Document:

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                                                                    EXHIBIT 10.2

                                     FORM OF

                         TRANSITIONAL SERVICES AGREEMENT

                                     BETWEEN

                              THE SOUTHERN COMPANY

                                       AND

                              SOUTHERN ENERGY, INC.

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                                TABLE OF CONTENTS

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ARTICLE 1 DEFINITIONS.............................................................................................1
   1.1  Additional Services.......................................................................................1
   1.2  Ancillary Agreements......................................................................................1
   1.3  Claims....................................................................................................1
   1.4  Confidential Disclosure Agreement.........................................................................1
   1.5  Distribution Date.........................................................................................1
   1.6  Engineering and Technical Services........................................................................1
   1.7  Impracticable.............................................................................................1
   1.8  Master Separation And Distribution Agreement..............................................................1
   1.9  Separation Date...........................................................................................1
   1.10  Service(s)...............................................................................................2
   1.11  Subsidiary...............................................................................................2
   1.12  Warranty.................................................................................................2
ARTICLE 2 TRANSITION SERVICE SCHEDULES............................................................................2
ARTICLE 3 SERVICES................................................................................................2
   3.1  Services Generally........................................................................................2
   3.2  Service Parameters........................................................................................3
   3.3  Impracticability..........................................................................................3
   3.4  Additional Resources......................................................................................3
   3.5  Additional Services.......................................................................................3
   3.6  Further Obligations As To Services........................................................................3
   3.7  Service Representatives...................................................................................3
ARTICLE 4 TERM....................................................................................................4
ARTICLE 5 COMPENSATION............................................................................................4
   5.1  Charges For Services......................................................................................4
   5.2  Payment Terms.............................................................................................5
   5.3  Performance Under Ancillary Agreements....................................................................5
   5.4  Error Correction; True-Ups; Accounting....................................................................5
   5.5  Pricing Adjustments.......................................................................................5
ARTICLE 6 GENERAL OBLIGATIONS; STANDARD OF CARE...................................................................5
   6.1  Performance Metrics.......................................................................................5
   6.2  DISCLAIMER OF WARRANTIES..................................................................................5
   6.3  Performance Metrics: Southern Energy......................................................................6
   6.4  Transitional Nature Of Services; Changes..................................................................6
   6.5  Responsibility For Errors; Delays.........................................................................6
   6.6  Good Faith Cooperation; Consents..........................................................................6
ARTICLE 7 TERMINATION.............................................................................................7
   7.1  Early Termination.........................................................................................7
   7.2  Survival..................................................................................................7
ARTICLE 8 RELATIONSHIP BETWEEN THE PARTIES........................................................................7
ARTICLE 9 SUBCONTRACTORS..........................................................................................7
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<S>                                                                                                              <C>
ARTICLE 10 INTELLECTUAL PROPERTY..................................................................................8
ARTICLE 11 ENGINEERING AND TECHNICAL SERVICES.....................................................................8
   11.1  Engineering and Technical Services.......................................................................8
   11.2  Professional Responsibility Regarding Engineering and Technical Services.................................8
   11.3  Applicable Laws and Regulations..........................................................................9
   11.4  Insurance................................................................................................9
   11.5  Reuse of Documents.......................................................................................9
   11.6  Non-Restrictive Relationship.............................................................................9
ARTICLE 12 CONFIDENTIALITY........................................................................................9
ARTICLE 13 LIMITATION OF LIABILITY...............................................................................10
ARTICLE 14 FORCE MAJEURE.........................................................................................10
ARTICLE 15 DISPUTE RESOLUTION....................................................................................10
   15.1  Mediation...............................................................................................10
   15.2  Arbitration.............................................................................................11
   15.3  Court Action............................................................................................11
   15.4  Continuity Of Service And Performance...................................................................11
ARTICLE 16 MISCELLANEOUS.........................................................................................11
   16.1  Entire Agreement........................................................................................11
   16.2  Existing Services Agreements............................................................................11
   16.3  Governing Law...........................................................................................11
   16.4  Descriptive Headings....................................................................................12
   16.5  Notices.................................................................................................12
   16.6  Nonassignability; Third-Party Beneficiaries.............................................................12
   16.7  Severability............................................................................................13
   16.8  Failure Or Indulgence Not Waiver; Remedies Cumulative...................................................13
   16.9  Amendment...............................................................................................13
</TABLE>

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                         TRANSITIONAL SERVICES AGREEMENT

     THIS TRANSITIONAL SERVICES AGREEMENT (the "Agreement") dated [________,
2000], between The Southern Company, a Delaware corporation ("Southern"),
having an office at 270 Peachtree Street, Atlanta, Georgia 30303 and Southern
Energy, Inc., a Delaware corporation ("Southern Energy"; Southern Energy and
Southern each being referenced herein individually as a "Party," and
collectively as the "Parties"), having an office at 900 Ashwood Parkway, Suite
500, Atlanta, Georgia 30338.

                                    ARTICLE 1
                                   DEFINITIONS

     For the purpose of this Agreement, the following capitalized terms shall
have the following meanings:

     1.1 Additional Services. "Additional Services" shall have the meaning set
forth in Section 3.5.

     1.2 Ancillary Agreements. "Ancillary Agreements" shall have the meaning set
forth in the Master Separation and Distribution Agreement.

     1.3 Claims. "Claims" shall have the meaning set forth in Section 11.6.2.

     1.4 Confidential Disclosure Agreement. "Master Confidential Disclosure
Agreement" shall mean that certain Master Confidential Disclosure Agreement
between Southern and Southern Energy.

     1.5 Distribution Date. "Distribution Date" shall have the meaning set forth
in the Master Separation and Distribution Agreement.

     1.6 Engineering and Technical Services. "Engineering and Technical
Services" shall have the meaning set forth in Section 11.1.

     1.7 Impracticable. "Impracticable" shall have the meaning set forth in
Section 3.3.

     1.8 Master Separation And Distribution Agreement. "Master Separation and
Distribution Agreement" shall mean that certain Master Separation and
Distribution Agreement between Southern and Southern Energy.

     1.9 Separation Date. Unless otherwise provided in this Agreement, or in any
agreement to be executed in connection with this Agreement, the effective time
and date of each action or agreement in connection with the Separation shall be
[12:01 a.m., Eastern Time, July 1, 2000] or such other date as may be fixed by
the Board of Directors of Southern (the "Separation Date").

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     1.10 Service(s). "Service(s)" shall have the meaning set forth in Section
3.1 and includes the Engineering and Technical Services.

     1.11 Subsidiary. "Subsidiary" of any Party means a corporation or other
organization whether incorporated or unincorporated of which at least a majority
of the securities or interests having by the terms thereof ordinary voting power
to elect at least a majority of the board of directors or others performing
similar functions with respect to such corporation or other organization is
directly or indirectly owned or controlled by such Party or by any one or more
of its Subsidiaries, or by such Party and one or more of its Subsidiaries;
provided, however, that no Party that is not directly or indirectly wholly-owned
by any other Party shall be a Subsidiary of such other Party unless such other
Party controls, or has the right, power or ability to control, that Party. For
purposes of this Agreement, Southern Energy shall be deemed not to be a
subsidiary of Southern.

     1.12 Warranty. "Warranty" shall have the meaning set forth in Section
11.2.1.

                                    ARTICLE 2
                          TRANSITION SERVICE SCHEDULES

     This Agreement will govern individual transitional services as requested by
Southern Energy and its Subsidiaries and provided by Southern and its
Subsidiaries, the details of which shall be set forth in the Transition Service
Schedules attached to this Agreement. Each Service shall be covered by this
Agreement upon execution of a transition service schedule in the form attached
hereto (each transition service schedule, a "Transition Service Schedule").

     The Parties shall set forth the terms for each Service on the applicable
Transitional Service Schedule, which may include, but are not limited to, the
time period during which the Service will be provided if different from the term
of this Agreement determined pursuant to Article 4 hereof, a summary of the
Service to be provided; a description of the Service; and the estimated
charge(s), if applicable, for the Service and any other terms applicable thereto
on the Transition Service Schedule. Obligations under each Transition Service
Schedule shall be effective upon the later of the execution of this Agreement or
the execution of the respective Transition Services Schedule. This Agreement
shall be deemed to include all the Transition Service Schedules wherever
reference to it is made.

                                    ARTICLE 3
                                    SERVICES

     3.1 Services Generally. Except as otherwise provided herein, for the term
determined pursuant to Article 4 hereof, Southern shall provide or cause to be
provided to Southern Energy the service(s) described in the Transition Service
Schedule(s) attached hereto, beginning on the Separation Date (the "Effective
Date"). The service(s) described on a single Transition Service Schedule shall
be referred to herein as a "Service." Collectively, the services described
on all the Transition Service Schedules (including Additional Services and
Engineering and Technical Services) shall be referred to herein as "Services."

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     3.2 Service Parameters. (i) Southern shall provide the Services only to the
extent and under the personnel availability conditions such Services are being
provided by Southern for Southern Energy immediately prior to the Effective
Date; and (ii) the Services will be available only for purposes of conducting
the business of Southern Energy substantially in the manner it was conducted
prior to the Effective Date.

     3.3 Impracticability. Southern shall not be required to provide any Service
to the extent the performance of such Service becomes "Impracticable" as a
result of a cause or causes outside the reasonable control of Southern, or to
the extent the performance of such Services would require Southern to violate
any applicable laws, rules or regulations or would result in the breach of any
agreement or other applicable contract.

     3.4 Additional Resources.  In providing the Services, Southern
shall not be obligated to: (i) hire any additional employees; (ii) maintain the
employment of any specific employee; (iii) purchase, lease or license any
additional equipment or materials; or (iv) pay any costs related to the transfer
or conversion of Southern Energy's data to Southern Energy or any alternate
supplier of Services.

     3.5 Additional Services. From time to time after the Effective Date, the
Parties may agree to identify additional Services that Southern will provide to
Southern Energy in accordance with the terms of this Agreement (the "Additional
Services"). In such event, the Parties shall execute additional Transition
Service Schedules for such Additional Services pursuant to Article 2. Except as
set forth in Section 3.6, the Parties may agree in writing on Additional
Services during the term of this Agreement.

     3.6 Further Obligations As To Services. Subject to the provisions of
Sections 3.2, 3.3 and 3.4 and otherwise except as set forth in the next
sentence, Southern shall perform, at a charge determined using the principles
for determining fees under Section 5.1, any Service that: (a) was provided by
Southern immediately prior to the Separation Date and which was inadvertently or
unintentionally omitted from the list of Services included in Transition Service
Schedules executed at the time of execution of this Agreement, or (b) is
essential to effectuate an orderly transition under the Master Separation and
Distribution Agreement unless such performance would significantly disrupt
Southern's operations or materially increase the scope of its responsibility
under this Agreement. If Southern reasonably believes the performance of
Services requested under subparagraphs (a) or (b) would significantly disrupt
its operations or materially increase the scope of its responsibility under this
Agreement, Southern and Southern Energy shall negotiate in good faith to
establish terms under which Southern can provide such Services, but Southern
shall not be obligated to provide such Services if, following good faith
negotiation, it is unable to reach agreement on such terms.

     3.7 Service Representatives. The Parties shall each appoint a
representative with respect to each Service (each a "Service Representative"),
which Service Representative shall coordinate the requesting, coordination,
scheduling and delivery of such Service. Unless

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otherwise indicated on the Transition Service Schedule for a Service, the
Party's respective Service Representatives for such Service shall be the persons
set forth on Schedule 3.7 as being responsible for such Service and certain
other related Services (each such person being a "Senior Representative"). Each
Senior Representative shall additionally be responsible for the replacement or
substitution, as necessary, of any Service Representatives for such Senior
Representative's assigned Services, and shall coordinate any requests for
changes in the scope of such Services, or for the provision of any additional
related Services, with such Senior Representative's counterpart with the other
Party. Either Party may nominate a substitute Service Representative for itself
with respect to a Service at any time upon reasonable notice to the other Party.
Any request for a Service made by Southern Energy through any person other than
Southern Energy's Senior Representative or Service Representative with respect
to such Service shall not be binding upon Southern.

                                    ARTICLE 4
                                      TERM

     The term of this Agreement shall commence on the Effective Date and shall
remain in effect until two (2) years after the Effective Date (the "Expiration
Date"), unless earlier terminated under Article 7. This Agreement may be
extended by the Parties in writing, either in whole or with respect to one or
more of the Services; provided, however, that such extension shall only apply to
the Services for which the Agreement was extended. At least six (6) months prior
to the Expiration Date, Southern Energy shall give Southern written notice, in
accordance with the provisions of Section 16.4, of Southern Energy's request to
extend the term of the Agreement in respect of any Services. In addition, the
Parties shall be deemed to have extended this Agreement with respect to a
specific Service if the Transition Service Schedule for such Service specifies a
completion or termination date beyond the aforementioned Expiration Date. The
Parties may agree on an earlier expiration date respecting a specific Service by
specifying such date on the Transition Service Schedule for that Service.
Services shall be provided up to and including the date set forth in the
applicable Transition Service Schedule, subject to earlier termination as
provided herein.

                                    ARTICLE 5
                                  COMPENSATION

     5.1 Charges For Services. Charges for Services shall be based upon the
greater of (a) the full cost of providing the Services, including direct costs
and indirect costs, or (b) the market value of such Services. Southern Energy
shall pay Southern the charges, if any, set forth on the Transition Service
Schedules for each of the Services listed therein as adjusted, from time to
time, in accordance with the processes and procedures established under Section
5.4 and Section 5.5 hereof. The Parties shall use good faith efforts to discuss
any situation in which the actual charge for a Service is reasonably expected to
exceed the estimated charge, if any, set forth on a Transition Service Schedule
for a particular Service; provided, however, that the incurrence of charges in
excess of any such estimate on such Transition Service Schedule shall not
justify stopping the provision of, or payment for, Services under this
Agreement.

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     5.2 Payment Terms. Southern shall bill Southern Energy monthly for all
charges pursuant to this Agreement. Such bills shall be accompanied by
reasonable documentation or other reasonable explanation supporting such
charges. Southern Energy shall pay Southern for all Services provided hereunder
within thirty (30) days after receipt of an invoice therefor. Late payments
shall bear interest at the lesser of 18% per annum or the maximum rate allowed
by law.

     5.3 Performance Under Ancillary Agreements. Notwithstanding anything to the
contrary contained herein, Southern Energy shall not be charged under this
Agreement for any obligations that are specifically required to be performed
under the Master Separation and Distribution Agreement or any other Ancillary
Agreement and any such other obligations shall be performed and charged for (if
applicable) in accordance with the terms of the Master Separation and
Distribution Agreement or such other Ancillary Agreement.

     5.4 Error Correction; True-Ups; Accounting. The Parties shall reasonably
agree on a process and procedure for conducting internal audits and making
adjustments to charges as a result of the movement of employees and functions
between Parties, the discovery of errors or omissions in charges, as well as a
true-up of amounts owed. In no event shall such processes and procedures extend
beyond two (2) years after completion of a Service.

     5.5 Pricing Adjustments. In the event of a tax or regulatory audit
adjustment relating to the pricing of any or all Services provided pursuant to
this Agreement in which it is determined by a taxing or regulatory authority
that any of the charges, individually or in combination, did not result in an
arm's-length payment, as determined under internationally accepted arm's-length
standards, then the Parties, including any Southern subcontractor providing
Services hereunder, may agree to make corresponding adjustments to the charges
in question for such period to the extent necessary to achieve arm's-length
pricing. Any adjustment made pursuant to this Section 5.5 at any time during the
term of this Agreement or after termination of this Agreement shall be reflected
in the Parties' legal books and records, and the resulting underpayment or
overpayment shall create, respectively, an obligation to be paid in the manner
specified in Section 5.2, or shall create a credit against amounts owed under
this Agreement.

                                    ARTICLE 6
                      GENERAL OBLIGATIONS; STANDARD OF CARE

     6.1 Performance Metrics: Southern. Subject to Sections 3.2, 3.3, 3.4 and
any other terms and conditions of this Agreement, Southern shall perform its
obligations hereunder in a commercially reasonable manner. Specific performance
metrics for Southern for a specific Service may be set forth in the
corresponding Transition Service Schedule. Where none is set forth, Southern
shall use reasonable efforts to provide Services in accordance with its
policies, procedures and practices in effect before the Effective Date and shall
exercise the same care and skill as it exercises in performing similar services
for itself.

     6.2 DISCLAIMER OF WARRANTIES. EXCEPT AS OTHERWISE SET FORTH HEREIN SOUTHERN
MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, INCLUDING BUT NOT LIMITED TO
THE IMPLIED WARRANTIES OF

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MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE
SERVICES OR OTHER DELIVERABLES PROVIDED BY IT HEREUNDER.

     6.3 Performance Metrics: Southern Energy. Specific performance metrics for
Southern Energy for a specific Service may be set forth in the corresponding
Transition Service Schedule. Where none is set forth, Southern Energy shall use
reasonable efforts, in connection with receiving Services, to follow the
policies, procedures and practices in effect before the Effective Date including
providing information and documentation sufficient for Southern to perform the
Services as they were performed before the Effective Date and making available,
as reasonably requested by Southern, sufficient resources and timely decisions,
approvals and acceptances in order that Southern may accomplish its obligations
hereunder in a timely manner.

     6.4 Transitional Nature Of Services; Changes. The Parties acknowledge the
transitional nature of the Services and agree that Southern may make changes
from time to time in the manner of performing the Services if Southern is making
similar changes in performing similar services for itself and its subsidiaries
and if Southern furnishes to Southern Energy thirty (30) days written notice
regarding such changes.

     6.5 Responsibility For Errors; Delays. Southern's sole responsibility to
Southern Energy:

         (a) for errors or omissions in Services (except for Engineering and
Technical Services provided for in Article 11), shall be to furnish correct
information, payment and/or adjustment in the Services, at no additional cost or
expense to Southern Energy; provided, Southern Energy must promptly advise
Southern of any such error or omission of which it becomes aware after having
used reasonable efforts to detect any such errors or omissions in accordance
with the standard of care set forth in Section 6.3; and

         (b) for failure to deliver any Service because of Impracticability,
shall be to use reasonable efforts, subject to Section 3.2, 3.3 and Section 3.4,
to make the Services available and/or to resume performing the Services as
promptly as reasonably practicable.

     6.6 Good Faith Cooperation; Consents. The Parties will use good faith
efforts to cooperate with each other in all matters relating to the provision
and receipt of Services. Such cooperation shall include exchanging information,
performing true-ups and adjustments, and obtaining all third party consents,
licenses, sublicenses or approvals necessary to permit each Party to perform its
obligations hereunder (including by way of example, not by way of limitation,
rights to use third party software needed for the performance of Services). The
costs of obtaining such third party consents, licenses, sublicenses or approvals
shall be borne by Southern Energy. Each Party will maintain, in accordance with
its standard document retention procedures, documentation supporting the
information relevant to cost calculations and cooperate with each other in
making such information available as needed in the event of a tax audit, whether
in the United States or any other country.

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                                    ARTICLE 7
                                EARLY TERMINATION

     7.1 Early Termination. Southern Energy may terminate this Agreement, either
with respect to all or with respect to any one or more of the Services provided
to Southern Energy hereunder, for any reason or for no reason, at any time upon
one hundred eighty (180) days prior written notice to Southern. Southern may
terminate this Agreement if Southern Energy fails to pay any amount which is due
and payable in respect of any Service in accordance with the provisions of
Section 5.2 hereof, and Southern Energy does not cure such breach within ten
(10) days after being given notice of such breach. In addition, subject to the
provisions of Article 15 below, either Party may terminate this Agreement with
respect to a specific Service if the other Party materially breaches a material
provision with regard to that particular Service (other than for nonpayment) and
does not cure such breach (or does not take reasonable steps required under the
circumstances to cure such breach going forward) within sixty (60) days after
being given notice of the breach; provided, however, that the non-terminating
Party may request that the Parties engage in a dispute resolution negotiation as
specified in Article 15 below prior to termination for breach.

     7.2 Survival. Those Sections of this Agreement that, by their nature, are
intended to survive termination will survive in accordance with their terms.
Notwithstanding the foregoing, in the event of any termination with respect to
one or more, but less than all Services, this Agreement shall continue in full
force and effect with respect to any Services not terminated hereby.

                                    ARTICLE 8
                        RELATIONSHIP BETWEEN THE PARTIES

     The relationship between the Parties established under this Agreement is
that of independent contractors and neither Party is an employee, agent,
partner, or joint venturer of or with the other. Southern will be solely
responsible for the payment of any employment-related taxes, insurance premiums
or other employment benefits in respect of the performance of Services by
Southern personnel under this Agreement. Southern Energy agrees to grant
Southern personnel access to sites, systems and information (subject to the
provisions of confidentiality in Article 12 below) as necessary for Southern to
perform its obligations hereunder. Southern Energy shall inform Southern
personnel of, and Southern personnel agree to obey, any and all security
regulations and other published policies of Southern Energy.

                                    ARTICLE 9
                                 SUBCONTRACTORS

     Southern may engage a "Subcontractor" to perform all or any portion of
Southern's duties under this Agreement, provided that any such Subcontractor
agrees in writing to be bound by confidentiality obligations at least as
protective as the terms of Article 13 regarding confidentiality below, and
provided further that Southern remains responsible for the performance of such
Subcontractor. As used in this Agreement, "Subcontractor" will mean any
individual, partnership, corporation, firm, association, unincorporated
organization, joint venture, trust or other entity engaged to perform hereunder,
other than Southern and its Subsidiaries.

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                                   ARTICLE 10
                              INTELLECTUAL PROPERTY

     Except as otherwise set forth herein, the terms of the Technology and
Intellectual Property Ownership and License Agreement between the Parties, a
copy of which is attached as an exhibit to the Master Separation and
Distribution Agreement, shall govern the use and ownership of any Technology (as
defined therein) and any patents, trademarks, or other intellectual property
transferred, licensed used or created in connection with the Services or
otherwise under this Agreement.

                                   ARTICLE 11
                       ENGINEERING AND TECHNICAL SERVICES

     11.1 Engineering and Technical Services. Pursuant to the terms of this
Agreement, Southern shall provide certain engineering, technical and consulting
Services to Southern Energy from time to time in connection with the
development, construction, ownership, maintenance and operation of electric
generating, transmission and distribution facilities, including, but not limited
to, technical and field services, engineering and generation technical services,
fuel procurement and related services and environmental services (the
"Engineering and Technical Services"); provided, however, that Southern shall
not be required to provide any Engineering and Technical Service if the
provision of such Engineering and Technical Service, in Southern's reasonable
discretion, would be in violation of Southern's fiduciary duties to its
shareholders or customers.

     11.2 Professional Responsibility Regarding Engineering and Technical
Services.

          11.2.1 Standard of Care/Warranty. In the performance of Engineering
     and Technical Services under this Agreement, Southern shall exercise due
     care to assure that the Services are provided in a workmanlike manner, and
     that such Services meet the standards and specifications set forth in the
     applicable Transitional Service Schedule. Southern hereby warrants that all
     Engineering and Technical Services provided hereunder will comply with the
     foregoing standard of care (the "Warranty").

          11.2.2 Warranty Cure. If Southern Energy discovers that any part of
     the Engineering and Technical Services fail to meet the Warranty, Southern
     Energy will notify Southern of such failure. Southern's sole obligation for
     failing to meet the Warranty shall be to reperform the Engineering and
     Technical Services thereunder at cost (direct cost plus indirect costs)
     such that it fully complies with the Transitional Service Schedule and
     applicable laws and regulations. Southern Energy will bear all costs and
     expenses incurred by Southern in association with curing any Warranted
     Engineering and Technical Services, except where the failure to meet the
     Warranty with respect to any Engineering and Technical Services is due to
     any willful misconduct on the part of Southern or its employees, agents,
     contractors or subcontractors, in which case such costs and expenses shall
     be borne by Southern. Southern makes no other

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     warranties with respect to its performance of the Services, and Southern
     Energy agrees to accept such services without further warranties of any
     nature.

     11.3 Applicable Laws and Regulations. Southern shall comply with all
national, federal, provincial, state and local laws, decrees, regulations and
ordinances (including without limitation those of any local jurisdiction in
which Engineering and Technical Services are performed) including, without
limitation, those pertaining to the environment, health, safety, sanitary
facilities, waste disposal and other matters applicable to or affecting the
performance of Engineering and Technical Services that are published and in
effect at the time particular Engineering and Technical Services are rendered.
Southern Energy shall inform Southern of, and Southern shall ensure that its
employees, agents and subcontractors comply with, site rules and regulations
while on the premises of any Southern Energy property or project.

     11.4 Insurance. During the course of performance of any Engineering and
Technical Services following the Distribution Date, Southern will obtain and
maintain in full force and effect insurance substantially in accordance with,
and meeting the requirements set forth in, Schedule 11.4 attached hereto.
Promptly after the execution hereof Southern shall furnish Southern Energy with
a written certificate from its insurers, addressed to Southern Energy,
indicating the existence of Southern's insurance coverage, the amount and nature
of such coverage, and the expiration date(s) of each policy. The certificate
also shall include a provision requiring Southern's insurers to give Southern
Energy at least thirty (30) days' written notice prior to the cancellation,
nonrenewal or material alteration of any policy.

     11.5 Reuse of Documents. All documents, including drawings and
specifications, prepared and furnished by Southern to Southern Energy pursuant
to this Agreement shall be the property of Southern Energy; provided, however,
that such documents are not intended or represented to be suitable for reuse by
Southern Energy or others on any other project. Southern Energy may not reuse or
adapt such documents on or for other projects without the written consent of
Southern; provided, further, that any such reuse or adaption by Southern Energy,
with the consent of Southern, will be at Southern Energy's sole risk and without
liability or legal exposure to Southern.

     11.6 Non-Restrictive Relationship. Nothing in this Agreement will be
construed to preclude Southern Energy from independently developing, acquiring
or obtaining Engineering and Technical Services or related documents which may
perform the same or similar functions as the Engineering and Technical Services
or related documents provided by Southern.

                                   ARTICLE 12
                                 CONFIDENTIALITY

     The terms of the Confidential Disclosure Agreement between the Parties
shall apply to any Confidential Information (as defined therein) which is the
subject matter of this Agreement.

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                                   ARTICLE 13
                             LIMITATION OF LIABILITY

     NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR ANY LOST PROFITS, LOSS OF
DATA, LOSS OF USE, COST OF COVER, BUSINESS INTERRUPTION OR OTHER SPECIAL,
INCIDENTAL, INDIRECT, PUNITIVE OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED, UNDER
ANY THEORY OF LIABILITY, ARISING FROM THE PERFORMANCE OF, OR RELATING TO, THIS
AGREEMENT.

                                   ARTICLE 14
                                  FORCE MAJEURE

     Each Party will be excused for any failure or delay in performing any of
its obligations under this Agreement, other than the obligations of Southern
Energy to make payments to Southern pursuant to Article 5 hereof for services
rendered, if such failure or delay is caused solely by Force Majeure. "Force
Majeure" includes, without limitation, any act of God or the public enemy; any
accident, explosion, fire, ice, earthquake, lightning, tornado, hurricane, or
other severe weather condition or calamity; any civil disturbance, labor
dispute, or labor or material shortage; any sabotage or acts of terrorism; any
acts of a public enemy, uprising, insurrection, civil unrest, war or rebellion;
any action or restraint by court order or public or governmental authority or
lawfully established civilian authorities, or any other circumstance or event
beyond the reasonable control of the Party relying upon such circumstance or
event.

                                   ARTICLE 15
                               DISPUTE RESOLUTION

     15.1 Mediation. If a dispute, controversy or claim ("Dispute") arises
between the Parties relating to the interpretation or performance of this
Agreement or the Ancillary Agreements, or the grounds for the termination
hereof, appropriate senior executives (e.g. director or vice president level) of
each Party who shall have the authority to resolve the matter shall meet or
confer (in person or by telephone) to attempt in good faith to negotiate a
resolution of the Dispute prior to pursuing other available remedies. The
initial meeting or conference between the appropriate senior executives shall be
referred to herein as the "Dispute Resolution Commencement Date." Discussions
and correspondence relating to trying to resolve such Dispute shall be treated
as confidential information developed for the purpose of settlement and shall be
exempt from discovery or production and shall not be admissible in any
proceeding relating to the subject matter of the Dispute. If the senior
executives are unable to resolve the Dispute within thirty (30) days from the
Dispute Resolution Commencement Date, and either Party wishes to pursue its
rights relating to such Dispute, then the Dispute will be mediated by a mutually
acceptable mediator appointed pursuant to the mediation rules of JAMS/Endispute
within thirty (30) days after written notice by one Party to the other demanding
non-binding mediation. Neither Party may unreasonably withhold consent to the
selection of a mediator or the location of the mediation. Both Parties will
share the costs of the mediation equally, except that each Party shall bear its
own costs and expenses, including attorney's fees, witness fees, travel
expenses, and preparation costs. The Parties may also agree to replace mediation
with some other form of non-binding or binding alternative dispute resolution
("ADR").

                                       10

<PAGE>   14

     15.2 Arbitration. Any Dispute which the Parties cannot resolve through
mediation within ninety (90) days of the Dispute Resolution Commencement Date,
unless otherwise mutually agreed, shall be submitted to final and binding
arbitration under the then current Commercial Arbitration Rules of the American
Arbitration Association ("AAA"), by three (3) arbitrators in Dekalb County,
Georgia. Such arbitrators shall be selected by the mutual agreement of the
Parties or, failing such agreement, shall be selected according to the aforesaid
AAA rules. The arbitrators will be instructed to prepare and deliver a written,
reasoned opinion stating their decision within thirty (30) days of the
completion of the arbitration. The prevailing Party in such arbitration shall be
entitled to expenses, including costs and reasonable attorneys' and other
professional fees, incurred in connection with the arbitration (but excluding
any costs and fees associated with prior negotiation or mediation). The decision
of the arbitrator shall be final and non-appealable and may be enforced in any
court of competent jurisdiction. The use of any ADR procedures will not be
construed under the doctrine of laches, waiver or estoppel to adversely affect
the rights of either Party.

     15.3 Court Action. Any Dispute regarding the following is not required to
be negotiated, mediated or arbitrated prior to seeking material relief from a
court of competent jurisdiction: breach of any obligation of confidentiality;
infringement, misappropriation, or misuse of any intellectual property right;
any other claim where interim relief from the court is sought to prevent serious
and irreparable injury to one of the Parties or to others. However, the Parties
to the Dispute shall make a good faith effort to negotiate and mediate such
Dispute, according to the above procedures, while such court action is pending.

     15.4 Continuity Of Service And Performance. Unless otherwise agreed in
writing, the Parties will continue to provide service and honor all other
commitments under this Agreement and each Ancillary Agreement during the course
of dispute resolution pursuant to the provisions of this Article 15 with respect
to all matters not subject to such dispute, controversy or claim.

                                   ARTICLE 16
                                  MISCELLANEOUS

     16.1 Entire Agreement. This Agreement, the Master Separation and
Distribution Agreement and the other Ancillary Agreements and the Exhibits and
Schedules referenced or attached hereto and thereto constitute the entire
agreement between the Parties with respect to the subject matter hereof and
thereof and shall supersede all prior written and oral and all contemporaneous
oral agreements and understandings with respect to the subject matter hereof and
thereof.

     16.2 Existing Services Agreement. The Parties acknowledge that Subsidiaries
of Southern are currently authorized to provide the services contracted for
herein to Southern Energy and its subsidiaries and, more specifically, that
Southern Company Services, Inc., a Subsidiary of Southern, is authorized to
provide the services identified herein directly, and, indirectly, to Southern
Energy and its Subsidiaries to Southern Energy Resources, Inc. (formerly known
as Southern Electric International, Inc.) pursuant to an Agreement dated July
17, 1981 (the "Existing Service Agreement"), all subject to certain conditions
established by applicable government regulations, orders, and approvals
("Existing Authority"). The Parties intend to implement this Agreement
consistent with and to the extent permitted by Existing Authority and to
cooperate toward obtaining and maintaining in effect such governmental agency
consents, orders or approvals as may be required in order to implement this
Agreement as fully as possible in accordance with its terms for the stated term.
After the Effective Date and upon receipt of and applicable regulatory
approvals and consents, the Existing Services Agreement shall be terminated and
superseded by this Agreement to the extent permitted under the Existing
Authority.

     16.3 Governing Law. This Agreement shall be construed in accordance with
and all Disputes hereunder shall be governed by the laws of the State of
Georgia. Any state court sitting in Dekalb County, Georgia and/or the United
States District Court for the Northern District of Georgia shall have
jurisdiction and venue over all Disputes between the Parties that are permitted
to be brought in a court of law pursuant to Article 15 above.

                                       11

<PAGE>   15

     16.4 Descriptive Headings. The headings contained in this Agreement, in any
Exhibit or Schedule hereto and in the table of contents to this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Any capitalized term used in any Exhibit or
Schedule but not otherwise defined therein, shall have the meaning assigned to
such term in this Agreement. When a reference is made in this Agreement to an
Article or a Section, Exhibit or Schedule, such reference shall be to an Article
or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise
indicated.

     16.5 Notices. Notices, offers, requests, or other communications required
or permitted to be given by either Party pursuant to the terms of this Agreement
shall be given in writing to the respective Parties to the following addresses:

          if to Southern :
                            The Southern Company
                            270 Peachtree Street
                            Atlanta, Georgia 30303
                            Attention: General Counsel
                            Fax: (404) 506-0544

          if to Southern Energy:
                            Southern Energy, Inc.
                            900 Ashwood Parkway
                            Suite 500
                            Atlanta, Georgia 30338
                            Attention: General Counsel
                            Fax: (770) 821-7001

or to such other address as the Party to whom notice is given may have
previously furnished to the other in writing as provided herein. Any notice
involving non-performance, termination, or renewal shall be sent by hand
delivery, recognized overnight courier or, within the United States, may also be
sent via certified mail, return receipt requested. All other notices may also be
sent by fax, confirmed by first class mail. All notices shall be deemed to have
been given and received on the earlier of actual delivery or three (3) days from
the date of postmark.

     16.6 Nonassignability; Third-Party Beneficiaries. Except as specifically
permitted under Article 9 above, neither Party may, directly or indirectly, in
whole or in part, whether by operation of law or otherwise, assign or transfer
this Agreement, without the other Party's prior written consent, and any
attempted assignment, transfer or delegation without such prior written consent
shall be voidable at the sole option of such other Party. Without limiting the
foregoing, this Agreement will be binding upon and inure to the benefit of the
Parties and their permitted successors and assigns. This Agreement, including
the Transition Services Schedules and the other documents referred to herein,
shall be binding upon and inure solely to the benefit of each party hereto and
their legal representatives and successors, and nothing in this Agreement,
express or implied, is intended to confer upon any other Person any rights or
remedies of any nature whatsoever under or by reason of this Agreement.

                                       12
<PAGE>   16

     16.7 Severability. If any term or other provision of this Agreement is
determined by a court, administrative agency or arbitrator to be invalid,
illegal or incapable of being enforced by any rule of law or public policy, all
other conditions and provisions of this Agreement will nevertheless remain in
full force and effect so long as the economic or legal substance of the
transactions contemplated is not affected in any manner materially adverse to
any Party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the Parties shall negotiate in good
faith to modify this Agreement so as to effect the original intent of the
Parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the fullest extent possible.

     16.8 Failure Or Indulgence Not Waiver; Remedies Cumulative. No failure or
delay on the part of either Party hereto in the exercise of any right hereunder
shall impair such right or be construed to be a waiver of, or acquiescence in,
any breach of any representation, warranty or agreement herein, nor shall any
single or partial exercise of any such right preclude other or further exercise
thereof or of any other right. All rights and remedies existing under this
Agreement are cumulative to, and not exclusive of, any rights or remedies
otherwise available.

     16.9 Amendment. No change or amendment will be made to this Agreement
except by an instrument in writing signed on behalf of each of the Parties to
such agreement.

                                       13

<PAGE>   17

     IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed in duplicate originals by its duly authorized representatives.

THE SOUTHERN COMPANY                   SOUTHERN ENERGY, INC.

By:                                    By:
   --------------------------------       ---------------------------------

Title:                                 Title:
      -----------------------------          ------------------------------

<PAGE>   18

     FORM OF TRANSITION SERVICE SCHEDULE TO TRANSITIONAL SERVICES AGREEMENT

1.   Transition Service Schedule #:____________ (To be inserted by
     representative)

2.   Functional Area:_______________

3.   Start/End Date: The Services start on the Effective Date of the
     Transitional Services Agreement between The Southern Company ("Southern")
     and Southern Energy, Inc. ("Southern Energy") to which this Transition
     Service Schedule is attached and end on [__________] unless otherwise
     indicated below.

     Indicate below if other start/end date:

     Start Date:
                ----------------------------

     End Date:
              ------------------------------

     If Start and End dates vary by service and/or location, please indicate in
     Section 5 below.

4.   Summary of Services (Describe the service to be provided in appropriate
     detail.

     Service Name                      Description

5.   List of services to be provided per location and site: (List all the
     services to be provided at each site. Enter Start Date and End Date if
     different from Section 3 above.)

     Location          Site           Service(s)        Start Date      End Date

6.   Performance parameters/Service level: (State minimum performance expected
     from each service, if applicable.):

7.   Estimated Total Compensation

8.   Describe cost methodology and cost drivers affecting Estimated Total
     Compensation (Describe on an individual service basis if necessary):

<PAGE>   19

9.   Describe the process by which the cost of services will be adjusted in the
     instance of an increase/reduction in the services provided: (Describe on an
     individual service basis if necessary.)

10.  Software: Will software be used or included with the Services to be
     provided under this Transition Service Schedule: ____ Yes ____ No

     List software/licenses to be provided, if any:

11.  Contract Administrators. List Service Representatives from Southern and
     Southern Energy:

     Upon execution of this Transition Service Schedule by both Parties, this
Transition Service Schedule is hereby deemed incorporated into and made part of
that certain Transitional Services Agreement between The Southern Company and
Southern Energy, Inc.

THE SOUTHERN COMPANY                   SOUTHERN ENERGY, INC.

By:                                    By:
   --------------------------------       ---------------------------------
        (Authorized Signature)                 (Authorized Signature)

Date:                                  Date:
     ------------------------------         -------------------------------
Name:                                  Name:
     ------------------------------         -------------------------------
Title:                                 Title:
      -----------------------------          ------------------------------

<PAGE>   20

                                  Schedule 3.7
                         Senior Service Representatives

Southern Energy

<TABLE>
<CAPTION>
Service                                Senior Representative (Title)
-------                                -----------------------------

<S>                                    <C>
Engineering and Technical Services     Chief Technical Officer

Intellectual Property/
Information Technology                 Chief Information Officer

All other Services                     Senior Vice President of Administration
                                       and External Affairs
</TABLE>

Southern

<TABLE>
<CAPTION>
Service                                Senior Representative (Title)
-------                                -----------------------------

<S>                                    <C>
Engineering and Technical Services;
Procurement                            President of Southern Company Generation

Intellectual Property/
Information Technology                 Chief Information Officer

Human Resources                        Senior Vice President of Human Resources,

Legal                                  General Counsel

External Affairs                       Vice President of External Affairs

Finance and Risk Management            Chief Financial Officer

Accounting                             Senior Vice President - Chief Accounting
                                       Officer

Internal Auditing                      Director of Internal Auditing

System Aircraft                        Vice President, System Aircraft
</TABLE>

<PAGE>   21
                                 Schedule 16.2
                    Existing Engineering Services Agreements<PAGE>   1

                                                                    EXHIBIT 10.3

                                     FORM OF

                 INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT

                                     BETWEEN

                              THE SOUTHERN COMPANY

                                       AND

                              SOUTHERN ENERGY, INC.

<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                            PAGE
<S>                                                                                                                         <C>
ARTICLE I  MUTUAL RELEASES; INDEMNIFICATION...................................................................................1
    Section 1.1. Release of Pre-Closing Claims................................................................................1
    Section 1.2. Indemnification by Southern Energy...........................................................................2
    Section 1.3. Indemnification by Southern..................................................................................3
    Section 1.4. Procedures for Defense, Settlement and Indemnification of Third Party Claims.................................3
    Section 1.5. Additional Matters...........................................................................................5
    Section 1.6. Survival of Indemnities......................................................................................6
ARTICLE II  INSURANCE MATTERS.................................................................................................6
    Section 2.1. Southern Energy Insurance Coverage During the Transition Period..............................................6
    Section 2.2. Cooperation and Agreement Not to Release Carriers............................................................6
    Section 2.3. Southern Energy Insurance Coverage After the Insurance Transition Period.....................................7
    Section 2.4. Responsibilities for Self-insured Obligations................................................................7
    Section 2.5. Procedures With Respect to Insured Southern Energy Liabilities...............................................7
    Section 2.6. Insufficient Limits of Liability for Southern Liabilities and Southern Energy Liabilities....................8
    Section 2.7. Cooperation..................................................................................................8
    Section 2.8. No Assignment or Waiver......................................................................................8
    Section 2.9. No Liability.................................................................................................9
    Section 2.10. No Restrictions.............................................................................................9
    Section 2.11. Further Agreements..........................................................................................9
    Section 2.12. Agreement Regarding Insurance Covering Environmental Claims.................................................9
    Section 2.13. Matters Governed by Employee Matters Agreement..............................................................9
ARTICLE III  MISCELLANEOUS....................................................................................................9
    Section 3.1. Entire Agreement.............................................................................................9
    Section 3.2. Governing Law...............................................................................................10
    Section 3.3. Notices.....................................................................................................10
    Section 3.4. Parties in Interest.........................................................................................10
    Section 3.5. Other Agreements Evidencing Indemnification Obligations.....................................................10
    Section 3.6. Counterparts................................................................................................10
    Section 3.7. Assignment..................................................................................................10
    Section 3.8. Severability................................................................................................11
    Section 3.9. Failure or Indulgence Not Waiver............................................................................11
    Section 3.10. Amendment..................................................................................................11
    Section 3.11. Authority..................................................................................................11
    Section 3.12. Interpretation.............................................................................................11
    Section 3.13. Government Approvals.......................................................................................11
ARTICLE IV  DEFINITIONS......................................................................................................11
    Section 4.1. Action......................................................................................................11
    Section 4.2. Affiliated Company..........................................................................................11
</TABLE>

<PAGE>   3

<TABLE>
<S>                                                                                                                         <C>
    Section 4.4. Claims Committee............................................................................................12
    Section 4.5. Commingled Claims...........................................................................................12
    Section 4.6. Coverage Amount.............................................................................................12
    Section 4.7. Credit Support Arrangements.................................................................................12
    Section 4.8. Employee Matters Agreement..................................................................................12
    Section 4.9. HoldCo Transaction..........................................................................................13
    Section 4.10. Employment Liabilities.....................................................................................12
    Section 4.11  Environmental Claims.......................................................................................
    Section 4.12. Indemnitee.................................................................................................12
    Section 4.13. Insurance Policies.........................................................................................12
    Section 4.14. Insurance Transition Period................................................................................13
    Section 4.15. Insured Southern Energy Liability..........................................................................13
    Section 4.16. Intercompany Agreements....................................................................................13
    Section 4.17. IPO Registration Statement.................................................................................13
    Section 4.18. Liabilities................................................................................................13
    Section 4.19. Person.....................................................................................................13
    Section 4.20. Separation.................................................................................................13
    Section 4.21. Separation Agreement.......................................................................................14
    Section 4.22. Separation Date............................................................................................14
    Section 4.23. Southern Business..........................................................................................14
    Section 4.24. Southern Energy Business...................................................................................14
    Section 4.25. Southern Energy Covered Parties............................................................................14
    Section 4.26. Southern Energy Group......................................................................................14
    Section 4.27. Southern Energy Indemnitees................................................................................14
    Section 4.28. Southern Energy Liabilities................................................................................14
    Section 4.29. Southern Group.............................................................................................15
    Section 4.30. Southern Indemnitees.......................................................................................15
    Section 4.31. Subsidiary.................................................................................................15
    Section 4.32. Tax Indemnification Agreement..............................................................................15
    Section 4.33. Taxes......................................................................................................15
    Section 4.34. Third Party Claim..........................................................................................15
</TABLE>

<PAGE>   4

                 INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT

            THIS INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT (this
"Agreement") is entered into on [___________, 2000] between The Southern
Company, a Delaware corporation ("Southern"), and Southern Energy, Inc., a
Delaware corporation ("Southern Energy"). Capitalized terms used herein and not
otherwise defined herein shall have the meanings ascribed to such terms in the
Article IV below.

                                    RECITALS

            WHEREAS, the Board of Directors of Southern has determined that it
is in the best interest of Southern and its stockholders to separate Southern's
existing businesses into two independent businesses;

            WHEREAS, as part of the foregoing, Southern and Southern Energy have
agreed, pursuant to the Master Separation and Distribution Agreement dated
[___________, 2000] (the "Separation Agreement"), which provides, among
other things, the initial public offering of Southern Energy stock, the
distribution of such stock and the execution and delivery of certain other
agreements in order to facilitate and provide for the foregoing; and

            WHEREAS, the parties desire to set forth certain agreements
regarding indemnification and insurance.

            NOW, THEREFORE, in consideration of the foregoing and the covenants
and agreements set forth below, the parties hereto agree as follows:

                                    ARTICLE I

                        MUTUAL RELEASES; INDEMNIFICATION

            Section 1.1. Release of Pre-Closing Claims.

            (a) Southern Energy Release. Except as provided in Section 1.1(c),
effective as of the Separation Date, Southern Energy does hereby, for itself and
as agent for each member of the Southern Energy Group, remise, release and
forever discharge the Southern Indemnitees from any and all Liabilities
whatsoever, whether at law or in equity (including any right of contribution),
whether arising under any contract or agreement, by operation of law or
otherwise, existing or arising from any acts or events occurring or failing to
occur or alleged to have occurred or to have failed to occur or any conditions
existing or alleged to have existed on or before the Separation Date, including
any such acts, events or conditions on or before the Separation Date in
connection with the transactions and all other activities to implement any of
the Separation, the IPO and the Distribution.

            (b) Southern Release. Except as provided in Section 1.1(c),
effective as of the Separation Date, Southern does hereby, for itself and as
agent for each member of the Southern Group, remise, release and forever
discharge the Southern Energy Indemnitees from any and all

                                       1
<PAGE>   5

Liabilities whatsoever, whether at law or in equity (including any right of
contribution), whether arising under any contract or agreement, by operation of
law or otherwise, existing or arising from any acts or events occurring or
failing to occur or alleged to have occurred or to have failed to occur or any
conditions existing or alleged to have existed on or before the Separation Date,
including any such acts, events or conditions on or before the Separation Date
in connection with the transactions and all other activities to implement any of
the Separation, the IPO and the Distribution.

            (c) Excluded Liabilities; No Impairment. Nothing contained in
Section 1.1(a) or (b) shall release any claims under, or impair any right of any
Person to enforce, the Separation Agreement, any Ancillary Agreement (including
this Agreement), or any Intercompany Agreement, in each case in accordance with
its terms.

            (d) No Actions as to Released Claims. Southern Energy agrees, for
itself and as agent for each member of the Southern Energy Group, not to make
any claim or demand, or commence any Action asserting any claim or demand,
including any claim of contribution or any indemnification, against Southern or
any member of the Southern Group, or any other Person released pursuant to
Section 1.1(a), with respect to any Liabilities released pursuant to Section
1.1(a). Southern agrees, for itself and as agent for each member of the Southern
Group, not to make any claim or demand, or commence any Action asserting any
claim or demand, including any claim of contribution or any indemnification,
against Southern Energy or any member of the Southern Energy Group, or any other
Person released pursuant to Section 1.1(b), with respect to any Liabilities
released pursuant to Section 1.1(b).

            (e) Further Instruments. At any time, at the request of any other
party, each party shall cause each member of its respective Group to execute and
deliver releases reflecting the provisions hereof.

            Section 1.2. Indemnification by Southern Energy. Except as otherwise
provided in this Agreement, Southern Energy shall, for itself and as agent for
each member of the Southern Energy Group, indemnify, defend (or, where
applicable, pay the defense costs for) and hold harmless the Southern
Indemnitees from and against any and all Liabilities that any third party seeks
to impose upon the Southern Indemnitees, or which are imposed upon the Southern
Indemnitees, if and to the extent such Liabilities relate to, arise out of or
result from any of the following items (without duplication):

                        (i) any acts or omission or alleged acts or omissions by
            or on behalf of any member of the Southern Energy Group in the
            conduct of the Southern Energy Business or in connection with the
            IPO or the Distribution;

                        (ii) any breach by Southern Energy or any member of the
            Southern Energy Group of the Separation Agreement or any of the
            Ancillary Agreements (including this Agreement); and

                        (iii) any Southern Energy Liability.

                                       2
<PAGE>   6

            In the event that any member of the Southern Energy Group makes a
payment to the Southern Indemnitees hereunder, and any of the Southern
Indemnitees subsequently diminishes the Liabilities on account of which such
payment was made, either directly or through a third-party recovery, Southern
will promptly repay (or will procure a Southern Indemnitee to promptly repay)
such member of the Southern Energy Group the amount by which the payment made by
such member of the Southern Energy Group exceeds the actual cost of the
associated indemnified Liability.

            Section 1.3. Indemnification by Southern. Except as otherwise
provided in this Agreement, Southern shall, for itself and as agent for each
member of the Southern Group, indemnify, defend (or, where applicable, pay the
defense costs for) and hold harmless the Southern Energy Indemnitees from and
against any and all Liabilities that any third party seeks to impose upon the
Southern Energy Indemnitees, or which are imposed upon the Southern Energy
Indemnitees, if and to the extent such Liabilities relate to, arise out of or
result from any of the following items (without duplication):

                        (i) any acts or omissions or alleged acts or omissions
            by or on behalf of any member of the Southern Group in the conduct
            of the Southern Business or in connection with the IPO or the
            Distribution;

                        (ii) any breach by Southern or any member of the
            Southern Group of the Separation Agreement or any of the Ancillary
            Agreements (including this Agreement); and

                        (iii) any Liabilities of the Southern Group other than
            the Credit Support Arrangements.

            In the event that any member of the Southern Group makes a payment
to the Southern Energy Indemnitees hereunder, and any of the Southern Energy
Indemnitees subsequently diminishes the Liabilities on account of which such
payment was made, either directly or through a third-party recovery, Southern
Energy will promptly repay (or will procure a Southern Energy Indemnitee to
promptly repay) such member of the Southern Group the amount by which the
payment made by such member of the Southern Group exceeds the actual cost of the
indemnified Liabilities.

            Section 1.4. Procedures for Defense, Settlement and Indemnification
of Third Party Claims.

            (a) Notice of Claims. If a Southern Indemnitee or a Southern Energy
Indemnitee (as applicable) (an "Indemnitee") shall receive notice or otherwise
learn of the assertion by a Person (including any Governmental Authority) who is
not a member of the Southern Group or the Southern Energy Group of any claim or
of the commencement by any such Person of any Action (collectively, a "Third
Party Claim") with respect to which a party (an "Indemnifying Party") may be
obligated to provide indemnification to such Indemnitee pursuant to Section 1.2
or 1.3,

                                       3
<PAGE>   7

or any other section of the Separation Agreement or any Ancillary Agreement
(including this Agreement), Southern and Southern Energy (as applicable) will
ensure that such Indemnitee shall give such Indemnifying Party written notice
thereof within thirty (30) days after becoming aware of such Third Party Claim.
Any such notice shall describe the Third Party Claim in reasonable detail.
Notwithstanding the foregoing, the delay or failure of any Indemnitee or other
Person to give notice as provided in this Section 1.4(a) shall not relieve the
related Indemnifying Party of its obligations under this Article I, except to
the extent that such Indemnifying Party is actually and substantially prejudiced
by such delay or failure to give notice.

            (b) Claims Committee. Any of the parties may refer any dispute
regarding the provisions of this Article I to the Claims Committee for
resolution. All determinations of the Claims Committee, if unanimous, shall be
binding on all of the parties and their respective successors and assigns. The
Claims Committee shall reach a resolution that minimizes expenses for all
parties and seeks to avoid hiring multiple counsel. In the event a Liability
arises from both an event, act or omission relating primarily to the Southern
Energy Business and an event, act or omission relating primarily to the Southern
Business, the Claims Committee shall apportion the Liability in accordance with
comparative fault, and it may re-apportion the Liability as it learns of
additional facts bearing on that assessment. In the event that the Claims
Committee cannot reach a unanimous determination as to the nature, status or
handling of any such claims within thirty (30) days after such referral (unless
the Claims Committee unanimously agrees to a longer time period), the issue will
be submitted for resolution pursuant to the procedures set forth in the dispute
resolution provisions contained in Section 5.7 of the Separation Agreement;
provided, that the provisions of this Section 1.4(b) shall supercede the
requirements of the second sentence of Section 5.7(a) of the Separation
Agreement.

            (c) Defense of Commingled Claims. With respect to any Commingled
Claim, the Claims Committee shall determine which party shall manage the defense
of, and may seek to settle or compromise, such Commingled Claim based upon the
specific facts of such claim.

            (d) Defense By Indemnifying Party. Other than in the case of a
Commingled Claim, an Indemnifying Party will manage the defense of and (unless
the Indemnifying Party has specified any reservations or exceptions to the
obligation to manage the defense or to indemnify that have been referred to, but
not resolved by, the Claims Committee) may settle or compromise any Third Party
Claim. Within thirty (30) days after the receipt of notice from an Indemnitee in
accordance with Section 1.4(a) (or sooner, if the nature of such Third Party
Claim so requires), the Indemnifying Party shall notify the Indemnitee that the
Indemnifying Party will assume responsibility for managing the defense of such
Third Party Claim, which notice shall specify any reservations or exceptions.

            (e) Defense By Indemnitee. If an Indemnifying Party fails to assume
responsibility for managing the defense of a Third Party Claim, or fails to
notify an Indemnitee that it will assume responsibility as provided in Section
1.4(d), such Indemnitee may manage the defense of such Third Party Claim.

                                       4
<PAGE>   8

            (f) No Settlement By Indemnitee Without Consent. Unless the
Indemnifying Party has failed to manage the defense of the Third Party Claim in
accordance with the terms of this Agreement, no Indemnitee may settle or
compromise any Third Party Claim without the consent of the Indemnifying Party.

            (g) No Consent to Certain Judgments or Settlements Without Consent.
Notwithstanding Section 1.4(d) above, no party shall consent to entry of any
judgment or enter into any settlement of a Third Party Claim without the consent
of the other party (such consent not to be unreasonably withheld) if the effect
of such judgment or settlement is to (A) permit any injunction, declaratory
judgment, other order or other nonmonetary relief to be entered, directly or
indirectly, against the other party or (B) materially affect the other party due
to the allocation of Liabilities and related indemnities set forth in the
Separation Agreement, this Agreement or any other Ancillary Agreement.

            Section 1.5. Additional Matters.

            (a) Cooperation in Defense and Settlement. With respect to any Third
Party Claim that implicates both Southern Energy and Southern in a material
fashion due to the allocation of Liabilities, responsibilities for management of
defense and related indemnities set forth in the Separation Agreement, this
Agreement or any of the Ancillary Agreements, the parties agree to cooperate
fully and maintain a joint defense (in a manner that will preserve the
attorney-client privilege with respect thereto) so as to minimize such
Liabilities and defense costs associated therewith. The party that is not
responsible for managing the defense of such Third Party Claims shall, upon
reasonable request, be consulted with respect to significant matters relating
thereto and may, if necessary or helpful, associate counsel to assist in the
defense of such claims.

            (b) Substitution. In the event of an Action in which the
Indemnifying Party is not a named defendant, if either the Indemnitee or the
Indemnifying Party shall so request, the parties shall endeavor to substitute
the Indemnifying Party for the named defendant. If such substitution or addition
cannot be achieved for any reason or is not requested, the rights and
obligations of the parties regarding indemnification and the management of the
defense of claims as set forth in this Article I shall not be altered.

            (c) Subrogation. In the event of payment by or on behalf of any
Indemnifying Party to or on behalf of any Indemnitee in connection with any
Third Party Claim, such Indemnifying Party shall be subrogated to and shall
stand in the place of such Indemnitee, in whole or in part based upon whether
the Indemnifying Party has paid all or only part of the Indemnitee's Liability,
as to any events or circumstances in respect of which such Indemnitee may have
any right, defense or claim relating to such Third Party Claim against any
claimant or plaintiff asserting such Third Party Claim or against any other
person. Such Indemnitee shall cooperate with such Indemnifying Party in a
reasonable manner, and at the cost and expense of such Indemnifying Party, in
prosecuting any subrogated right, defense or claim.

                                       5
<PAGE>   9
            (d) Not Applicable to Taxes or Employment Liabilities. This
Agreement shall not apply to Taxes (which are covered by the Tax Indemnification
Agreement) or Employment Liabilities (which are covered by the Employee Matters
Agreement).

            Section 1.6. Survival of Indemnities. Subject to Section 3.7, the
rights and obligations of the members of the Southern Group and the Southern
Energy Group under this Article I shall survive the sale or other transfer by
any party of any assets or businesses or the assignment by it of any Liabilities
or the sale by any member of the Southern Group or the Southern Energy Group of
the capital stock or other equity interests of any Subsidiary to any Person.

                                   ARTICLE II

                               INSURANCE MATTERS

            Section 2.1. Southern Energy Insurance Coverage During the
Transition Period.

            (a) Maintain Comparable Insurance. Throughout the period beginning
on the Separation Date and ending on the Distribution Date (i.e., the "Insurance
Transition Period"), Southern shall, subject to insurance market conditions and
other factors beyond its control, maintain policies of insurance, including for
the benefit of Southern Energy or any of its Subsidiaries, directors, officers,
employees or other covered parties (collectively, the "Southern Energy Covered
Parties") which are comparable to those maintained generally by Southern;
provided, however, that if Southern determines that (i) the amount or scope of
such coverage will be reduced to a level materially inferior to the level of
coverage in existence immediately prior to the Insurance Transition Period or
(ii) the retention or deductible level applicable to such coverage, if any, will
be increased to a level materially greater than the levels in existence
immediately prior to the Insurance Transition Period, Southern shall give
Southern Energy notice of such determination as promptly as practicable. Upon
notice of such determination, Southern Energy shall be entitled to no less than
sixty (60) days to evaluate its options regarding continuance of coverage
hereunder and may cancel its interest in all or any portion of such coverage as
of any day within such sixty (60) day period. Except as provided below, during
the Insurance Transition Period, such policies of insurance shall cover Southern
Energy Covered Parties for liabilities and losses insured prior to the
Distribution Date.

            (b) Reimbursement for Premiums. Southern Energy shall promptly pay
or reimburse Southern, as the case may be, for premium expenses, and Southern
Energy Covered Parties shall promptly pay or reimburse Southern for any costs
and expenses which Southern may incur in connection with the insurance coverages
maintained pursuant to this Section 2.1, including but not limited to any
subsequent premium adjustments. All payments and reimbursements by Southern
Energy and Southern Energy Covered Parties to Southern shall be made within
fifteen (15) days after Southern Energy's receipt of an invoice from Southern.

            Section 2.2. Cooperation and Agreement Not to Release Carriers. Each
of Southern and Southern Energy will share such information as is reasonably
necessary in order to permit the other to manage and conduct its insurance
matters in an orderly fashion. Each of Southern

                                       6
<PAGE>   10

and Southern Energy, at the request of the other, shall cooperate with and use
commercially reasonable efforts to assist the other in recoveries for claims
made under any insurance policy for the benefit of any insured party, and
neither Southern nor Southern Energy, nor any of their Subsidiaries, shall take
any action which would intentionally jeopardize or otherwise interfere with
either party's ability to collect any proceeds payable pursuant to any insurance
policy. Except as otherwise contemplated by the Separation Agreement, this
Agreement or any Ancillary Agreement, after the Separation Date, neither
Southern nor Southern Energy shall (and shall ensure that no member of their
respective Groups shall), without the consent of the other, provide any
insurance carrier with a release, or amend, modify or waive any rights under any
such policy or agreement, if such release, amendment, modification or waiver
would adversely affect any rights or potential rights of any member of the other
Group thereunder. However, nothing in this Section 2.2 shall (A) preclude any
member of any Group from presenting any claim or from exhausting any policy
limit, (B) require any member of any Group to pay any premium or other amount or
to incur any Liability, (C) require any member of any Group to renew, extend or
continue any policy in force or (D) except as otherwise provided in Section
2.12, apply to Southern in connection with rights to coverage for Environmental
Actions under Insurance Policies in effect prior to the Separation Date.

            Section 2.3. Southern Energy Insurance Coverage After the Insurance
Transition Period. From and after expiration of the Insurance Transition Period,
Southern Energy, and Southern Energy alone, shall be responsible for obtaining
and maintaining insurance programs for its risk of loss and such insurance
arrangements shall be separate and apart from Southern's insurance programs.
Notwithstanding the foregoing, Southern, upon the request of Southern Energy,
shall use all commercially reasonable efforts to assist Southern Energy in the
transition to its own separate insurance programs from and after the Insurance
Transition Period, and shall provide Southern Energy with any information that
is in the possession of Southern and is reasonably available and necessary to
either obtain insurance coverages for Southern Energy or to assist Southern
Energy in preventing unintended self-insurance, in whatever form.

            Section 2.4. Responsibilities for Self-insured Obligations. Southern
Energy will reimburse Southern for all amounts necessary to exhaust or otherwise
satisfy all applicable self-insured retentions, amounts for fronted policies,
deductibles and retrospective premium adjustments and similar amounts not
covered by Insurance Policies in connection with Southern Energy Liabilities and
Insured Southern Energy Liabilities.

            Section 2.5. Procedures With Respect to Insured Southern Energy
Liabilities.

            (a) Reimbursement. Southern Energy will reimburse Southern for all
amounts incurred to pursue insurance recoveries from Insurance Policies for
Insured Southern Energy Liabilities.

            (b) Management of Claims. The defense of claims, suits or actions
giving rise to potential or actual Insured Southern Energy Liabilities will be
managed (in conjunction with Southern's insurers, as appropriate) by the party
that would have had responsibility for managing such claims, suits or actions
had such Insured Southern Energy Liabilities been Southern Energy Liabilities.

                                       7
<PAGE>   11

            Section 2.6. Insufficient Limits of Liability for Southern
Liabilities and Southern Energy Liabilities. In the event that there are
insufficient limits of liability available under Southern's Insurance Policies
in effect prior to the Distribution Date to cover the Liabilities of Southern
and/or Southern Energy that would otherwise be covered by such Insurance
Policies, then to the extent that other insurance is not available to Southern
and/or Southern Energy for such Liabilities an adjustment will be made in
accordance with the following procedures:

                        (i) Each party will be allocated an amount equal to
            their proportional share of any excess Liabilities (net of any
            deductible) of the lesser of (A) the available limits of liability
            available under Southern's Insurance Policies in effect prior to the
            Distribution Date net of uncollectible amounts attributable to
            insurer insolvencies, and (B) the proceeds received from Southern's
            Insurance Policies if the Liabilities are the subject of disputed
            coverage claims and, following consultation with each other,
            Southern and/or Southern Energy agree to accept less than full
            policy limits from Southern's and Southern Energy's insurers (the
            "Coverage Amount").

                        (ii) A party who receives more than its share of the
            Coverage Amount (the "Overallocated Party") agrees to reimburse the
            other party (the "Underallocated Party") to the extent that the
            Liabilities of the Underallocated Party that would have been covered
            under such Insurance Policies (subject to the limitations of Section
            2.12) is less than the Underallocated Party's share of the Coverage
            Amount.

                        (iii) This Section 2.6 shall terminate three years
            following the Distribution Date; provided, however, that either
            party may extend the three year period applicable to these
            provisions by up to five additional two-year periods, or as
            otherwise shall be agreed to in order to accomplish the allocation
            objective set forth above and in order to have access to any
            available coverage under the Insurance Policies.

            Section 2.7. Cooperation. Southern and Southern Energy will
cooperate with each other in all respects, and they shall execute any additional
documents which are reasonably necessary, to effectuate the provisions of this
Article II.

            Section 2.8. No Assignment or Waiver. This Agreement shall not be
considered as an attempted assignment of any policy of insurance or as a
contract of insurance and shall not be construed to waive any right or remedy of
any member of the Southern Group in respect of any Insurance Policy or any other
contract or policy of insurance.

            Section 2.9. No Liability. Southern Energy does hereby, for itself
and as agent for each other member of the Southern Energy Group, agree that no
member of the Southern Group or any Southern Indemnitee shall have any Liability
whatsoever as a result of the insurance policies and practices of Southern and
its Subsidiaries as in effect at any time prior to the Distribution Date,
including as a result of the level or scope of any such insurance, the
creditworthiness of any insurance carrier, the terms and conditions of any
policy, the adequacy or timeliness of any notice to any insurance carrier with
respect to any claim or potential claim or otherwise.

                                       8
<PAGE>   12

            Section 2.10. No Restrictions. Nothing in this Agreement shall be
deemed to restrict any member of the Southern Energy Group from acquiring at its
own expense any other insurance policy in respect of any Liabilities or covering
any period.

            Section 2.11. Further Agreements. The Parties acknowledge that they
intend to allocate financial obligations without violating any laws regarding
insurance, self-insurance or other financial responsibility. If it is determined
that any action undertake pursuant to the Separation Agreement, this Agreement
or any Ancillary Agreement is violative of any insurance, self-insurance or
related financial responsibility law or regulation, the parties agree to work
together to do whatever is necessary to comply with such law or regulation while
trying to accomplish, as much as possible, the allocation of financial
obligations as intended in the Separation Agreement, this Agreement and any
Ancillary Agreement.

            Section 2.12. Agreement Regarding Insurance Covering Environmental
Claims. Notwithstanding anything to the contrary in this Agreement (including
Article II hereof), the Separation Agreement or any Ancillary Agreement:

            (a) Except as set forth in Section 2.12(b), Southern Energy shall
not make any claim against, or be entitled to any proceeds from, any primary,
umbrella or excess general liability policy in effect prior to the Separation
Date for any Environmental Claims;

            (b) In the event that an Environmental Claim could be covered under
any primary, umbrella or excess general liability policy in effect prior to the
Separation Date, and provided that at the time the claim is made Southern has
not fully and finally released or agreed to release (at Southern's sole
discretion) the insurance carrier with respect to coverage applicable to that
claim under such policy, Southern Energy shall be permitted to submit the
Environmental Claim to Southern for submission to the relevant insurance
carrier. Southern shall control all negotiations on the claim and the policy
with the insurance carrier, and Southern Energy shall be entitled to an
equitable apportionment of any proceeds received by Southern from the policy.

            Section 2.13. Matters Governed by Employee Matters Agreement. This
Article II shall not apply to any insurance policies that are the subject of the
Employee Matters Agreement.

                                   ARTICLE III

                                  MISCELLANEOUS

            Section 3.1. Entire Agreement. This Agreement, the Master Separation
Agreement, the other Ancillary Agreements and the Exhibits and Schedules
attached hereto and thereto, constitutes the entire agreement between the
parties with respect to the subject matter hereof and shall supersede all prior
written and oral and all contemporaneous oral agreements and understandings with
respect to the subject matter hereof.

                                       9
<PAGE>   13

            Section 3.2. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Georgia as to all matters
regardless of the laws that might otherwise govern under principles of conflicts
of laws applicable thereto.

            Section 3.3. Notices. Any notice, demand, offer, request or other
communication required or permitted to be given by either party pursuant to the
terms of this Agreement shall be in writing and shall be deemed effectively
given the earlier of (i) when received, (ii) when delivered personally, (iii)
one (1) business day after being delivered by facsimile (with receipt of
appropriate confirmation), (iv) one (1) business day after being deposited with
an overnight courier service or (v) four (4) days after being deposited in the
U.S. mail, First Class with postage prepaid, and addressed to the attention of
the party's General Counsel at the address of its principal executive office or
such other address as a party may request by notifying the other in writing.

            Section 3.4. Parties in Interest. This Agreement, including the
Schedules and Exhibits hereto, and the other documents referred to herein, shall
be binding upon Southern, Southern's Subsidiaries, Southern Energy and Southern
Energy's Subsidiaries and inure solely to the benefit of the Southern Energy
Indemnitees and the Southern Indemnitees and their respective permitted assigns,
and nothing in this Agreement, express or implied, is intended to confer upon
any other Person any rights or remedies of any nature whatsoever under or by
reason of this Agreement.

            Section 3.5. Other Agreements Evidencing Indemnification
Obligations. Southern hereby agrees to execute, for the benefit of any Southern
Energy Indemnitee, such documents as may be reasonably requested by such
Southern Energy Indemnitee, evidencing Southern's agreement that the
indemnification obligations of Southern set forth in this Agreement inure to the
benefit of and are enforceable by such Southern Energy Indemnitee. Southern
Energy hereby agrees to execute, for the benefit of any Southern Indemnitee,
such documents as may be reasonably requested by such Southern Indemnitee,
evidencing Southern Energy's agreement that the indemnification obligations of
Southern Energy set forth in this Agreement inure to the benefit of and are
enforceable by such Southern Indemnitee.

            Section 3.6. Counterparts. This Agreement, including the Schedules
and Exhibits hereto, and the other documents referred to herein, may be executed
in counterparts, each of which shall be deemed to be an original but all of
which shall constitute one and the same agreement.

            Section 3.7. Assignment. The rights and obligations in this
Agreement may not be assigned or delegated by any party hereto, in whole or in
part, without the express prior written consent of the other party hereto.

            Section 3.8. Severability. If any term or other provision of this
Agreement or the Schedules or Exhibits attached hereto is determined by a
nonappealable decision by a court, administrative agency or arbitrator to be
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party.

                                       10
<PAGE>   14

Upon such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that transactions
contemplated hereby are fulfilled to the fullest extent possible.

            Section 3.9. Failure or Indulgence Not Waiver. No failure or delay
on the part of either party hereto in the exercise of any right hereunder shall
impair such right or be construed to be a waiver of, or acquiescence in, any
breach of any representation, warranty or agreement herein, nor shall any single
or partial exercise of any such right preclude other or further exercise thereof
or of any other right.

            Section 3.10. Amendment. No change or amendment will be made to this
Agreement except by an instrument in writing signed on behalf of each of the
parties to this Agreement.

            Section 3.11. Authority. Each of the parties hereto represents to
the other that (a) it has the corporate or other requisite power and authority
to execute, deliver and perform this Agreement, (b) the execution, delivery and
performance of this Agreement by it have been duly authorized by all necessary
corporate or other action, (c) it has duly and validly executed and delivered
this Agreement, and (d) this Agreement is a legal, valid and binding obligation,
enforceable against it in accordance with its terms subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and general equity principles.

            Section 3.12. Interpretation. The headings contained in this
Agreement, in any Exhibit or Schedule hereto and in the table or contents to
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. Any capitalized term used in
any Schedule or Exhibit but not otherwise defined therein, shall have the
meaning assigned to such term in this Agreement. When a reference is made in
this Agreement to an Article or a Section, Exhibit or Schedule, such reference
shall be to an Article or Section of, or an Exhibit or Schedule to, this
Agreement unless otherwise indicated.

            Section 3.13. Governmental Approvals. The parties acknowledge that
certain of the provisions of this Agreement may be subject to certain conditions
established by applicable government regulations, orders, and approvals
("Existing Authority"). The parties intend to implement this Agreement
consistent with and to the extent permitted by Existing Authority and to
cooperate toward obtaining and maintaining in effect such governmental agency
consents, orders or approvals as may be required in order to implement this
Agreement as fully as possible in accordance with its terms.

                                   ARTICLE IV

                                  DEFINITIONS

            Section 4.1. Action. "Action" means any demand, action, suit,
countersuit, arbitration, inquiry, proceeding or investigation by or before any
federal, state, local, foreign or international governmental authority or any
arbitration or mediation tribunal.

            Section 4.2. Affiliated Company. "Affiliated Company" has the
meaning set forth in the Separation Agreement.

                                       11
<PAGE>   15

            Section 4.3. Claims Committee. "Claims Committee" means a committee
composed of (i) either the General Counsel or an Associate General Counsel of
Southern and (ii) either the General Counsel or an Associate General Counsel of
Southern Energy.

            Section 4.4. Commingled Claims. "Commingled Claims" means,
collectively, any Third Party Claims (i) which involve an employee, consultant
or contractor that was employed by both the Southern Energy Business and the
Southern Business, (ii) in which both Southern and Southern Energy are named, or
(iii) involving both the Southern Energy Business and the Southern Business.

            Section 4.5. Coverage Amount. "Coverage Amount" has the meaning set
forth in Section 2.6(a) of this Agreement.

            Section 4.6. Credit Support Arrangements. "Credit Support
Arrangements" has the meaning set forth in Section 5.13 of the Separation
Agreement.

            Section 4.7. Employee Matters Agreement. "Employee Matters
Agreement" means the Employee Matters Agreement attached as an exhibit to the
Separation Agreement.

            Section 4.8. Employment Liabilities. "Employment Liabilities" has
the meaning set forth in Schedule 2.01 to the Employee Matters Agreement.

            Section 4.9. Environmental Claim. "Environmental Claim" means any
and all administrative or judicial actions, suits, orders, claims, liens,
notices of violation, investigations, complaints, requests for information,
proceedings or other written communication, whether criminal or civil, by any
Person based upon, alleging, asserting, or claiming any (a) violation of, or
liability under any environmental law, (b) violation of any permit, or (c)
liability for investigatory costs, cleanup costs, removal costs, remedial costs,
response costs, natural resource damages, property damage, personal injury,
fines, or penalties arising out of, based upon, resulting from or related to,
the presence, release, or threatened release into the environment of any
hazardous materials or any other environmental condition.

            Section 4.10. HoldCo Transaction. "HoldCo Transaction" has the
meaning set forth in the Separation Agreement.

            Section 4.11. Indemnitee. "Indemnitee" has the meaning set forth in
Section 1.4(a) hereof.

            Section 4.12. Insurance Policies. "Insurance Policies" means
insurance policies pursuant to which a Person makes a true risk transfer to an
insurer.

                                       12
<PAGE>   16

            Section 4.13. Insurance Transition Period. "Insurance Transition
Period" has the meaning set forth in Section 2.1 of this Agreement.

            Section 4.14. Insured Southern Energy Liability. "Insured Southern
Energy Liability" means any Southern Energy Liability to the extent that (i) it
is covered under the terms of Southern's Insurance Policies in effect prior to
the Distribution Date and (ii) Southern Energy is not a named insured under, or
otherwise entitled to the benefits of, such Insurance Policies.

            Section 4.15. Intercompany Agreements. "Intercompany Agreements"
means any written agreement between Southern or any of its Subsidiaries or
Affiliated Companies and Southern Energy or any of its Subsidiaries or
Affiliated Companies which is in effect prior to the Separation Date.

            Section 4.16. IPO Registration Statement. "IPO Registration
Statement" means the registration statement on Form S-1 pursuant to the
Securities Act to be filed with the SEC registering the shares of common stock
of Southern Energy to be issued in the IPO, together with all amendments
thereto.

            Section 4.17. Liabilities. "Liabilities" means all debts,
liabilities, guarantees, assurances, commitments and obligations, whether fixed,
contingent or absolute, asserted or unasserted, matured or unmatured, liquidated
or unliquidated, accrued or not accrued, known or unknown, due or to become due,
whenever or however arising (including, without limitation, whether arising out
of any contract or tort based on negligence or strict liability) and whether or
not the same would be required by generally accepted principles and accounting
policies to be reflected in financial statements or disclosed in the notes
thereto. For purposes of any indemnification hereunder, "Liabilities" shall be
deemed also to include any and all damages, claims, suits, judgments, fines,
penalties, costs and expenses of any kind or character, including attorney's
fees.

            Section 4.18. Person. "Person" means an individual, a partnership, a
corporation, a limited liability company, an association, a joint stock company,
a trust, a joint venture, an unincorporated organization and a governmental
entity or any department, agency or political subdivision thereof.

            Section 4.19. Separation. "Separation" has the meaning set forth in
the Separation Agreement.

                                       13
<PAGE>   17

            Section 4.20. Separation Agreement. "Separation Agreement" means the
Master Separation and Distribution Agreement dated [ _______, 2000], of which
this is an exhibit thereto.

            Section 4.21. Separation Date. "Separation Date" means [12:01 a.m.,
Eastern Standard Time, July 1, 2000], or such date as may be fixed by the Board
of Directors of Southern.

            Section 4.22. Southern Business. "Southern Business" has the
meaning set forth in the Separation Agreement.

            Section 4.23. Southern Energy Business. "Southern Energy Business"
has the meaning set forth in the Separation Agreement.

            Section 4.24. Southern Energy Covered Parties. "Southern Energy
Covered Parties" shall have the meaning set forth in Section 2.1(a) of this
Agreement.

            Section 4.25. Southern Energy Group. "Southern Energy Group" has the
meaning set forth in the Separation Agreement.

            Section 4.26. Southern Energy Indemnitees. "Southern Energy
Indemnitees" means Southern Energy, each member of the Southern Energy Group and
each of their respective directors, officers and employees.

            Section 4.27. Southern Energy Liabilities. "Southern Energy
Liabilities" means i) all Liabilities of the Southern Energy Group, and (ii) the
Credit Support Arrangements.

                                       14
<PAGE>   18

            Section 4.28. Southern Group. "Southern Group" has the meaning set
forth in the Separation Agreement.

            Section 4.29. Southern Indemnitees. "Southern Indemnitees" means
Southern, each member of the Southern Group and each of their respective
directors, officers and employees.

            Section 4.30. Subsidiary. "Subsidiary" has the meaning set forth in
the Separation Agreement.

            Section 4.31. Tax Indemnification Agreement. "Tax Indemnification
Agreement" means the Tax Indemnification Agreement attached as an exhibit to the
Separation Agreement.

            Section 4.32. Taxes. "Taxes" has the meaning set forth in the Tax
Indemnification Agreement.

            Section 4.33. Third Party Claim. "Third Party Claim" has the meaning
set forth in Section 1.4(a) of this Agreement.

                         [SIGNATURES ON FOLLOWING PAGE]

                                       15
<PAGE>   19

            IN WITNESS WHEREOF, each of the parties has caused this
Indemnification and Insurance Matters Agreement to be executed on its behalf by
its officers thereunto duly authorized on the day and year first above written.

THE SOUTHERN COMPANY

By:
    --------------------
Name:
      ------------------
Title:
       -----------------

SOUTHERN ENERGY, INC.

By:
    --------------------
Name:
      ------------------
Title:
       -----------------

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