fuel prices. The increases in purchased power
from affiliates in the third quarter and year-to-date 2004 are primarily due to
higher fuel prices and an increase in capacity payments resulting from Gulf
Powers increased load growth. Fuel expense.During the third quarter 2004, fuel expense increased from
the corresponding period in 2003 primarily due to higher coal and natural gas
prices. The increase in fuel expense for year-to-date 2004 is primarily due to
a greater percentage of generation needs coming from higher priced natural gas
units and higher fuel prices. Since fuel expenses are generally offset by
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 third quarter and
year-to-date 2004, when compared to the corresponding periods in 2003, are
primarily the result of power purchased from merchant generation resources in
order to minimize total production cost. Since energy expenses are generally
offset by revenues through Gulf Powers fuel cost recovery mechanism, these
expenses do not have a significant impact on net income. Other operations expense.The increase in other operations expense for
year-to-date 2004 when compared to the corresponding period in 2003 is
primarily due to a $3.5 million increase in employee benefit expenses, a $1.5
million increase in expenses related to marketing conservation programs and a
$1.4 million increase in accrued expenses for uninsured litigation and workers
compensation claims. Maintenance expense.The increases in maintenance expense during the
third quarter and year-to-date 2004 are due primarily to unscheduled plant
maintenance when compared to the corresponding periods in 2003. Other income (expense), net.The increases in this net expense for the
third quarter and year-to-date 2004 are primarily due to an increase in
charitable donations, when compared to the same periods in 2003. Income taxes.The decreases in income tax expense during the third
quarter and year-to-date 2004 are primarily due to a decrease in 2004 taxable
income resulting from a state tax credit for a charitable donation. 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 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 66




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION conservation practiced by customers, the price of electricity, the price
elasticity of demand and the rate of economic growth in Gulf Powers service
area. For additional information relating to these issues, see BUSINESS  The
SOUTHERN System  Risk Factors in Item 1 and MANAGEMENTS DISCUSSION AND
ANALYSIS  RESULTS OF OPERATIONS  Future Earnings Potential of Gulf 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 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 of Gulf Power in Item 7 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 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
payment of substantial penalties that cannot be determined at this time. 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 the U.S. District Court for the Southern District of New
York against Southern Company and four other electric power companies. A
nearly identical complaint was filed 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 and the other defendants have filed
motions to dismiss both lawsuits. Southern Company intends to vigorously defend
against these claims. While the outcome of this matter cannot be determined at
this time, an adverse judgment could result in substantial capital
expenditures. 67




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Other Environmental
Matters 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. See MANAGEMENTS DISCUSSION AND ANALYSIS  Future Earnings Potential -
Environmental Matters  Environmental Statutes and Regulations of Gulf Power
in Item 7 and Note 3 to the financial statements of Gulf Power under
Environmental Cost Recovery in Item 8 of the Form 10-K and Note (O) to the
Condensed Financial Statements herein for information on liabilities associated
with environmental remediation projects. During the third quarter 2004, Gulf
Power increased its estimated liability for these projects by approximately $47
million as a result of revised rules and changes in the extent of remediation
expected to be required by the Florida Department of Environmental Protection
(FDEP). The majority of the remediation areas are active substation sites. The
schedule for completion of the remediation projects will be subject to FDEP
approval. The projects have been approved by the Florida PSC for recovery, as
expended, through Gulf Powers environmental cost recovery clause; therefore,
there was no impact on Gulf Powers net income as a result of these revised
estimates. FERC and Florida 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 Gulf Power
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 market power. This new interim approach requires utilities
to submit 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. 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 submitted the required analyses on August 9, 2004.
In that filing, Southern Company passed the pivotal supplier analysis for all
markets and the wholesale market share analysis for all markets except the
Southern Company control area. Southern Company also submitted other analyses
to demonstrate that it lacks generation market power. This filing remains
pending at the FERC. Southern Company, along with other utilities, has also
filed an appeal of the FERCs April 14, 2004 order with the Circuit Court of
Appeals in Washington, D.C. In the event that the FERCs default mitigation
measures are ultimately applied, Gulf Power may be required to charge
cost-based rates for certain wholesale sales, 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. 68




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GULF 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  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. Storm Damage Cost
Recovery On September 15 and 16, 2004, Hurricane Ivan hit the Gulf Coast of Florida and
Alabama causing substantial damage in Gulf Powers service territory. Gulf
Power maintains an accumulated provision for property damage to cover the cost
of damages from major storms to its transmission and distribution lines and the
cost of uninsured damages to its generation facilities and other property.
Prior to Hurricane Ivan, the balance in the accumulated provision for property
damage was approximately $28 million. The estimated total amount of damage
related to Hurricane Ivan charged to the accumulated provision for property
damage as of September 2004 was $75.5 million. Gulf Powers current annual
accrual to the accumulated provision for property damage, as approved by the
Florida PSC, is $3.5 million. The Florida PSC has also approved
additional accrual amounts at Gulf Powers discretion. Gulf Power is currently
reviewing alternatives that would potentially allow for more rapid recovery of
these costs. See Note 1 to Gulf Powers financial statements under Provision
for Property Damage in Item 8 of the Form 10-K for additional information. Other Matters On August 12, 2004, Georgia Power and Gulf Power entered into a PPA with
Florida Power & Light (FP&L). Under the agreement, Georgia Power and Gulf Power
will provide FP&L with 165 megawatts of capacity annually from the jointly
owned Plant Scherer Unit 3 for the period from June 2010 through December 2015.
The contract provides for fixed capacity payments and variable energy payments
based on actual energy delivered. The contract is contingent upon certain
events, including approval of the Florida PSC. The final outcome of this matter
cannot now be determined. On October 22, 2004, President Bush signed the American Jobs Creation Act
of 2004 (the Jobs Act) into law. The Jobs Act represents the most significant
revision to the Internal Revenue Code since 1986. Congress must still develop
the regulations that will implement the requirements of the Jobs Act. Gulf
Power is currently assessing the impact of the Jobs Act on its taxable income.
However, Gulf Power currently does not expect the Jobs Act to have a material
impact on its financial statements. 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. 69




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 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 the third quarter 2004, Gulf Power prospectively adopted FASB Staff
Position (FSP) 106-2, Accounting and Disclosure Requirements related to the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the
Medicare Act). The Medicare Act provides a 28% prescription drug subsidy for
Medicare eligible retirees. FSP 106-2 requires recognition of the impacts of
the Medicare Act in the accumulated post-retirement
benefit obligation (APBO) 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 elected to apply this treatment prospectively. The effect of the
subsidy reduced Gulf Powers expenses for the three months ended September 30,
2004 by approximately $0.2 million and is expected to have a similar impact on
future expenses. The subsidys impact on the post-retirement medical plan APBO
was a reduction of approximately $8 million. However, the ultimate impact on
future periods is subject to federal regulations governing the subsidy created
in the Medicare Act being finalized. See Note (G) to the Condensed Financial
Statements herein for additional information. FINANCIAL CONDITION AND LIQUIDITY Overview Major changes in Gulf Powers financial condition during the first nine months
of 2004 included the addition of approximately $106.7 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. 70




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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. Approximately $75 million will be required by September 30, 2005
for redemptions and maturities of long-term debt. 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. At
September 30, 2004, Gulf Powers current liabilities exceeded current
assets as a result of the scheduled redemption of $75 million principal amount
of 6.10% senior notes, originally due in 2016. These notes were redeemed in
October 2004 with proceeds from the Series K 4.90% Senior
Notes due October 1, 2014 that
were issued in September. See Financing Activities herein 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 September 30, 2004, Gulf
Power had approximately $46.4 million of cash and cash
equivalents and $56.5
million of unused committed lines of credit with banks which 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 September 30, 2004, Gulf Power had
no commercial paper outstanding. Subsequent to September 30, 2004, Gulf Power
entered into loan agreements for $50 million maturing October 21, 2005 and $100
million maturing October 28, 2005. Proceeds from these borrowings were used for
general corporate purposes and to finance repairs to Gulf Powers electric
system for damage suffered as a result of Hurricane Ivan. Management believes
that the need for working capital can be adequately met by utilizing lines of
credit, commercial paper and bank notes without maintaining large cash
balances. Credit Rating Risk Gulf Power does not have any credit arrangements that would require material
changes in payment schedules or terminations as a result of a credit rating
downgrade. Gulf Power is party to certain derivative agreements that could
require collateral and/or accelerated payment in the event of a credit rating
change to below investment grade. These agreements are primarily for natural gas price risk management
activities. At September 30, 2004, Gulf Power had no material exposure related
to these agreements. Market Price Risk Gulf Powers market risk exposures relative to interest rate changes have not
changed materially compared with the December 31, 2003 reporting period. In
addition, Gulf Power is not aware of any facts or circumstances 71




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION that would significantly affect such exposures in the near term. 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 September
30, 2004 was as follows: Third Quarter2004
    
    Year-to-DateChanges
    
    ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    3,393
    
    
    $
    2,504Contracts realized or settled
    
    
    (2,714
    )
    
    
    (6,513
    )New contracts at inception
    
    
    
    
    
    
    Changes in valuation techniques
    
    
    
    
    
    
    Current period changes (a)
    
    
    5,523
    
    
    
    10,211Contracts at September 30, 2004
    
    $
    6,202
    
    
    $
    6,202
  (a)
    
    Current period changes also include the changes in fair value of new
contracts entered into during the period. Source of September 30, 2004Valuation PricesTotal
    
    MaturityFair Value
    
    Year 1
    
    1-3 Years(in thousands)Actively quoted
    
    $
    6,279
    
    
    $
    5,924
    
    
    $
    355External sources
    
    
    (77
    )
    
    
    (77
    )
    
    
    Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at September 30,
2004
    
    $
    6,202
    
    
    $
    5,847
    
    
    $
    355
 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 September 2004, Gulf Power issued $75 million of Series K 4.90% Senior
Notes due October 1, 2014. The proceeds from this issue were used to redeem the
$75 million outstanding principle amount of its Series D 6.10% Senior Notes on
October 22, 2004. 72




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GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Subsequent to September 30, 2004, Gulf Power entered into loan agreements
for $50 million maturing October 21, 2005 and $100 million maturing October 28,
2005. Proceeds from these borrowings were used for general corporate purposes
and to finance repairs to Gulf Powers electric system for damage suffered as a result
of Hurricane Ivan. 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. 73




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MISSISSIPPI POWER COMPANY 74




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MISSISSIPPI POWER COMPANY 
  For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Operating Revenues:Retail sales
    
    $
    167,770
    
    
    $
    150,860
    
    
    $
    448,186
    
    
    $
    398,888Sales for resale Non-affiliates
    
    
    72,077
    
    
    
    67,396
    
    
    
    206,812
    
    
    
    197,141Affiliates
    
    
    14,481
    
    
    
    5,968
    
    
    
    34,848
    
    
    
    17,856Contract termination
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,111Other revenues
    
    
    4,236
    
    
    
    3,590
    
    
    
    11,231
    
    
    
    10,064Total operating revenues
    
    
    258,564
    
    
    
    227,814
    
    
    
    701,077
    
    
    
    686,060Operating Expenses:Fuel
    
    
    97,081
    
    
    
    66,109
    
    
    
    249,971
    
    
    
    172,829Purchased power Non-affiliates
    
    
    6,783
    
    
    
    3,121
    
    
    
    26,831
    
    
    
    14,449Affiliates
    
    
    13,966
    
    
    
    21,194
    
    
    
    54,119
    
    
    
    59,281Other operations
    
    
    40,261
    
    
    
    38,560
    
    
    
    114,371
    
    
    
    123,466Maintenance
    
    
    14,192
    
    
    
    12,397
    
    
    
    47,408
    
    
    
    45,408Depreciation and amortization
    
    
    10,051
    
    
    
    13,968
    
    
    
    30,068
    
    
    
    40,943Taxes other than income taxes
    
    
    14,486
    
    
    
    14,148
    
    
    
    41,675
    
    
    
    41,231Total operating expenses
    
    
    196,820
    
    
    
    169,497
    
    
    
    564,443
    
    
    
    497,607Operating Income
    
    
    61,744
    
    
    
    58,317
    
    
    
    136,634
    
    
    
    188,453Other Income and (Expense):Interest expense
    
    
    (3,064
    )
    
    
    (3,383
    )
    
    
    (8,915
    )
    
    
    (10,920
    )Interest expense to affiliate trusts
    
    
    (650
    )
    
    
    
    
    
    
    (1,299
    )
    
    
    Distributions on mandatorily redeemable
preferred securities
    
    
    
    
    
    
    (630
    )
    
    
    (630
    )
    
    
    (1,890
    )Other income (expense), net
    
    
    135
    
    
    
    2,170
    
    
    
    518
    
    
    
    2,935Total other income and (expense)
    
    
    (3,579
    )
    
    
    (1,843
    )
    
    
    (10,326
    )
    
    
    (9,875
    )Earnings Before Income Taxes
    
    
    58,165
    
    
    
    56,474
    
    
    
    126,308
    
    
    
    178,578Income taxes
    
    
    22,151
    
    
    
    21,584
    
    
    
    48,118
    
    
    
    68,226Net Income
    
    
    36,014
    
    
    
    34,890
    
    
    
    78,190
    
    
    
    110,352Dividends on Preferred Stock
    
    
    433
    
    
    
    503
    
    
    
    3,399
    
    
    
    1,510Net Income After Dividends on Preferred Stock
    
    $
    35,581
    
    
    $
    34,387
    
    
    $
    74,791
    
    
    $
    108,842
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Net Income After Dividends on Preferred Stock
    
    $
    35,581
    
    
    $
    34,387
    
    
    $
    74,791
    
    
    $
    108,842Other comprehensive income (loss):Change in fair value of marketable securities, net of tax
of $(49)
    
    
    (80
    )
    
    
    
    
    
    
    
    
    
    
    Changes in fair value of qualifying hedges, net of tax
net of tax of $580 and $(820), respectively
    
    
    936
    
    
    
    
    
    
    
    (1,324
    )
    
    
    COMPREHENSIVE INCOME
    
    $
    36,437
    
    
    $
    34,387
    
    
    $
    73,467
    
    
    $
    108,842
 The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements. 75




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MISSISSIPPI POWER COMPANY 
  For the Nine MonthsEnded September 30,2004
    
    2003(in thousands)Operating Activities:Net income
    
    $
    78,190
    
    
    $
    110,352Adjustments to reconcile net income
to net cash provided from operating activities Depreciation and amortization
    
    
    33,351
    
    
    
    46,180Deferred income taxes and investment tax credits, net
    
    
    30,187
    
    
    
    3,682Pension, postretirement, and other employee benefits
    
    
    (273
    )
    
    
    471Tax benefit of stock options
    
    
    834
    
    
    
    1,876Other, net
    
    
    (4,564
    )
    
    
    (532
    )Changes in certain current assets and liabilities Receivables, net
    
    
    (24,233
    )
    
    
    8,846Fossil fuel stock
    
    
    3,985
    
    
    
    (3,914
    )Materials and supplies
    
    
    (372
    )
    
    
    64Other current assets
    
    
    (9,996
    )
    
    
    8,643Accounts payable
    
    
    (8,928
    )
    
    
    (29,609
    )Accrued taxes
    
    
    9,071
    
    
    
    7,138Accrued compensation
    
    
    (3,506
    )
    
    
    (5,352
    )Other current liabilities
    
    
    (23,365
    )
    
    
    (6,922
    )Net cash provided from operating activities
    
    
    80,381
    
    
    
    140,923Investing Activities:Gross property additions
    
    
    (44,837
    )
    
    
    (41,636
    )Cost of removal net of salvage
    
    
    (3,747
    )
    
    
    (4,282
    )Other
    
    
    (2,504
    )
    
    
    (1,884
    )Net cash used for investing activities
    
    
    (51,088
    )
    
    
    (47,802
    )Financing Activities:Increase in notes payable, net
    
    
    14,976
    
    
    
    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
    
    
    (1,395
    )
    
    
    (1,510
    )Payment of common stock dividends
    
    
    (49,650
    )
    
    
    (49,500
    )Other
    
    
    (630
    )
    
    
    (1,185
    )Net cash used for financing activities
    
    
    (75,087
    )
    
    
    (82,944
    )Net Change in Cash and Cash Equivalents
    
    
    (45,794
    )
    
    
    10,177Cash and Cash Equivalents at Beginning of Period
    
    
    69,120
    
    
    
    62,695Cash and Cash Equivalents at End of Period
    
    $
    23,326
    
    
    $
    72,872Supplemental Cash Flow Information:Cash paid during the period for Interest
    
    $
    8,241
    
    
    $
    12,918Income taxes (net of refunds)
    
    $
    1,798
    
    
    $
    47,589
 The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements. 76




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MISSISSIPPI POWER COMPANY 
  At September 30,
    
    At December 31,Assets
    
    2004
    
    2003(in thousands)Current Assets:Cash and cash equivalents
    
    $
    23,326
    
    
    $
    69,120Receivables Customer accounts receivable
    
    
    39,533
    
    
    
    30,514Unbilled revenues
    
    
    19,536
    
    
    
    19,278Under recovered regulatory clause revenues
    
    
    24,872
    
    
    
    14,607Other accounts and notes receivable
    
    
    8,466
    
    
    
    8,088Affiliated companies
    
    
    16,391
    
    
    
    12,160Accumulated provision for uncollectible accounts
    
    
    (815
    )
    
    
    (897
    )Fossil fuel stock, at average cost
    
    
    21,248
    
    
    
    25,233Vacation pay
    
    
    5,766
    
    
    
    5,766Materials and supplies, at average cost
    
    
    24,042
    
    
    
    23,670Assets from risk management activities
    
    
    12,251
    
    
    
    2,672Prepaid income taxes
    
    
    15,535
    
    
    
    27,415Prepaid expenses
    
    
    3,327
    
    
    
    4,518Total current assets
    
    
    213,478
    
    
    
    242,144Property, Plant, and Equipment:In service
    
    
    1,867,204
    
    
    
    1,841,667Less accumulated provision for depreciation
    
    
    691,893
    
    
    
    679,9391,175,311
    
    
    
    1,161,728Construction work in progress
    
    
    28,479
    
    
    
    25,844Total property, plant, and equipment
    
    
    1,203,790
    
    
    
    1,187,572Other Property and Investments
    
    
    5,041
    
    
    
    2,934Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    11,573
    
    
    
    12,125Prepaid pension costs
    
    
    18,911
    
    
    
    18,167Unamortized debt issuance expense
    
    
    7,029
    
    
    
    6,993Unamortized loss on reacquired debt
    
    
    9,625
    
    
    
    10,201Prepaid rent
    
    
    13,345
    
    
    
    14,758Other
    
    
    8,798
    
    
    
    16,280Total deferred charges and other assets
    
    
    69,281
    
    
    
    78,524Total Assets
    
    $
    1,491,590
    
    
    $
    1,511,174
 The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements. 77




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MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At September 30,
    
    At December 31,Liabilities and Stockholder's Equity
    
    2004
    
    2003(in thousands)Current Liabilities:Securities due within one year
    
    $
    
    
    
    $
    80,000Notes payable
    
    
    14,976
    
    
    
    Accounts payable Affiliated
    
    
    19,415
    
    
    
    21,259Other
    
    
    44,720
    
    
    
    55,309Customer deposits
    
    
    7,735
    
    
    
    11,863Accrued taxes Income taxes
    
    
    18,591
    
    
    
    1,696Other
    
    
    35,010
    
    
    
    42,834Accrued interest
    
    
    3,838
    
    
    
    3,223Accrued vacation pay
    
    
    5,766
    
    
    
    5,766Accrued compensation
    
    
    20,325
    
    
    
    23,832Regulatory clauses over recovery
    
    
    7,586
    
    
    
    31,118Other
    
    
    8,545
    
    
    
    4,867Total current liabilities
    
    
    186,507
    
    
    
    281,767Long-term Debt
    
    
    242,495
    
    
    
    202,488Long-term Debt Payable to Affiliated Trusts
    
    
    36,082
    
    
    
    Mandatorily Redeemable Preferred Securities
    
    
    
    
    
    
    35,000Deferred Credits and Other Liabilities:Accumulated deferred income taxes
    
    
    158,567
    
    
    
    142,088Deferred credits related to income taxes
    
    
    22,125
    
    
    
    23,279Accumulated deferred investment tax credits
    
    
    18,951
    
    
    
    19,841Employee benefit obligations
    
    
    54,083
    
    
    
    54,830Plant Daniel lease guarantee obligation, at fair value
    
    
    13,345
    
    
    
    14,758Plant Daniel capacity
    
    
    47,919
    
    
    
    60,300Other cost of removal obligations
    
    
    76,172
    
    
    
    73,378Miscellaneous regulatory liabilities
    
    
    12,751
    
    
    
    11,899Other
    
    
    31,125
    
    
    
    27,248Total deferred credits and other liabilities
    
    
    435,038
    
    
    
    427,621Total Liabilities
    
    
    900,122
    
    
    
    946,876Cumulative 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
    
    
    293,350
    
    
    
    292,515Premium on preferred stock
    
    
    23
    
    
    
    326Retained earnings
    
    
    229,769
    
    
    
    203,419Accumulated other comprehensive loss
    
    
    (2,786
    )
    
    
    (1,462
    )Total common stockholders equity
    
    
    558,047
    
    
    
    532,489Total Liabilities and Stockholders Equity
    
    $
    1,491,590
    
    
    $
    1,511,174
 The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements. 78




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MISSISSIPPI POWER COMPANY 
 
 THIRD QUARTER 2004 vs. THIRD 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 third
quarter and year-to-date 2004 was $35.6 million and $74.8 million,
respectively, compared to $34.4 million and $108.8 million, respectively, for
the corresponding periods of 2003. Earnings for year-to-date 2004 decreased
$34 million, or 31.3%, primarily as a result of the 2003 gain of $38 million
after tax related to the termination of a PPA with Dynegy and related 2003
contract revenue of $10 million after-tax. This decrease was partially offset
by the net impact of a $6 million after tax decrease in other operations
expense related to costs incurred in the third quarter of 2003 to restructure
the lease agreement for the combined cycle generating units at Plant Daniel and
a decrease of $8 million after tax in depreciation and amortization resulting
from the impact of the Mississippi PSCs order approving the inclusion of the
additional 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)Third Quarter
    
    Year-To-Date(in thousands)
    
    %
    
    (in thousands)
    
    %Retail sales
    
    $
    16,910
    
    
    
    11.2
    
    
    $
    49,298
    
    
    
    12.4Sales for resale  non-affiliates
    
    
    4,681
    
    
    
    6.9
    
    
    
    9,671
    
    
    
    4.9Sale for
resale  affiliates
    
    
    8,513
    
    
    
    142.6
    
    
    
    16,992
    
    
    
    95.2Fuel expense
    
    
    30,972
    
    
    
    46.8
    
    
    
    77,142
    
    
    
    44.6Purchased power  non-affiliates
    
    
    3,662
    
    
    
    117.3
    
    
    
    12,382
    
    
    
    85.7Purchased
power  affiliates
    
    
    (7,228
    )
    
    
    (34.1
    )
    
    
    (5,162
    )
    
    
    (8.7
    )Other operations expense
    
    
    1,701
    
    
    
    4.4
    
    
    
    (9,095
    )
    
    
    (7.4
    )Maintenance expense
    
    
    1,795
    
    
    
    14.5
    
    
    
    2,000
    
    
    
    4.4Depreciation and amortization
    
    
    (3,917
    )
    
    
    (28.0
    )
    
    
    (10,875
    )
    
    
    (26.6
    )Interest expense
    
    
    (319
    )
    
    
    (9.4
    )
    
    
    (2,005
    )
    
    
    (18.4
    )Other income (expense), net
    
    
    (2,035
    )
    
    
    (93.8
    )
    
    
    (2,417
    )
    
    
    (82.4
    )Income taxes
    
    
    567
    
    
    
    2.6
    
    
    
    (20,108
    )
    
    
    (29.5
    )Dividends on preferred stock
    
    
    (70
    )
    
    
    (13.9
    )
    
    
    1,889
    
    
    
    125.1
 Retail sales.Retail sales revenue increased $16.9 million, or 11.2%, in
the third quarter 2004 and $49.3 million or 12.4% year-to-date 2004 when
compared to the same periods in 2003. The increases in retail sales revenues
are primarily the result of increases of $15.3 million in the third quarter
2004 and $47.6 million year-to-date 2004 in fuel cost recovery revenues, which
generally do not have an effect on income. Retail sales revenues, excluding
fuel revenues, for the third quarter 2004 to residential and commercial
customers remained mostly constant while retail sales to industrial customers,
excluding fuel revenues, decreased 2.2% primarily as a result
of the effects Hurricane Ivan 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 79




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION remained mostly constant as compared to the same period in 2003. Sales
for resale  non-affiliates.The increases in sales for resale to
non-affiliates in the third quarter and year-to-date 2004 as compared to the
same periods in 2003 are primarily due to the increases of $6.6 million and
$13.3 million, respectively, in revenue from wholesale territorial customers
that were offset by decreases of $1.9 million and $3.7 million, respectively,
in revenue from non-territorial customers. The increases in the third quarter
and year-to-date 2004 revenue from wholesale territorial customers as compared
to the same periods in 2003 are the result of increases in the price per
kilowatt-hour due to fuel cost. The decreases in the third quarter and year to
date 2004 revenue from wholesale non-territorial customers as compared to the
same period in 2003 are the result of the loss of capacity revenues as a result
of the termination of the Dynegy contract in 2003. 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 more generation available for sale. The increase in purchased power
from affiliates is primarily due to the increase in the cost of fuel. Fuel expense.In the third quarter and year-to-date 2004, fuel expense
increased when compared to the same periods in 2003 as a result of 10.5% and
10.3% increases in generation, respectively, and 20.4% and 29.0% increases in
the cost of 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 third quarter and year-to-date 2004
purchased power from non-affiliates increased due to higher fuel prices in
2004. Other operations expense.The third quarter and year-to-date 2004
decreases in other operations expense when compared to the same periods in 2003
are a result of approximately $11 million incurred during the third 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. Maintenance expense.The third quarter and year-to-date 2004 increases in
maintenance expense when compared to the same periods in 2003 are primarily a
result of higher operating hours at the combined cycle units in 2004 and
resulting higher expense. See Note 7 to the financial statements of Mississippi
Power under Long-Term Service Agreements in Item 8 of the Form 10-K for
additional information. Depreciation and amortization.The third 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. Mississippi Power recorded a credit to expense in
the amount of $4.1 million and $12.4 million for the quarter and year-to-date
2004, respectively, to amortize this 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 Future
Earnings Potential  FERC and Mississippi 80




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION PSC Matters  Retail Rate Filing and Note (K) to the Condensed Financial
Statements herein for additional information. Interest expense.The decreases in interest expense for the third 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. Other income (expense), net.The third quarter and year-to-date 2004
decreases in other income (expense), net of $2 million, or 93.8%, and $2.4
million, or 82.4%, respectively, are the result of lower revenue from
miscellaneous contract work and a FERC settlement in July 2003 that resulted in
the recognition, in the third quarter 2003, of $1.2 million of revenue
previously reserved for refund. See Note 3 to the financial statements of
Mississippi Power under Transmission Facilities Agreement in Item 8 of the
Form 10-K. Income taxes.The third quarter and year-to-date 2004 income taxes
increased $0.6 million, or 2.6%, and decreased $20.1 million, or 29.5%,
respectively, as a direct result of the changes in earnings before income taxes
when compared to the same periods in 2003. Dividends on preferred stock.The year-to-date 2004 increase in dividends
on preferred stock is the result of a $2.0 million loss on the redemption of
preferred stock recognized in the second quarter of 2004. The third quarter
2004 dividends on preferred stock remained fairly constant in comparison to the
same period in 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 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 Mississippi Powers
service area. For additional information relating to these issues, see
BUSINESS  The SOUTHERN System  Risk Factors in Item 1 and MANAGEMENTS
DISCUSSION AND ANALYSIS  RESULTS OF OPERATIONS  Future Earnings Potential
of Mississippi Power in Item 7 in the Form 10-K. Environmental Matters New Source Review
Actions 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 of Mississippi
Power 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 81




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 payment of
substantial penalties that cannot be determined at this time. 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 the U.S. District Court for the Southern District of New
York against Southern Company and four other electric power companies. A
nearly identical complaint was filed 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 and the other defendants have filed
motions to dismiss both lawsuits. Southern Company intends to vigorously defend
against these claims. While the outcome of this matter cannot be determined at
this time, an adverse judgment could result in substantial capital
expenditures. Other Environmental
Matters 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. This new interim approach requires utilities to
submit 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 82




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. 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 submitted the required analyses on August 9, 2004.
In that filing, Southern Company passed the pivotal supplier analysis for all
markets and the wholesale market share analysis for all markets except the
Southern Company control area. Southern Company also submitted other analyses
to demonstrate that it lacks generation market power. This filing remains
pending at the FERC. Southern Company, along with other utilities, has also
filed an appeal of the FERCs April 14, 2004 order with the Circuit Court of
Appeals in Washington, D.C. In the event that the FERCs default mitigation
measures are ultimately applied, Mississippi Power may be required to charge
cost-based rates for certain wholesale sales, 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  Transmission 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
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. This amortization increased after tax
earnings for the third quarter and year-to-date 2004 by $2.5 million
and $7.7 million, respectively. In
addition, the Mississippi PSC also approved Mississippi Powers
requested changes to its PEP rate schedule 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 Mississippi Power under Retail
Regulatory Filing in Item 8 of the Form 10-K and Note (K) to the Condensed
Financial Statements herein. 83




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Storm Damage Cost
Recovery During the month of September 2004, Mississippi Powers service territory was
impacted by Hurricane Ivan. As mandated by the Mississippi PSC, Mississippi
Power maintains an accumulated provision for property damage to cover the cost
of damages from major storms to its transmission and distribution lines and the
cost of uninsured damages to it generation facilities and other property. The
total amount of damage related to this hurricane was estimated to be $7.6
million and was charged to the storm damage reserve in September 2004, leaving
a balance in the reserve of $0.3 million. See Note 1 to the financial
statements of Mississippi Power under Provision for Property Damage in Item 8
of the Form 10-K and Note (K) to the Condensed Financial Statements herein for
more information. Other Matters On October 22, 2004, President Bush signed the American Jobs Creation Act of
2004 (the Jobs Act) into law. The Jobs Act represents the most significant
revision to the Internal Revenue Code since 1986. Congress must still develop
the regulations that will implement the requirements of the Jobs Act.
Mississippi Power is currently assessing the impact of the Jobs Act on its
taxable income. However, Mississippi Power currently does not expect the Jobs
Act to have a material impact on its financial statements. Mississippi Power is subject to certain claims and legal actions arising
in the ordinary course of business. In addition, Mississippi Powers business
activities are subject to extensive governmental regulation related to public
health and the environment. Litigation over environmental issues and claims of
various types, including property damage, personal injury and citizen
enforcement of environmental requirements, has increased generally throughout
the United States. In particular, personal injury claims for damages caused by
alleged exposure to hazardous materials have become more frequent. The
ultimate outcome of such litigation against Mississippi Power cannot be
predicted at this time; however, management does not anticipate that the
liabilities, if any, arising from such current proceedings would have a
material adverse effect on Mississippi Powers financial statements. See the Notes to the Condensed Financial Statements herein for discussion
of various contingencies and other matters which may affect future earnings
potential. ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates Mississippi Power prepares its financial statements in accordance with
accounting principles generally accepted in the United States. Significant
accounting policies are described in Note 1 to the financial statements of
Mississippi Power in Item 8 of the Form 10-K. In the application of these
policies, certain estimates are made
that may have a material impact on Mississippi Powers results of operations
and related disclosures. Different
assumptions and measurements could produce estimates that are significantly
different from those recorded in the financial statements. See MANAGEMENTS
DISCUSSION AND ANALYSIS  ACCOUNTING POLICIES  Application of Critical
Accounting Policies and Estimates of Mississippi Power in Item 7 of the
Form 10-K for a complete discussion of Mississippi Powers critical accounting
policies and estimates related to Electric Utility Regulation, Contingent
Obligations, 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. 84




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 the third quarter 2004, Mississippi Power prospectively adopted FASB
Staff Position (FSP) 106-2, Accounting and Disclosure Requirements related to
the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the
Medicare Act). The Medicare Act provides a 28% prescription drug subsidy for
Medicare eligible retirees. FSP 106-2 requires recognition of the impacts of
the Medicare Act in the accumulated post-retirement benefit obligation (APBO)
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 elected
to apply this treatment prospectively. The effect of the subsidy reduced
Mississippi Powers expenses for the three months ended September 30, 2004 by
approximately $0.2 million and is expected to have a similar impact on future
expenses. The subsidys impact on the post-retirement medical plan APBO was a
reduction of approximately $8 million. However, the ultimate impact on future
periods is subject to federal regulations governing the subsidy created in the
Medicare Act which are being finalized. See Note (G) to the Condensed Financial
Statements herein for additional information. FINANCIAL CONDITION AND LIQUIDITY Overview Major changes in Mississippi Powers financial condition during the first nine
months of 2004 included the addition of approximately $45 million to utility
plant, a reduction in current liabilities of $95 million, an increase of $40
million in long-term debt, a decrease of $46 million in cash and an increase in
accounts receivable of $24.2 million. 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 of the Form 10-K for a description of Mississippi Powers capital
requirements for its construction program, lease obligations, purchase
commitments and trust funding requirements. Sources of Capital In addition to the financing activities described herein, Mississippi Power
plans to obtain the funds required for
construction and other purposes from sources similar to those used in the past.
These sources include cash flows from operating activities and issuances of
unsecured debt, trust preferred securities, preferred stock and pollution
control bonds issued for Mississippi Powers benefit by public authorities. The
amount, type and timing of any financings, if needed, will depend upon
maintenance of adequate earnings, regulatory approval, 85




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION prevailing market conditions and other factors. See BUSINESS  Financing
Programs in Item 1 of the Form 10-K for additional information. To meet short-term cash needs and contingencies, Mississippi Power had at
September 30, 2004, approximately $23 million of cash and cash equivalents and
$100 million of unused committed credit arrangements with banks. Of these
facilities, $13 million expire in 2004 and the remaining $87 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 September 30,
2004, Mississippi Power had $15 million in 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. Off-Balance Sheet Financing Arrangements See MANAGEMENTS
DISCUSSION AND ANALYSIS  FINANCIAL CONDITION AND LIQUIDITY 
Off-Balance Sheet Financing Arrangements in Item 7 and Note 7 to the
financial statements of Mississippi Power under Operating Leases in Item 8 of
the Form 10-K for information related to Mississippi Powers lease of a
combined cycle generating facility at Plant Daniel. Credit Rating Risk Mississippi Power does not have any credit arrangements that would require
material changes in payment schedules or terminations as a result of a credit
rating downgrade. Mississippi Power is party to certain derivative agreements
that could require collateral and/or accelerated payment in the event of a
credit rating change to below investment grade. These agreements are primarily
for natural gas price risk management activities. At September 30, 2004,
Mississippi Power had no material exposure related to these agreements. Market Price Risk Mississippi Powers market risk exposures relative to interest rate changes
have not changed materially compared with the December 31, 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. 86




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MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION The fair values of derivative, fuel and energy contracts at September 30,
2004, were as follows: Third Quarter2004
    
    Year-to-DateChanges
    
    ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    1,166
    
    
    $
    2,470Contracts realized or settled
    
    
    (2,316
    )
    
    
    (5,772
    )New contracts at inception
    
    
    
    
    
    
    Changes in valuation techniques
    
    
    
    
    
    
    Current period changes (a)
    
    
    10,973
    
    
    
    13,125Contracts at September 30, 2004
    
    $
    9,823
    
    
    $
    9,823
  (a)
    
    Current period changes also include the changes in fair value of new
contracts entered into during the period. Source of September 30, 2004,Valuation PricesTotal
    
    MaturityFair Value
    
    Year 1
    
    1-3 Years(in thousands)Actively quoted
    
    $
    12,820
    
    
    $
    11,718
    
    
    $
    1,102External sources
    
    
    (2,997
    )
    
    
    (2,937
    )
    
    
    (60
    )Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at September
30, 2004
    
    $
    9,823
    
    
    $
    8,781
    
    
    $
    1,042
 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 other issues of higher
cost preferred stock and the remainder was used for general corporate purposes. In addition to any financings that may be necessary to meet Mississippi
Powers capital requirements and contractual obligations, 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. 87




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SAVANNAH ELECTRIC
AND
POWER COMPANY 88




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SAVANNAH ELECTRIC AND POWER COMPANY 
  For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Operating Revenues:Retail sales
    
    $
    102,312
    
    
    $
    95,364
    
    
    $
    258,772
    
    
    $
    234,378Sales for resale Non-affiliates
    
    
    966
    
    
    
    1,068
    
    
    
    3,670
    
    
    
    4,100Affiliates
    
    
    960
    
    
    
    1,627
    
    
    
    5,050
    
    
    
    4,863Other revenues
    
    
    1,141
    
    
    
    1,056
    
    
    
    2,792
    
    
    
    2,891Total operating revenues
    
    
    105,379
    
    
    
    99,115
    
    
    
    270,284
    
    
    
    246,232Operating Expenses:Fuel
    
    
    15,106
    
    
    
    18,060
    
    
    
    39,713
    
    
    
    42,079Purchased power Non-affiliates
    
    
    2,373
    
    
    
    1,136
    
    
    
    9,102
    
    
    
    3,763Affiliates
    
    
    35,966
    
    
    
    26,017
    
    
    
    85,241
    
    
    
    67,110Other operations
    
    
    15,054
    
    
    
    13,905
    
    
    
    44,732
    
    
    
    40,886Maintenance
    
    
    4,932
    
    
    
    5,266
    
    
    
    18,268
    
    
    
    17,865Depreciation and amortization
    
    
    5,452
    
    
    
    5,121
    
    
    
    15,902
    
    
    
    15,270Taxes other than income taxes
    
    
    4,190
    
    
    
    4,026
    
    
    
    11,582
    
    
    
    11,125Total operating expenses
    
    
    83,073
    
    
    
    73,531
    
    
    
    224,540
    
    
    
    198,098Operating Income
    
    
    22,306
    
    
    
    25,584
    
    
    
    45,744
    
    
    
    48,134Other Income and (Expense):Interest expense, net of amounts capitalized
    
    
    (3,023
    )
    
    
    (2,378
    )
    
    
    (9,155
    )
    
    
    (7,472
    )Distributions on mandatorily redeemable
preferred securities
    
    
    
    
    
    
    (685
    )
    
    
    (109
    )
    
    
    (2,055
    )Other income (expense), net
    
    
    530
    
    
    
    784
    
    
    
    109
    
    
    
    214Total other income and (expense)
    
    
    (2,493
    )
    
    
    (2,279
    )
    
    
    (9,155
    )
    
    
    (9,313
    )Earnings Before Income Taxes
    
    
    19,813
    
    
    
    23,305
    
    
    
    36,589
    
    
    
    38,821Income taxes
    
    
    7,262
    
    
    
    8,927
    
    
    
    13,391
    
    
    
    14,638Net Income
    
    
    12,551
    
    
    
    14,378
    
    
    
    23,198
    
    
    
    24,183Dividends on Preferred Stock
    
    
    675
    
    
    
    
    
    
    
    825
    
    
    
    Net Income After Dividends on Preferred Stock
    
    $
    11,876
    
    
    $
    14,378
    
    
    $
    22,373
    
    
    $
    24,183
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Net Income After Dividends on Preferred Stock
    
    $
    11,876
    
    
    $
    14,378
    
    
    $
    22,373
    
    
    $
    24,183Other comprehensive income (loss):Changes in fair value of qualifying hedges, net of tax
of $8, $(457), $(2) and $(457), respectively
    
    
    12
    
    
    
    (724
    )
    
    
    (3
    )
    
    
    (724
    )Less: Reclassification adjustment for amounts included in net income,
net of tax of $9, $3, $39 and $3, respectively
    
    
    14
    
    
    
    4
    
    
    
    61
    
    
    
    4COMPREHENSIVE INCOME
    
    $
    11,902
    
    
    $
    13,658
    
    
    $
    22,431
    
    
    $
    23,463
 The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements. 89




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SAVANNAH ELECTRIC AND POWER COMPANY 
  For the Nine MonthsEnded September 30,2004
    
    2003(in thousands)Operating Activities:Net income
    
    $
    23,198
    
    
    $
    24,183Adjustments to reconcile net income
to net cash provided from operating activities Depreciation and amortization
    
    
    17,671
    
    
    
    16,836Deferred income taxes and investment tax credits, net
    
    
    10,465
    
    
    
    1,375Pension, postretirement, and other employee benefits
    
    
    4,978
    
    
    
    4,417Tax benefit of stock options
    
    
    682
    
    
    
    860Other, net
    
    
    143
    
    
    
    (3,095
    )Changes in certain current assets and liabilities Receivables, net
    
    
    (21,783
    )
    
    
    (4,607
    )Fossil fuel stock
    
    
    1,246
    
    
    
    (375
    )Materials and supplies
    
    
    (575
    )
    
    
    (384
    )Other current assets
    
    
    (1,750
    )
    
    
    4,593Accounts payable
    
    
    (1,856
    )
    
    
    (1,647
    )Accrued taxes
    
    
    6,424
    
    
    
    10,374Accrued compensation
    
    
    (1,543
    )
    
    
    (1,482
    )Other current liabilities
    
    
    (494
    )
    
    
    (2,518
    )Net cash provided from operating activities
    
    
    36,806
    
    
    
    48,530Investing Activities:Gross property additions
    
    
    (109,327
    )
    
    
    (27,469
    )Other
    
    
    (10,744
    )
    
    
    3,751Net cash used for investing activities
    
    
    (120,071
    )
    
    
    (23,718
    )Financing Activities:Increase in notes payable, net
    
    
    20,784
    
    
    
    6,148Proceeds Pollution control bonds
    
    
    
    
    
    
    13,870Other long-term debt
    
    
    10,000
    
    
    
    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
    
    
    (7
    )
    
    
    (420
    )Mandatorily redeemable preferred securities
    
    
    (40,000
    )
    
    
    Payment of preferred stock dividends
    
    
    (150
    )
    
    
    Payment of common stock dividends
    
    
    (17,400
    )
    
    
    (17,250
    )Other
    
    
    43
    
    
    
    (153
    )Net cash provided from (used for) financing activities
    
    
    49,270
    
    
    
    (26,675
    )Net Change in Cash and Cash Equivalents
    
    
    (33,995
    )
    
    
    (1,863
    )Cash and Cash Equivalents at Beginning of Period
    
    
    37,943
    
    
    
    3,978Cash and Cash Equivalents at End of Period
    
    $
    3,948
    
    
    $
    2,115Supplemental Cash Flow Information:Cash paid during the period for Interest (net of $918 and $162 capitalized for 2004 and 2003, respectively)
    
    $
    6,276
    
    
    $
    7,609Income taxes (net of refunds)
    
    $
    1,158
    
    
    $
    1,900
 The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements. 90




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SAVANNAH ELECTRIC AND POWER COMPANY 
  At September 30,
    
    At December 31,Assets
    
    2004
    
    2003(in thousands)Current Assets:Cash and cash equivalents
    
    $
    3,948
    
    
    $
    37,943Receivables Customer accounts receivable
    
    
    29,896
    
    
    
    19,674Unbilled revenues
    
    
    10,639
    
    
    
    11,288Under recovered regulatory clause revenues
    
    
    14,477
    
    
    
    Other accounts and notes receivable
    
    
    825
    
    
    
    1,138Affiliated companies
    
    
    3,288
    
    
    
    4,872Accumulated provision for uncollectible accounts
    
    
    (1,011
    )
    
    
    (641
    )Fossil fuel stock, at average cost
    
    
    7,405
    
    
    
    8,652Materials and supplies, at average cost
    
    
    9,646
    
    
    
    9,070Prepaid income taxes
    
    
    19,684
    
    
    
    24,419Prepaid expenses
    
    
    1,421
    
    
    
    1,377Other
    
    
    2,329
    
    
    
    623Total current assets
    
    
    102,547
    
    
    
    118,415Property, Plant, and Equipment:In service
    
    
    937,246
    
    
    
    912,504Less accumulated provision for depreciation
    
    
    407,551
    
    
    
    402,394529,695
    
    
    
    510,110Construction work in progress
    
    
    89,385
    
    
    
    14,121Total property, plant, and equipment
    
    
    619,080
    
    
    
    524,231Other Property and Investments
    
    
    2,391
    
    
    
    2,248Deferred Charges and Other Assets:Deferred charges related to income taxes
    
    
    9,165
    
    
    
    9,611Cash surrender value of life insurance for
deferred compensation plans
    
    
    24,173
    
    
    
    23,866Unamortized debt issuance expense
    
    
    4,097
    
    
    
    5,652Unamortized loss on reacquired debt
    
    
    8,116
    
    
    
    7,488Other regulatory assets
    
    
    3,914
    
    
    
    3,427Other
    
    
    14,588
    
    
    
    14,983Total deferred charges and other assets
    
    
    64,053
    
    
    
    65,027Total Assets
    
    $
    788,071
    
    
    $
    709,921
 The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements. 91




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SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At September 30,
    
    At December 31,Liabilities and Stockholder's Equity
    
    2004
    
    2003(in thousands)Current Liabilities:Securities due within one year
    
    $
    30,961
    
    
    $
    40,910Notes payable
    
    
    20,784
    
    
    
    Accounts payable Affiliated
    
    
    15,281
    
    
    
    13,797Other
    
    
    9,087
    
    
    
    13,147Customer deposits
    
    
    6,993
    
    
    
    6,922Accrued taxes Income taxes
    
    
    2,257
    
    
    
    1,172Other
    
    
    6,812
    
    
    
    1,473Accrued interest
    
    
    4,332
    
    
    
    2,802Accrued vacation pay
    
    
    2,581
    
    
    
    2,530Accrued compensation
    
    
    4,109
    
    
    
    5,652Other
    
    
    3,579
    
    
    
    5,107Total current liabilities
    
    
    106,776
    
    
    
    93,512Long-term Debt
    
    
    202,435
    
    
    
    222,493Deferred Credits and Other Liabilities:Accumulated deferred income taxes
    
    
    89,037
    
    
    
    83,852Deferred credits related to income taxes
    
    
    9,040
    
    
    
    9,804Accumulated deferred investment tax credits
    
    
    8,127
    
    
    
    8,625Employee benefit obligations
    
    
    44,812
    
    
    
    39,833Other cost of removal obligations
    
    
    40,531
    
    
    
    36,843Miscellaneous regulatory liabilities
    
    
    13,434
    
    
    
    12,932Other
    
    
    6,936
    
    
    
    15,735Total deferred credits and other liabilities
    
    
    211,917
    
    
    
    207,624Total Liabilities
    
    
    521,128
    
    
    
    523,629Non-Cumulative Preferred Stock
    
    
    45,000
    
    
    
    Common Stockholders Equity:Common stock, par value $5 per share Authorized  16,000,000 sharesOutstanding  10,844,635 shares
    
    
    54,223
    
    
    
    54,223Paid-in capital
    
    
    55,037
    
    
    
    24,417Retained earnings
    
    
    114,829
    
    
    
    109,856Accumulated other comprehensive loss
    
    
    (2,146
    )
    
    
    (2,204
    )Total common stockholders equity
    
    
    221,943
    
    
    
    186,292Total Liabilities and Stockholders Equity
    
    $
    788,071
    
    
    $
    709,921
 The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements. 92




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SAVANNAH ELECTRIC AND POWER COMPANY 
 
 THIRD QUARTER 2004 vs. THIRD QUARTER 2003
AND
YEAR-TO-DATE 2004 vs. YEAR-TO-DATE 2003 RESULTS OF OPERATIONS Earnings Savannah Electrics net income after dividends on preferred stock for the third
quarter and year-to-date 2004 was $11.9 million and $22.4 million,
respectively, compared to $14.4 million and $24.2 million, respectively, for
the corresponding periods of 2003. Earnings decreased by $2.5 million, or
17.4%, in the third quarter 2004 primarily due to higher operating expenses.
Year-to-date 2004 earnings were down by $1.8 million, or 7.5%, as a result of
higher operating expenses, partially offset by higher operating revenues. Significant income statement items appropriate for discussion include the
following: Increase (Decrease)Third Quarter
    
    Year-To-Date(in thousands)
    
    %
    
    (in thousands)
    
    %Retail sales
    
    $
    6,948
    
    
    
    7.3
    
    
    $
    24,394
    
    
    
    10.4Fuel expense
    
    
    (2,954
    )
    
    
    (16.4
    )
    
    
    (2,366
    )
    
    
    (5.6
    )Purchased power  non-affiliates
    
    
    1,237
    
    
    
    108.9
    
    
    
    5,339
    
    
    
    141.9Purchased power  affiliates
    
    
    9,949
    
    
    
    38.2
    
    
    
    18,131
    
    
    
    27.0Other operations expense
    
    
    1,149
    
    
    
    8.3
    
    
    
    3,846
    
    
    
    9.4Interest expense, net of amounts
capitalized
    
    
    645
    
    
    
    27.1
    
    
    
    1,683
    
    
    
    22.5Dividends on preferred stock
    
    
    675
    
    
    
    N/M
    
    
    
    825
    
    
    
    N/M
   N/M
    
    Not meaningful Retail sales. Excluding fuel revenues, which do not affect net income,
retail sales revenue remained stable in the third quarter 2004 and increased by
$6.5 million, or 4.7%, year-to-date 2004 when compared to the corresponding
periods in 2003. The year-to-date 2004 increase in retail revenues is
primarily a result of favorable weather conditions in the first two quarters of
2004 and a 2.2% increase in the number of customers. Year-to-date 2004 energy
sales to residential and commercial customers were higher by 8.7% and 6.2%,
respectively. Industrial sales revenues, excluding fuel revenues, for
year-to-date 2004 remained essentially constant as compared to the same period
in 2003. Fuel expense.Fuel expense decreased in the third quarter and
year-to-date 2004 primarily as a result of a decrease in generation, partially
offset by higher cost of fuel. Generation decreased 14.3% for third quarter
and 4.0% for year-to-date 2004 when compared to the prior year because Savannah
Electric had opportunities to purchase power at prices less than its cost to
generate. 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 third 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 than available from affiliates. These
transactions do not have a significant impact on earnings, as energy costs are
generally recovered through the fuel cost recovery clause. 93




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Purchased
power  affiliates. Purchased power from affiliates increased
in the third quarter and year-to-date 2004 as compared to the same periods in
the prior year primarily due to the availability of Southern Company system
generation at prices below self-generation to meet increased sales demand. The
capacity component of purchased power expense from affiliates is higher in
year-to-date 2004 reflecting a greater write-down of deferred Wansley PPA
costs, consistent with the accounting order approved by the Georgia PSC in
December 2002, and higher capacity costs from affiliates.
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 $0.4 million decrease to expense for the third quarter and a $0.5 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. 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 third quarter and
year-to-date 2004 as compared to the same periods in the prior year in other
operations expense are attributed to increases in distribution expenses and
administrative and general expenses. Distribution expenses increased $0.4
million, or 19.5%, and $0.6 million, or 10.7%, for the third quarter and
year-to-date 2004, respectively, primarily as a result of storm-related
expenses. Administrative and general expenses increased $0.5 million, or 7.6%,
and $2.6 million, or 14.4%, for the third quarter and year-to-date 2004,
respectively, primarily relating to accounting and auditing services, legal
expenses, workers compensation claims and employee benefit expenses. Interest expense, net of amounts capitalized.The third quarter and
year-to-date 2004 increases in this expense as compared to the same periods in
the prior year are mainly due to an increase in long-term debt outstanding of
$65 million. 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 senior notes issued
in late 2003. Dividends on preferred stock.Dividends on preferred stock increased for
the third quarter and year-to-date 2004 due to the issuance of 1,800,000 shares
($45 million aggregate par value) of 6.00% Series Preferred Stock,
Non-Cumulative, Par Value $25 Per Share in June 2004. See FINANCIAL CONDITION
AND LIQUIDITY  Financing Activities herein for additional information. 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 Savannah Electrics
service area. For additional information relating to these issues, see BUSINESS
 The SOUTHERN System  Risk Factors in Item 1 and MANAGEMENTS DISCUSSION
AND ANALYSIS  RESULTS OF OPERATIONS  Future Earnings Potential of Savannah
Electric 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.
See MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS OF
MANAGEMENTS DISCUSSION AND ANALYSIS  RESULTS 94




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 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 Savannah Electric
had been effectively stayed pending this final resolution of the TVA case. 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 and could possibly require payment of
substantial penalties that cannot be determined at this time. 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 the U.S. District Court for the Southern District of New
York against Southern Company and four other electric power companies. A
nearly identical complaint was filed 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 and the other defendants have filed
motions to dismiss both lawsuits. Southern Company intends to vigorously defend
against these claims. While the outcome of this matter cannot be determined at
this time, an adverse judgment could result in substantial capital
expenditures. Other Environmental Matters On April 21, 2004, the EPA published
the final regional nitrogen oxide
reduction rules applicable to the State of Georgia. These rules specified 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. However, on October 22, 2004, the EPA announced it was granting a
petition for reconsideration filed with the EPA by a coalition of Georgia
industries. The EPA will stay implementation of the rule, as it relates to
the State of Georgia, while it initiates rulemakings to address the petition. The impact of
the nitrogen oxide reduction rules will depend on the outcome of the petition
for reconsideration and/or any subsequent development and approval of the State
of Georgias state implementation plan and cannot be determined at this time. 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 state and
therefore cannot be determined at this time. 95




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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 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. 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 requires
utilities to submit 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. 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 submitted the required analyses on August 9, 2004.
In that filing, Southern Company passed the pivotal supplier analysis for all
markets and the wholesale market share analysis for all markets except the
Southern Company control area. Southern Company also submitted other analyses
to demonstrate that it lacks generation market power. This filing remains
pending at the FERC. Southern Company, along with other utilities, has also
filed an appeal of the FERCs April 14, 2004 order with the Circuit Court of
Appeals in Washington, D.C. In the event that the FERCs default mitigation
measures are ultimately applied, Savannah Electric may be required to charge
cost-based rates for certain wholesale sales, 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 occurred on May 24, 2004. On May 20, 2004, Southern Power
filed a request to withdraw the PPAs and to terminate the ongoing 96




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. In direct
testimony filed on October 14, 2004, the Georgia PSC staff proposed a different
valuation that shows the market value for the Plant McIntosh construction
project is less than book value. Georgia Power and Savannah Electric disagree
with the proposed valuation methodology. Georgia Power and Savannah Electric
plan to file rebuttal testimony in November with hearings being held in that
same month. The Georgia PSC is expected to issue a final order in this matter
in December 2004. 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 September 30, 2004,
the investment in the McIntosh construction project totaled approximately $74.2
million for Savannah Electric. The ultimate outcome of the Georgia PSCs review
cannot now be determined. See Note (J) to the Condensed Financial Statements
herein for additional information. 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
24 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 were
recorded as construction work in progress in June 2004 and were to 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 September 30, 2004 is approximately $14.5 million and is
included in Savannah Electrics Condensed Balance Sheets herein. On October 25,
2004, the Georgia PSC approved Savannah Electrics request, with no significant
modifications. The approved increase will allow for the recovery of
approximately $161 million in fuel costs, which includes an estimate of future
fuel costs over the next twelve months and recovery of the existing under
recovered fuel balance, over the next 24 months. The approved fuel rate
increase also includes the recovery of approximately $3.5 million in costs
associated with the coal transloader to be amortized over a 21-month period,
which the Georgia PSC had denied in June 2004. The new rates will become
effective in November 2004. See Note (L) to the Condensed Financial Statements
herein for additional information. 97




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Retail Rate Case Savannah Electric is currently preparing testimony and exhibits for a base
retail rate case, which is expected to be filed with the Georgia PSC in late
November or early December 2004. It is expected that an increase in retail
revenues will be requested to recover the investment in the McIntosh combined
cycle plant, continued investment in new transmission and distribution
facilities to support growth and improve reliability and increasing operating
expenses, in part, to meet new laws and regulations. A decision by the Georgia
PSC is expected in mid-year 2005. Other Matters On October 22, 2004, President Bush signed the American Jobs Creation Act of
2004 (the Jobs Act) into law. The Jobs Act represents the most significant
revision to the Internal Revenue Code since 1986. Congress must still develop
the regulations that will implement the requirements of the Jobs Act. Savannah
Electric is currently assessing the impact of the Jobs Act on its taxable
income. However, Savannah Electric currently does not expect the Jobs Act to
have a material impact on its financial statements. At the end of September, Kerr-McGee Corporation, one of Savannah
Electrics largest industrial customers, shut down one of its three production
lines at its Savannah, Georgia facility. The annual reduction in base revenues
is not expected to have a material impact on Savannah Electrics financial
statements. Effective September 30, 2004, Savannah Electric retired Units 4 and 5 at
Plant Riverside. The remaining units at the plant will be retired on May 31,
2005. These retirements will have no material impact on Savannah Electrics
financial statements. Savannah Electric is subject to certain claims and legal actions arising
in the ordinary course of business. In addition, Savannah Electrics business
activities are subject to extensive governmental regulation related to public
health and the environment. Litigation over environmental issues and claims of
various types, including
property damage, personal injury and citizen enforcement of environmental
requirements, has increased generally throughout the United States. In
particular, personal injury claims for damages caused by alleged
exposure to hazardous materials have become more frequent. The ultimate
outcome of such litigation against Savannah Electric cannot be predicted at
this time; however, management does not anticipate that the liabilities,
if any, arising from such current proceedings would have a material adverse
effect on Savannah Electrics financial statements. See the Notes to the Condensed Financial Statements herein for discussion
of various contingencies and other matters which may affect future earnings
potential. 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 98




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 the third quarter 2004, Savannah Electric prospectively adopted FASB
Staff Position (FSP) 106-2, Accounting and Disclosure Requirements related to
the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the
Medicare Act). The Medicare Act provides a 28% prescription drug subsidy for
Medicare eligible retirees. FSP 106-2 requires recognition of the impacts of
the Medicare Act in the accumulated post-retirement benefit obligation (APBO)
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 elected
to apply this treatment prospectively. The effect of the subsidy reduced
Savannah Electrics expenses for the three months ended September 30, 2004 by
approximately $0.1 million and is expected to have a similar impact on future
expenses. The subsidys impact on the post-retirement medical plan APBO was a
reduction of approximately $3.5 million. However, the ultimate impact on future
periods is subject to federal regulations governing the subsidy created
in the Medicare Act being finalized. See Note (G) to the Condensed Financial
Statements herein for additional information. FINANCIAL CONDITION AND LIQUIDITY Overview Major changes in Savannah Electrics financial condition during the first nine
months of 2004 included the addition of approximately $109.3 million to utility
plant, which includes 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. 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. Approximately $31 million will be required by September 30, 2005
for maturities of long term debt. 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. 99




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. These sources include cash flows from operating activities
and issuances of unsecured debt, preferred stock and pollution control bonds
issued for Savannah Electrics benefit by public authorities and capital
contributions from Southern Company. 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. Savannah Electric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, Savannah Electric had at
September 30, 2004 approximately $3.9 million of cash and cash equivalents and
$50 million of unused committed credit arrangements with banks, of which $10
million expires in 2004, $30 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. Savannah
Electric expects to renew its credit facilities, as needed, prior to
expiration. 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 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 September 30, 2004,
Savannah Electric had $12.8 million of commercial paper and $8.0 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 arrangements that would require
material changes in payment schedules or terminations as a result of a credit
rating downgrade. Savannah Electric is party to certain derivative agreements
that could require collateral and/or accelerated payment in the event of a
credit rating change to below investment grade. These agreements are primarily
for natural gas price risk management activities. At September 30, 2004,
Savannah Electric had no material exposure related to these agreements. 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. 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. 100




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SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION The fair value of derivative energy contracts at September 30, 2004 was as
follows: Third Quarter2004
    
    Year-to-DateChanges
    
    ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    1,583
    
    
    $
    463Contracts realized or settled
    
    
    (1,034
    )
    
    
    (1,816
    )New contracts at inception
    
    
    
    
    
    
    Changes in valuation techniques
    
    
    
    
    
    
    Current period changes (a)
    
    
    1,676
    
    
    
    3,578Contracts at September 30, 2004
    
    $
    2,225
    
    
    $
    2,225
  (a)
    
    Current period changes also include the changes in fair value of new
contracts entered into during the period. Source of September 30, 2004Valuation PricesTotal
    
    MaturityFair Value
    
    Year 1
    
    1-3 Years(in thousands)Actively quoted
    
    $
    2,251
    
    
    $
    1,947
    
    
    $
    304External sources
    
    
    (26
    )
    
    
    (26
    )
    
    
    Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at September 30, 2004
    
    $
    2,225
    
    
    $
    1,921
    
    
    $
    304
 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 Company 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. Subsequent to September 30, 2004, Savannah Electric has entered into
interest rate hedging transactions related to the anticipated issuance of
senior notes totaling approximately $30 million. The notes are expected to be
issued in 2004. Further, Savannah Electric also entered into an interest rate
hedging transaction related to $13.9
million of its outstanding tax-exempt auction rate securities. The interest
rate swap will fix Savannah Electrics interest cost related to these
securities beginning in 2005 and continuing through 2007. In addition to any financings that may be necessary to meet Savannah
Electrics capital requirements and contractual obligations, Savannah Electric
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. 101




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SOUTHERN POWER COMPANY 102




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SOUTHERN POWER COMPANY 
  For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Operating Revenues:Sales for resale Non-affiliates
    
    $
    58,417
    
    
    $
    93,251
    
    
    $
    218,148
    
    
    $
    212,517Affiliates
    
    
    128,111
    
    
    
    112,258
    
    
    
    322,124
    
    
    
    253,627Contract termination
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80,000Other revenues
    
    
    2,413
    
    
    
    3,115
    
    
    
    7,023
    
    
    
    8,200Total Operating Revenues
    
    
    188,941
    
    
    
    208,624
    
    
    
    547,295
    
    
    
    554,344Operating Expenses:Fuel
    
    
    35,460
    
    
    
    49,440
    
    
    
    109,793
    
    
    
    104,676Purchased power Non-affiliates
    
    
    16,697
    
    
    
    18,399
    
    
    
    56,115
    
    
    
    49,959Affiliates
    
    
    24,699
    
    
    
    43,399
    
    
    
    95,681
    
    
    
    93,001Other operations
    
    
    13,919
    
    
    
    12,362
    
    
    
    42,173
    
    
    
    30,597Maintenance
    
    
    3,431
    
    
    
    2,253
    
    
    
    10,850
    
    
    
    4,733Depreciation and amortization
    
    
    12,789
    
    
    
    11,634
    
    
    
    38,363
    
    
    
    26,240Taxes other than income taxes
    
    
    2,686
    
    
    
    3,132
    
    
    
    8,083
    
    
    
    6,495Total operating expenses
    
    
    109,681
    
    
    
    140,619
    
    
    
    361,058
    
    
    
    315,701Operating Income
    
    
    79,260
    
    
    
    68,005
    
    
    
    186,237
    
    
    
    238,643Other Income and (Expense):Interest expense, net of amounts capitalized
    
    
    (18,582
    )
    
    
    (13,587
    )
    
    
    (45,491
    )
    
    
    (17,930
    )Other income (expense), net
    
    
    (161
    )
    
    
    (1,288
    )
    
    
    1,603
    
    
    
    (1,159
    )Total other income and (expense)
    
    
    (18,743
    )
    
    
    (14,875
    )
    
    
    (43,888
    )
    
    
    (19,089
    )Earnings Before Income Taxes
    
    
    60,517
    
    
    
    53,130
    
    
    
    142,349
    
    
    
    219,554Income taxes
    
    
    23,195
    
    
    
    12,991
    
    
    
    55,425
    
    
    
    77,367Earnings Before Cumulative Effect of
Accounting Change
    
    
    37,322
    
    
    
    40,139
    
    
    
    86,924
    
    
    
    142,187Cumulative effect of accounting change 
less income taxes of $231 thousand
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    367Net Income
    
    $
    37,322
    
    
    $
    40,139
    
    
    $
    86,924
    
    
    $
    142,554
 
 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)
    
    (in thousands)Net Income
    
    $
    37,322
    
    
    $
    40,139
    
    
    $
    86,924
    
    
    $
    142,554Other comprehensive income (loss):Changes in fair value of qualifying hedges, net of tax
of $(128), $1,072, $(546) and $(7,492),
respectively
    
    
    (205
    )
    
    
    1,711
    
    
    
    (967
    )
    
    
    (12,276
    )Less: Reclassification adjustment for amounts
included in net income,
net of tax of $1,100, $794, $2,973 and $910,
respectively
    
    
    1,758
    
    
    
    1,265
    
    
    
    4,741
    
    
    
    1,969COMPREHENSIVE INCOME
    
    $
    38,875
    
    
    $
    43,115
    
    
    $
    90,698
    
    
    $
    132,247
 The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements. 103




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SOUTHERN POWER COMPANY 
  For the Nine MonthsEnded September 30,2004
    
    2003(in thousands)Operating Activities:Net income
    
    $
    86,924
    
    
    $
    142,554Adjustments to reconcile net income
to net cash provided from operating activities Depreciation and amortization
    
    
    45,912
    
    
    
    28,590Deferred income taxes and investment tax credits, net
    
    
    4,227
    
    
    
    11,271Deferred capacity revenues
    
    
    36,270
    
    
    
    26,097Tax benefit of stock options
    
    
    225
    
    
    
    Hedge settlements
    
    
    
    
    
    
    (93,298
    )Other, net
    
    
    (3,258
    )
    
    
    1,373Changes in certain current assets and liabilities Receivables, net
    
    
    (44,477
    )
    
    
    (28,757
    )Fossil fuel stock
    
    
    2,889
    
    
    
    5,082Materials and supplies
    
    
    (1,634
    )
    
    
    (469
    )Other current assets
    
    
    13,208
    
    
    
    (17,133
    )Accounts payable
    
    
    (16,936
    )
    
    
    (1,792
    )Accrued taxes
    
    
    31,979
    
    
    
    17,272Accrued interest
    
    
    (16,400
    )
    
    
    (6,696
    )Other current liabilities
    
    
    
    
    
    
    151Net cash provided from operating activities
    
    
    138,929
    
    
    
    84,245Investing Activities:Gross property additions
    
    
    (113,522
    )
    
    
    (277,509
    )Sale of property to affiliates
    
    
    414,582
    
    
    
    Change in construction payables, net
    
    
    (14,499
    )
    
    
    (18,641
    )Other
    
    
    2,359
    
    
    
    1,146Net cash provided from (used for) investing activities
    
    
    288,920
    
    
    
    (295,004
    )Financing Activities:Decrease in notes payable, net  affiliated
    
    
    
    
    
    
    (19,988
    )Increase (decrease) in notes payable, net
    
    
    (114,349
    )
    
    
    102,681Proceeds Senior notes
    
    
    
    
    
    
    575,000Capital contributions from parent company
    
    
    
    
    
    
    385Redemptions Other long-term debt
    
    
    
    
    
    
    (380,404
    )Capital distributions to parent company
    
    
    (113,000
    )
    
    
    Payment of common stock dividends
    
    
    (187,000
    )
    
    
    Other
    
    
    2,989
    
    
    
    (9,133
    )Net cash provided from (used for) financing activities
    
    
    (411,360
    )
    
    
    268,541Net Change in Cash and Cash Equivalents
    
    
    16,489
    
    
    
    57,782Cash and Cash Equivalents at Beginning of Period
    
    
    2,798
    
    
    
    19,474Cash and Cash Equivalents at End of Period
    
    $
    19,287
    
    
    $
    77,256Supplemental Cash Flow Information:Cash paid during the period for Interest (net of $17,368 and $30,015 capitalized for 2004 and 2003, respectively)
    
    $
    50,857
    
    
    $
    111,668Income taxes (net of refunds)
    
    $
    16,822
    
    
    $
    60,266
 The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements. 104




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SOUTHERN POWER COMPANY 
  At September 30,
    
    At December 31,Assets
    
    2004
    
    2003(in thousands)Current Assets:Cash and cash equivalents
    
    $
    19,287
    
    
    $
    2,798Receivables Customer accounts receivable
    
    
    13,226
    
    
    
    10,772Other accounts receivable
    
    
    
    
    
    
    270Accumulated provision for uncollectible accounts
    
    
    (350
    )
    
    
    (350
    )Affiliated companies
    
    
    56,422
    
    
    
    14,130Fossil fuel stock, at average cost
    
    
    2,909
    
    
    
    5,798Materials and supplies, at average cost
    
    
    9,758
    
    
    
    8,123Prepaid income taxes
    
    
    
    
    
    
    11,222Prepaid expenses
    
    
    2,578
    
    
    
    2,528Other
    
    
    152
    
    
    
    1,174Total current assets
    
    
    103,982
    
    
    
    56,465Property, Plant, and Equipment:In service
    
    
    1,823,625
    
    
    
    1,831,139Less accumulated provision for depreciation
    
    
    98,408
    
    
    
    60,0051,725,217
    
    
    
    1,771,134Construction work in progress
    
    
    204,437
    
    
    
    504,097Total property, plant, and equipment
    
    
    1,929,654
    
    
    
    2,275,231Deferred Charges and Other Assets:Unamortized debt issuance expense
    
    
    15,481
    
    
    
    18,315Accumulated deferred income taxes
    
    
    10,281
    
    
    
    21,911Prepaid long-term service agreements
    
    
    35,193
    
    
    
    21,728OtherAffiliated
    
    
    6,455
    
    
    
    12,790Other
    
    
    3,615
    
    
    
    2,845Total deferred charges and other assets
    
    
    71,025
    
    
    
    77,589Total Assets
    
    $
    2,104,661
    
    
    $
    2,409,285
 The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements. 105




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SOUTHERN POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED) At September 30,
    
    At December 31,Liabilities and Stockholder's Equity
    
    2004
    
    2003(in thousands)Current Liabilities:Securities due within one year
    
    $
    200
    
    
    $
    200Notes payable
    
    
    
    
    
    
    114,347Accounts payable Affiliated
    
    
    23,669
    
    
    
    51,442Other
    
    
    2,929
    
    
    
    6,591Accrued taxes Income taxes
    
    
    23,528
    
    
    
    Other
    
    
    9,740
    
    
    
    1,289Accrued interest
    
    
    13,612
    
    
    
    30,012Other
    
    
    186
    
    
    
    489Total current liabilities
    
    
    73,864
    
    
    
    204,370Long-term Debt
    
    
    1,149,266
    
    
    
    1,149,112Deferred Credits and Other Liabilities:Deferred capacity revenuesAffiliated
    
    
    65,332
    
    
    
    28,799Other
    
    
    
    
    
    
    256OtherAffiliated
    
    
    13,666
    
    
    
    15,061Other
    
    
    134
    
    
    
    211Total deferred credits and other liabilities
    
    
    79,132
    
    
    
    44,327Total Liabilities
    
    
    1,302,262
    
    
    
    1,397,809Common Stockholders Equity:Common stock, par value $.01 per share Authorized - 1,000,000 sharesOutstanding - 1,000 sharesPaid-in capital
    
    
    737,537
    
    
    
    850,312Retained earnings
    
    
    117,550
    
    
    
    217,626Accumulated other comprehensive loss
    
    
    (52,688
    )
    
    
    (56,462
    )Total common stockholders equity
    
    
    802,399
    
    
    
    1,011,476Total Liabilities and Stockholders Equity
    
    $
    2,104,661
    
    
    $
    2,409,285
 The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements. 106




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SOUTHERN POWER COMPANY 
 
 THIRD QUARTER 2004 vs. THIRD QUARTER 2003
AND
YEAR-TO-DATE 2004 vs. YEAR-TO-DATE 2003 RESULTS OF OPERATIONS Earnings Southern Powers net income for the third quarter and year-to-date 2004 was
$37.3 million and $86.9 million, respectively, compared to $40.1 million and
$142.5 million for the corresponding periods of 2003. The decrease in third
quarter 2004 earnings of $2.8 million, or 7.0%, is due to a reduction in the
earnings from sales of uncontracted capacity as new PPAs have become effective.
The decrease in year-to-date 2004 earnings of $55.6 million, or 39.0%, is
primarily attributed to a one-time gain of $50 million recognized in May 2003
upon termination of PPAs with Dynegy, as well as the reduction in earnings from
sales of uncontracted capacity. 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 MW: 600 MW 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)Third Quarter
    
    Year-To-Date(in thousands)
    
    %
    
    (in thousands)
    
    %Sales for resale  non-affiliates
    
    $
    (34,834
    )
    
    
    (37.4
    )
    
    $
    5,631
    
    
    
    2.6Sale for resale  affiliates
    
    
    15,853
    
    
    
    14.1
    
    
    
    68,497
    
    
    
    27.0Fuel expense
    
    
    (13,980
    )
    
    
    (28.3
    )
    
    
    5,117
    
    
    
    4.9Purchased power  non-affiliates
    
    
    (1,702
    )
    
    
    (9.3
    )
    
    
    6,156
    
    
    
    12.3Purchased power  affiliates
    
    
    (18,700
    )
    
    
    (43.1
    )
    
    
    2,680
    
    
    
    2.9Other operations expense
    
    
    1,557
    
    
    
    12.6
    
    
    
    11,576
    
    
    
    37.8Maintenance expense
    
    
    1,178
    
    
    
    52.3
    
    
    
    6,117
    
    
    
    129.2Depreciation and amortization
    
    
    1,155
    
    
    
    9.9
    
    
    
    12,123
    
    
    
    46.2Taxes other than income taxes
    
    
    (446
    )
    
    
    (14.2
    )
    
    
    1,588
    
    
    
    24.4Interest expense, net of amounts
capitalized
    
    
    4,995
    
    
    
    36.8
    
    
    
    27,561
    
    
    
    153.7Other income (expense), net
    
    
    1,127
    
    
    
    87.5
    
    
    
    2,762
    
    
    
    238.3Income taxes
    
    
    10,204
    
    
    
    78.5
    
    
    
    (21,942
    )
    
    
    (28.4
    )
 Sales for resale  non-affiliates. The decrease in non-affiliate sales for
the third quarter 2004 relative to the same period in 2003 resulted from the
inception of Georgia Powers PPA for all the capacity of Plant Harris Unit 2 in
June 2004; this capacity was therefore no longer available for non-affiliate
sales. Year-to-date 2004 revenues from sales for resale to non-affiliates were
higher when compared to the corresponding period in 2003. This increase was
primarily due to additional wholesale capacity and energy sales to
non-affiliates as a result of commercial operation of Plant Stanton A in
October 2003. 107




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SOUTHERN POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION Sales for resale  affiliates.During the third quarter 2004, sales for
resale to affiliates increased as compared to the same period in 2003 primarily
due to energy and capacity sales to Georgia Power that commenced in June 2004
for Plant Harris Unit 2. For year-to-date 2004, revenues under this PPA, as
well as a full nine months of revenues in 2004 for PPAs at Plant Harris Unit 1
and Plant Franklin Units 1 and 2 that began in June 2003 with both Alabama
Power and Georgia Power, contributed to the increase. 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. Fuel expense. Fuel expense for the third quarter 2004 decreased when
compared to third quarter 2003 primarily as a result of the Plant Harris Unit 2
PPA with Georgia Power, under which Georgia Power assumes fuel responsibility.
Year-to-date 2004 fuel expense increased when compared to the same period in
2003 largely due to increased gas transportation expenses associated with Plant
Harris Unit 2 prior to its commitment under the Georgia Power PPA.
Significantly lower offsetting hedge gains in 2004 also contributed to the
year-to-date increase. 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. For third quarter 2004, the decrease
in purchased power  non-affiliates when compared to the same period in 2003
is the result of lower demand due to milder weather and the availability of
lower priced energy from affiliates or self generation. The year-to-date 2004
increase over the same period in 2003 is attributable to the increase in lower
priced energy available from contracts with Georgia electric membership
corporations and North Carolina municipalities. Purchased power  affiliates. The decrease in purchased power from
affiliates during the third quarter 2004 compared to the same period in the
prior year is the result of lower demand due to the milder weather and lower
relative cost of Southern Powers self generation. Expenses from purchased
power transactions will vary depending on demand, availability and the cost of
generating. Other operations and maintenance expenses.For the third quarter and
year-to-date 2004, other operations and maintenance expenses 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 reasons for the increases in depreciation
and amortization in the third quarter and year-to-date 2004 as compared to the
corresponding periods in the prior year. Taxes other than income taxes.During the third quarter 2004, taxes other
than income taxes decreased from the same period in 2003 due to lower property
tax rates resulting from a favorable settlement in the fourth quarter of 2003.
Year-to-date 2004 taxes other than income taxes increased over 2003 as a result
of the increased property tax base in October 2003 when Plant Stanton A entered
service. Interest expense, net of amounts capitalized.In the third 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 108




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SOUTHERN POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION regarding the transfer of the Plant McIntosh Units 10 and 11 construction
project to Georgia Power and Savannah Electric on May 24, 2004. In August
2004, Southern Power completed limited construction activities at the Plant
Franklin Unit 3 to preserve the long-term viability of the project and
indefinitely suspended further construction. Capitalized interest was stopped
effective with the suspension date. Other income (expense), net.During the third quarter and year-to-date
2004, other income (expense), net increased due to gains on gas and electric
hedge positions, both realized and unrealized, and as a result of a state
taxable gain on the sale of Plant McIntosh Units 10 and 11 construction project
to Georgia Power and Savannah Electric. Income taxes.The increase in income taxes for the third quarter 2004 are
a direct result of the change in income items discussed above. The decrease in
income taxes year-to-date 2004 corresponds to the decrease in pre-tax earnings
due to the Dynegy settlement recorded in the second quarter of 2003. 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 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 requires
utilities to submit 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. 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 submitted the required analyses on August 9, 2004.
In that filing, Southern Company passed the pivotal supplier analysis for all
markets and the wholesale market share analysis for all markets except the
Southern Company control area. Southern Company also submitted other analyses
to demonstrate that it lacks generation market power. This filing remains
pending at the FERC. Southern Company, along with other utilities, has also
filed an appeal of the FERCs April 14, 2004 order with the Circuit Court of
Appeals in Washington, D.C. In the event that the FERCs default mitigation measures are ultimately
applied, Southern Power may be required to charge cost-based rates
for certain wholesale sales,
which may be lower than negotiated market-based rates. The final 109




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SOUTHERN POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. 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. Power Sales Agreements On August 12, 2004, Southern Power entered into two PPAs with Florida Power &
Light (FP&L). Under the agreements, Southern Power will provide FP&L with a
total of 790 megawatts of capacity annually from Plant Harris Unit 1 and Plant
Franklin Unit 1 for the period from June 2010 through December 2015. The PPAs
provide for fixed capacity payments and variable energy payments based on
actual energy delivered. Additionally, FP&L will make payments for firm gas
transportation. These contracts are contingent upon certain events, including
approval of the Florida PSC. The final outcome of this matter cannot now be
determined. Southern Power executed on August 26, 2004 multiple agreements with a new
full-requirements customer. For the years 2005-2009, Southern Power will sell
approximately 130 megawatts of additional wholesale capacity from existing
resources to Flint Energies, a cooperative located in Reynolds, Georgia. 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. 110




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SOUTHERN POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 PPAs with
Georgia Power for the remaining 200 MW of uncontracted capacity at Plant
Franklin Unit 2 and 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. Other Construction Projects In October 2004, a partnership between Southern Company and the Orlando
Utilities Commission (OUC) was selected by the U.S. Department of Energy (DOE)
to build and operate a 285 MW coal-gasification facility. The facility will be
located at OUCs Stanton Energy Center near Orlando, Florida, site of the
existing gas-fired 630 MW Stanton A unit co-owned by Southern Power, OUC and
others. Southern Power will own and operate the Southern Company portion of the
project. The project will demonstrate a coal gasification technology that has
been under development, in partnership with the DOE, at Southern Companys
power systems development facility near Birmingham, Alabama. The project is
scheduled to begin commercial operation in early 2010, with a projected total
cost of $557 million. The DOE will contribute approximately $235 million of the
cost. In August 2004, Southern Power completed limited construction activities
on Plant Franklin Unit 3 to preserve the long-term viability of the project and
indefinitely suspended further construction. Final completion is not
anticipated 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. Other Matters On October 22, 2004, President Bush signed the American Jobs Creation Act of
2004 (Jobs Act) into law. The Jobs Act represents the most significant
revision to the Internal Revenue Code since 1986. Congress must still develop
the regulations that will implement the requirements of the Jobs Act. Southern
Power is currently assessing the impact of the Jobs Act on its taxable income.
However, Southern Power currently does not expect the Jobs Act to have a
material impact on its financial statements. 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 111




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SOUTHERN POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. 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 nine
months of 2004 was the sale of the Plant McIntosh Units 10 and 11 combined
cycle construction project to Georgia Power and Savannah Electric at a final
book cost of $415 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, returned $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. In September 2004, Southern Power declared and paid $75
million in additional dividends to Southern Company, bringing the
dividends paid out of retained earnings to $187 million. 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 have eliminated the current need for short-term borrowings
under the commercial paper program. The projected construction program will
decrease by $202 million and $41 million in 2004 and 2005, respectively, for
the Plant McIntosh combined cycle construction project as a result of the sale
of the project. 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 112




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SOUTHERN POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION has been to refinance most of such short-term borrowings with long-term
securities following commercial operation of the generating facilities. At
September 30, 2004, there was no commercial paper outstanding. 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
September 30, 2004 $19.3 million in cash and equivalents and $325 million of an
unused committed credit arrangement with banks expiring in 2006. Reflecting the
change in Southern Powers future construction needs following the sale of the
McIntosh construction project, the committed credit arrangement was reduced
from $650 million to $325 million. 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 facilities and for general corporate purposes,
subject to borrowing limitations for each generating facility. The
arrangements permit Southern Power to fund construction of future generating
facilities upon meeting certain requirements. Southern Power expects to renew
its credit facility, as needed, prior to expiration. Credit Rating Risk Southern Power does not have any credit arrangements that would require
material changes in payment schedules or terminations as a result of a credit
rating downgrade. There are 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 September 30, 2004, the maximum
potential collateral requirements were approximately $179 million. Southern Power is also party to certain derivative agreements that could
require collateral and/or accelerated payment in the event of a credit rating
change to below investment grade. These agreements are primarily for natural
gas price risk management activities. At September 30, 2004, Southern Power
had no material exposure related to these agreements. Market Price Risk Southern Powers market risk exposures relative to interest rate changes have
not changed materially compared with the December 31, 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. 113




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SOUTHERN POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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
September 30, 2004 were as follows: Third Quarter2004
    
    Year-to-DateChanges
    
    ChangesFair Value(in thousands)Contracts beginning of period
    
    $
    (39
    )
    
    $
    665Contracts realized or settled
    
    
    (23
    )
    
    
    (522
    )New contracts at inception
    
    
    
    
    
    
    Changes in valuation techniques
    
    
    
    
    
    
    Current period changes (a)
    
    
    9
    
    
    
    (196
    )Contracts at September 30, 2004
    
    $
    (53
    )
    
    $
    (53
    )
  (a)
    
    Current period changes also include the changes in fair value of new
contracts entered into during the period. Source of September 30, 2004Valuation PricesTotal
    
    MaturityFair Value
    
    Year 1
    
    1-3 Years(in thousands)Actively quoted
    
    $
    32
    
    
    $
    32
    
    
    $
    External sources
    
    
    (85
    )
    
    
    (85
    )
    
    
    Models and other methods
    
    
    
    
    
    
    
    
    
    
    Contracts at September 30, 2004
    
    $
    (53
    )
    
    $
    (53
    )
    
    $
    
 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. 114




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NOTES TO THE CONDENSED
FINANCIAL STATEMENTSFOR
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, N, O, PAlabama Power
    
    A, B, C, D, F, G, MGeorgia Power
    
    A, B, C, D, F, G, I, JGulf Power
    
    A, B, C, D, F, G, OMississippi Power
    
    A, B, C, D, F, G, KSavannah Electric
    
    A, B, C, D, F, G, J, LSouthern Power
    
    A, B, F, J
 115




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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 September 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 had been effectively
stayed pending this final resolution of the TVA case. On June 16, 2004,
the U.S. District Court for the Northern District of Alabama lifted the
stay of the New Source Review litigation against Alabama Power, 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 adverse outcome in any one of these cases could require substantial
capital expenditures and could possibly require payment of substantial
penalties that cannot be determined at this time. 116




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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  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. Southern Company has produced documents in response to requests
by Mirants bankruptcy counsel and is fully cooperating in the
investigation. The final outcome of these matters cannot now be
determined.See Note 3 to the financial statements of Southern Company under Mirant
Bankruptcy and Note 5 to the financial statements of Southern Company in
Item 8 of the Form 10-K and Note (N) herein for 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, 117




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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  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
requires utilities to submit 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.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 submitted the
required analyses on August 9, 2004. In that filing, Southern Company
passed the pivotal supplier analysis for all markets and the
wholesale market share analysis for all markets except the Southern
Company control area. Southern Company also submitted other analyses
to demonstrate that it lacks generation market power. This filing
remains pending at the FERC. Southern Company, along with other
utilities, has also filed an appeal of the FERCs April 14, 2004
order with the Circuit Court of Appeals in Washington, D.C. In the
event that the FERCs default mitigation measures are ultimately
applied, Southern Power and the retail operating companies may be
required to charge cost-based rates for certain wholesale sales, 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, a lease-in lease-out
(LILO) transaction. The original adjustment of $30 million included
approximately $6.5 million of interest. Recently several taxpayers have
reached settlements with the IRS 118




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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  related to LILO transactions. Southern Company has recently submitted the
issue to the IRS appeals division with a request for an accelerated
review, which could result in a settlement. If Southern Company is unable
to resolve the issue in the IRS appeals division, Southern Company will
continue to pursue litigation. 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). 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
additional interest charges of up to $24 million. Additionally, although
the payment of the tax liability, exclusive of this interest, would not
affect Southern Companys results of operations, it could have a material
impact on cash flow. See Note 1 to the financial statements of Southern
Company under Leveraged Leases in Item 8 of the Form 10-K for additional
details of the deferred taxes related to these transactions. The ultimate
outcome of these matters cannot now be determined.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
    
    09/30/04(in millions)Alabama Power
    
    $
    359
    
    
    $
    
    
    
    $
    
    
    
    $
    18
    
    
    $
    
    
    
    $
    377Georgia Power
    
    
    476
    
    
    
    
    
    
    
    (2
    )
    
    
    23
    
    
    
    
    
    
    
    497Gulf Power
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    6Mississippi Power
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    1
    
    
    
    5Savannah Electric
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Southern Company
    
    $
    845
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    44
    
    
    $
    2
    
    
    $
    889
  (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 119




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NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  trusts to Southern Company and the retail operating companies are
reflected as Long-term Debt Payable to Affiliated Trusts on the
accompanying Condensed Balance Sheets.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 September 30, 2004, Southern Companys
investment totaled $26.3 million. During the third quarter of 2004,
Southern Company terminated new investments in this fund; however,
additional contributions to existing investments will still occur.
Southern Company has committed to a maximum investment of $50 million. The
assets of the venture capital fund are included in Cash and Other
Investments on the accompanying Condensed Balance Sheets.(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 nine-month periods ending September 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
    
    Nine
    
    NineMonths
    
    Months
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended
    
    EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Interest rate
    
    
    3.8
    %
    
    
    3.1
    %
    
    
    3.1
    %
    
    
    2.7
    %Average expected life of stock options (in
years)
    
    
    5.0
    
    
    
    4.3
    
    
    
    5.0
    
    
    
    4.3Expected volatility of common stock
    
    
    19.0
    %
    
    
    21.7
    %
    
    
    19.6
    %
    
    
    23.6
    %Expected annual dividends on common stock
    
    $
    1.43
    
    
    $
    1.40
    
    
    $
    1.40
    
    
    $
    1.37Weighted average fair value of stock
options granted
    
    $
    3.34
    
    
    $
    3.38
    
    
    $
    3.29
    
    
    $
    3.59
 120




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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 September 30, 2004Net income (in millions)
    
    $
    644
    
    
    $
    641Earnings per share (dollars):Basic
    
    $
    0.87
    
    
    $
    0.87Diluted
    
    $
    0.87
    
    
    $
    0.87Three Months Ended September 30, 2003Net income (in millions)
    
    $
    619
    
    
    $
    614Earnings per share (dollars):Basic
    
    $
    0.85
    
    
    $
    0.84Diluted
    
    $
    0.84
    
    
    $
    0.83Nine Months Ended September 30, 2004Net income (in millions)
    
    $
    1,328
    
    
    $
    1,315Earnings per share (dollars):Basic
    
    $
    1.80
    
    
    $
    1.78Diluted
    
    $
    1.79
    
    
    $
    1.77Nine Months Ended September 30, 2003Net income (in millions)
    
    $
    1,349
    
    
    $
    1,336Earnings per share (dollars):Basic
    
    $
    1.86
    
    
    $
    1.84Diluted
    
    $
    1.85
    
    
    $
    1.83
  Diluted Earnings Per Share Three Months
    
    Three Months
    
    Nine Months
    
    Nine MonthsEnded
    
    Ended
    
    Ended
    
    Ended(in thousands)
    
    September 30,
    
    September 30,
    
    September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003As reported shares
    
    
    739,345
    
    
    
    729,816
    
    
    
    738,056
    
    
    
    724,462Effect of options
    
    
    4,350
    
    
    
    5,039
    
    
    
    4,215
    
    
    
    5,208Diluted shares
    
    
    743,695
    
    
    
    734,855
    
    
    
    742,271
    
    
    
    729,670
  (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 September 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
    
    $
    58,261
    
    
    $
    22,488
    
    
    $
    15,367
    
    
    $
    6,198
    
    
    $
    11,962
    
    
    $
    2,246
    
    
    $
    Other comprehensive income
(loss)
    
    
    (201
    )
    
    
    (322
    )
    
    
    
    
    
    
    
    
    
    
    (2,144
    )
    
    
    
    
    
    
    (73
    )Net income
    
    
    (1,974
    )
    
    
    22
    
    
    
    27
    
    
    
    4
    
    
    
    5
    
    
    
    (21
    )
    
    
    20Total fair value
    
    $
    56,086
    
    
    $
    22,188
    
    
    $
    15,394
    
    
    $
    6,202
    
    
    $
    9,823
    
    
    $
    2,225
    
    
    $
    (53
    )
 121




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##### Table of Contents



NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  For the three months and nine months ended September 30, 2004 and 2003,
the amounts recognized in income for derivative energy contracts that are
not hedges, for Southern Company, Alabama Power, Georgia Power, Gulf
Power, Mississippi Power, Savannah Electric and Southern Power were
immaterial.In addition, the pre-tax gains that will be reclassified from Other
Comprehensive Income to Fuel Expense by Southern Company for the twelve
month period ended September 30, 2005 are immaterial.At September 30, 2004, Southern Company had $3.2 billion notional amount
of interest rate swaps outstanding with net fair value gains of $13.9
million as follows:Fair Value Hedges Fair Value Gain (Loss)Notional
    
    Fixed Rate
    
    Variable
    
    Maturity
    
    September 30, 2004Amount
    
    Received
    
    Rate Paid
    
    Date
    
    (in millions)Southern Company
    
    $400 million
    
    
    5.3
    %
    
    6-month LIBOR (in
arrears)
less 0.103%
    
    February 2007
    
    $
    19.3Southern Company
    
    $40 million
    
    
    7.625
    %
    
    6-month LIBOR (in
arrears) plus
2.9225%
    
    December 2009
    
    $
    1.5
  Cash Flow Hedges Weighted
    
    
    
    Fair ValueVariable
    
    Average
    
    
    
    Gain (Loss)Notional
    
    Rate
    
    Fixed Rate
    
    Maturity
    
    September 30, 2004Amount
    
    Received
    
    Paid
    
    Date
    
    (in millions)Alabama Power
    
    $536 million
    
    BMA Index
    
    
    2.007
    %
    
    January 2007
    
    $
    2.9Alabama Power
    
    $195 million
    
    3-month LIBOR
    
    
    1.89
    %
    
    April 2006
    
    $
    2.3Alabama Power
    
    $250 million
    
    3-month LIBOR
    
    
    5.676
    %
    
    March 2035
    
    $
    (13.6
    )Alabama Power
    
    $220 million
    
    3-month LIBOR
    
    
    3.4145
    %
    
    November 2007
    
    $
    (0.4
    )Georgia Power
    
    $250 million
    
    3-month LIBOR plus
0.125%
    
    
    1.96
    %
    
    February 2005
    
    $
    0.2Georgia Power
    
    $50 million
    
    3-month LIBOR plus
0.10%
    
    
    1.5625
    %
    
    January 2005
    
    $
    0.1Georgia Power
    
    $873 million
    
    BMA Index
    
    
    1.3878
    %
    
    December 2004
    
    $
    0.7Georgia Power
    
    $250 million
    
    3-month LIBOR
    
    
    4.6629
    %
    
    February 2015
    
    $
    1.2Georgia Power
    
    $100 million
    
    3-month LIBOR
    
    
    5.029
    %
    
    December 2015
    
    $
    (0.3
    )Savannah Electric
    
    $20 million
    
    3-month LIBOR plus
0.375%
    
    
    2.055
    %
    
    December 2004
    
    $
    0.0
 122




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##### Table of Contents



NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  For the twelve month period ended September 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
    
    $
    (4.7
    )Georgia Power
    
    
    (2.7
    )Gulf Power
    
    
    (0.3
    )Savannah Electric
    
    
    (0.1
    )Southern Power
    
    
    (11.0
    )Southern Company
    
    $
    (18.8
    )
  (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
nine-month periods ending September 30, 2004 and 2003 are as follows: Southern
    
    Alabama
    
    Georgia
    
    Gulf
    
    Mississippi
    
    SavannahPENSION PLANS (in millions)
    
    Company
    
    Power
    
    Power
    
    Power
    
    Power
    
    ElectricThree Months Ended
September 30, 2004Service cost
    
    $
    32
    
    
    $
    8
    
    
    $
    10
    
    
    $
    1
    
    
    $
    2
    
    
    $
    1Interest cost
    
    
    67
    
    
    
    18
    
    
    
    25
    
    
    
    3
    
    
    
    3
    
    
    
    1Expected return on plan assets
    
    
    (114
    )
    
    
    (34
    )
    
    
    (45
    )
    
    
    (5
    )
    
    
    (5
    )
    
    
    (1
    )Recognized net gain
    
    
    (3
    )
    
    
    (1
    )
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    Net amortization
    
    
    5
    
    
    
    (1
    )
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Net cost (income)
    
    $
    (13
    )
    
    $
    (10
    )
    
    $
    (10
    )
    
    $
    (1
    )
    
    $
    
    
    
    $
    1Nine Months Ended
September 30, 2004Service cost
    
    $
    96
    
    
    $
    24
    
    
    $
    30
    
    
    $
    3
    
    
    $
    6
    
    
    $
    3Interest cost
    
    
    203
    
    
    
    54
    
    
    
    77
    
    
    
    9
    
    
    
    9
    
    
    
    3Expected return on plan assets
    
    
    (340
    )
    
    
    (104
    )
    
    
    (135
    )
    
    
    (15
    )
    
    
    (15
    )
    
    
    (3
    )Recognized net gain
    
    
    (5
    )
    
    
    (3
    )
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    Net amortization
    
    
    13
    
    
    
    1
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    Net cost (income)
    
    $
    (33
    )
    
    $
    (28
    )
    
    $
    (26
    )
    
    $
    (3
    )
    
    $
    
    
    
    $
    3Three Months Ended
September 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
    )
    
    $
    
    
    
    $
    1Nine Months Ended
September 30, 2003Service cost
    
    $
    87
    
    
    $
    21
    
    
    $
    30
    
    
    $
    3
    
    
    $
    3
    
    
    $
    3Interest cost
    
    
    195
    
    
    
    51
    
    
    
    75
    
    
    
    9
    
    
    
    9
    
    
    
    3Expected return on plan assets
    
    
    (336
    )
    
    
    (105
    )
    
    
    (135
    )
    
    
    (15
    )
    
    
    (12
    )
    
    
    (3
    )Recognized net gain
    
    
    (33
    )
    
    
    (9
    )
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    Net amortization
    
    
    12
    
    
    
    3
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    Net cost (income)
    
    $
    (75
    )
    
    $
    (39
    )
    
    $
    (39
    )
    
    $
    (3
    )
    
    $
    
    
    
    $
    3
 123




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##### Table of Contents



NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) POSTRETIREMENT PLANS
    
    Southern
    
    Alabama
    
    Georgia
    
    Gulf
    
    Mississippi
    
    Savannah(in millions)
    
    Company
    
    Power
    
    Power
    
    Power
    
    Power
    
    ElectricThree Months Ended
September 30, 2004Service cost
    
    $
    7
    
    
    $
    2
    
    
    $
    3
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest cost
    
    
    21
    
    
    
    5
    
    
    
    9
    
    
    
    1
    
    
    
    1
    
    
    
    1Expected return on plan assets
    
    
    (13
    )
    
    
    (5
    )
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    Net amortization
    
    
    8
    
    
    
    3
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    Net cost (income)
    
    $
    23
    
    
    $
    5
    
    
    $
    9
    
    
    $
    1
    
    
    $
    1
    
    
    $
    1Nine Months Ended
September 30, 2004Service cost
    
    $
    21
    
    
    $
    6
    
    
    $
    7
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest cost
    
    
    69
    
    
    
    17
    
    
    
    31
    
    
    
    3
    
    
    
    3
    
    
    
    3Expected return on plan assets
    
    
    (37
    )
    
    
    (13
    )
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    Net amortization
    
    
    26
    
    
    
    7
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    Net cost (income)
    
    $
    79
    
    
    $
    17
    
    
    $
    33
    
    
    $
    3
    
    
    $
    3
    
    
    $
    3Three Months Ended
September 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
    
    
    $
    1Nine Months Ended
September 30, 2003Service cost
    
    $
    18
    
    
    $
    6
    
    
    $
    6
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest cost
    
    
    69
    
    
    
    18
    
    
    
    30
    
    
    
    3
    
    
    
    3
    
    
    
    3Expected return on plan assets
    
    
    (36
    )
    
    
    (12
    )
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    Net amortization
    
    
    24
    
    
    
    6
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    Net cost (income)
    
    $
    75
    
    
    $
    18
    
    
    $
    30
    
    
    $
    3
    
    
    $
    3
    
    
    $
    3
  In the third quarter 2004, Southern Company prospectively adopted FASB
Staff Position (FSP) 106-2, Accounting and Disclosure Requirements
related to the Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 (the Medicare Act). The Medicare Act provides a 28%
prescription drug subsidy for Medicare eligible retirees. FSP 106-2
requires recognition of the impacts of the Medicare Act in the accumulated
post-retirement benefit obligation (APBO) 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 elected to apply this
treatment prospectively. As shown in the following table (amounts in
millions), the effect of the subsidy reduced Southern Companys expenses
for the three months ended September 30, 2004 by approximately $5 million
and is expected to have a similar impact on future expenses. The subsidys
impact on the post-retirement medical plan APBO was a reduction of
approximately $182 million. However, the ultimate impact on future periods
is subject to federal regulations governing the subsidy created in the
Medicare Act which are being finalized. Expense
    
    APBOAlabama Power
    
    $
    (1.6
    )
    
    $
    (60.0
    )Georgia Power
    
    
    (2.3
    )
    
    
    (72.0
    )Gulf Power
    
    
    (0.2
    )
    
    
    (8.0
    )Mississippi Power
    
    
    (0.2
    )
    
    
    (8.0
    )Savannah Electric
    
    
    (0.1
    )
    
    
    (3.5
    )Southern Company
    
    $
    (5.0
    )
    
    $
    (182.0
    )
 124




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##### Table of Contents



NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  (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 initial
investment in the leveraged lease was 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.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. Hearings on Georgia Powers filed testimony were held in
September 2004. In direct testimony filed on October 14, 2004, the Georgia
PSC staff proposed certain adjustments to Georgia Powers general rate
case filing that indicate a $57 million revenue surplus. Georgia Power
disagrees with a majority of the staffs proposed adjustments. The
hearings on the staff testimony were held in October 2004. Georgia Power
plans to file rebuttal testimony in November 2004 with hearings on that
testimony being held in the same month. 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 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.(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 125




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##### Table of Contents



NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  information showing that the book cost of the McIntosh construction
project is lower than its market value. In direct testimony filed on
October 14, 2004 the Georgia PSC staff proposed a different valuation that
shows the market value for the Plant McIntosh construction project is less
than book value. Georgia Power and Savannah Electric disagree with the
proposed valuation methodology. However, full recovery of the project
costs depends on the outcome of the Georgia PSCs review. The Georgia PSC
is expected to issue a final order in this matter in December 2004. 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 September 30, 2004, the investment in the McIntosh
construction project totaled approximately $381.1 million and $74.2
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 reclassify 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,
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 1 to the financial statements of Mississippi Power under
Provision for Property Damage in Item 8 of the Form 10-K. As a result of
the restoration costs associated with Hurricane Ivan, an estimated amount
of $7.6 million has been charged to the provision for property damage in
September 2004, leaving a balance in the reserve of $0.3 million.(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 24 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 were recorded as construction work in progress
in June 2004 and were to 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 September 30, 2004
is approximately $14.5 million. On October 25, 126




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##### Table of Contents



NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  2004, the Georgia PSC approved Savannah Electrics request, with no
significant modifications. The approved increase will allow for the
recovery of approximately $161 million in fuel costs, which includes an
estimate of future fuel costs over the next 12 months and recovery of the
existing under recovered fuel balance over the next 24 months. The
approved fuel rate increase also includes the recovery of approximately
$3.5 million in costs associated with the coal transloader to be amortized
over a 21-month period, which the Georgia PSC had denied in June 2004. The
new rates will become effective in November 2004.(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.
On October 5, 2004, the Alabama PSC voted to approve the rate mechanism
as filed. The rate mechanism will begin operation in January 2005 and
provide for the recovery of these costs pursuant to a factor that will
be calculated annually. Environmental costs to be recovered would
include (1) applicable operation and maintenance expenses, (2)
depreciation and a return on invested capital beginning with 2005
investments and (3) a true up of prior period over/under recovery
amounts. It is anticipated that for the first two years of the increase,
retail rates will increase by approximately 1% ($33 million) in 2005 and
approximately an additional 1% ($30 million) in 2006. In conjunction
with the Alabama PSCs approval, Alabama Power agreed to a moratorium
until March 2007 on any retail rate increase under the previously
approved Rate Stabilization and Equalization Plan. Any increase in March
2007 would be based upon the earned return on retail common equity at
December 31, 2006. See Note 3 to the financial statements of Southern
Company under Retail Rate Adjustment Procedures and of Alabama Power
under Alabama Power Retail Rate Adjustment Procedures in Item 8 of the
Form 10-K for further information on the Rate Stabilization and
Equalization Plan.In a separate action, on October 19, 2004, Alabama Power received approval
from the Alabama PSC to record its hurricane related operation and
maintenance expenses in the natural disaster reserve, thereby deferring
the approximately $41 million negative balance at September 30, 2004, for
recovery in future periods in a manner which minimizes the impact on
customers. This asset is included in Other Regulatory Assets in the
accompanying Condensed Balance Sheet. See Note 1 to the financial statements of
Alabama Power under Natural Disaster Reserve in Item 8 of the Form 10-K
for additional information.(N)
    
    See Note 7 to the financial statements of Southern Company under
Guarantees in Item 8 of the Form 10-K for information regarding
guarantees made to certain counterparties regarding performance of
contractual commitments by Mirants trading and marketing subsidiaries.
During the third quarter of 2004, Mirant rejected in bankruptcy, and the
bankruptcy court approved the rejection, of two contracts covered by
Southern Company guarantees. As a result, in September 2004, Southern
Company recorded reserves for its estimated exposure under these
guarantees, which are included in other income and (expense) on the
accompanying Consolidated Statements of Income and are not material. In
October 2004, Southern Company paid approximately $1.1 million to
extinguish all further liabilities under one of these guarantees, which
had a notional amount of $5 million. Therefore, the total notional
amount of guarantees remaining outstanding at October 31, 2004 was less
than $25 million, of which $8 million will expire on December 31, 2004
and the remaining guarantees will expire by 2009.(O)
    
    See Note 3 to the financial statements of Gulf Power under
Environmental Cost Recovery in Item 8 of the Form 10-K. In September
2004, Gulf Power increased its liability and related regulatory asset
for the estimated costs of environmental remediation projects to by $47
million to $59.8 million. This increase relates to new regulations and
stricter site closure criteria by the Florida Department of
Environmental Protection (FDEP) for soil and groundwater contamination from
herbicide applications. The schedule for completion of these remediation
projects will be subject to FDEP approval. 127




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##### Table of Contents



NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)  See Note 1 to the financial statements of Gulf Power under Provision for
Property Damage in Item 8 of the Form 10-K. As a result of the
restoration costs associated with Hurricane Ivan, an estimated amount of
$75.5 million has been charged to the provision for property damage in
September 2004, which exceeded the existing balance. The $47.5 million
balance is included in Other Regulatory Assets in the accompanying
Condensed Balance Sheet as of September 30, 2004.(P)
    
    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
    
    Southern
    
    
    
    
    
    
    
    
    
    All
    
    ReconcilingCompanies
    
    Power
    
    Eliminations
    
    Total
    
    Other
    
    Eliminations
    
    Consolidated(in millions)Three Months Ended September 30,
2004:Operating revenues
    
    $
    3,322
    
    
    $
    189
    
    
    $
    (153
    )
    
    $
    3,358
    
    
    $
    110
    
    
    $
    (27
    )
    
    $
    3,441Segment net income (loss)
    
    
    591
    
    
    
    37
    
    
    
    
    
    
    
    628
    
    
    
    16
    
    
    
    
    
    
    
    644Nine Months Ended September 30,
2004:Operating revenues
    
    
    8,733
    
    
    
    547
    
    
    
    (418
    )
    
    
    8,862
    
    
    
    402
    
    
    
    (82
    )
    
    
    9,182Segment net income (loss)
    
    
    1,171
    
    
    
    87
    
    
    
    
    
    
    
    1,258
    
    
    
    70
    
    
    
    (1
    )
    
    
    1,327Total assets at September 30, 2004
    
    $
    33,093
    
    
    $
    2,105
    
    
    $
    (165
    )
    
    $
    35,033
    
    
    $
    1,951
    
    
    $
    (486
    )
    
    $
    36,498Three Months Ended September 30,
2003:Operating revenues
    
    $
    3,172
    
    
    $
    208
    
    
    $
    (156
    )
    
    $
    3,224
    
    
    $
    100
    
    
    $
    (23
    )
    
    $
    3,301Segment net income (loss)
    
    
    562
    
    
    
    41
    
    
    
    
    
    
    
    603
    
    
    
    16
    
    
    
    
    
    
    
    619Nine Months Ended September 30,
2003:Operating revenues
    
    
    8,144
    
    
    
    554
    
    
    
    (347
    )
    
    
    8,351
    
    
    
    376
    
    
    
    (61
    )
    
    
    8,666Segment net income (loss)
    
    
    1,170
    
    
    
    143
    
    
    
    
    
    
    
    1,313
    
    
    
    36
    
    
    
    
    
    
    
    1,349Total assets at December 31, 2003
    
    $
    31,405
    
    
    $
    2,409
    
    
    $
    (122
    )
    
    $
    33,692
    
    
    $
    1,671
    
    
    $
    (325
    )
    
    $
    35,038
  Products and Services Electric Utilities RevenuesPeriod
    
    Retail
    
    Wholesale
    
    Other
    
    Total(in millions)Three Months Ended September 30, 2004
    
    $
    2,915
    
    
    $
    343
    
    
    $
    100
    
    
    $
    3,358Three Months Ended September 30, 2003
    
    
    2,757
    
    
    
    376
    
    
    
    91
    
    
    
    3,224Nine Months Ended September 30, 2004
    
    
    7,537
    
    
    
    1,038
    
    
    
    287
    
    
    
    8,862Nine Months Ended September 30, 2003
    
    
    6,907
    
    
    
    1,034
    
    
    
    410
    
    
    
    8,351
 128




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##### Table of Contents



PART II- OTHER INFORMATION 
 Item 1.       Legal Proceedings.  See the Notes to the Condensed Financial Statements herein
for information regarding certain legal and administrative
proceedings in which Southern Company and its reporting
subsidiaries are involved. 
 Item 6.       Exhibits.  (10)
    
    Material Contracts Southern Company(a)1
    
    -
    
    Form Award Agreement setting forth terms of nonqualified stock option grants, made under the Southern Company
Omnibus Incentive Compensation Plan as Amended and Restated effective May 23, 2001, to employees of The
Southern Company and its subsidiaries.Alabama Power(b)1
    
    -
    
    Form Award Agreement setting forth terms of nonqualified stock option grants, made under the Southern Company
Omnibus Incentive Compensation Plan as Amended and Restated effective May 23, 2001, to employees of The
Southern Company and its subsidiaries. (See Exhibit 10(a)1 herein)Georgia Power(c)1
    
    -
    
    Form Award Agreement setting forth terms of nonqualified stock option grants, made under the Southern Company
Omnibus Incentive Compensation Plan as Amended and Restated effective May 23, 2001, to employees of The
Southern Company and its subsidiaries. (See Exhibit 10(a)1 herein)Gulf Power(d)1
    
    -
    
    Form Award Agreement setting forth terms of nonqualified stock option grants, made under the Southern Company
Omnibus Incentive Compensation Plan as Amended and Restated effective May 23, 2001, to employees of The
Southern Company and its subsidiaries. (See Exhibit 10(a)1 herein)Mississippi Power(e)1
    
    -
    
    Form Award Agreement setting forth terms of nonqualified stock option grants, made under the Southern Company
Omnibus Incentive Compensation Plan as Amended and Restated effective May 23, 2001, to employees of The
Southern Company and its subsidiaries. (See Exhibit 10(a)1 herein)(e)2
    
    -
    
    Separation Agreement between Mississippi Power and Don E. Mason dated July 26, 2004.
 129




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##### Table of Contents



Item 6.       Exhibits.  (10)
    
    Material Contracts (continued) Savannah Electric(f)1
    
    -
    
    Form Award Agreement setting forth terms of nonqualified stock option grants, made under the Southern Company
Omnibus Incentive Compensation Plan as Amended and Restated effective May 23, 2001, to employees of The
Southern Company and its subsidiaries. (See Exhibit 10(a)1 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.)
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Item 6.       Exhibits. (24)
    
    Power of Attorney and Resolutions (continued)Southern Power(g)1
    
    -
    
    Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 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.(d)2
    
    -
    
    Certificate of Gulf Powers Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of
2002.
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Item 6.       Exhibits. (31)
    
    Section 302 Certifications (continued)Mississippi Power(e)1
    
    -
    
    Certificate of Mississippi Powers Chief Executive Officer required by Section 302 of the Sarbanes-Oxley
Act of 2002.(e)2
    
    -
    
    Certificate of Mississippi Powers Chief Financial Officer required by Section 302 of the Sarbanes-Oxley
Act of 2002.Savannah Electric(f)1
    
    -
    
    Certificate of Savannah Electrics Chief Executive Officer required by Section 302 of the Sarbanes-Oxley
Act of 2002.(f)2
    
    -
    
    Certificate of Savannah Electrics Chief Financial Officer required by Section 302 of the Sarbanes-Oxley
Act of 2002.Southern Power(g)1
    
    -
    
    Certificate of Southern Powers Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act
of 2002.(g)2
    
    -
    
    Certificate of Southern Powers Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act
of 2002.(32)
    
    Section 906 CertificationsSouthern Company(a)
    
    -
    
    Certificate of Southern Companys Chief Executive Officer and Chief Financial Officer required by Section 906 of
the Sarbanes-Oxley Act of 2002.Alabama Power(b)
    
    -
    
    Certificate of Alabama Powers Chief Executive Officer and Chief Financial Officer required by Section 906 of the
Sarbanes-Oxley Act of 2002.Georgia Power(c)
    
    -
    
    Certificate of Georgia Powers Chief Executive Officer and Chief Financial Officer required by Section 906 of the
Sarbanes-Oxley Act of 2002.Gulf Power(d)
    
    -
    
    Certificate of Gulf Powers Chief Executive Officer and Chief Financial Officer required by Section 906 of the
Sarbanes-Oxley Act of 2002.
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Item 6.       Exhibits. (32)
    
    Section 906 Certifications (continued)Mississippi Power(e)
    
    -
    
    Certificate of Mississippi Powers Chief Executive Officer and Chief Financial Officer required by Section 906 of
the Sarbanes-Oxley Act of 2002.Savannah Electric(f)
    
    -
    
    Certificate of Savannah Electrics Chief Executive Officer and Chief Financial Officer required by Section 906 of
the Sarbanes-Oxley Act of 2002.Southern Power(g)
    
    -
    
    Certificate of Southern Powers Chief Executive Officer and Chief Financial Officer required by Section 906 of the
Sarbanes-Oxley Act of 2002.
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THE SOUTHERN COMPANY 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned
company shall be deemed to relate only to matters having reference to such
company and any subsidiaries thereof. THE SOUTHERN COMPANYBy
    
    David M. RatcliffeChairman and Chief Executive Officer(Principal Executive Officer)By
    
    Thomas A. FanningExecutive Vice President, Chief Financial Officer and Treasurer(Principal Financial Officer)By
    
    /s/ Wayne Boston(Wayne Boston, Attorney-in-fact)Date: November 5, 2004
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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 Officer)By
    
    /s/ Wayne Boston(Wayne Boston, Attorney-in-fact)Date: November 5, 2004
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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, Treasurer and Assistant Secretary(Principal Financial Officer)By
    
    /s/ Wayne Boston(Wayne Boston, Attorney-in-fact)Date: November 5, 2004
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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: November 5, 2004
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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: November 5, 2004
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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: November 5, 2004
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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: November 5, 2004
 140