SOUTHERN COMPANY
Table of Contents

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

 


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     Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
                         
    Large        
    Accelerated   Accelerated   Non-accelerated
Registrant   Filer   Filer   Filer
The Southern Company
    X                  
Alabama Power Company
                    X  
Georgia Power Company
                    X  
Gulf Power Company
                    X  
Mississippi Power Company
                    X  
Southern Power Company
                    X  
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o  No þ (Response applicable to all registrants.)
             
    Description of   Shares Outstanding  
Registrant   Common Stock   at September 30, 2007  
The Southern Company
  Par Value $5 Per Share     759,478,801  
Alabama Power Company
  Par Value $40 Per Share     15,750,000  
Georgia Power Company
  Without Par Value     9,261,500  
Gulf Power Company
  Without Par Value     1,792,717  
Mississippi Power Company
  Without Par Value     1,121,000  
Southern Power Company
  Par Value $0.01 Per Share     1,000  
     This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, and Southern Power Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.

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INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2007
           
        Page  
        Number  
DEFINITIONS     5  
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION     6  
   
 
       
PART I — FINANCIAL INFORMATION
       
   
 
       
Item 1.  
Financial Statements (Unaudited)
       
Item 2.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
       
           
        8  
        9  
        10  
        12  
        13  
           
        36  
        36  
        37  
        38  
        40  
           
        56  
        56  
        57  
        58  
        60  
           
        77  
        77  
        78  
        79  
        81  
           
        97  
        97  
        98  
        99  
        101  
           
        116  
        116  
        117  
        118  
        120  
        131  
Item 3.       34  
Item 4.       34  

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INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2007
           
        Page  
        Number  
PART II — OTHER INFORMATION
       
   
 
       
Item 1.       147  
Item 1A.       147  
Item 2.  
Unregistered Sales of Equity Securities and Use of Proceeds
  Inapplicable
Item 3.  
Defaults Upon Senior Securities
  Inapplicable
Item 4.  
Submission of Matters to a Vote of Security Holders
  Inapplicable
Item 5.  
Other Information
  Inapplicable
Item 6.       148  
        152  

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

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
     This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, statements concerning the strategic goals for the wholesale business, retail sales growth, customer growth, storm damage cost recovery and repairs, fuel cost recovery, environmental regulations and expenditures, access to sources of capital, projections for postretirement benefit trust contributions, synthetic fuel investments, financing activities, completion or termination of construction projects, impacts of adoption of new accounting rules, PPA revenues, costs of implementing the IIC settlement with the FERC, and estimated construction and other expenditures. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar terminology. There are various factors that could cause actual results to differ materially from those suggested by the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include:
  the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry, implementation of the Energy Policy Act of 2005, environmental laws including regulation of emissions of sulfur, nitrogen, mercury, carbon, soot, or particulate matter and other substances, and also changes in tax and other laws and regulations to which Southern Company and its subsidiaries are subject, as well as changes in application of existing laws and regulations;
  current and future litigation, regulatory investigations, proceedings or inquiries, including the pending EPA civil actions against certain Southern Company subsidiaries, FERC matters, IRS audits, and Mirant matters;
  the effects, extent, and timing of the entry of additional competition in the markets in which Southern Company’s subsidiaries operate;
  variations in demand for electricity, including those relating to weather, the general economy, population and business growth (and declines), and the effects of energy conservation measures;
  available sources and costs of fuels;
  ability to control costs;
  investment performance of Southern Company’s employee benefit plans;
  advances in technology;
  state and federal rate regulations and the impact of pending and future rate cases and negotiations, including rate actions relating to fuel and storm restoration cost recovery;
  the performance of projects undertaken by the non-utility businesses and the success of efforts to invest in and develop new opportunities;
  fluctuations in the level of oil prices;
  the level of production by the synthetic fuel operations at Carbontronics Synfuels Investors LP and Alabama Fuel Products, LLC for the remainder of fiscal year 2007;
  internal restructuring or other restructuring options that may be pursued;
  potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial to Southern Company or its subsidiaries;
  the ability of counterparties of Southern Company and its subsidiaries to make payments as and when due;
  the ability to obtain new short- and long-term contracts with neighboring utilities;
  the direct or indirect effect on Southern Company’s business resulting from terrorist incidents and the threat of terrorist incidents;
  interest rate fluctuations and financial market conditions and the results of financing efforts, including Southern Company’s and its subsidiaries’ credit ratings;
  the ability of Southern Company and its subsidiaries to obtain additional generating capacity at competitive prices;
  catastrophic events such as fires, earthquakes, explosions, floods, hurricanes, droughts, pandemic health events such as an avian influenza, or other similar occurrences;
  the direct or indirect effects on Southern Company’s business resulting from incidents similar to the August 2003 power outage in the Northeast;
  the effect of accounting pronouncements issued periodically by standard setting bodies; and
  other factors discussed elsewhere herein and in other reports (including the Form 10-K) filed by the registrants from time to time with the SEC.
Each registrant expressly disclaims any obligation to update any forward-looking statements.

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THE SOUTHERN COMPANY AND
SUBSIDIARY COMPANIES

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
      2007     2006     2007      2006  
    (in thousands)     (in thousands)  
Operating Revenues:
                                   
Retail revenues
  $ 4,085,704     $ 3,853,423     $ 9,934,571     $ 9,295,223  
Wholesale revenues
    563,233       506,326       1,530,809       1,361,097  
Other electric revenues
    130,590       120,001       381,467       347,086  
Other revenues
    52,516       69,628       165,793       200,735  
 
                       
Total operating revenues
    4,832,043       4,549,378       12,012,640       11,204,141  
 
                       
Operating Expenses:
                               
Fuel
    1,738,693       1,625,046       4,512,718       3,981,241  
Purchased power
    281,489       239,891       445,698       483,145  
Other operations
    651,127       603,346       1,802,876       1,753,719  
Maintenance
    260,449       236,647       831,483       793,569  
Depreciation and amortization
    311,939       300,104       928,569       896,562  
Taxes other than income taxes
    206,763       186,631       574,329       540,834  
 
                       
Total operating expenses
    3,450,460       3,191,665       9,095,673       8,449,070  
 
                       
Operating Income
    1,381,583       1,357,713       2,916,967       2,755,071  
Other Income and (Expense):
                               
Allowance for equity funds used during construction
    28,050       11,847       71,821       33,772  
Interest income
    11,638       12,748       31,853       25,657  
Equity in losses of unconsolidated subsidiaries
    (410 )     (133 )     (20,712 )     (44,985 )
Leveraged lease income
    12,359       16,787       31,928       52,489  
Impairment loss on equity method investments
          (695 )           (15,969 )
Interest expense, net of amounts capitalized
    (220,090 )     (185,189 )     (614,345 )     (542,259 )
Interest expense to affiliate trusts
    (12,696 )     (30,550 )     (58,867 )     (91,819 )
Preferred and preference dividends of subsidiaries
    (10,451 )     (9,120 )     (30,709 )     (26,141 )
Other income (expense), net
    17,271       (30,154 )     8,325       (26,986 )
 
                       
Total other income and (expense)
    (174,329 )     (214,459 )     (580,706 )     (636,241 )
 
                       
Earnings Before Income Taxes
    1,207,254       1,143,254       2,336,261       2,118,830  
Income taxes
    445,259       405,269       806,424       734,015  
 
                       
Consolidated Net Income
  $ 761,995     $ 737,985     $ 1,529,837     $ 1,384,815  
 
                       
Common Stock Data:
                               
Earnings per share-
                               
Basic
  $ 1.00     $ 0.99     $ 2.03     $ 1.86  
Diluted
  $ 1.00     $ 0.99     $ 2.02     $ 1.85  
Average number of basic shares of common stock outstanding (in thousands)
    758,308       742,884       754,568       742,532  
Average number of diluted shares of common stock outstanding (in thousands)
    762,392       747,560       759,182       746,983  
Cash dividends paid per share of common stock
  $ 0.4025     $ 0.3875     $ 1.1925     $ 1.1475  
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Nine Months  
    Ended September 30,  
    2007     2006  
    (in thousands)  
Operating Activities:
               
Consolidated net income
  $ 1,529,837     $ 1,384,815  
Adjustments to reconcile consolidated net income to net cash provided from operating activities —
               
Depreciation and amortization
    1,108,475       1,059,567  
Deferred income taxes and investment tax credits
    102,314       344,062  
Allowance for equity funds used during construction
    (71,821 )     (33,772 )
Equity in losses of unconsolidated subsidiaries
    20,712       44,985  
Leveraged lease income
    (31,928 )     (52,489 )
Pension, postretirement, and other employee benefits
    75,303       74,033  
Stock option expense
    26,011       25,045  
Hedge settlements
    15,151       18,006  
Hurricane Katrina grant proceeds-property reserve
    60,000        
Other, net
    10,454       47,060  
Changes in certain current assets and liabilities —
               
Receivables
    (426,107 )     (460,092 )
Fossil fuel stock
    (57,624 )     (136,720 )
Materials and supplies
    (55,191 )     (56,559 )
Other current assets
    (2,808 )     61,019  
Hurricane Katrina grant proceeds
    14,345        
Accounts payable
    (3,951 )     (319,564 )
Accrued taxes
    303,781       185,626  
Accrued compensation
    (148,274 )     (162,455 )
Other current liabilities
    (1,342 )     (42,382 )
 
           
Net cash provided from operating activities
    2,467,337       1,980,185  
 
           
Investing Activities:
               
Property additions
    (2,469,059 )     (2,112,780 )
Investment in restricted cash from pollution control bonds
    (96,052 )      
Distribution of restricted cash from pollution control bonds
    44,550        
Nuclear decommissioning trust fund purchases
    (538,049 )     (572,932 )
Nuclear decommissioning trust fund sales
    531,169       566,052  
Proceeds from property sales
    31,333       148,427  
Investment in unconsolidated subsidiaries
    (34,550 )     (57,116 )
Cost of removal, net of salvage
    (65,601 )     (53,605 )
Hurricane Katrina capital grant proceeds
    10,869        
Other
    25,908       (66,517 )
 
           
Net cash used for investing activities
    (2,559,482 )     (2,148,471 )
 
           
Financing Activities:
               
Increase (decrease) in notes payable, net
    (656,348 )     788,744  
Proceeds —
               
Long-term debt
    3,081,500       1,075,845  
Common stock
    414,498       30,804  
Preferred and Preference Stock
    150,000        
Redemptions —
               
Long-term debt
    (904,270 )     (550,176 )
Long-term debt to affiliate trusts
    (695,376 )     (67,457 )
Preferred stock
          (14,569 )
Common stock repurchased
          (117 )
Payment of common stock dividends
    (898,766 )     (851,991 )
Other
    (31,432 )     (26,811 )
 
           
Net cash provided from financing activities
    459,806       384,272  
 
           
Net Change in Cash and Cash Equivalents
    367,661       215,986  
Cash and Cash Equivalents at Beginning of Period
    166,846       202,111  
 
           
Cash and Cash Equivalents at End of Period
  $ 534,507     $ 418,097  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $44,229 and $16,604 capitalized for 2007 and 2006, respectively)
  $ 600,634     $ 638,380  
Income taxes (net of refunds)
  $ 388,634     $ 245,941  
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                 
    At September 30,     At December 31,  
Assets   2007     2006  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 534,507     $ 166,846  
Restricted cash
    51,502        
Receivables —
               
Customer accounts receivable
    1,360,586       942,821  
Unbilled revenues
    370,541       283,275  
Under recovered regulatory clause revenues
    919,771       516,441  
Other accounts and notes receivable
    318,377       329,619  
Accumulated provision for uncollectible accounts
    (26,336 )     (34,901 )
Fossil fuel stock, at average cost
    732,345       674,902  
Materials and supplies, at average cost
    701,243       648,127  
Vacation pay
    123,505       121,246  
Prepaid expenses
    167,974       127,908  
Other
    181,839       242,735  
 
           
Total current assets
    5,435,854       4,019,019  
 
           
Property, Plant, and Equipment:
               
In service
    46,565,693       45,484,895  
Less accumulated depreciation
    17,213,524       16,581,886  
 
           
 
    29,352,169       28,903,009  
Nuclear fuel, at amortized cost
    336,477       317,429  
Construction work in progress
    2,896,405       1,871,538  
 
           
Total property, plant, and equipment
    32,585,051       31,091,976  
 
           
Other Property and Investments:
               
Nuclear decommissioning trusts, at fair value
    1,146,615       1,057,534  
Leveraged leases
    976,928       1,138,730  
Other
    259,147       296,484  
 
           
Total other property and investments
    2,382,690       2,492,748  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    932,382       895,446  
Prepaid pension costs
    1,577,648       1,548,983  
Unamortized debt issuance expense
    183,947       171,758  
Unamortized loss on reacquired debt
    289,820       293,016  
Deferred under recovered regulatory clause revenues
    354,548       845,201  
Other regulatory assets
    912,102       935,804  
Other
    654,172       564,498  
 
           
Total deferred charges and other assets
    4,904,619       5,254,706  
 
           
 
               
Total Assets
  $ 45,308,214     $ 42,858,449  
 
           
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                 
    At September 30,     At December 31,  
Liabilities and Stockholders’ Equity   2007     2006  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 1,721,312     $ 1,416,898  
Notes payable
    1,284,453       1,940,801  
Accounts payable
    1,102,793       1,081,256  
Customer deposits
    269,420       248,781  
Accrued taxes —
               
Income taxes
    363,065       110,009  
Other
    423,928       390,716  
Accrued interest
    199,325       183,918  
Accrued vacation pay
    154,857       151,113  
Accrued compensation
    299,306       443,610  
Other
    298,181       385,858  
 
           
Total current liabilities
    6,116,640       6,352,960  
 
           
Long-term Debt
    13,095,389       10,942,025  
 
           
Long-term Debt Payable to Affiliated Trusts
    721,651       1,561,358  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    5,853,662       5,989,063  
Deferred credits related to income taxes
    278,043       291,474  
Accumulated deferred investment tax credits
    485,259       503,217  
Employee benefit obligations
    1,682,419       1,566,591  
Asset retirement obligations
    1,184,590       1,136,982  
Other cost of removal obligations
    1,318,417       1,300,461  
Other regulatory liabilities
    893,507       793,869  
Other
    565,054       305,255  
 
           
Total deferred credits and other liabilities
    12,260,951       11,886,912  
 
           
Total Liabilities
    32,194,631       30,743,255  
 
           
Preferred and Preference Stock of Subsidiaries
    766,302       744,065  
 
           
Common Stockholders’ Equity:
               
Common stock, par value $5 per share —
               
Authorized — 1 billion shares
               
Issued — September 30, 2007: 759,863,967 Shares;
               
— December 31, 2006: 751,863,854 Shares
               
Treasury — September 30, 2007: 385,166 Shares;
               
— December 31, 2006: 5,593,691 Shares
               
Par value
    3,799,320       3,759,319  
Paid-in capital
    1,340,344       1,096,387  
Treasury, at cost
    (10,571 )     (192,309 )
Retained earnings
    7,256,378       6,765,219  
Accumulated other comprehensive loss
    (38,190 )     (57,487 )
 
           
Total Common Stockholders’ Equity
    12,347,281       11,371,129  
 
           
Total Liabilities and Stockholders’ Equity
  $ 45,308,214     $ 42,858,449  
 
           
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2007     2006     2007     2006  
    (in thousands)     (in thousands)  
Consolidated Net Income
  $ 761,995     $ 737,985     $ 1,529,837     $ 1,384,815  
Other comprehensive income (loss):
                               
Qualifying hedges:
                               
Changes in fair value, net of tax of $(7,342), $(18,019), $6,087, and $(3,634), respectively
    (11,667 )     (28,556 )     9,704       (5,645 )
Reclassification adjustment for amounts included in net income, net of tax of $1,548, $(646), $4,227, and $(340), respectively
    2,369       1,059       6,770       1,347  
Marketable securities:
                               
Change in fair value, net of tax of $1,094, $365, $2,998, and $4,772, respectively
    2,130       866       4,757       7,721  
Reclassification adjustment for amounts included in net income, net of tax of $(127), $-, $(488), and $-, respectively
    (201 )           (774 )      
Pension and other post retirement benefit plans:
                               
Additional prior service costs from amendment to non-qualified pension plans, net of tax of $-, $-, $(1,510), and $-, respectively
                (2,424 )      
Reclassification adjustment for amounts included in net income, net of tax of $263, $-, $790, and $-, respectively
    422             1,264        
 
                       
Total other comprehensive income (loss)
    (6,947 )     (26,631 )     19,297       3,423  
 
                       
COMPREHENSIVE INCOME
  $ 755,048     $ 711,354     $ 1,549,134     $ 1,388,238  
 
                       
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2007 vs. THIRD QUARTER 2006
AND
YEAR-TO-DATE 2007 vs. YEAR-TO-DATE 2006
OVERVIEW
Discussion of the results of operations is focused on Southern Company’s primary business of electricity sales in the Southeast by the traditional operating companies – Alabama Power, Georgia Power, Gulf Power, and Mississippi Power – and Southern Power. Southern Power is an electric wholesale generation subsidiary with market-based rate authority. Southern Company’s other business activities include investments in synthetic fuels and leveraged lease projects, telecommunications, and energy-related services. For additional information on these businesses, see BUSINESS – The Southern Company System – “Traditional operating companies,” “Southern Power,” and “Other Business” in Item 1 of the Form 10-K. For information regarding the synthetic fuel investment, see Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein.
Southern Company continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and earnings per share. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Southern Company in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$24.0   3.3   $145.0   10.5
 
Southern Company’s third quarter 2007 earnings were $762.0 million ($1.00 per share) compared to $738.0 million ($0.99 per share) for third quarter 2006. The increase was primarily due to a retail base rate increase at Alabama Power, favorable weather as compared to the same period in 2006, and an increase in contributions from market-based rates to large commercial and industrial customers when compared to the same period in 2006. The third quarter 2007 increase was partially offset by higher other operations and maintenance expenses.
Southern Company’s year-to-date 2007 earnings were $1.5 billion ($2.03 per share) compared to $1.4 billion ($1.86 per share) for year-to-date 2006. The increase was primarily due to a retail base rate increase at Alabama Power, favorable weather as compared to the same period in 2006, and customer growth in the Southern Company service area. Higher earnings from the synthetic fuel business also contributed to the increase. The year-to-date 2007 increase was partially offset by higher other operations and maintenance expenses and a decrease in contributions from market-based rates to large commercial and industrial customers.
Retail Revenues
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$232.3   6.0   $639.3   6.9
 
In the third quarter 2007, retail revenues were $4.1 billion compared to $3.9 billion for the same period in 2006.
Year-to-date 2007, retail revenues were $9.9 billion compared to $9.3 billion for the same period in 2006.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the change to retail revenues follow:
                                 
    Third Quarter   Year-to-Date
    2007   2007
    (in millions)   (% change)   (in millions)   (% change)
Retail – prior year
  $ 3,853.4             $ 9,295.2          
Estimated change in —
                               
Rates and pricing
    89.6       2.3       121.9       1.3  
Sales growth
    3.3       0.1       52.2       0.6  
Weather
    23.5       0.6       54.2       0.6  
Fuel and other cost recovery
    115.9       3.0       411.1       4.4  
 
Retail – current year
  $ 4,085.7       6.0 %   $ 9,934.6       6.9 %
 
Revenues associated with changes in rates and pricing increased for third quarter 2007 when compared to the same period in 2006 primarily as a result of an increase in base rates at Alabama Power, as well as an increase in contributions from market-based rates to large commercial and industrial customers. Revenues associated with changes in rates and pricing increased for year-to-date 2007 when compared to the same period in 2006 primarily as a result of an increase in base rates at Alabama Power, partially offset by a decrease in contributions from market-based rates to large commercial and industrial customers during the first two quarters of 2007.
Revenues attributable to changes in sales growth increased for third quarter and year-to-date 2007 when compared to the same periods in 2006 due to a 1.2% and 1.5% increase in retail KWH sales, respectively, resulting primarily from continued customer growth. The number of retail customers increased by 1.5% as of September 2007 compared to September 2006. For the third quarter and year-to-date 2007, residential KWH sales increased 1.5% and 2.6%, respectively, and commercial KWH sales increased 2.8% and 3.1%, respectively. These increases were partially offset by a 1.0% decrease in KWH sales to industrial customers in both the third quarter and year-to-date 2007 primarily due to reduced demand from the primary metals and textile industries.
Revenues resulting from changes in weather increased because of favorable weather for third quarter and year-to-date 2007 compared to the same periods in 2006.
Fuel and other cost recovery revenues increased $115.9 million in the third quarter of 2007 and $411.1 million for year-to-date 2007 when compared to the same periods in 2006. Electric rates for the traditional operating companies include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the fuel component of purchased power costs, and do not affect net income.
Wholesale Revenues
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$56.9
  11.2   $169.7   12.5
 
In the third quarter 2007, wholesale revenues were $563.2 million compared to $506.3 million in the same period in 2006. The increase was primarily a result of a rise in fuel revenues due to a 6.4% increase in the average unit cost of fuel per net KWH generated. Also contributing to the increase were generating plant operational performance incentives on existing wholesale contracts.
For year-to-date 2007, wholesale revenues were $1.5 billion compared to $1.3 billion for the same period in 2006. The increase was a result of a rise in fuel revenues due to an 8.6% increase in the average unit cost of fuel per net KWH generated, increased revenues from new and existing contracts, and generating plant operational performance incentives on existing wholesale contracts. Short-term opportunity sales also contributed to the increase due to higher sales margins attributable to favorable weather compared to neighboring territories and a

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
favorable price differential between market prices and Southern Company’s marginal cost. Short-term opportunity sales are made at market-based rates that generally provide a margin above Southern Company’s variable cost to produce the energy.
Other Electric Revenues
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$10.6   8.8   $34.4   9.9
 
In the third quarter 2007, other electric revenues were $130.6 million compared to $120.0 million in the same period in 2006. The increase was primarily a result of an increase in transmission revenues of $5.3 million and an increase in outdoor lighting revenues of $2.2 million related to a 3.1% increase in the number of lighting customers.
For year-to-date 2007, other electric revenues were $381.5 million compared to $347.1 million in the same period in 2006. The increase was primarily a result of an increase in transmission revenues of $17.8 million, an increase in outdoor lighting revenues of $5.7 million related to a 3.1% increase in the number of lighting customers, and an increase in customer fees of $4.1 million related primarily to an increase in the number of retail electric customers.
Fuel and Purchased Power Expenses
                                 
    Third Quarter 2007     Year-to-Date 2007  
    vs.     vs.  
    Third Quarter 2006     Year-to-Date 2006  
    (change in millions)     (% change)     (change in millions)     (% change)  
Fuel
  $ 113.6       7.0     $ 531.5       13.3  
Purchased power
    41.6       17.3       (37.4 )     (7.8)  
                       
Total fuel and purchased power expenses
  $ 155.2             $ 494.1          
                       
Fuel and purchased power expenses for the third quarter 2007 were $2.0 billion compared to $1.8 billion for the corresponding period in 2006. The increase in fuel and purchased power expenses was due to a $37.3 million net increase in the average cost of fuel and purchased power, as well as a $117.9 million net increase related to total KWHs generated and purchased when compared to the same period in 2006. The net increase in fuel and purchased power expenses for the third quarter 2007 compared to the corresponding period in 2006 resulted from rising fossil fuel prices and a 0.3% increase in fossil fuel generation by Southern Company-owned facilities, primarily due to a 17.6% decrease in hydro generation from a severe drought.
Fuel and purchased power expenses for year-to-date 2007 were $5.0 billion compared to $4.5 billion for the corresponding period in 2006. The increase in fuel and purchased power expenses was due to a $324.9 million net increase in the average cost of fuel and purchased power, as well as a $169.2 million net increase related to total KWHs generated and purchased when compared to the same period in 2006. The net increase in fuel and purchased power expenses for year-to-date 2007 compared to the corresponding period in 2006 resulted from rising fossil fuel prices and a 5.0% increase in fossil fuel generation by Southern Company-owned facilities, primarily due to a 43.6% decrease in hydro generation from a severe drought.
Increases in fuel and purchased power expenses at the traditional operating companies are generally offset by fuel revenues and do not affect net income. See FUTURE EARNINGS POTENTIAL – “FERC and State PSC Matters – Retail Fuel Cost Recovery” herein for additional information. Fuel expenses incurred under Southern Power’s PPAs are generally the responsibility of the counterparties and do not significantly affect net income.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of Southern Company’s cost of generation and purchased power are as follows:
                                                 
    Third Quarter   Third Quarter           Year-to-Date   Year-to-Date    
Average Cost   2007   2006   % change   2007   2006   % change
    (cents per net KWH)           (cents per net KWH)        
 
Fuel
    3.01       2.83       6.4       2.90       2.67       8.6  
Purchased power
    8.67       10.45       (17.0)       7.75       8.25       (6.1)  
 
Energy purchases will vary depending on demand for energy within the Southern Company service area, the market cost of available energy as compared to the cost of Southern Company system generated-energy, and the availability of Southern Company system generation.
Other Operations and Maintenance Expenses
                                 
    Third Quarter 2007     Year-to-Date 2007  
    vs.     vs.  
    Third Quarter 2006     Year-to-Date 2006  
    (change in millions)     (% change)     (change in millions)     (% change)  
Other operations
  $ 47.8       7.9     $ 49.2       2.8  
Maintenance
    23.8       10.1       37.9       4.8  
                       
Total other operations and maintenance expenses
  $ 71.6             $ 87.1          
                       
For the third quarter 2007, other operations and maintenance expenses were $911.6 million compared to $840.0 million in the same period in 2006. The increase in other operations and maintenance expenses was primarily a result of a $49.1 million increase related to labor and materials expenses, timing of and expenses incurred for maintenance outages, and increases in expenses associated with new facilities, primarily Plant Rowan acquired by Southern Power in September 2006. Also contributing to the increase in other operations and maintenance expenses was a $20.1 million increase in administrative and general expenses largely related to an increase in shared service expenses and accrued litigation expenses.
For year-to-date 2007, other operations and maintenance expenses were $2.6 billion compared to $2.5 billion for the same period in 2006. The increase in other operations and maintenance expenses was primarily a result of a $79.8 million increase related to labor and materials expenses, timing of and expenses incurred for maintenance outages, and increases in expenses associated with new facilities, primarily Plants DeSoto and Rowan acquired by Southern Power in June 2006 and September 2006, respectively.
Depreciation and Amortization
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$11.8
  3.9   $32.0   3.6
 
In the third quarter 2007, depreciation and amortization was $311.9 million compared to $300.1 million in the same period in 2006.
For year-to-date 2007, depreciation and amortization was $928.6 million compared to $896.6 million in the same period in 2006.
The third quarter and year-to-date 2007 increases in depreciation and amortization were a result of additional investments in environmental, transmission, and distribution projects, as well as an increase in amortization related to a regulatory liability recorded in 2003 in connection with the Mississippi PSC’s accounting order on

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Plant Daniel capacity. See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information. Also contributing to the increases was the acquisition of Plant Rowan by Southern Power in September 2006.
Taxes Other than Income Taxes
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$20.2   10.8   $33.5   6.2
 
In the third quarter 2007, taxes other than income taxes were $206.8 million compared to $186.6 million in the same period in 2006.
For year-to-date 2007, taxes other than income taxes were $574.3 million compared to $540.8 million in the same period in 2006.
The third quarter and year-to-date 2007 increases in taxes other than income taxes were primarily a result of increases in franchise taxes which are directly related to increases in revenues.
Allowance for Equity Funds Used During Construction
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$16.3   136.8   $38.0   112.7
 
In the third quarter 2007, allowance for equity funds used during construction was $28.1 million compared to $11.8 million in the same period in 2006.
For year-to-date 2007, allowance for equity funds used during construction was $71.8 million compared to $33.8 million in the same period in 2006.
The third quarter and year-to-date 2007 increases were primarily a result of additional investments in environmental, transmission, and distribution projects mainly at Alabama Power and Georgia Power.
Equity in Losses of Unconsolidated Subsidiaries
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$0.3   208.3   $(24.3)   (54.0)
 
The third quarter 2007 variance when compared to the third quarter 2006 is not material.
For year-to-date 2007, equity in losses of unconsolidated subsidiaries was $20.7 million compared to $45.0 million for the same period in 2006. Southern Company made investments in two synthetic fuel production facilities that generate operating losses. These investments also allow Southern Company to claim federal income tax credits that offset these operating losses and make the projects profitable. The decrease in equity in losses of unconsolidated subsidiaries for year-to-date 2007 when compared with the same period in 2006 was primarily the result of terminating Southern Company’s membership interest in one synthetic fuel entity in 2006 which eliminated the funding obligation and Southern Company’s share of losses for year-to-date 2007, partially offset by higher operating expenses at the other synthetic fuel entity due to idled production for a portion of second quarter and most of third quarter 2006. See FUTURE EARNINGS POTENTIAL – “Income

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Tax Matters – Synthetic Fuel Tax Credits” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein for further information.
Leveraged Lease Income
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$(4.4)   (26.4)   $(20.6)   (39.2)
 
Leveraged lease income for the third quarter 2007 was $12.4 million compared to $16.8 million for the corresponding period in 2006.
Leveraged lease income for year-to-date 2007 was $31.9 million compared to $52.5 million for the corresponding period in 2006.
Southern Company has several leveraged lease agreements which relate to international and domestic energy generation, distribution, and transportation assets. Southern Company receives federal income tax deductions for depreciation and amortization, as well as interest on long-term debt related to these investments. The adoption of FASB Staff Position No. FAS 13-2 (FSP 13-2), “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” resulted in decreases to leveraged lease pre-tax income of $6.4 million and $19.3 million for the third quarter and year-to-date 2007, respectively, when compared to the same periods in 2006. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Leveraged Lease Transactions” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Leveraged Lease Transactions” herein for further information.
Impairment Loss on Equity Method Investments
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$(0.7)
  N/M   $(16.0)   N/M
 
N/M – Not meaningful
The third quarter 2007 variance when compared to the third quarter 2006 is not material.
For year-to-date 2007, impairment loss on equity method investments was $0.0 compared to $16.0 million for the same period in 2006. The decrease in impairment loss on equity method investments was primarily a result of impairment losses of $15.9 million recognized during the second quarter 2006 related to Southern Company’s investments in two synthetic fuel production facilities. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Synthetic Fuel Tax Credits” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein for further information.
Interest Expense, Net of Amounts Capitalized
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$34.9   18.8   $72.0   13.3
 
Interest expense, net of amounts capitalized for the third quarter 2007 was $220.1 million compared to $185.2 million for the corresponding period in 2006. The increase was a result of $42.8 million increase associated with $1.6 billion in additional debt outstanding at September 30, 2007 compared to September 30, 2006 and higher interest rates associated with the issuance of new long-term debt. Also contributing to the increase was $2.0 million related to an increase in average interest rates on existing variable rate debt. These increases were

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
partially offset by $9.9 million in higher capitalized interest as compared to the same period in 2006. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Financing Activities” of Southern Company in Item 7 of the Form 10-K and herein for additional information.
Interest expense, net of amounts capitalized for year-to-date 2007 was $614.3 million compared to $542.3 million for the corresponding period in 2006. The increase was a result of an $87.4 million increase associated with $1.6 billion in additional debt outstanding at September 30, 2007 compared to September 30, 2006 and higher interest rates associated with the issuance of new long-term debt. Also contributing to the increase was $12.3 million related to an increase in average interest rates on existing variable rate debt. These increases were partially offset by $27.6 million in higher capitalized interest as compared to the same period in 2006.
Interest Expense to Affiliate Trusts
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$(17.9)   (58.4)   $(32.9)   (35.9)
 
Interest expense to affiliate trusts for the third quarter 2007 was $12.7 million compared to $30.6 million for the corresponding period in 2006.
Interest expense to affiliate trusts for year-to-date 2007 was $58.9 million compared to $91.8 million for the corresponding period in 2006.
The third quarter and year-to-date 2007 decreases in interest expense to affiliate trusts were primarily a result of the redemption of approximately $1.0 billion of long-term debt payable to affiliated trusts since September 30, 2006.
Other Income (Expense), Net
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$47.5   157.3   $35.3   130.8
 
In the third quarter 2007, other income (expense), net was $17.3 million compared to $(30.2) million for the same period in 2006 primarily as a result of a $47.0 million increase related to changes in the value of derivative transactions in the synthetic fuel business. These derivative transactions were entered into to reduce Southern Company’s exposure to changes in the value of synthetic fuel tax credits, which are impacted by changes in oil prices. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Synthetic Fuel Tax Credits” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein for further information.
For year-to-date 2007, other income (expense), net was $8.3 million compared to $(27.0) million for the same period in 2006 primarily as a result of a $42.8 million increase related to changes in the value of derivative transactions in the synthetic fuel business, partially offset by the release of $6.3 million in certain obligations associated with one of Southern Company’s synthetic fuel investments which was terminated effective July 1, 2006.
Income Taxes
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$40.0   9.9   $72.4   9.9
 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income taxes for the third quarter 2007 were $445.3 million compared to $405.3 million for the corresponding period in 2006. The increase in income taxes was primarily a result of higher pre-tax earnings and a decrease in net synthetic fuel tax credits in third quarter 2007 compared to the same period in 2006. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Synthetic Fuel Tax Credits” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Synthetic Fuel Tax Credits” herein for further information. The increase in income taxes was partially offset by the tax benefit associated with an increase in allowance for equity funds used during construction and an increase in the IRC Section 199 domestic production deduction. See FUTURE EARNINGS POTENTIAL – “Income Tax Matters – IRC Section 199 Domestic Production Deduction” and Note (H) to the Condensed Financial Statements herein for further information.
Income taxes for year-to-date 2007 were $806.4 million compared to $734.0 million for the corresponding period in 2006. The increase was primarily a result of higher pre-tax earnings. The increase in income taxes was partially offset by the tax benefit associated with an increase in reference to a heading where capitalized allowance for equity funds used during construction and an increase in the IRC Section 199 domestic production deduction.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Southern Company’s future earnings potential. The level of Southern Company’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Company’s primary business of selling electricity. These factors include the traditional operating companies’ ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. Another major factor is the profitability of the competitive market-based wholesale generating business and federal regulatory policy, which may impact Southern Company’s level of participation in this market. Future earnings for the electricity business in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in the service area. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be fully recovered in rates on a timely basis. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters” in Item 8 of the Form 10-K for additional information.
New Source Review Litigation
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – New Source Review Actions” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding a civil action brought by the EPA alleging that Alabama Power had violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of its coal-fired generating facilities. The plaintiffs’ appeal against Alabama Power was stayed by the U.S. Court of Appeals for the Eleventh Circuit pending the U.S. Supreme Court’s decision in a similar case against Duke Energy. On April 2, 2007, the U.S. Supreme Court issued an opinion in the Duke Energy case. The U.S. District Court for the Northern District of Alabama has issued an order indicating a willingness to re-

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evaluate its previous decision in light of the Supreme Court’s Duke Energy opinion. The Eleventh Circuit is now considering whether to proceed with the appeal or remand the case to the District Court for further proceedings, and if so, whether to vacate the District Court’s original judgment in favor of Alabama Power. The final resolution of these claims cannot be determined at this time.
Eight-Hour Ozone Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Southern Company in Item 7 of the Form 10-K for additional information regarding revisions to the eight-hour ozone air quality standard. On June 20, 2007, the EPA proposed additional revisions to the current eight-hour ozone standard which, if enacted, could result in designation of new nonattainment areas within Southern Company’s service territory. The EPA has requested comment and is expected to make a determination regarding finalization of a revised standard in 2008. The ultimate outcome of this matter cannot be determined at this time.
Fine Particulate Matter Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Southern Company in Item 7 of the Form 10-K for additional information regarding nonattainment designations for the fine particulate matter air quality standard. In March 2007, the EPA finalized its fine particulate matter implementation rule, requiring submittal of state plans for addressing the nonattainment designations by April 2008. The ultimate outcome of this matter depends on the development and submittal of those state plans and the resolution of pending legal challenges and, therefore, cannot be determined at this time.
Georgia Multi-Pollutant Rule
On June 27, 2007, the State of Georgia approved a new “multi-pollutant” rule for certain existing coal-fired electric utility steam generating units in Georgia. The rule is designed to reduce emissions of mercury, sulfur dioxide, nitrogen oxide, and fine particulates state-wide by requiring installation of specified control technologies at each affected unit by a date certain between December 31, 2008 and June 1, 2015. This rule will require the installation of controls on the majority of Georgia Power’s coal-fired units. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – General” in Item 7 of the Form 10-K for a discussion of estimated compliance costs for 2007 through 2009. If compliance costs cannot be fully recovered in rates on a timely basis, Southern Company’s financial statements would be adversely impacted. See “FERC and State PSC Matters – Georgia Power Retail Base Rate Recovery” for information on Georgia Power’s request to increase retail rates effective January 1, 2008.
Plant Wansley Environmental Litigation
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters – Plant Wansley Environmental Litigation” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters — Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K for additional information on litigation involving alleged violations of the Clean Air Act at four of the units at Plant Wansley. On June 18, 2007, the U.S. District Court for the Northern District of Georgia approved a settlement between the parties resolving all remaining issues and dismissed the case. There was no material impact on Southern Company’s financial statements.

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Florida Greenhouse Gas Executive Orders
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters - Global Climate Issues” of Southern Company in Item 7 of the Form 10-K for additional information regarding domestic efforts to reduce greenhouse gases. On July 13, 2007, the Governor of the State of Florida signed three executive orders addressing reduction of greenhouse gas emissions within the state, including statewide emission reduction targets beginning in 2017. Included in the orders is a directive to the Secretary of Environmental Protection to develop rules adopting maximum allowable emissions levels of greenhouse gases for electric utilities, consistent with the statewide emission reduction targets, and a request to the Florida PSC to initiate rulemaking requiring utilities to produce at least 20% of their electricity from renewable sources. The impact of these orders on Southern Company will depend on the development, adoption, and implementation of any rules governing greenhouse gas emissions, and the ultimate outcome cannot be determined at this time.
FERC and State PSC Matters
Market-Based Rate Authority
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Market-Based Rate Authority” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information regarding the proceedings initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory and in May 2005 to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing.
In late June and July 2007, hearings were held in the December 2004 proceeding and briefs to the presiding ALJ were filed in August and September 2007. Southern Company anticipates an initial decision from the ALJ in November 2007 on the issues that were set for hearing. The ultimate outcome of this generation dominance proceeding cannot now be determined, but an adverse decision by the FERC in a final order could result in refunds of approximately $19.7 million, plus interest.
On June 21, 2007, the FERC issued an order terminating the May 2005 proceeding pertaining to the other three parts of the market-based rate analysis. In addition, on June 21, 2007, the FERC issued its final rule regarding market-based rate authority. The FERC generally retained its current market-based rate standards. The impact of this order and its effect on the generation dominance proceeding cannot now be determined.
Intercompany Interchange Contract
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Intercompany Interchange Contract” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for information regarding the proceeding initiated by the FERC in May 2005 to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the Power Pool is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (2) whether any parties to the IIC have violated the FERC’s standards of conduct applicable to utility companies that are transmission providers, and (3) whether Southern Company’s code of conduct defining Southern Power as a “system company” rather than a “marketing affiliate” is just and reasonable.

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On April 19, 2007, the FERC approved, with certain modifications, the compliance filing submitted by Southern Company on November 6, 2006. The compliance plan largely involves functional separation and information restrictions related to marketing activities conducted on behalf of Southern Power. Implementation of the plan is not expected to have a material impact on Southern Company’s financial statements.
Retail Fuel Cost Recovery
The traditional operating companies each have established fuel cost recovery rates approved by their respective state PSCs. Over the past several years, the traditional operating companies have experienced higher than expected fuel costs for coal, natural gas, and uranium. These higher fuel costs have resulted in under recovered fuel costs included in the balance sheets of approximately $1.2 billion at September 30, 2007. Gulf Power and Mississippi Power were granted increased fuel billing factors effective January 1, 2007. Georgia Power was granted an increase effective March 2007. Alabama Power was ordered to increase its fuel billing factor effective July 2007. Operating revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes to the billing factors will have no significant effect on Southern Company’s revenues or net income but will affect cash flow. The traditional operating companies will continue to monitor the under recovered fuel cost balance in light of these higher fuel costs. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Alabama Power Retail Regulatory Matters” and “Georgia Power Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information.
Georgia Power Retail Base Rate Filing
Georgia Power is currently operating under a three-year retail rate order that expires December 31, 2007. Under the terms of the existing order, earnings are evaluated annually against a retail return on common equity range of 10.25% to 12.25%. Two-thirds of any earnings above the 12.25% return are applied to rate refunds, with the remaining one-third retained by Georgia Power. The order required Georgia Power to file a general rate case by July 1, 2007.
On June 29, 2007, Georgia Power filed a request to increase retail base rates with the Georgia PSC. The request includes an increase effective January 1, 2008 of approximately $406 million, or 5.98%, in retail revenues, based on a future test year ending July 31, 2008 and a proposed retail return on common equity of 12.5%. The majority of the increase in retail revenues is being requested to cover the costs of environmental compliance and continued investment in new generation, transmission, and distribution facilities to support growth and ensure reliability. The remainder of the increase would include recovery of higher operation, maintenance, and other investment costs to meet the rising demand for electricity. Hearings on Georgia Power’s direct testimony were held in early October. In direct testimony filed on October 22, 2007, the Georgia PSC staff proposed certain adjustments to Georgia Power’s general rate case that indicates a $21 million revenue surplus. Georgia Power disagrees with the majority of the staff’s proposed adjustments. Hearings on Georgia PSC staff’s and intervenors’ direct testimony will be held in early November. Georgia Power’s rebuttal hearings will occur later the same month. Georgia Power expects the Georgia PSC to issue a final order in this matter on December 20, 2007. In addition to the traditional test period request, Georgia Power filed information for a three-year rate plan option that includes additional increases of approximately $189 million, or 2.62%, and $41 million, or 0.56%, in retail revenues effective January 1, 2009 and 2010, respectively, to cover the costs of additional environmental controls and certified PPAs. The final outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Georgia Power” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Georgia Power Retail Regulatory Matters” in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements herein for additional information.

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Mississippi Power Storm Damage Cost Recovery
See Note 3 to the financial statements of Southern Company under “PSC Matters – Storm Damage Cost Recovery” in Item 8 of the Form 10-K for information regarding storm restoration costs in connection with Hurricane Katrina and a financing order issued by the Mississippi PSC that authorized the issuance of $121.2 million of storm restoration bonds under a state bond program. The storm restoration bonds were issued by the Mississippi Development Bank on June 1, 2007 on behalf of the State of Mississippi. On June 1, 2007, Mississippi Power received a grant payment of $85.2 million from the State of Mississippi representing recovery of $25.2 million in retail storm restoration costs incurred or to be incurred and $60.0 million to increase Mississippi Power’s property damage reserve. On October 9, 2007, Mississippi Power received an additional grant payment of $17.6 million for expenditures incurred to date for construction of a new storm operations center. The funds received related to previously incurred storm restoration expenditures have been accounted for as a government grant and have been recorded as a reduction to the regulatory asset that was recorded as the storm restoration expenditures were incurred, in accordance with FASB Statement No. 71, “Accounting for the Effects of Certain Types of Regulation.” The funds received for storm restoration expenditures to be incurred were recorded as a regulatory liability. Mississippi Power will receive further grant payments of up to $18.4 million as expenditures are incurred to construct a new storm operations center. See Note (D) to the Condensed Financial statements herein for additional information.
Mirant Matters
Mirant was an energy company with businesses that included independent power projects and energy trading and risk management companies in the U.S. and selected other countries. It was a wholly-owned subsidiary of Southern Company until its initial public offering in October 2000. In April 2001, Southern Company completed a spin-off to its shareholders of its remaining ownership, and Mirant became an independent corporate entity. In July 2003, Mirant filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code. See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Bankruptcy” in Item 8 of the Form 10-K for information regarding Southern Company’s contingent liabilities associated with Mirant, including guarantees of contractual commitments, litigation, and joint and several liabilities in connection with the consolidated federal income tax return.
MC Asset Recovery Litigation
See Note 3 to the financial statements of Southern Company under “Mirant Matters – MC Asset Recovery Litigation” in Item 8 of the Form 10-K for information regarding a suit between MC Asset Recovery, a special purpose subsidiary of the post-bankruptcy corporation that adopted the name Mirant Corporation, and Southern Company. On March 28, 2007, MC Asset Recovery filed a Fourth Amended Complaint. Among other things, the Fourth Amended Complaint adds a claim under the Federal Debt Collection Procedure Act (FDCPA) to avoid certain transfers from Mirant to Southern Company and withdraws the breach of fiduciary duty claim the court struck as a result of Southern Company’s motion for summary judgment. MC Asset Recovery claims to have standing to assert violations of the FDCPA and to recover property on behalf of the Mirant debtors’ estates. The ultimate outcome of this matter cannot be determined at this time.
Mirant Securities Litigation
See Note 3 to the financial statements of Southern Company under “Mirant Matters – Mirant Securities Litigation” in Item 8 of the Form 10-K for information regarding a class action lawsuit that several Mirant shareholders (plaintiffs) originally filed against Mirant and certain Mirant officers in May 2002. In November 2002, Southern Company, certain former and current senior officers of Southern Company, and 12 underwriters of Mirant’s initial public offering were added as defendants. On March 24, 2006, the plaintiffs filed a motion for reconsideration requesting that the court vacate that portion of its July 14, 2003 order dismissing the

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plaintiffs’ claims based upon Mirant’s alleged improper energy trading and marketing activities involving the California energy market. On March 6, 2007, the court granted plaintiffs’ motion for reconsideration, reinstated the California energy market claims, and granted in part and denied in part defendants’ motion to compel certain class certification discovery. On March 21, 2007, defendants filed renewed motions to dismiss the California energy claims on grounds originally set forth in their 2003 motions to dismiss, but which were not addressed by the court. On July 27, 2007, certain defendants, including Southern Company, filed motions for reconsideration of the court’s denial of a motion seeking dismissal of certain federal securities laws claims based upon, among other things, certain alleged errors included in financial statements issued by Mirant. The ultimate outcome of this matter cannot be determined at this time.
Southern Company Employee Savings Plan Litigation
See Note 3 to the financial statements of Southern Company under “Mirant Matters – Southern Company Employee Savings Plan Litigation” in Item 8 of the Form 10-K for information related to the pending settlement of a class action complaint filed under ERISA in June 2004, and amended in December 2004 and November 2005, on behalf of a purported class of participants in or beneficiaries of The Southern Company Employee Savings Plan at any time since April 2, 2001 and whose plan accounts included investments in Mirant common stock. On August 14, 2007, the U.S. District Court for the Northern District of Georgia issued a final order and judgment approving the December 2006 settlement agreement. The deadline for the appeal expired with no appeal filed. There was no material impact on the financial statements of Southern Company. This matter is now concluded.
Income Tax Matters
Leveraged Lease Transactions
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Leveraged Lease Transactions” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Income Tax Matters” in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Leveraged Lease Transactions” herein for information regarding IRS challenges to Southern Company’s transactions related to international leveraged leases that could have material impacts on Southern Company’s financial statements. Effective January 1, 2007, Southern Company adopted FSP 13-2, which amends FASB Statement No. 13, “Accounting for Leases” requiring recalculation of the rate of return and the allocation of income whenever the projected timing of the income tax cash flows generated by a leveraged lease is revised with recognition of the resulting gain or loss in the year of the revision. FSP 13-2 also requires that all recognized tax positions in a leveraged lease must be measured in accordance with the criteria in FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” and any changes resulting from FIN 48 must be reflected as a change in important lease assumptions as of the date of adoption. The cumulative effect of initially adopting FSP 13-2 was recorded as an adjustment to beginning retained earnings. For the lease-in-lease-out (LILO) transaction settled with the IRS in February 2005, the cumulative effect of adopting FSP 13-2 was a $17 million reduction in retained earnings. With respect to Southern Company’s sale-in-lease-out (SILO) transactions, the adoption of FSP 13-2 reduced retained earnings by $108 million and the adoption of FIN 48 reduced beginning retained earnings by an additional $15 million. The adjustments to retained earnings are non-cash charges and will be recognized as income over the remaining terms of the affected leases. Any future changes in the timing of projected or actual income tax cash flows will result in an additional recalculation of the net investment in the leases and will be recorded currently in income. Southern Company is continuing to pursue resolution of these matters through litigation. Southern Company believes these transactions are valid leases for U.S. tax purposes and the related deductions are allowable. In addition, the U.S. Senate is currently considering legislation that would disallow tax benefits after December 31, 2007 for SILO losses and other international leveraged lease transactions (such as LILO transactions). The

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ultimate impact on Southern Company’s net income will be dependent on the outcome of pending litigation and the proposed legislation. The impact could be significant, and potentially material, but cannot now be determined.
Synthetic Fuel Tax Credits
As discussed in MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Synthetic Fuel Tax Credits” of Southern Company in Item 7 of the Form 10-K, Southern Company has an investment in an entity that produces synthetic fuel and receives tax credits under Section 45K (formerly Section 29) of the IRC. In accordance with Section 45K of the IRC, these tax credits are subject to limitation as the annual average price of oil (as determined by the DOE) increases over a specified, inflation-adjusted dollar amount published in the spring of the subsequent year. Southern Company, along with its partners in this investment, has continued to monitor oil prices. Reserves against tax credits earned in 2007 of $37.6 million have been recorded in the first nine months of 2007 due to projected phase-outs of the credits in 2007 as a result of current and projected future oil prices. Additionally, the synthetic fuel tax credits are not allowed under IRC Section 45K for any production after December 31, 2007.
Georgia State Income Tax Credits
In September 2007, 2006, and 2005, Georgia Power filed its 2006, 2005, and 2004 income tax returns, respectively, which included state income tax credits for activity through Georgia ports. Georgia Power has also filed additional similar claims for the years 2002 through 2004. The Georgia Department of Revenue has not responded to these claims. On July 24, 2007, Georgia Power filed a complaint in the Superior Court of Fulton County to recover the credits claimed for the years 2002 through 2004. If Georgia Power prevails, these claims could have a significant, and possibly material, positive effect on Southern Company’s net income. If Georgia Power is not successful, payment of the related state tax could have a significant, and possibly material, negative effect on Southern Company’s cash flow. The ultimate outcome of this matter cannot now be determined.
IRC Section 199 Domestic Production Deduction
The American Jobs Creation Act of 2004 created a tax deduction for the portion of income attributable to United States production activities as defined in IRC Section 199. The deduction is equal to a stated percentage of the taxpayer’s qualified production activities. The percentage is phased in over the years 2005 through 2010 with a 3% rate applicable to the years 2005 and 2006, a 6% rate applicable for years 2007 through 2009, and a 9% rate applicable for all years after 2009. The tax benefit of this deduction is estimated to be approximately $15 — $20 million per year in years 2008 and 2009, and approximately 50% higher in 2010.
Construction Projects
Integrated Gasification Combined Cycle (IGCC) Project
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Construction Projects – Integrated Gasification Combined Cycle” of Southern Company in Item 7 of the Form 10-K for information regarding the development by Southern Power and the Orlando Utilities Commission (OUC) of an IGCC project in Orlando, Florida at OUC’s Stanton Energy site. Since the definitive agreements relating to the development of the project were executed in December 2005, the estimated costs of the gasifier portion have increased due primarily to increases in commodity costs and increased market demand for labor. Southern Power had the option under the original agreements to end its participation in the gasifier portion of the project at the end of the project definition phase, which has been completed. On March 29, 2007, Southern Power’s Board of Directors approved the continuation and the completion of the design, engineering, and construction of the gasifier portion of the project. Southern Power and OUC will share 65% and 35% of the

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estimated cost increase, respectively, under the proposed amended agreements. In April 2007, OUC approved its portion of the cost increase, subject to the DOE’s approval of the additional funding. On May 8, 2007, SCS, as agent for Southern Power, and the DOE entered into an amendment to the February 2006 cooperative agreement to increase the DOE’s funding for the gasifier portion of the project by $58.75 million.
Southern Power is evaluating the potential impacts of proposed federal and state legislation and regulations on the gasifier portion of the IGCC project. Specifically, there is an ongoing assessment of the State of Florida’s governor’s executive orders concerning future emissions restrictions and the rules and regulations necessary for implementation of such orders. For additional information on the governor’s orders, see “Environmental Matters – Florida Greenhouse Gas Executive Orders” herein. As of October 31, 2007, Southern Power’s share of actual and committed costs related to the gasifier portion of the IGCC project was approximately $45 million. These costs will increase as the project continues. The ultimate impact on Southern Company’s financial statements will be dependent on the evaluation and application of the State of Florida’s governor’s executive orders and any other legislation or regulations, but could be significant and possibly material. The ultimate outcome of this matter cannot now be determined.
Nuclear
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Construction Projects – Nuclear” of Southern Company in Item 7 of the Form 10-K for information regarding a development agreement between Southern Nuclear and Duke Energy to evaluate the potential construction of a new two-unit nuclear plant at a jointly owned site in Cherokee County, South Carolina. In March 2007, the Southern Nuclear Board of Directors voted to withdraw from any further development of this project and a notice of withdrawal from the project was provided to Duke Energy. Adjustments to the carrying value of the related assets were recorded in the first quarter 2007 and were not material to the financial statements. During the second quarter 2007, Duke Energy chose to independently continue with the project and purchased Southern Company’s interest in the project with no material effect on Southern Company’s financial statements. This matter is now concluded.
Other Matters
Georgia Power proposed a donation of approximately 2,200 acres in Tallulah Gorge State Park to the State of Georgia which the Georgia Department of Natural Resources voted to accept on October 24, 2007. The donation is expected to be effective in the fourth quarter 2007. The impact of this donation to Southern Company’s net income could possibly be significant but cannot be determined at this time.
Southern Company is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Southern Company’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such pending or potential litigation against Southern Company and its subsidiaries cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Southern Company in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Southern Company’s financial statements.

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See the Notes to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Southern Company in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Company’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES - “Application of Critical Accounting Policies and Estimates” of Southern Company in Item 7 of the Form 10-K for a complete discussion of Southern Company’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.
New Accounting Standards
Income Taxes
On January 1, 2007, Southern Company adopted FIN 48, which requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement, and classification of income tax uncertainties, along with any related interest and penalties. The provisions of FIN 48 were applied to all tax positions beginning January 1, 2007. The impact on Southern Company’s financial statements was a reduction to beginning 2007 retained earnings of approximately $15 million related to Southern Company’s SILO transactions. See Note (I) to the Condensed Financial Statements herein for details regarding the financial statement impact of the adoption.
Leveraged Leases
Effective January 1, 2007, Southern Company adopted FSP 13-2. The cumulative effect of initially adopting FSP 13-2 was recorded as an adjustment to beginning retained earnings. For the LILO transaction settled with the IRS in February 2005, the cumulative effect of adopting FSP 13-2 was a $17 million reduction in retained earnings. With respect to Southern Company’s SILO transactions, the adoption of FSP 13-2 reduced retained earnings by $108 million. The adjustments to retained earnings are non-cash charges and will be recognized as income over the remaining terms of the affected leases. Any future changes in the projected or actual income tax cash flows will result in an additional recalculation of the net investment in the leases and will be recorded currently in income. See FUTURE EARNINGS POTENTIAL — “Income Tax Matters – Leveraged Lease Transactions” and Note (B) to the Condensed Financial Statements under “INCOME TAX MATTERS – Leveraged Lease Transactions” herein for further details about the effect of FSP 13-2.
Fair Value Measurement
The FASB issued FASB Statement No. 157 (SFAS No. 157), “Fair Value Measurements” in September 2006. This standard provides guidance on how to measure fair value where it is permitted or required under other accounting pronouncements. SFAS No. 157 also requires additional disclosures about fair value measurements. Southern Company plans to adopt SFAS No. 157 on January 1, 2008 and is currently assessing the impact of this standard.

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Fair Value Option
In February 2007, the FASB issued FASB Statement No. 159 (SFAS No. 159), “Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Southern Company plans to adopt SFAS No. 159 on January 1, 2008 and is currently assessing its impact to the extent the fair value option is elected.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Southern Company’s financial condition and liquidity position remained stable at September 30, 2007. Net cash provided from operating activities totaled $2.5 billion for the first nine months of 2007, compared to $2.0 billion for the corresponding period in 2006. The $487 million increase is primarily due to the increase in net income as previously discussed and a reduction in the outflow of cash for accounts payable, primarily related to gas purchases. Net cash used for investing activities totaled $2.6 billion primarily due to gross property additions to utility plant of $2.5 billion. Net cash provided from financing activities totaled $460 million for the first nine months of 2007, compared to $384 million for the corresponding period in 2006. The increase was primarily the result of additional common stock and long-term debt issuances.
Significant balance sheet changes for the first nine months of the year include a $1.3 billion increase in long-term debt, which was used primarily for the repayment of short-term debt, redemptions of long-term debt payable to affiliated trusts, construction expenditures, and general corporate purposes. Total property, plant, and equipment, net of depreciation, increased $1.5 billion during the first nine months of 2007 primarily from the installation of additional environmental equipment and transmission and distribution construction.
The market price of Southern Company’s common stock at September 30, 2007 was $36.28 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $16.26 per share, representing a market-to-book ratio of 223%, compared to $36.86, $15.24, and 242%, respectively, at the end of 2006. The dividend for the third quarter 2007 was $0.4025 per share compared to $0.3875 per share in the third quarter 2006.
Capital Requirements and Contractual Obligations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Southern Company in Item 7 of the Form 10-K for a description of Southern Company’s capital requirements for its construction program and other funding requirements associated with scheduled maturities of long-term debt, as well as the related interest, preferred and preference stock dividends, leases, trust funding requirements, and other purchase commitments. Approximately $1.7 billion will be required by September 30, 2008 for redemptions and maturities of long-term debt.
Sources of Capital
Southern Company intends to meet its future capital needs through internal cash flow and external security issuances. Equity capital can be provided from any combination of Southern Company’s stock plans, private placements, or public offerings. The amount and timing of additional equity capital to be raised will be contingent on Southern Company’s investment opportunities. Southern Company does not currently anticipate any equity offerings in 2007 outside of its existing stock option plan, the employee savings plan, and the Southern Investment Plan. The traditional operating companies and Southern Power plan to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
from operating cash flows, security issuances, term loans, short-term borrowings, and equity contributions from Southern Company. However, the amount, type, and timing of any financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Southern Company in Item 7 of the Form 10-K for additional information.
Southern Company’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt as well as cash needs which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Southern Company has substantial cash flow from operating activities and access to capital markets, including commercial paper programs. At September 30, 2007, Southern Company and its subsidiaries had approximately $534 million of cash and cash equivalents, $52 million of restricted cash related to the sale of pollution control bonds which may be used only for future project costs, and approximately $3.6 billion of unused credit arrangements with banks, of which $74 million expire in 2007 and $3.5 billion expire in 2008 and beyond. Approximately $79 million of the credit facilities expiring in 2007 and 2008 allow for the execution of term loans for an additional two-year period, and approximately $443 million contain provisions allowing one-year term loans. See Note 6 to the financial statements of Southern Company under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. The traditional operating companies may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of each of the traditional operating companies. At September 30, 2007, the Southern Company system had outstanding commercial paper of $1.2 billion, outstanding bank notes of $60 million, and no extendible commercial notes outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.
Off-Balance Sheet Financing Arrangements
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Off-Balance Sheet Financing Arrangements” of Southern Company in Item 7 and Note 7 to the financial statements of Southern Company under “Operating Leases” in Item 8 of the Form 10-K for information related to Mississippi Power’s lease of a combined cycle generating facility at Plant Daniel.
Credit Rating Risk
Southern Company does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB and Baa2, or BBB- or Baa3 or below. These contracts are primarily for physical electricity purchases and sales. At September 30, 2007, the maximum potential collateral requirements at a BBB and Baa2 rating were approximately $8.6 million and at a BBB- or Baa3 rating were approximately $293.3 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $883.5 million. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash.
Southern Company’s operating subsidiaries are also party to certain agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas and power price risk management activities. At September 30, 2007, Southern Company’s total exposure to these types of agreements was $26.7 million.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Market Price Risk
Southern Company’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2006 reporting period. In addition, Southern Company is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulation, the traditional operating companies have limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. In addition, Southern Power’s exposure to market volatility in commodity fuel prices and prices of electricity is limited because its long- term sales contracts shift substantially all fuel cost responsibility to the purchaser. To mitigate residual risks relative to movements in electricity prices, the traditional operating companies and Southern Power enter into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, into financial hedge contracts for natural gas purchases. The traditional operating companies have implemented fuel-hedging programs at the instruction of their respective state PSCs.
The fair value of derivative energy contracts at September 30, 2007 was as follows:
                 
    Third Quarter   Year-to-Date
    2007   2007
    Changes   Changes
    Fair Value
    (in millions)
Contracts beginning of period
  $ (32 )   $ (82 )
Contracts realized or settled
    32       62  
New contracts at inception
           
Changes in valuation techniques
           
Current period changes (a)
    (22 )     (2 )
     
Contracts at September 30, 2007
  $ (22 )   $ (22 )
     
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
                         
    Source of September 30, 2007
            Valuation Prices        
    Total   Maturity
    Fair Value   Year 1   1-3 Years
    (in millions)
Actively quoted
  $ (22 )   $ (25 )   $ 3  
External sources
          1       (1 )
Models and other methods
                 
    — -
Contracts at September 30, 2007
  $ (22 )   $ (24 )   $ 2  
       
Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to the traditional operating companies’ fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through the traditional operating companies’ fuel cost recovery clauses. In addition, unrealized gains and losses on energy-related derivatives used by Southern Power to hedge anticipated purchases and sales are deferred in other comprehensive income. Gains and losses on derivative contracts that are not designated as hedges are recognized in the statements of income as incurred.

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At September 30, 2007, the fair value gain/(loss) of derivative energy contracts was reflected in the financial statements as follows:
         
    Amounts
    (in millions)
Regulatory assets, net
  $ (21.7 )
Accumulated other comprehensive income
    0.5  
Net income
    (0.4 )
 
Total fair value
  $ (21.6 )
   
Unrealized pre-tax losses recognized in income for the three months and nine months ended September 30, 2007 for derivative energy contracts that are not hedges were $2.2 million and $0.7 million, respectively.
To reduce Southern Company’s exposure to changes in the value of synthetic fuel tax credits, which are impacted by changes in oil prices, Southern Company has entered into derivative transactions indexed to annual average oil prices. Because these transactions are not designated as hedges, the gains and losses are recognized in the statements of income as incurred. For the three months and nine months ended September 30, 2007, the fair value gains recognized in income to mark the transactions to market were $23.6 million and $23.4 million, respectively.
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Southern Company in Item 7 and Notes 1 and 6 to the financial statements of Southern Company under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.
Financing Activities
In the first nine months of 2007, Southern Company and its subsidiaries issued $2.8 billion of senior notes, incurred obligations related to the issuance of $246.5 million of pollution control revenue bonds, issued $150 million of preference stock, and issued $414 million of common stock, including treasury stock, through employee, director, and other stock plans. The proceeds were primarily used to repay short-term indebtedness, to redeem higher cost securities, and to fund ongoing construction projects. See Southern Company’s Condensed Consolidated Statements of Cash Flows herein for further details on financing activities during the first nine months of 2007. Southern Company and its subsidiaries also terminated interest rate derivatives related to these transactions at a gain of $15 million. These gains were deferred in other comprehensive income, of which $9 million will be amortized to income over a 10-year period and $6 million will be amortized over a 30-year period. During the first nine months of 2007, Southern Company and its subsidiaries redeemed or paid at maturity $1.6 billion in senior notes and other long-term debt.
In September 2007, holders of $225 million aggregate principal amount of Southern Company’s Series 2007B Floating Rate Extendible Senior Notes and holders of $75 million aggregate principal amount of Georgia Power’s Series 2007C Floating Rate Senior Notes elected not to extend the then current maturity dates in September 2008.
During the first nine months of 2007, Southern Company and its subsidiaries entered into additional derivative transactions designed to hedge interest rate risk of future debt issuances. See Note (F) to the Condensed Financial Statements herein for further details.
Subsequent to September 30, 2007, Alabama Power issued $200 million of Series 2007C 6.00% Senior Insured Monthly Notes due October 15, 2037 and issued $50 million of 6.50% Preference Stock. The proceeds from both issuances were used for general corporate purposes and to fund its continuous construction program. Alabama Power also terminated interest rate derivatives related to the senior note issuance at a loss of less than $1 million. Georgia Power issued $225 million of 6.50% Preference Stock. The proceeds along with other

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
monies of Georgia Power were applied to the redemption in November of $309 million aggregate principal amount of its Series F 4.875% Junior Subordinated Notes due November 1, 2042 and the related flexible trust preferred and common securities of Georgia Power Capital Trust VI. Also subsequent to September 30, 2007, Gulf Power issued $45 million of 6.45% Preference Stock. Proceeds were used to repay a portion of short-term indebtedness and for other corporate purposes including its continuous construction program. In addition, Alabama Power announced the planned redemption of 1,250 shares of Alabama Power Company Flexible Money Market Class A Preferred Stock (Series 2003A), Par Value $100,000 Per Share ($125 million aggregate value) in January 2008. In October 2007, Gulf Power issued a notice of redemption to the holders of the $41.2 million of Gulf Power Series E Junior Subordinated Notes due November 30, 2042 and the related trust preferred and common securities of Gulf Power Capital Trust IV. All securities in this series will be redeemed in November 2007.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Company and its subsidiaries plan to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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

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ALABAMA POWER COMPANY

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ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2007     2006     2007     2006  
    (in thousands)     (in thousands)  
Operating Revenues:
                               
Retail revenues
  $ 1,394,539     $ 1,333,021     $ 3,444,282     $ 3,161,873  
Wholesale revenues —
                               
Non-affiliates
    160,832       167,066       472,015       469,748  
Affiliates
    35,400       29,138       116,626       134,551  
Other revenues
    44,427       43,182       135,569       128,366  
 
                       
Total operating revenues
    1,635,198       1,572,407       4,168,492       3,894,538  
 
                       
Operating Expenses:
                               
Fuel
    506,933       521,507       1,353,914       1,282,450  
Purchased power —
                               
Non-affiliates
    71,622       66,690       94,330       121,394  
Affiliates
    100,054       88,407       249,261       234,145  
Other operations
    201,495       182,508       556,639       527,580  
Maintenance
    88,135       81,287       303,989       287,734  
Depreciation and amortization
    118,403       114,052       351,514       336,209  
Taxes other than income taxes
    72,503       59,692       216,752       190,635  
 
                       
Total operating expenses
    1,159,145       1,114,143       3,126,399       2,980,147  
 
                       
Operating Income
    476,053       458,264       1,042,093       914,391  
Other Income and (Expense):
                               
Allowance for equity funds used during construction
    9,600       3,921       24,562       13,285  
Interest income
    4,935       4,931       12,942       12,973  
Interest expense, net of amounts capitalized
    (65,918 )     (61,786 )     (194,565 )     (174,079 )
Interest expense to affiliate trusts
    (4,059 )     (4,059 )     (12,178 )     (12,178 )
Other income (expense), net
    (13,067 )     (7,866 )     (19,957 )     (17,599 )
 
                       
Total other income and (expense)
    (68,509 )     (64,859 )     (189,196 )     (177,598 )
 
                       
Earnings Before Income Taxes
    407,544       393,405       852,897       736,793  
Income taxes
    152,956       149,379       319,840       280,376  
 
                       
Net Income
    254,588       244,026       533,057       456,417  
Dividends on Preferred and Preference Stock
    8,504       6,072       24,867       18,216  
 
                       
Net Income After Dividends on Preferred and Preference Stock
  $ 246,084     $ 237,954     $ 508,190     $ 438,201  
 
                       
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2007     2006     2007     2006  
    (in thousands)     (in thousands)  
Net Income After Dividends on Preferred and Preference Stock
  $ 246,084     $ 237,954     $ 508,190     $ 438,201  
Other comprehensive income (loss):
                               
Qualifying hedges:
                               
Changes in fair value, net of tax of $(932), $(2,049), $256, and $334, respectively
    (1,533 )     (3,369 )     420       551  
Reclassification adjustment for amounts included in net income, net of tax of $74, $(854), $206, and $(2,869), respectively
    121       (1,406 )     339       (4,720 )
 
                       
Total other comprehensive income (loss)
    (1,412 )     (4,775 )     759       (4,169 )
 
                       
COMPREHENSIVE INCOME
  $ 244,672     $ 233,179     $ 508,949     $ 434,032  
 
                       
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Nine Months  
    Ended September 30,  
    2007     2006  
    (in thousands)  
Operating Activities:
               
Net income
  $ 533,057     $ 456,417  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    410,695       391,422  
Deferred income taxes and investment tax credits, net
    10,545       17,157  
Allowance for equity funds used during construction
    (24,562 )     (13,285 )
Pension, postretirement, and other employee benefits
    6,941       8,795  
Stock option expense
    4,533       4,518  
Tax benefit of stock options
    1,051       267  
Hedge settlements
          18,006  
Other, net
    11,465       (8,383 )
Changes in certain current assets and liabilities —
               
Receivables
    (168,447 )     (144,475 )
Fossil fuel stock
    (17,123 )     (37,858 )
Materials and supplies
    (30,412 )     (13,683 )
Other current assets
    7,624       33,980  
Accounts payable
    (53,611 )     (152,179 )
Accrued taxes
    213,510       134,349  
Accrued compensation
    (23,986 )     (34,658 )
Other current liabilities
    17,130       32,894  
 
           
Net cash provided from operating activities
    898,410       693,284  
 
           
Investing Activities:
               
Property additions
    (822,818 )     (618,568 )
Investment in restricted cash from pollution control bonds
    (96,049 )      
Distribution of restricted cash from pollution control bonds
    44,550        
Nuclear decommissioning trust fund purchases
    (201,523 )     (206,480 )
Nuclear decommissioning trust fund sales
    201,523       206,480  
Cost of removal, net of salvage
    (33,194 )     (28,089 )
Other
    (12,930 )     (19,054 )
 
           
Net cash used for investing activities
    (920,441 )     (665,711 )
 
           
Financing Activities:
               
Decrease in notes payable, net
    (119,670 )     (315,278 )
Proceeds —
               
Common stock issued to parent
    140,000       40,000  
Senior notes
    450,000       950,000  
Pollution control bonds
    246,500        
Preference Stock
    150,000        
Gross excess tax benefit of stock options
    2,324       530  
Redemptions —
               
Pollution control bonds
          (2,950 )
Senior notes
    (168,500 )     (196,500 )
Payment of preferred and preference stock dividends
    (22,875 )     (18,210 )
Payment of common stock dividends
    (348,750 )     (330,450 )
Other
    (14,822 )     (21,469 )
 
           
Net cash provided from financing activities
    314,207       105,673  
 
           
Net Change in Cash and Cash Equivalents
    292,176       133,246  
Cash and Cash Equivalents at Beginning of Period
    15,539       22,472  
 
           
Cash and Cash Equivalents at End of Period
  $ 307,715     $ 155,718  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $12,455 and $5,652 capitalized for 2007 and 2006, respectively)
  $ 176,842     $ 174,568  
Income taxes (net of refunds)
  $ 157,501     $ 165,266  
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At September 30,     At December 31,  
Assets   2007     2006  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 307,715     $ 15,539  
Restricted cash
    51,499        
Receivables —
               
Customer accounts receivable
    488,928       323,202  
Unbilled revenues
    109,336       90,596  
Under recovered regulatory clause revenues
    278,288       32,451  
Other accounts and notes receivable
    57,179       49,708  
Affiliated companies
    30,128       70,836  
Accumulated provision for uncollectible accounts
    (8,721 )     (7,091 )
Fossil fuel stock, at average cost
    170,063       153,120  
Materials and supplies, at average cost
    285,863       255,664  
Vacation pay
    46,642       46,465  
Prepaid expenses
    41,236       76,265  
Other
    21,988       66,663  
 
           
Total current assets
    1,880,144       1,173,418  
 
           
Property, Plant, and Equipment:
               
In service
    16,444,682       15,997,793  
Less accumulated provision for depreciation
    5,869,903       5,636,475  
 
           
 
    10,574,779       10,361,318  
Nuclear fuel, at amortized cost
    145,290       137,300  
Construction work in progress
    838,421       562,119  
 
           
Total property, plant, and equipment
    11,558,490       11,060,737  
 
           
Other Property and Investments:
               
Equity investments in unconsolidated subsidiaries
    50,325       47,486  
Nuclear decommissioning trusts, at fair value
    549,526       513,521  
Other
    29,780       35,980  
 
           
Total other property and investments
    629,631       596,987  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    378,893       354,225  
Prepaid pension costs
    749,158       722,287  
Deferred under recovered regulatory clause revenues
    69,168       301,048  
Other regulatory assets
    270,877       279,661  
Other
    207,923       166,927  
 
           
Total deferred charges and other assets
    1,676,019       1,824,148  
 
           
Total Assets
  $ 15,744,284     $ 14,655,290  
 
           
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At September 30,     At December 31,  
Liabilities and Stockholder’s Equity   2007     2006  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 978,244     $ 668,646  
Notes payable
          119,670  
Accounts payable —
               
Affiliated
    172,113       162,951  
Other
    207,241       263,506  
Customer deposits
    65,941       62,978  
Accrued taxes —
               
Income taxes
    195,292       3,120  
Other
    96,926       29,696  
Accrued interest
    65,770       53,573  
Accrued vacation pay
    38,645       38,767  
Accrued compensation
    62,993       87,194  
Other
    60,003       79,907  
 
           
Total current liabilities
    1,943,168       1,570,008  
 
           
Long-term Debt
    4,285,242       3,838,906  
 
           
Long-term Debt Payable to Affiliated Trusts
    206,186       309,279  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    2,056,588       2,116,575  
Deferred credits related to income taxes
    96,114       98,941  
Accumulated deferred investment tax credits
    182,579       188,582  
Employee benefit obligations
    411,073       375,940  
Asset retirement obligations
    499,197       476,460  
Other cost of removal obligations
    612,755       600,278  
Other regulatory liabilities
    439,806       399,822  
Other
    36,769       35,805  
 
           
Total deferred credits and other liabilities
    4,334,881       4,292,403  
 
           
Total Liabilities
    10,769,477       10,010,596  
 
           
Preferred and Preference Stock
    634,646       612,407  
 
           
Common Stockholder’s Equity:
               
Common stock, par value $40 per share —
               
Authorized — 25,000,000 shares
               
Outstanding — September 30, 2007: 15,750,000 shares
               
— December 31, 2006: 12,250,000 shares
    630,000       490,000  
Paid-in capital
    2,036,633       2,028,963  
Retained earnings
    1,675,690       1,516,245  
Accumulated other comprehensive loss
    (2,162 )     (2,921 )
 
           
Total common stockholder’s equity
    4,340,161       4,032,287  
 
           
Total Liabilities and Stockholder’s Equity
  $ 15,744,284     $ 14,655,290  
 
           
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2007 vs. THIRD QUARTER 2006
AND
YEAR-TO-DATE 2007 vs. YEAR-TO-DATE 2006
OVERVIEW
Alabama Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the State of Alabama and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Alabama Power’s primary business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth, and to effectively manage and secure timely recovery of rising costs. These costs include those related to growing demand, increasingly stringent environmental standards, fuel prices, and restoration following major storms.
Alabama Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS — OVERVIEW — “Key Performance Indicators” of Alabama Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$8.1
  3.4   $70.0   16.0
 
Alabama Power’s net income after dividends on preferred and preference stock for the third quarter 2007 was $246.1 million compared to $238.0 million for the corresponding period of 2006. Net income after dividends on preferred and preference stock for year-to-date 2007 was $508.2 million compared to $438.2 million for the corresponding period of 2006. The increase in earnings for the third quarter and year-to-date 2007 were primarily due to retail base rate revenue increases resulting from an increase in rates under Rate RSE and Rate CNP for environmental costs (Rate CNP Environmental) that took effect January 1, 2007, as well as favorable weather conditions. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters — Retail Rate Adjustments” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information on Alabama Power’s rates. The increases in revenues for the third quarter and year-to-date 2007 were partially offset by increases in other operations expense mainly related to administrative and general expense, maintenance expense primarily associated with distribution, steam power, and nuclear power, taxes other than income taxes related to state and municipal public utility license tax, and interest expense due to additional debt outstanding and higher interest rates associated with the issuance of new long-term debt.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$61.5   4.6   $282.4   8.9
 
In the third quarter 2007, retail revenues were $1.39 billion compared to $1.33 billion in the same period in 2006.
For year-to-date 2007, retail revenues were $3.44 billion compared to $3.16 billion in the same period in 2006.
Details of retail revenues are as follows:
                                 
    Third Quarter   Year-to-Date
    2007   2007
    (in millions)   (% change)   (in millions)   (% change)
Retail — prior year
  $ 1,333.0             $ 3,161.9          
Estimated change in —
                               
Rates and pricing
    61.5       4.6       171.0       5.4  
Sales growth
    (2.6 )     (0.2 )     (0.5 )     0.0  
Weather
    10.8       0.8       34.2       1.0  
Fuel and other cost recovery
    (8.2 )     (0.6 )     77.7       2.5  
 
Retail — current year
  $ 1,394.5       4.6 %   $ 3,444.3       8.9 %
 
Revenues associated with changes in rates and pricing increased in the third quarter and year-to-date 2007 when compared to the same periods in 2006 primarily due to the Rate RSE and Rate CNP Environmental increases effective in January 2007. See MANAGEMENT’S DISCUSSION AND ANALYSIS - FUTURE EARNINGS POTENTIAL — “PSC Matters — Retail Rate Adjustments” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters” in Item 8 of the Form 10-K.
Revenues attributable to changes in sales growth were relatively flat in the third quarter of 2007 when compared to the same period in 2006. Commercial KWH energy sales increased due to continued customer and demand growth. This increase was offset by a decrease in industrial KWH energy sales as a result of decreased sales demand in the chemicals and textiles sectors. Residential KWH energy sales during the third quarter 2007 were relatively flat.
For year-to-date 2007, revenues attributable to changes in sales growth were relatively flat when compared to the same period in 2006. Commercial KWH energy sales increased 1.5% due to continued customer and demand growth. This increase was offset by a 0.9% decrease in KWH energy sales to residential customers primarily as a result of a decrease in average residential customer usage and a 2.0% decrease in KWH energy sales to industrial customers primarily as a result of decreased sales demand in the primary metals and textiles sectors.
Revenues increased as a result of favorable weather in the third quarter of 2007 when compared to same period in 2006. The favorable weather, which primarily impacts residential and commercial customers, resulted in increased KWH energy sales to these customers of 1.5% each.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For year-to-date 2007, revenues increased as a result of favorable weather when compared to same period in 2006 which resulted in increased KWH energy sales to residential and commercial customers of 3.1% and 1.2%, respectively.
Fuel and other cost recovery revenues decreased in the third quarter of 2007 when compared to the same period in 2006 due to the reduction in the Rate NDR customer billing rate as a result of Alabama Power fully recovering the balance in the deferred natural disaster reserve account in June 2007. See FUTURE EARNINGS POTENTIAL — “FERC and Alabama Power PSC Matters — Natural Disaster Cost Recovery” herein for additional information.
For year-to-date 2007, fuel and other cost recovery revenues increased when compared to the same period in 2006 due to an increase in fuel costs, purchased power costs, and cost associated with PPAs certificated by the Alabama PSC, offset by a reduction in the Rate NDR customer billing rate. Electric rates for Alabama Power include provisions to recognize the full recovery of fuel costs, purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with Alabama Power’s natural disaster reserve. Under these provisions, fuel and other cost recovery revenues generally equal fuel and other cost recovery expenses and do not affect net income.
Wholesale Revenues — Affiliates
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$6.3
  21.5   $(17.9)   (13.3)
 
In the third quarter 2007, revenues from wholesale energy sales to affiliates were $35.4 million compared to $29.1 million in the same period in 2006. This increase was primarily due to a 44.1% increase in price offset by a 15.7% decrease in KWH sales.
For year-to-date 2007, revenues from wholesale energy sales to affiliates were $116.6 million compared to $134.5 million for the same period in 2006. This decrease was primarily due to an 8.3% decrease in price as well as a 5.5% decrease in KWH sales.
Wholesale energy sales to affiliated companies within the Southern Company system vary from period to period depending on demand and the availability and cost of generating resources at each company. These sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since the energy is generally sold at marginal cost.
Other Revenues
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$1.2   2.9   $7.2   5.6
 
The third quarter 2007 variance when compared to the third quarter 2006 is not material.
For year-to-date 2007, other revenues were $135.6 million compared to $128.4 million for the same period in 2006. This increase was mainly due to a $4.2 million increase in revenues from co-generation steam facilities resulting from higher gas prices and facilities service contracts and a $2.1 million increase in revenues associated with rent from electric property related to pole attachments and microwave tower rentals.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
                                 
    Third Quarter 2007     Year-to-Date 2007  
    vs.     vs.  
    Third Quarter 2006     Year-to-Date 2006  
    (change in millions)   (% change)   (change in millions)   (% change)
Fuel
  $ (14.6 )     (2.8)     $ 71.5       5.6  
Purchased power-non-affiliates
    4.9       7.4       (27.1 )     (22.3)  
Purchased power-affiliates
    11.7       13.2       15.1       6.5  
                       
Total fuel and purchased power expenses
  $ 2.0             $ 59.5          
                       
In the third quarter 2007, total fuel and purchased power expenses were $678.6 million compared to $676.6 million in the same period in 2006. This increase was primarily due to a $10.6 million increase related to greater KWHs purchased offset by an $8.6 million decrease in the cost of energy resulting from a decrease in the average cost of fuel.
For year-to-date 2007, total fuel and purchased power expenses were $1.70 billion compared to $1.64 billion for the same period in 2006. This increase is primarily due to a $60.4 million increase related to greater KWHs generated and purchased.
Fuel and purchased power transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Alabama Power’s energy cost recovery clause.
Details of Alabama Power’s cost of generation and purchased power are as follows:
                                                 
    Third Quarter   Third Quarter           Year-to-Date   Year-to-Date    
Average Cost   2007   2006   % change   2007   2006   % change
    (cents per net KWH)           (cents per net KWH)        
Fuel
    2.35       2.41       (2.5 )     2.35       2.34       0.4  
Purchased power
    7.57       7.43       1.9       6.30       6.41       (1.7 )
 
In the third quarter 2007, fuel expense was $506.9 million compared to $521.5 million in the same period in 2006. This decrease was due to a 1.4% decrease in generation from Alabama Power-owned coal and gas-fired facilities and a 5.0% decrease in natural gas prices. These decreases were partially offset by a 1.4% increase in the average cost of coal.
For year-to-date 2007, fuel expense was $1.35 billion compared to $1.28 billion for the same period in 2006. This increase was due to a 1.4% increase in the average cost of coal and a 3.2% increase in generation from Alabama Power-owned coal and gas-fired facilities due to a 47.3% decrease in hydro generation from a severe drought. These increases were partially offset by a 4.6% decrease in natural gas prices.
Non-affiliates
In the third quarter 2007, purchased power — non-affiliates was $71.6 million compared to $66.7 million in the same period in 2006. This increase was primarily due to a 65.5% increase in the amount of energy purchased due to the use of available lower price market purchases from non-affiliates to meet the increase in weather related system demand requirements partially offset by a 33.6% decrease in price.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For year-to-date 2007, purchased power — non-affiliates was $94.3 million compared to $121.4 million for the same period in 2006. This decrease was primarily due to a 12.9% decrease in price while the amount of energy purchased declined slightly.
Energy purchases from non-affiliates will vary depending on market cost of available energy being lower than Southern Company system-generated energy, demand for energy within the system service territory, and availability of Southern Company system generation.
Affiliates
In the third quarter 2007, purchased power — affiliates was $100.1 million compared to $88.4 million in the same period in 2006. This increase was due to a 13.1% increase in price offset by a 2.5% decrease in energy purchased.
For year-to-date 2007, purchased power — affiliates was $249.3 million compared to $234.2 million in the same period in 2006. This increase was due to a 6.4% increase in energy purchased and a 5.4% increase in price.
Energy purchases from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC, as approved by the FERC.
Other Operations and Maintenance Expenses
                                 
    Third Quarter 2007   Year-to-Date 2007
    vs.   vs.
    Third Quarter 2006   Year-to-Date 2006
    (change in millions)   (% change)   (change in millions)   (% change)
Other operations
  $ 19.0     10.4     $ 29.0     5.5  
Maintenance
    6.8     8.4       16.3     5.6  
                         
Total other operations and maintenance expenses
  $ 25.8           $ 45.3        
                         
In the third quarter 2007, other operations and maintenance expenses were $289.6 million compared to $263.8 million in the same period in 2006. This was primarily a result of a $9.6 million increase in administrative and general expenses related to an increase in the accrued expenses for liability insurance, litigation and workers’ compensation reserve, and an increase in nuclear services expense and a $6.7 million increase in steam power expense associated with scheduled outage maintenance cost, environmental-related expense at various coal-fired facilities, and the cost of labor and materials. Also contributing to the increase was a $4.6 million increase in nuclear expense related to outage cost and a $2.9 million increase in distribution expenses related to scheduled overhead line clearance.
For year-to-date 2007, other operations and maintenance expenses were $860.6 million compared to $815.3 million in the same period in 2006. This increase is primarily due to a $12.6 million increase in distribution expenses related to scheduled overhead line clearance and meter expenses and an $8.8 million increase in administrative and general expenses related to an increase in the accrued expenses for liability insurance, litigation and workers’ compensation reserve, and an increase in employee group insurance. Also contributing to the increase was a $7.2 million increase in steam power expense associated with increases in environmental-related expenses as well as the cost of labor and materials, a $6.3 million increase in nuclear expense related to

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
outage cost, a $3.3 million increase in transmission expenses related to load dispatching and external electric purchases, and a $2.6 million increase in customer accounts related to uncollectible accounts and meter reading expense.
Taxes Other than Income Taxes
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$12.8
  21.5   $26.1   13.7
 
In the third quarter 2007, taxes other than income taxes were $72.5 million compared to $59.7 million in the same period in 2006. For year-to-date 2007, taxes other than income taxes were $216.7 million compared to $190.6 million for the same period in 2006. These increases were primarily due to increases in state and municipal public utility license taxes which are directly related to increased retail revenues.
Allowance for Equity Funds Used During Construction
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$5.7   144.8   $11.3   84.9
 
Allowance for equity funds used during construction (AFUDC) in the third quarter 2007 was $9.6 million compared to $3.9 million in the same period in 2006. For year-to-date 2007, AFUDC was $24.6 million compared to $13.3 million for the same period in 2006. These increases were primarily due to increases in the amount of construction work in progress related to environmental, transmission, and distribution projects compared to the same periods in 2006.
Interest Expense, Net of Amounts Capitalized
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$4.1   6.7   $20.5   11.8
 
In the third quarter 2007, interest expense, net of amounts capitalized was $65.9 million compared to $61.8 million in the same period in 2006. For year-to-date 2007, interest expense, net of amounts capitalized was $194.6 million compared to $174.1 million for the same period in 2006. These increases were mainly due to additional debt outstanding and higher interest rates associated with the issuance of new long-term debt. For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Financing Activities” of Alabama Power in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY — “Financing Activities” herein.
Other Income (Expense), Net
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$5.2   66.1   $2.4   13.4
 

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the third quarter 2007, other income (expense), net was $13.1 million compared to $7.9 million in the same period in 2006. This increase in other income (expense), net was mainly attributed to the write off of the net book value of certain equipment due to the discontinuation of a non-utility marketing program. Neither the write off of the assets, the revenue, nor the net profit(loss) associated with this marketing program were material to the results of operations.
For year-to-date 2007, other income (expense), net was $20.0 million compared to $17.6 million for the same period in 2006. The increase in other expense, net was mainly attributed to the write off of the net book value of certain equipment due to the discontinuation of a non-utility marketing program during the third quarter. This increase was partially offset due to the recording of the settlement with the EPA in the NSR litigation in the first quarter of 2006. For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL - “Environmental Matters — New Source Review Actions” of Alabama Power in Item 7 of the Form 10-K.
Dividends on Preferred and Preference Stock
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$2.4   40.1   $6.7   36.5
 
Dividends on preferred and preference stock in the third quarter 2007 were $8.5 million compared to $6.1 million in the same period in 2006. For year-to-date 2007, dividends on preferred and preference stock were $24.9 million compared to $18.2 million for the same period in 2006. These increases were due to the additional dividends associated with the issuance of six million shares of preference stock ($150 million stated capital) in December 2006 and the issuance of six million shares of preference stock ($150 million stated capital) in September 2007. For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Financing Activities” of Alabama Power in Item 7 of the Form 10-K.
Income Taxes
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$3.6   2.4   $39.5   14.1
 
The third quarter 2007 variance when compared to the third quarter 2006 is not material.
For year-to-date 2007, income tax expense was $319.8 million compared to $280.3 million in the same period in 2006. This increase was primarily a result of higher earnings before income taxes.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Alabama Power’s future earnings potential. The level of Alabama Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Alabama Power’s primary business of selling electricity. These factors include Alabama Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Alabama Power’s service area. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL of Alabama Power in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be fully recovered in rates on a timely basis. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.
New Source Review Litigation
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — New Source Review Actions” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Environmental Matters — New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding a civil action brought by the EPA alleging that Alabama Power had violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of its coal-fired generating facilities. The plaintiffs’ appeal against Alabama Power was stayed by the U.S. Court of Appeals for the Eleventh Circuit pending the U.S. Supreme Court’s decision in a similar case against Duke Energy. On April 2, 2007, the U.S. Supreme Court issued an opinion in the Duke Energy case. The U.S. District Court for the Northern District of Alabama has issued an order indicating a willingness to re-evaluate its previous decision in light of the Supreme Court’s Duke Energy opinion. The Eleventh Circuit is now considering whether to proceed with the appeal or remand the case to the District Court for further proceedings, and if so, whether to vacate the District Court’s original judgment in favor of Alabama Power. The final resolution of these claims cannot be determined at this time.
Eight-Hour Ozone Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters - Environmental Statutes and Regulations — Air Quality” of Alabama Power in Item 7 of the Form 10-K for additional information regarding revisions to the eight-hour ozone air quality standard. On June 20, 2007, the EPA proposed additional revisions to the current eight-hour ozone standard which, if enacted, could result in designation of new nonattainment areas within Alabama Power’s service territory. The EPA has requested comment and is expected to make a determination regarding finalization of a revised standard in 2008. The ultimate outcome of this matter cannot be determined at this time.
Fine Particulate Matter Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters - Environmental Statutes and Regulations — Air Quality” of Alabama Power in Item 7 of the Form 10-K for additional information regarding nonattainment designations for the fine particulate matter air quality standard. In March 2007, the EPA finalized its fine particulate matter implementation rule, requiring submittal of state plans for addressing the nonattainment designations by April 2008. The ultimate outcome of this matter depends on the development and submittal of those state plans and the resolution of pending legal challenges and, therefore, cannot be determined at this time.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FERC and Alabama PSC Matters
Market-Based Rate Authority
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “FERC Matters - Market-Based Rate Authority” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “FERC Matters — Market-Based Rate Authority” in Item 8 of the Form 10-K for information regarding the proceedings initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory and in May 2005 to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing.
In late June and July 2007, hearings were held in the December 2004 proceeding and briefs to the presiding ALJ were filed in August and September. Alabama Power anticipates an initial decision from the ALJ in November 2007 on the issues that were set for hearing. The ultimate outcome of this generation dominance proceeding cannot now be determined, but an adverse decision by the FERC in a final order could result in refunds of approximately $3.9 million, plus interest.
On June 21, 2007, the FERC issued an order terminating the May 2005 proceeding pertaining to the other three parts of the market-based rate analysis. In addition, on June 21, 2007, the FERC issued its final rule regarding market-based rate authority. The FERC generally retained its current market-based rate standards. The impact of this order and its effect on the generation dominance proceeding cannot now be determined.
Intercompany Interchange Contract
See MANAGEMENT’S DISCUSSION AND ANALYSIS - FUTURE EARNINGS POTENTIAL — “FERC Matters - Intercompany Interchange Contract” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “FERC Matters — Intercompany Interchange Contract” in Item 8 of the Form 10-K for information regarding the proceeding initiated by the FERC in May 2005 to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the Power Pool is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (2) whether any parties to the IIC have violated the FERC’s standards of conduct applicable to utility companies that are transmission providers, and (3) whether Southern Company’s code of conduct defining Southern Power as a “system company” rather than a “marketing affiliate” is just and reasonable.
On April 19, 2007, the FERC approved, with certain modifications, the compliance filing submitted by Southern Company on November 6, 2006. The compliance plan largely involves functional separation and information restrictions related to marketing activities conducted on behalf of Southern Power. Implementation of the plan is not expected to have a material impact on Alabama Power’s financial statements.
Retail Fuel Cost Recovery
Alabama Power has established fuel cost recovery rates approved by the Alabama PSC. Alabama Power’s under recovered fuel costs as of September 30, 2007 totaled $307 million as compared to $301 million at December 31, 2006. As a result of the increasing level of under recovered fuel costs, in June 2007, the Alabama PSC ordered Alabama Power to increase its Rate ECR factor to 3.1 cents per KWH from 2.4 cents per KWH,

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
effective with billings beginning July 2007 for the 30-month period ending December 2009. This change represents on average an increase of approximately $7.37 per month for a customer billing of 1,000 KWH. This increase is intended to permit the recovery of energy costs based on an estimate of future energy costs, as well as the collection of the existing under recovered energy costs by the end of 2009. During the 30-month period, Alabama Power will be allowed to include a carrying charge associated with the under recovered fuel costs in the fuel expense calculation. In the event the application of this increased Rate ECR factor results in an over recovered position during this period, Alabama Power will pay interest on any such over recovered balance at the same rate used to derive the carrying costs. As a result of the order, Alabama Power classified $69 million of the under recovered regulatory clause receivable as deferred charges and other assets in the Condensed Balance Sheet as of September 30, 2007 herein.
Natural Disaster Cost Recovery
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters — Natural Disaster Cost Recovery” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters — Natural Disaster Cost Recovery” in Item 8 of the Form 10-K for information regarding natural disaster cost recovery. As of December 31, 2006, Alabama Power had a deficit balance in the deferred natural disaster reserve account of approximately $16.8 million. In June 2007, Alabama Power fully recovered its prior storm costs related to Hurricanes Dennis and Katrina. As a result customer rates decreased by $1.73 per month per residential customer account and $4.29 per month per non-residential customer account beginning with July 2007 billings. Alabama Power continues to collect a monthly Rate NDR charge to establish and maintain a target reserve balance of $75 million for future storms. At September 30, 2007, Alabama Power had accumulated a balance of $23.1 million in the target reserve for future storms, which is included in the Condensed Balance Sheet herein under “Other Regulatory Liabilities.”
Other Matters
Alabama Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Alabama Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such pending or potential litigation against Alabama Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Alabama Power in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Alabama Power’s financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Alabama Power prepares its financial statements in accordance with accounting principles generally accepted in

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the United States. Significant accounting policies are described in Note 1 to the financial statements of Alabama Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Alabama Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS — ACCOUNTING POLICIES — “Application of Critical Accounting Policies and Estimates” of Alabama Power in Item 7 of the Form 10-K for a complete discussion of Alabama Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.
New Accounting Standards
Income Taxes
On January 1, 2007, Alabama Power adopted FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement, and classification of income tax uncertainties, along with any related interest and penalties. The provisions of FIN 48 were applied to all tax positions beginning January 1, 2007. The adoption of FIN 48 did not have a material impact on Alabama Power’s financial statements.
Fair Value Measurement
The FASB issued FASB Statement No. 157 (SFAS No. 157), “Fair Value Measurements” in September 2006. This standard provides guidance on how to measure fair value where it is permitted or required under other accounting pronouncements. SFAS No. 157 also requires additional disclosures about fair value measurements. Alabama Power plans to adopt SFAS No. 157 on January 1, 2008 and is currently assessing the impact of this standard.
Fair Value Option
In February 2007, the FASB issued FASB Statement No. 159 (SFAS No. 159), “Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Alabama Power plans to adopt SFAS No. 159 on January 1, 2008 and is currently assessing its impact to the extent the fair value option is elected.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Alabama Power’s financial condition and liquidity position remained stable at September 30, 2007. Net cash provided from operating activities totaled $898.4 million for the first nine months of 2007, compared to $693.3 million for the corresponding period in 2006. The $205.1 million increase in cash provided from operating activities in the first nine months of 2007 is primarily due to the increase in net income as previously discussed, lower cash outflow for accounts payable, and an increase in the accrued tax liability. Net cash used for investing activities totaled $920.4 million primarily due to gross property additions to utility plant of $822.8 million in the first nine months of 2007. These additions were primarily related to construction of transmission and distribution facilities, replacement of steam equipment, purchases of nuclear fuel, and installation of

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
equipment to comply with environmental standards. Net cash provided from financing activities totaled $314.2 million for the first nine months of 2007, compared to $105.7 million for the corresponding period in 2006. The increase was primarily the result of a decrease in cash outflow for the repayment of outstanding notes payable.
Capital Requirements and Contractual Obligations
See MANAGEMENT’S DISCUSSION AND ANALYSIS - FINANCIAL CONDITION AND LIQUIDITY — “Capital Requirements and Contractual Obligations” of Alabama Power in Item 7 of the Form 10-K for a description of Alabama Power’s capital requirements for its construction program, scheduled maturities of long-term debt, as well as the related interest, preferred and preference stock dividends, lease obligations, purchase commitments, and trust funding requirements. Approximately $978 million will be required through September 30, 2008 for maturities of long-term debt.
In October 2007, Alabama Power’s Board of Directors approved a new capital budget for 2008 and 2009. The construction program budget for Alabama Power is $1.57 billion for 2008 and $1.58 billion for 2009. Through 2009, Alabama Power estimates spending $1.26 billion on environmental related additions, $354 million on Plant Farley (including $272 million for nuclear fuel), $752 million on distribution facilities and $281 million on transmission facilities. The Southern Company’s system financial plan, including its capital budget, is expected to be reviewed by the Southern Company Board of Directors in early 2008. See Note 7 to the financial statements of Alabama Power under “Construction Program” in Item 8 of the Form 10-K for additional details.
Sources of Capital
Alabama Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Recently, Alabama Power has primarily utilized funds from operating cash flows, short-term debt, external security offerings, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Alabama Power in Item 7 of the Form 10-K for additional information.
Alabama Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt as well as cash needs which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Alabama Power had at September 30, 2007 approximately $308 million of cash and cash equivalents, $51.5 million of restricted cash related to the sale of pollution control bonds which may be used only for future project costs, unused committed lines of credit of approximately $978 million (including $563 million of such lines which are dedicated to funding purchase obligations related to variable rate pollution control bonds), and an extendible commercial note program. Of the unused credit facilities, $378 million will expire at various times in 2008 (of which $298 million allow for one-year term loans). The remaining $600 million credit facility expires in 2012. Alabama Power expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Alabama Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. Alabama Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Alabama Power and other Southern Company subsidiaries. Alabama Power has regulatory authority for up to $1.4 billion of short-term borrowings. At September 30, 2007, Alabama Power had no commercial paper or extendible commercial notes outstanding. Management believes that the need for working capital can be adequately met by issuing commercial paper or utilizing lines of credit without maintaining large cash balances.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Credit Rating Risk
Alabama Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. However, Alabama Power, along with all members of the Power Pool, is party to certain agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for it and/or Georgia Power. These agreements are primarily for natural gas and power price risk management activities. At September 30, 2007, Alabama Power’s total exposure to these types of agreements was $26.7 million.
Market Price Risk
Alabama Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2006 reporting period. In addition, Alabama Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulation, Alabama Power has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Alabama Power enters into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Alabama Power has also implemented a retail fuel hedging program at the instruction of the Alabama PSC.
The fair value of derivative energy contracts at September 30, 2007 was as follows:
                 
    Third Quarter     Year-to-Date  
    2007     2007  
    Changes     Changes  
    Fair Value  
    (in thousands)  
Contracts beginning of period
  $ (12,670 )   $ (32,628 )
Contracts realized or settled
    10,510       25,245  
New contracts at inception
           
Changes in valuation techniques
           
Current period changes (a)
    (5,795 )     (572 )
 
Contracts at September 30, 2007
  $ (7,955 )   $ (7,955 )
 
(a) Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
                         
    Source of September 30, 2007  
    Valuation Prices  
    Total     Maturity  
    Fair Value     Year 1     1-3 Years  
            (in thousands)          
Actively quoted
  $ (7,956 )   $ (8,921 )   $ 965  
External sources
    1       1        
Models and other methods
                 
 
Contracts at September 30, 2007
  $ (7,955 )   $ (8,920 )   $ 965  
 

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to Alabama Power’s fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through Alabama Power’s fuel cost recovery clause. Certain other energy related derivatives, designated as hedges, are deferred in other comprehensive income. Gains and losses on derivative contracts that are not designated as hedges are recognized in the statements of income as incurred.
At September 30, 2007, the fair value gain/(loss) of derivative energy contracts was reflected in the financial statements as follows:
         
    Amounts  
    (in thousands)  
Regulatory assets, net
  $ (7,956 )
Accumulated other comprehensive income
     
Net income
    1  
 
Total fair value
  $ (7,955 )
 
Unrealized pre-tax gains and losses on energy contracts recognized in income were not material for any period presented. For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS - FINANCIAL CONDITION AND LIQUIDITY - “Market Price Risk” of Alabama Power in Item 7 and Notes 1 and 6 to the financial statements of Alabama Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.
Financing Activities
Alabama Power issued $200 million of senior notes in the first quarter of 2007. The proceeds were used to repay a portion of Alabama Power’s outstanding short-term indebtedness and for other general corporate purposes, including Alabama Power’s continuing construction activities. Also in the first quarter of 2007, Alabama Power issued 1,750,000 shares of common stock to Southern Company at $40.00 a share ($70 million aggregate purchase price). The proceeds from the sale were used by Alabama Power for general corporate purposes.
In the second quarter 2007, Alabama Power paid at maturity $168.5 million in aggregate principal amount of Series W Floating Rate Extendible Senior Notes. In addition, Alabama Power issued $250 million of senior notes. The proceeds were used to repay a portion of Alabama Power’s outstanding short-term indebtedness and for other general corporate purposes, including Alabama Power’s continuing construction activities. Also in the second quarter of 2007, Alabama Power issued 1,750,000 shares of common stock to Southern Company at $40.00 a share ($70 million aggregate purchase price). The proceeds from the sale were used by Alabama Power for general corporate purposes.
Additionally, in the second quarter 2007, Alabama Power incurred obligations related to the issuance of $246.5 million of The Industrial Development Board of the City of Mobile Pollution Control Revenue Bonds (Alabama Power Barry Plant Project). The proceeds will be held by the trustee and will be transferred to Alabama Power to fund pollution control and environmental improvement facilities at Plant Barry. As of September 30, 2007, approximately $195.5 million had been applied to fund project costs, with the remaining $51 million held by the trustee.

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ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In September 2007, Alabama Power issued 6,000,000 shares of 6.45% Series Preference Stock, Non-Cumulative, Par Value $1 Per Share (Stated Capital $25 Per Share) ($150 million aggregate purchase price). The proceeds from the sale were used by Alabama Power for general corporate purposes.
Subsequent to September 30, 2007, Alabama Power issued $200 million of Series 2007C 6.00% Senior Insured Monthly Notes due October 15, 2037. Alabama Power also terminated interest rate derivatives related to the senior note issuance at a loss of less than $1.0 million. In addition, Alabama Power issued 2,000,000 shares of 6.50% Series Preference Stock, Non-Cumulative, Par Value $1 Per Share (Stated Capital $25 Per Share) ($50 million aggregate purchase price). The proceeds from the sale were used by Alabama Power for general corporate purposes.
Also subsequent to September 30, 2007, Alabama Power paid at maturity $200 million in aggregate principal amount of Series L 7.125% Senior Notes and Alabama Power redeemed $103.1 million aggregate principal amount of Series D Junior Subordinated Notes due October 1, 2042 and the related Flexible Trust Preferred Securities and Common Securities of Alabama Power Capital Trust IV. In addition, Alabama Power announced the planned redemption of 1,250 shares of Alabama Power Company Flexible Money Market Class A Preferred Stock (Series 2003A), Par Value $100,000 Per Share ($125 million aggregate value) in January 2008.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Alabama Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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GEORGIA POWER COMPANY

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GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2007     2006     2007     2006  
    (in thousands)     (in thousands)  
Operating Revenues:
                               
Retail revenues
  $ 2,143,511     $ 2,001,938     $ 5,141,403     $ 4,885,404  
Wholesale revenues —
                               
Non-affiliates
    127,810       135,647       406,632       404,014  
Affiliates
    107,451       78,249       208,065       203,791  
Other revenues
    64,965       59,471       188,956       173,746  
 
                       
Total operating revenues
    2,443,737       2,275,305       5,945,056       5,666,955  
 
                       
Operating Expenses:
                               
Fuel
    786,021       698,703       2,030,745       1,750,638  
Purchased power —
                               
Non-affiliates
    168,358       145,495       282,121       288,459  
Affiliates
    196,700       186,669       560,897       572,642  
Other operations
    258,865       258,055       739,151       744,858  
Maintenance
    129,812       116,320       391,070       374,203  
Depreciation and amortization
    128,268       125,352       381,679       372,850  
Taxes other than income taxes
    87,708       82,701       231,659       227,431  
 
                       
Total operating expenses
    1,755,732       1,613,295       4,617,322       4,331,081  
 
                       
Operating Income
    688,005       662,010       1,327,734       1,335,874  
Other Income and (Expense):
                               
Allowance for equity funds used during construction
    17,846       7,802       45,712       20,324  
Interest income
    1,436       1,039       2,543       1,613  
Interest expense, net of amounts capitalized
    (81,796 )     (65,770 )     (225,457 )     (193,442 )
Interest expense to affiliate trusts
    (6,798 )     (14,878 )     (35,682 )     (44,633 )
Other income (expense), net
    11,291       7,772       7,376       9,666  
 
                       
Total other income and (expense)
    (58,021 )     (64,035 )     (205,508 )     (206,472 )
 
                       
Earnings Before Income Taxes
    629,984       597,975       1,122,226       1,129,402  
Income taxes
    229,862       214,102       401,046       413,832  
 
                       
Net Income
    400,122       383,873       721,180       715,570  
Dividends on Preferred Stock
    689       1,790       2,067       4,150  
 
                       
Net Income After Dividends on Preferred Stock
  $ 399,433     $ 382,083     $ 719,113     $ 711,420  
 
                       
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2007     2006     2007     2006  
    (in thousands)     (in thousands)  
Net Income After Dividends on Preferred Stock
  $ 399,433     $ 382,083     $ 719,113     $ 711,420  
Other comprehensive income (loss):
                               
Qualifying hedges:
                               
Changes in fair value, net of tax of $(4,686), $(10,765), $5,044, and $254, respectively
    (7,430 )     (17,066 )     7,996       398  
Reclassification adjustment for amounts included in net income, net of tax of $73, $(236), $75, and $(194), respectively
    116       (373 )     120       (308 )
Marketable securities:
                               
Change in fair value, net of tax of $71, $(296), $107, and $(459), respectively
    112       (471 )     170       (729 )
 
                       
Total other comprehensive income (loss)
    (7,202 )     (17,910 )     8,286       (639 )
 
                       
COMPREHENSIVE INCOME
  $ 392,231     $ 364,173     $ 727,399     $ 710,781  
 
                       
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

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GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Nine Months  
    Ended September 30,  
    2007     2006  
    (in thousands)  
Operating Activities:
               
Net income
  $ 721,180     $ 715,570  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    458,522       439,197  
Deferred income taxes and investment tax credits
    34,267       35,865  
Deferred expenses — affiliates
    (19,460 )     (19,721 )
Allowance for equity funds used during construction
    (45,712 )     (20,324 )
Pension, postretirement, and other employee benefits
    35,337       32,140  
Other, net
    14,382       4,989  
Changes in certain current assets and liabilities —
               
Receivables
    (211,971 )     (213,235 )
Fossil fuel stock
    1,827       (76,805 )
Materials and supplies
    (22,605 )     (43,252 )
Prepaid income taxes
    42,047       62,164  
Other current assets
    7,450       (786 )
Accounts payable
    (1,122 )     (162,226 )
Accrued taxes
    25,779       151,042  
Accrued compensation
    (62,643 )     (56,274 )
Other current liabilities
    31,179       8,272  
 
           
Net cash provided from operating activities
    1,008,457       856,616  
 
           
Investing Activities:
               
Property additions
    (1,214,093 )     (781,134 )
Nuclear decommissioning trust fund purchases
    (336,526 )     (366,452 )
Nuclear decommissioning trust fund sales
    329,646       359,572  
Cost of removal, net of salvage
    (28,811 )     (18,363 )
Change in construction payables, net of joint owner portion
    48,074       (13,133 )
Other
    (11,553 )     (7,328 )
 
           
Net cash used for investing activities
    (1,213,263 )     (826,838 )
 
           
Financing Activities:
               
Increase (decrease) in notes payable, net
    (166,951 )     371,480  
Proceeds —
               
Senior notes
    1,400,000        
Capital contributions from parent company
    270,250       265,777  
Pollution control bonds
          125,845  
Redemptions —
               
Senior notes
    (300,000 )     (150,000 )
First mortgage bonds
          (20,000 )
Pollution control bonds
          (125,845 )
Capital leases
    (2,073 )     (270 )
Long-term debt to affiliate trusts
    (453,608 )      
Preferred stock
          (14,569 )
Payment of preferred stock dividends
    (2,255 )     (2,126 )
Payment of common stock dividends
    (517,425 )     (472,500 )
Other
    (24,662 )     (1,621 )
 
           
Net cash provided from (used for) financing activities
    203,276       (23,829 )
 
           
Net Change in Cash and Cash Equivalents
    (1,530 )     5,949  
Cash and Cash Equivalents at Beginning of Period
    16,850       11,138  
 
           
Cash and Cash Equivalents at End of Period
  $ 15,320     $ 17,087  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $19,181 and $8,177 capitalized for 2007 and 2006, respectively)
  $ 229,282     $ 226,368  
Income taxes (net of refunds)
  $ 254,742     $ 177,486  
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

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GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At September 30,     At December 31,  
Assets   2007     2006  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 15,320     $ 16,850  
Receivables —
               
Customer accounts receivable
    670,600       474,046  
Unbilled revenues
    188,036       130,585  
Under recovered regulatory clause revenues
    526,227       353,976  
Other accounts and notes receivable
    95,370       93,656  
Affiliated companies
    49,521       21,941  
Accumulated provision for uncollectible accounts
    (10,273 )     (10,030 )
Fossil fuel stock, at average cost
    390,183       392,011  
Materials and supplies, at average cost
    326,938       304,514  
Vacation pay
    62,306       61,907  
Prepaid income taxes
    19,057       61,104  
Other
    42,300       85,725  
 
           
Total current assets
    2,375,585       1,986,285  
 
           
Property, Plant, and Equipment:
               
In service
    21,745,564       21,279,792  
Less accumulated provision for depreciation
    8,614,032       8,343,309  
 
           
 
    13,131,532       12,936,483  
Nuclear fuel, at amortized cost
    191,186       180,129  
Construction work in progress
    1,559,280       923,948  
 
           
Total property, plant, and equipment
    14,881,998       14,040,560  
 
           
Other Property and Investments:
               
Equity investments in unconsolidated subsidiaries
    61,706       70,879  
Nuclear decommissioning trusts, at fair value
    597,089       544,013  
Other
    36,883       58,848  
 
           
Total other property and investments
    695,678       673,740  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    523,012       510,531  
Prepaid pension costs
    709,115       688,671  
Deferred under recovered regulatory clause revenues
    285,381       544,152  
Other regulatory assets
    601,613       629,003  
Other
    296,054       235,788  
 
           
Total deferred charges and other assets
    2,415,175       2,608,145  
 
           
Total Assets
  $ 20,368,436     $ 19,308,730  
 
           
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

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CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At September 30,     At December 31,  
Liabilities and Stockholder’s Equity   2007     2006  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 432,400     $ 303,906  
Notes payable
    566,330       733,281  
Accounts payable —
               
Affiliated
    239,813       238,093  
Other
    439,132       402,222  
Customer deposits
    169,317       155,763  
Accrued taxes —
               
Income taxes
    183,303       217,603  
Other
    236,235       275,098  
Accrued interest
    87,135       74,643  
Accrued vacation pay
    49,485       49,704  
Accrued compensation
    82,897       141,356  
Other
    98,974       125,494  
 
           
Total current liabilities
    2,585,021       2,717,163  
 
           
Long-term Debt
    5,207,764       4,242,839  
 
           
Long-term Debt Payable to Affiliated Trusts
    515,465       969,073  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    2,891,790       2,815,724  
Deferred credits related to income taxes
    149,349       157,297  
Accumulated deferred investment tax credits
    272,361       282,070  
Employee benefit obligations
    764,125       698,274  
Asset retirement obligations
    654,295       626,681  
Other cost of removal obligations
    428,084       436,137  
Other regulatory liabilities
    268,606       281,391  
Other
    139,556       80,839  
 
           
Total deferred credits and other liabilities
    5,568,166       5,378,413  
 
           
Total Liabilities
    13,876,416       13,307,488  
 
           
Preferred Stock
    44,990       44,991  
 
           
Common Stockholder’s Equity:
               
Common stock, without par value—
               
Authorized - 20,000,000 shares
               
Outstanding - 9,261,500 shares
    398,473       398,473  
Paid-in capital
    3,320,650       3,039,845  
Retained earnings
    2,731,514       2,529,826  
Accumulated other comprehensive loss
    (3,607 )     (11,893 )
 
           
Total common stockholder’s equity
    6,447,030       5,956,251  
 
           
Total Liabilities and Stockholder’s Equity
  $ 20,368,436     $ 19,308,730  
 
           
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2007 vs. THIRD QUARTER 2006
AND
YEAR-TO-DATE 2007 vs. YEAR-TO-DATE 2006
OVERVIEW
Georgia Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the State of Georgia and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Georgia Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth, and to effectively manage and secure timely recovery of rising costs. These costs include those related to growing demand and increasingly stringent environmental standards. These issues are addressed in a general rate case filed on June 29, 2007 that is expected to be completed in late December. In addition, fuel costs rose significantly during 2005 and 2006. Georgia Power received Georgia PSC orders to increase its fuel recovery rate effective July 1, 2006 and March 1, 2007 and continues to work with the Georgia PSC to enable the timely recovery of these costs.
Georgia Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Georgia Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$17.3
  4.5   $7.7   1.1
 
Georgia Power’s net income after dividends on preferred stock for the third quarter was $399.4 million compared to $382.1 million for the corresponding period in 2006. The increase in earnings was primarily the result of higher base retail revenues due to favorable weather conditions and its effects on pricing partially offset by the timing of maintenance activities.
For year-to-date 2007 net income after dividends on preferred stock was $719.1 million compared to $711.4 million for the corresponding period in 2006. The increase in earnings was primarily the result of higher base retail revenues from residential and commercial customers due to favorable weather conditions, customer growth, and a lower effective tax rate. This increase was offset by increased maintenance and interest expenses as well as lower contributions from market-driven rates to large commercial and industrial customers during the first two quarters of 2007.
Retail Revenues
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$141.6   7.1   $256.0   5.2
 
In the third quarter 2007, retail revenues were $2.1 billion compared to $2.0 billion in the corresponding period in 2006.
For year-to-date 2007, retail revenues were $5.1 billion compared to $4.9 billion for the same period in 2006.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of retail revenues are as follows:
                                 
    Third Quarter 2007   Year-to-Date 2007
    (in millions)   (% change)   (in millions)   (% change)
Retail – prior year
  $ 2,001.9             $ 4,885.4          
Estimated change in —
                               
Rates and pricing
    28.0       1.4       (56.8 )     (1.2 )
Sales growth
    1.7       0.1       37.2       0.8  
Weather
    10.5       0.5       20.5       0.4  
Fuel cost recovery
    101.4       5.1       255.1       5.2  
 
Retail – current year
  $ 2,143.5       7.1     $ 5,141.4       5.2  
 
Revenues associated with changes in rates and pricing increased in the third quarter 2007 and decreased for year-to-date 2007 when compared to the corresponding periods for 2006. Revenues associated with rates and pricing changes increased in the third quarter 2007 primarily due to higher demand driven revenues from commercial customers. Some commercial customers are billed under tariffs that are subject to increased capacity charges when new peak demands are set, as occurred in August. Also contributing to the increase related to changes in rates and pricing were higher contributions from market-driven rates for sales to large commercial and industrial customers. Revenues associated with changes in rates and pricing decreased year-to-date 2007 primarily due to lower contributions from market-driven rates for sales to large commercial and industrial customers partially offset by higher demand revenues from commercial customers.
Revenues attributable to sales growth were $1.7 million in the third quarter and $37.2 million year-to-date 2007 when compared to the corresponding periods for 2006. Total retail KWH sales increased 1.6% for the third quarter and 1.9% for year-to-date compared to the corresponding periods in 2006. These increases were primarily the result of the addition of over 26,000 customers. For the third quarter and year-to-date, residential KWH sales increased 1.4% and 3.1%, respectively, and commercial KWH sales increased 2.8% in each period. These increases were partially offset by a 0.5% year-to-date decrease in KWH sales to industrial customers primarily due to reduced demand from the textile industry.
Revenues attributable to changes in weather increased in the third quarter and year-to-date 2007 when compared to the corresponding periods for 2006 primarily due to the sustained warmer conditions in August 2007.
Fuel cost recovery revenues increased when compared to the corresponding periods for 2006. Georgia Power’s rates include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, which increased July 1, 2006 and March 1, 2007, fuel revenues generally equal fuel expenses, including the fuel component of purchased power costs, and do not affect net income. See FUTURE EARNINGS POTENTIAL – “FERC and Georgia PSC Matters – Retail Fuel Cost Recovery” herein for additional information.
Wholesale Revenues – Non-Affiliates
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$(7.8)
  (5.8)   $2.6   0.6
 
In the third quarter 2007, revenues from wholesale – non-affiliates were $127.8 million compared to $135.6 million in the same period in 2006. The third quarter decrease was primarily the result of a 5.9% decrease in

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
wholesale non-affiliate sales volume due to lower off-system sales from long-term contracts as well as decreased off-system market opportunity sales because generation resources were needed to meet Georgia Power retail and Southern Company system demand.
For year-to-date 2007, revenues from wholesale – non-affiliates were $406.6 million compared to $404.0 million in the same period in 2006. The increase was not material.
Wholesale energy sales to non-affiliates will vary depending on the market cost of available energy compared to the cost of Georgia Power and Southern Company system owned generation, demand for energy within the Southern Company service territory, and availability of Southern Company system generation.
Wholesale Revenues – Affiliates
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$29.3   37.3   $4.3   2.1
 
In the third quarter 2007, revenues from wholesale – affiliates were $107.5 million compared to $78.2 million for the corresponding period in 2006. This increase was primarily due to an 18.9% increase in third quarter 2007 KWH sales to affiliates due to the availability of Georgia Power generating assets to meet Southern Company system demand.
For year-to-date 2007, revenues from wholesale – affiliates were $208.1 million compared to $203.8 million, for the corresponding period in 2006. The increase was not material.
Wholesale energy sales to affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. These sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost.
Other Revenues
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$5.5   9.2   $15.3   8.8
 
In the third quarter and year-to-date 2007, other revenues were $65.0 million and $189.0 million, respectively, compared to $59.5 million and $173.7 million in the corresponding periods in 2006. The other revenue increases were primarily due to increases in transmission and outdoor lighting revenues. Transmission revenues increased $2.7 million third quarter and $9.6 million year-to-date primarily due to the increased usage of Georgia Power’s transmission system by non-affiliated companies. Outdoor lighting revenues increased $2.2 million in the third quarter and $5.7 million year-to-date primarily due to a 3.1% increase in the number of lighting customers.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
                                 
    Third Quarter 2007     Year-to-Date 2007  
    vs.     vs.  
    Third Quarter 2006     Year-to-Date 2006  
    (change in millions)     (% change)     (change in millions)     (% change)  
Fuel
  $ 87.3       12.5     $ 280.1       16.0  
Purchased power – non-affiliates
    22.9       15.7       (6.3 )     (2.2)  
Purchased power – affiliates
    10.0       5.4       (11.8 )     (2.1)  
                       
Total fuel and purchased power expenses
  $ 120.2             $ 262.0          
                       
In the third quarter 2007, total fuel and purchased power expenses were $1.2 billion compared to $1.0 billion for the corresponding period in 2006. The increase in fuel and purchased power expenses was due to $79.8 million net increase in the average cost of energy per net KWH and a $40.4 million increase from higher KWH volumes generated and purchased compared to the corresponding period in 2006. The increase in KWH volumes generated and purchased can be partially attributed to the increased demand due to warmer summer weather as well as the decrease in Georgia Power’s hydro generation due to the severe drought in Georgia.
For year-to-date 2007, total fuel and purchased power expenses were $2.9 billion compared to $2.6 billion for the same period in 2006. The net increase in fuel and purchase power expenses was primarily due to a $203.6 million net increase in the average cost of energy per net KWH and a $58.4 million increase from higher KWH volumes generated and purchased compared to the corresponding period in 2006. The increase in KWH volumes generated and purchased can be partially attributed to the increased demand due to the warmer summer weather as well as the decrease in Georgia Power’s hydro generation due to the severe drought in Georgia.
Fuel and purchased power transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Georgia Power’s fuel cost recovery clause. See FUTURE EARNINGS POTENTIAL – “FERC and Georgia PSC Matters – Retail Fuel Cost Recovery” herein for additional information
Details of Georgia Power’s cost of generation and purchased power are as follows:
                                                 
    Third Quarter   Third Quarter       Year-to-Date   Year-to-Date    
Average Cost   2007   2006   % change   2007   2006   % change
    (cents per net KWH)           (cents per net KWH)        
Fuel
    2.77       2.52       9.9       2.69       2.43       10.7  
Purchased power
    7.61       7.31       4.1       7.25       7.04       3.0  
 
In the third quarter 2007, fuel expense was $786.0 million compared to $698.7 million for the corresponding period in 2006. This increase was due to a 9.9% increase in the average cost of fuel per net KWH generated and the increased use of available gas generation resources to meet summer peak demand requirements in 2007.
For year-to-date 2007, fuel expense was $2.0 billion compared to $1.8 billion in 2006. This increase was the result of a 10.7% increase in the average cost of fuel per net KWH generated primarily due to higher coal transportation costs and an increase in the use of available gas generation resources, which have higher fuel costs than other generation resources.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-affiliates
In the third quarter 2007, purchased power expense – non-affiliates was $168.4 million compared to $145.5 million for the third quarter 2006. This increase was primarily the result of an increase of 62.2% in KWH volume purchased from non-affiliates compared to the same period in 2006 due to the use of available lower priced market purchases from non-affiliates to meet the increase in weather-related system demand requirements.
For year-to-date 2007, purchased power expense – non-affiliates was $282.1 million compared to $288.5 million for the corresponding period in 2006. The decrease was primarily the result of a year-to-date 20.8% decrease in the average cost of purchase power from non-affiliates per KWH purchased, partially offset by an increase of 23.5% in KWH volume purchased from non-affiliates compared to the same period in 2006.
Energy purchases from non-affiliates will vary depending on market cost of available energy being lower than Southern Company system-generated energy, demand for energy within the system service territory, and availability of Southern Company system generation.
Affiliates
In the third quarter 2007, purchased power – affiliates was $196.7 million compared to $186.7 million for the third quarter 2006. Purchases from affiliates increased primarily due to an overall increase in the marginal cost of energy despite a decrease of 6.8% in KWH volume purchased from affiliates compared to the same period in 2006.
For year-to-date 2007, purchased power – affiliates was $560.9 million compared to $572.6 million for the corresponding period in 2006. Year-to-date KWH purchases decreased 1.1% primarily due to the availability of Georgia Power self-owned assets to meet customer demand.
Energy purchases from affiliated companies within the Southern Company system will vary depending with demand and the availability and cost of generating resources at each company. These purchases are made in accordance with the IIC, as approved by the FERC.
Other Operations and Maintenance Expenses
                                 
    Third Quarter 2007     Year-to-Date 2007  
    vs.     vs.  
    Third Quarter 2006     Year-to-Date 2006  
    (change in millions)     (% change)     (change in millions)     (% change)  
Other operations
  $ 0.8       0.3     $ (5.7 )     (0.8)  
Maintenance
    13.5       11.6       16.9       4.5  
                       
Total other operations and maintenance expenses
  $ 14.3             $ 11.2          
                       
In the third quarter 2007, other operations and maintenance expenses were $388.7 million compared to $374.4 million in the same period in 2006. This was primarily the result of a $13.0 million increase due to the timing and higher cost of generation maintenance and outage activities at Georgia Power’s fossil and nuclear units and a $6.4 million increase in expenses due to the timing of distribution maintenance activities. This was partially offset by a $2.1 million decrease in transmission expenses associated with the integrated transmission system that Georgia Power shares with its joint owners and a $2.4 million decrease in uncollectible account expenses.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For year-to-date 2007, other operations and maintenance expenses were $1.13 billion compared to $1.12 billion for the same period in 2006. The $11.2 million increase was primarily the result of an $18.0 million increase in fossil generation expenses due to the timing and higher cost of maintenance outages. Also contributing to the increase was $5.5 million in additional nuclear outage expenses. Offsetting these increases were a $5.4 million decrease in uncollectible account expenses and a $7.0 million decrease in employee compensation and benefit expenses.
Allowance for Equity Funds Used During Construction
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$10.0
  128.7   $25.4   124.9
 
In the third quarter and year-to-date 2007, the allowance for equity funds used during construction was $17.8 million and $45.7 million, respectively, compared to $7.8 million and $20.3 million for the corresponding periods in 2006. These increases were primarily related to a 115.3% increase in average third quarter expenditures and a 106.4% increase in average year-to-date expenditures related to new and ongoing construction activities for environmental, transmission, and distribution projects. See Note 7 to the financial statements of Georgia Power under “Construction Program” in Item 8 of the Form 10-K for additional information regarding Georgia Power’s construction program.
Interest Expense, Net of Amounts Capitalized
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$16.0   24.4   $32.1   16.6
 
In the third quarter and year-to-date 2007, interest expense, net of amounts capitalized was $81.8 million and $225.5 million, respectively, compared to $65.8 million and $193.4 million for the corresponding periods in 2006. These increases were primarily the result of generally higher interest rates for variable rate debt and the issuance of additional long-term debt. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY – “Financing Activities” herein for additional information.
Interest Expense to Affiliate Trusts
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$(8.1)   (54.3)   $(8.9)   (20.1)
 
In the third quarter and year-to-date 2007, interest expense to affiliate trusts was $6.8 million and $35.7 million, respectively, compared to $14.9 million and $44.6 million for the corresponding periods in 2006. These decreases were primarily the result of the redemption of junior subordinated notes and related trust preferred securities issued by Georgia Power Capital Trust V in June 2007. This decrease was partially offset by the increase in interest expense, net of amounts capitalized. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Financing Activities” herein for additional information.

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GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Income (Expense), Net
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$3.5   45.3   $(2.3)   (23.7)
 
In the third quarter and year-to-date 2007, other income (expense), net was $11.3 million and $7.4 million, respectively, compared to $7.8 million and $9.7 million for the corresponding periods in 2006. The third quarter increase was primarily the result of higher income from a residential pricing program and customer contract work. The year-to-date decrease was the result of higher charitable donations and lower customer facilities charges.
Income Taxes
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$15.8   7.4   $(12.8)   (3.1)
 
In the third quarter and year-to-date 2007, income taxes were $229.9 million and $401.0 million, respectively, compared to $214.1 million and $413.8 million for the corresponding periods in 2006. The third quarter increase was primarily a result of higher pre-tax net income. The year-to-date decrease was primarily the result of higher state income tax credits, an increase in federal tax benefits, and lower pre-tax income. See Note (H) to the Condensed Financial Statements herein for additional information related to the tax impact of state income tax credits on Georgia Power’s effective tax rate.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Georgia Power’s future earnings potential. The level of Georgia Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Georgia Power’s business of selling electricity. These factors include Georgia Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon growth in energy sales which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Georgia Power’s service area. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Georgia Power in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be fully recovered in rates on a timely basis. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Eight-Hour Ozone Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Georgia Power in Item 7 of the Form 10-K for additional information regarding revisions to the eight-hour ozone air quality standard. On June 20, 2007, the EPA proposed additional revisions to the current eight-hour ozone standard which, if enacted, could result in designation of new nonattainment areas within Georgia Power’s service territory. The EPA has requested comment and is expected to make a determination regarding finalization of a revised standard in 2008. The ultimate outcome of this matter cannot be determined at this time.
Fine Particulate Matter Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations — Air Quality” of Georgia Power in Item 7 of the Form 10-K for additional information regarding nonattainment designations for the fine particulate matter air quality standard. In March 2007, the EPA finalized its fine particulate matter implementation rule, requiring submittal of state plans for addressing the nonattainment designations by April 2008. The ultimate outcome of this matter depends on the development and submittal of those state plans and the resolution of pending legal challenges and, therefore, cannot be determined at this time.
Georgia Multi-Pollutant Rule
On June 27, 2007, the State of Georgia approved a new “multi-pollutant” rule for certain existing coal-fired electric utility steam generating units in Georgia. The rule is designed to reduce emissions of mercury, sulfur dioxide, nitrogen oxide, and fine particulates state-wide by requiring installation of specified control technologies at each affected unit by a date certain between December 31, 2008 and June 1, 2015. This rule will require the installation of controls on the majority of Georgia Power’s coal-fired units. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – General” in Item 7 of the Form 10-K for a discussion of estimated compliance costs for 2007 through 2009. If compliance costs cannot be fully recovered in rates on a timely basis, Georgia Power’s financial statements would be adversely impacted. See “FERC and Georgia PSC Matters – Retail Base Rate Recovery” for information on Georgia Power’s request to increase retail rates effective January 1, 2008.
Plant Wansley Environmental Litigation
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Plant Wansley Environmental Litigation” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Environmental Matters – Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K for additional information on litigation involving alleged violations of the Clean Air Act at four of the units at Plant Wansley. On June 18, 2007, the U.S. District Court for the Northern District of Georgia approved a settlement between the parties resolving all remaining issues and dismissed the case. There was no material impact on Georgia Power’s financial statements.

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FERC and Georgia PSC Matters
Market-Based Rate Authority
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Market-Based Rate Authority” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information regarding the proceedings initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory and in May 2005 to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing.
In late June and July 2007, hearings were held in the December 2004 proceeding and briefs to the presiding ALJ were filed in August and September. Georgia Power anticipates an initial decision from the ALJ in November 2007 on the issues that were set for hearing. The ultimate outcome of this generation dominance proceeding cannot now be determined, but an adverse decision by the FERC in a final order could result in refunds of approximately $5.8 million, plus interest.
On June 21, 2007, the FERC issued an order terminating the May 2005 proceeding pertaining to the other three parts of the market-based rate analysis. In addition, on June 21, 2007, the FERC issued its final rule regarding market-based rate authority. The FERC generally retained its current market-based rate standards. The impact of this order and its effect on the generation dominance proceeding cannot now be determined.
Intercompany Interchange Contract
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Intercompany Interchange Contract” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for information regarding the proceeding initiated by the FERC in May 2005 to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the Power Pool is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (2) whether any parties to the IIC have violated the FERC’s standards of conduct applicable to utility companies that are transmission providers, and (3) whether Southern Company’s code of conduct defining Southern Power as a “system company” rather than a “marketing affiliate” is just and reasonable.
On April 19, 2007, the FERC approved, with certain modifications, the compliance filing submitted by Southern Company on November 6, 2006. The compliance plan largely involves functional separation and information restrictions related to marketing activities conducted on behalf of Southern Power. Implementation of the plan is not expected to have a material impact on Georgia Power’s financial statements.
Retail Fuel Cost Recovery
As of September 30, 2007, Georgia Power had an under recovered fuel balance of approximately $811.6 million, compared to $898.1 million at December 31, 2006. On February 6, 2007, the Georgia PSC approved an increase in Georgia Power’s total annual billings of approximately $383 million related to fuel cost recovery effective March 1, 2007. The order also requires Georgia Power to file for a new fuel cost recovery rate no later than March 1, 2008. Fuel cost recovery revenues as recorded on the financial statements are adjusted for differences in actual recoverable costs and amounts billed in current regulated rates. Accordingly, any changes

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in the billing factor will have no significant effect on Georgia Power’s revenues or net income, but will affect cash flow. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Retail Regulatory Matters – Fuel Cost Recovery” in Item 8 of the Form 10-K for additional information.
Retail Base Rate Filing
Georgia Power is currently operating under a three-year retail rate order that expires December 31, 2007. Under the terms of the existing order, earnings are evaluated annually against a retail return on common equity range of 10.25% to 12.25%. Two-thirds of any earnings above the 12.25% return are applied to rate refunds, with the remaining one-third retained by Georgia Power. The order required Georgia Power to file a general rate case by July 1, 2007.
On June 29, 2007, Georgia Power filed a request to increase retail base rates with the Georgia PSC. The request includes an increase effective January 1, 2008 of approximately $406 million, or 5.98%, in retail revenues, based on a future test year ending July 31, 2008 and a proposed retail return on common equity of 12.5%. The majority of the increase in retail revenues is being requested to cover the costs of environmental compliance and continued investment in new generation, transmission, and distribution facilities to support growth and ensure reliability. The remainder of the increase would include recovery of higher operations, maintenance, and other investment costs to meet the rising demand for electricity. Hearings on Georgia Power’s direct testimony were held in early October. In direct testimony filed on October 22, 2007, the Georgia PSC staff proposed certain adjustments to Georgia Power’s general rate case that indicates a $21 million revenue surplus. Georgia Power disagrees with the majority of the staff’s proposed adjustments. Hearings on Georgia PSC staff’s and intervenors’ direct testimony will be held in early November. Georgia Power’s rebuttal hearings will occur later the same month. Georgia Power expects the Georgia PSC to issue a final order in this matter on December 20, 2007. In addition to the traditional test period request, Georgia Power filed information for a three-year rate plan option that includes additional increases of approximately $189 million, or 2.62%, and $41 million, or 0.56%, in retail revenues effective January 1, 2009 and 2010, respectively, to cover the costs of additional environmental controls and certified PPAs. The final outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “PSC Matters – Rate Plans” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Retail Regulatory Matters – Rate Plans” in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements herein for additional information.
Other
The Georgia PSC recently approved certification of Plant McDonough combined cycle units four and five and decertified Plant McDonough coal units one and two. See BUSINESS – “Rate Matters – Integrated Resource Planning” of Georgia Power in Item 1 of the Form 10-K for additional information.
Other Matters
In September 2007, 2006, and 2005 Georgia Power filed its 2006, 2005, and 2004 income tax returns, respectively, which included state income tax credits for activity through Georgia ports. Georgia Power has also filed additional similar claims for the years 2002 through 2004. The Georgia Department of Revenue has not responded to these claims. On July 24, 2007, Georgia Power filed a complaint in the Superior Court of Fulton County to recover the credits claimed for the years 2002 through 2004. If Georgia Power prevails, these claims could have a significant, and possibly material, positive effect on Georgia Power’s net income. If Georgia Power is not

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successful, payment of the related state tax could have a significant, and possibly material, negative effect on Georgia Power’s cash flow. The ultimate outcome of this matter cannot now be determined.
See Note 3 to the financial statements of Georgia Power under “Property Tax Dispute” in Item 8 of the Form 10-K for information on the property tax dispute with Monroe County, Georgia. The administrative appeals and notices of arbitration have been expanded to include tax year 2006. The appeals remain stayed pending the outcome of the related litigation. On March 30, 2007, the Georgia Court of Appeals reversed the trial court and ruled that the Monroe County Board of Tax Assessors (Monroe Board) had exceeded its legal authority and remanded the case for entry of an injunction prohibiting the Monroe Board from collecting taxes based on its independent valuation of Plant Scherer. In April 2007, the Monroe Board filed a petition with the Georgia Supreme Court requesting review of the decision of the Georgia Court of Appeals. On July 16, 2007, the Georgia Supreme Court agreed to hear the Monroe Board’s requested review of this decision. The Georgia Supreme Court heard oral arguments regarding the matter on October 15, 2007. The suit could impact all co-owners. Georgia Power could be subject to total taxes through September 30, 2007 of up to $21.7 million, plus penalties and interest. The ultimate outcome of this matter cannot currently be determined.
Georgia Power proposed a donation of approximately 2,200 acres in Tallulah Gorge State Park to the State of Georgia which the Georgia Department of Natural Resources voted to accept on October 24, 2007. The donation is expected to be effective in the fourth quarter 2007. The impact of this donation to Georgia Power’s net income could possibly be significant but cannot be determined at this time.
Georgia Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Georgia Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such pending or potential litigation against Georgia Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Georgia Power in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Georgia Power’s financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Georgia Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Georgia Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Georgia Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. Also see MANAGEMENT’S DISCUSSION AND ANALYSIS — ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Georgia Power in Item 7 of the Form 10-K for a complete discussion of Georgia Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
New Accounting Standards
Income Taxes
On January 1, 2007, Georgia Power adopted FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement, and classification of income tax uncertainties, along with any related interest and penalties. The provisions of FIN 48 were applied to all tax positions beginning January 1, 2007. The adoption of FIN 48 did not have a material impact on Georgia Power’s financial statements. See Note (I) to the Condensed Financial Statements herein for additional information.
Fair Value Measurement
The FASB issued FASB Statement No. 157 (SFAS No. 157), “Fair Value Measurements” in September 2006. This standard provides guidance on how to measure fair value where it is permitted or required under other accounting pronouncements. SFAS No. 157 also requires additional disclosures about fair value measurements. Georgia Power plans to adopt SFAS No. 157 on January 1, 2008 and is currently assessing the impact of this standard.
Fair Value Option
In February 2007, the FASB issued FASB Statement No. 159 (SFAS No. 159), “Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Georgia Power plans to adopt SFAS No. 159 on January 1, 2008 and is currently assessing its impact to the extent the fair value option is elected.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Georgia Power’s financial condition and liquidity position remained stable at September 30, 2007. Net cash provided from operating activities totaled $1.0 billion for the first nine months of 2007, compared to $857 million for the corresponding period in 2006. The $152 million increase in cash provided from operating activities in the first nine months of 2007 is primarily due to higher total retail revenues and less cash used for working capital primarily through lower inventory additions and increases in accounts payable, accrued taxes, and other current liabilities. Net cash used for investing activities totaled $1.2 billion primarily due to gross property additions to utility plant of $1.3 billion in the first nine months of 2007. These additions were primarily related to construction of transmission and distribution facilities, purchases of nuclear fuel, and installation of equipment to comply with environmental standards. Net cash provided from financing activities totaled $203 million for the first nine months of 2007, compared to net cash used for financing activities of $24 million for the corresponding period in 2006. The net change was primarily the result of the issuance of new senior notes.
Capital Requirements and Contractual Obligations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY “Capital Requirements and Contractual Obligations” of Georgia Power in Item 7 of the Form 10-K for a description of Georgia Power’s capital requirements for its construction program, scheduled maturities of long-term debt, as well as related interest, preferred stock dividends, lease obligations, purchase commitments, and

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trust funding requirements. Since December 31, 2006, Georgia Power has entered into four additional PPAs totaling approximately 1,863 MW annually. These contracts begin in 2009 and 2010 and are expected to result in additional obligations of $1.3 million in 2008-2009, $191.4 million in 2010-2011, and $1.08 billion thereafter. Of the total capacity, approximately 561 MW will expire in 2017, 1,274 MW in 2025, and 28 MW in 2029. These contracts have been certified by the Georgia PSC. Two of the contracts are with Southern Power and are also subject to FERC approval. Approximately $432 million will be required through September 30, 2008 for redemptions and maturities of long-term debt.
Sources of Capital
Georgia Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Recently, Georgia Power has primarily utilized funds from operating cash flows, short-term debt, external security offerings, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Georgia Power in Item 7 of the Form 10-K for additional information.
Georgia Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt as well as cash needs which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Georgia Power had at September 30, 2007 approximately $15 million of cash and cash equivalents and $902 million of unused credit arrangements with banks, of which $110 million of such lines are dedicated to funding purchase obligations related to variable rate pollution control bonds. Of the unused credit arrangements, $40 million expire in 2008 and $862 million expire in 2012.
Of the facilities that expire in 2008, all contain provisions allowing two-year term loans executable at expiration. Georgia Power expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Georgia Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. These unused credit arrangements provide liquidity support to Georgia Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Georgia Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Georgia Power and other Southern Company subsidiaries. At September 30, 2007, Georgia Power had approximately $566 million of commercial paper and no bank loans or extendible commercial notes outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.
Credit Rating Risk
Georgia Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- or Baa3 or below. These contracts are primarily for physical electricity purchases and sales. At September 30, 2007, the maximum potential collateral requirements at a BBB- or Baa3 rating were approximately $8 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $388 million. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit, or cash.
Georgia Power, along with all members of the Power Pool, is also party to certain agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for it and/or Alabama Power. These agreements are primarily for natural gas and power price risk management

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activities. At September 30, 2007, Georgia Power’s total exposure to these types of agreements was $26.7 million.
Market Price Risk
Georgia Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2006 reporting period. In addition, Georgia Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulation, Georgia Power has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Georgia Power enters into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Georgia Power continues to manage a fuel hedging program at the instruction of the Georgia PSC.
The fair value of derivative energy contracts at September 30, 2007 was as follows:
                 
    Third Quarter   Year-to-Date
    2007   2007
    Changes   Changes
    Fair Value
    (in thousands)
Contracts beginning of period
  $ (21,458 )   $ (38,003 )
Contracts realized or settled
    19,859       33,394  
New contracts at inception
           
Changes in valuation techniques
           
Current period changes (a)
    (9,557 )     (6,547 )
 
Contracts at September 30, 2007
  $ (11,156 )   $ (11,156 )
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
                         
    Source of September 30, 2007
    Valuation Prices
    Total   Maturity
    Fair Value   Year 1   1-3 Years
    (in thousands)
Actively quoted
  $ (11,158 )   $ (12,095 )   $ 937  
External sources
    2       2        
Models and other methods
                 
 
Contracts at September 30, 2007
  $ (11,156 )   $ (12,093 )   $ 937  
 
Unrealized gains and losses from mark to market adjustments on derivative contracts related to Georgia Power’s fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through Georgia Power’s fuel cost recovery mechanism. Gains and losses on derivative contracts that are not designated as hedges are recognized in the statements of income as incurred.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At September 30, 2007, the fair value gain/(loss) of all derivative energy contracts was reflected in the financial statements as follows:
         
    Amounts
    (in thousands)
Regulatory assets, net
  $ (11,158 )
Accumulated other comprehensive income
     
Net income
    2  
 
Total fair value
  $ (11,156 )
 
Unrealized pre-tax gains and losses on energy contracts recognized in income were not material for any period presented.
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Georgia Power in Item 7 and Notes 1 and 6 to the financial statements of Georgia Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.
Financing Activities
In the first nine months of 2007, Georgia Power issued $1.4 billion of senior notes. The proceeds were used to repay a portion of Georgia Power’s outstanding short-term indebtedness, to fund the redemption in June of $454 million outstanding principal amount of its Series E 7.125% Junior Subordinated Notes due March 2042 and the related 7.125% Preferred Securities of Georgia Power Capital Trust V, and for other general corporate purposes, including Georgia Power’s continuous construction program. Georgia Power also terminated derivative transactions related to the issuances at a net gain of $12.1 million, $5.7 million of which will be amortized over a 30-year period, with the remainder amortized over a 10-year period.
In July, Georgia Power borrowed $300 million under a short-term credit agreement that matured in September 2007. The proceeds were used to repay short-term indebtedness incurred to repay $300 million of Georgia Power’s Series J 4.875% Senior Notes at maturity in July 2007. Also during July, Georgia Power borrowed $150 million under a short-term credit agreement that matured in August 2007 to provide additional short-term liquidity.
In addition, in September 2007, holders of $75 million aggregate principal amount of Georgia Power’s Series 2007C Floating Rate Senior Notes elected not to extend the then current maturity date in September 2008.
Also, in the first nine months of 2007, Georgia Power entered into derivative transactions designed to mitigate interest rate risk related to planned future debt issuances. See Note (F) to the Condensed Financial Statements for further details.
Subsequent to September 30, 2007, Georgia Power issued $225 million of 6.50% Preference Stock. The proceeds along with other monies of Georgia Power were applied to the redemption in November of $309 million aggregate principal amount of its Series F 4.875% Junior Subordinated Notes due November 2042 and the related flexible trust preferred and common securities of Georgia Power Capital Trust VI.
Also subsequent to September 30, 2007, Georgia Power entered into interest rate derivatives with a notional amount of $50 million to hedge the interest rate risk of a planned future debt issuance. The derivative will be settled at the time the underlying debt is issued.

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In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Georgia Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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GULF POWER COMPANY

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CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2007     2006     2007     2006  
    (in thousands)     (in thousands)  
Operating Revenues:
                               
Retail revenues
  $ 325,864     $ 317,591     $ 788,827     $ 742,564  
Wholesale revenues —
                               
Non-affiliates
    20,892       22,994       65,296       64,176  
Affiliates
    13,297       19,323       74,190       87,348  
Other revenues
    16,503       13,122       42,870       34,706  
 
                       
Total operating revenues
    376,556       373,030       971,183       928,794  
 
                       
Operating Expenses:
                               
Fuel
    150,665       165,774       430,188       407,930  
Purchased power —
                               
Non-affiliates
    7,110       5,837       10,453       15,164  
Affiliates
    36,737       28,814       54,247       50,941  
Other operations
    53,987       47,210       147,000       137,461  
Maintenance
    16,491       13,238       49,148       43,952  
Depreciation and amortization
    21,540       22,313       63,840       66,679  
Taxes other than income taxes
    25,027       23,333       65,516       62,015  
 
                       
Total operating expenses
    311,557       306,519       820,392       784,142  
 
                       
Operating Income
    64,999       66,511       150,791       144,652  
Other Income and (Expense):
                               
Interest income
    1,295       1,938       4,192       3,488  
Interest expense, net of amounts capitalized
    (10,968 )     (10,031 )     (32,343 )     (29,088 )
Interest expense to affiliate trusts
    (577 )     (1,148 )     (1,732 )     (3,443 )
Other income (expense), net
    150       (324 )     139       (1,221 )
 
                       
Total other income and (expense)
    (10,100 )     (9,565 )     (29,744 )     (30,264 )
 
                       
Earnings Before Income Taxes
    54,899       56,946       121,047       114,388  
Income taxes
    19,911       21,544       44,271       42,896  
 
                       
Net Income
    34,988       35,402       76,776       71,492  
Dividends on Preference Stock
    825       825       2,475       2,475  
 
                       
Net Income After Dividends on Preference Stock
  $ 34,163     $ 34,577     $ 74,301     $ 69,017  
 
                       
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2007     2006     2007     2006  
    (in thousands)     (in thousands)  
Net Income After Dividends on Preference Stock
  $ 34,163     $ 34,577     $ 74,301     $ 69,017  
Other comprehensive income (loss):
                               
Qualifying hedges:
                               
Changes in fair value, net of tax of $(976), $(1,382), $1,561, and $(1,573), respectively
    (1,554 )     (2,201 )     2,485       (2,505 )
Reclassification adjustment for amounts included in net income, net of tax of $54, $31, $214, and $94, respectively
    87       51       342       151  
 
                       
Total other comprehensive income (loss)
    (1,467 )     (2,150 )     2,827       (2,354 )
 
                       
COMPREHENSIVE INCOME
  $ 32,696     $ 32,427     $ 77,128     $ 66,663  
 
                       
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

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CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Nine Months  
    Ended September 30,  
    2007     2006  
    (in thousands)  
Operating Activities:
               
Net income
  $ 76,776     $ 71,492  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    67,644       70,691  
Deferred income taxes
    (11,540 )     6,392  
Pension, postretirement, and other employee benefits
    1,809       2,783  
Stock option expense
    1,022       880  
Tax benefit of stock options
    268       118  
Other, net
    3,099       3,513  
Changes in certain current assets and liabilities —
               
Receivables
    (18,793 )     (53,771 )
Fossil fuel stock
    (19,667 )     (26,151 )
Materials and supplies
    (1,521 )     (3,909 )
Prepaid income taxes
    7,177       (603 )
Property damage cost recovery
    19,467       19,285  
Other current assets
    1,735       909  
Accounts payable
    7,500       14,621  
Accrued taxes
    31,826       12,972  
Accrued compensation
    (5,217 )     (8,794 )
Other current liabilities
    2,890       6,918  
 
           
Net cash provided from operating activities
    164,475       117,346  
 
           
Investing Activities:
               
Property additions
    (164,217 )     (108,524 )
Cost of removal, net of salvage
    (7,890 )     (3,349 )
Construction payables
    (6,354 )     (4,212 )
Other
    (232 )     (9,543 )
 
           
Net cash used for investing activities
    (178,693 )     (125,628 )
 
           
Financing Activities:
               
Increase (decrease) in notes payable, net
    (94,881 )     57,241  
Proceeds —
               
Senior Notes
    85,000        
Common stock issued to parent
    80,000        
Capital contributions from parent company
          21,140  
Gross excess tax benefit of stock options
    646       240  
Redemptions — Pollution control bonds
          (12,075 )
Payment of preference stock dividends
    (2,475 )     (2,475 )
Payment of common stock dividends
    (55,575 )     (52,725 )
Other
    (1,104 )     (287 )
 
           
Net cash provided from financing activities
    11,611       11,059  
 
           
Net Change in Cash and Cash Equivalents
    (2,607 )     2,777  
Cash and Cash Equivalents at Beginning of Period
    7,526       3,847  
 
           
Cash and Cash Equivalents at End of Period
  $ 4,919     $ 6,624  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest (net of $619 and $59 capitalized for 2007 and 2006, respectively)
  $ 24,875     $ 25,412  
Income taxes (net of refunds)
  $ 25,659     $ 36,164  
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

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GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At September 30,     At December 31,  
Assets   2007     2006  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 4,919     $ 7,526  
Receivables —
               
Customer accounts receivable
    89,608       56,489  
Unbilled revenues
    47,141       38,287  
Under recovered regulatory clause revenues
    69,406       79,235  
Other accounts and notes receivable
    14,304       9,015  
Affiliated companies
    2,587       15,302  
Accumulated provision for uncollectible accounts
    (1,655 )     (1,279 )
Fossil fuel stock, at average cost
    95,703       76,036  
Materials and supplies, at average cost
    36,827       35,306  
Property damage cost recovery
    24,341       28,771  
Other regulatory assets
    11,699       15,977  
Other
    2,186       14,259  
 
           
Total current assets
    397,066       374,924  
 
           
Property, Plant, and Equipment:
               
In service
    2,660,350       2,574,517  
Less accumulated provision for depreciation
    916,031       901,564  
 
           
 
    1,744,319       1,672,953  
Construction work in progress
    97,467       62,815  
 
           
Total property, plant, and equipment
    1,841,786       1,735,768  
 
           
Other Property and Investments
    16,709       14,846  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    17,212       17,148  
Prepaid pension costs
    71,027       69,895  
Other regulatory assets
    105,113       110,077  
Other
    21,687       17,831  
 
           
Total deferred charges and other assets
    215,039       214,951  
 
           
Total Assets
  $ 2,470,600     $ 2,340,489  
 
           
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

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GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At September 30,     At December 31,  
Liabilities and Stockholder’s Equity   2007     2006  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 41,238     $  
Notes payable
    25,565       120,446  
Accounts payable —
               
Affiliated
    47,426       44,375  
Other
    47,485       49,979  
Customer deposits
    24,628       21,363  
Accrued taxes —
               
Income taxes
    47,870       29,771  
Other
    24,764       15,033  
Accrued interest
    9,982       7,645  
Accrued compensation
    11,715       16,932  
Other regulatory liabilities
    6,743       9,029  
Other
    26,557       30,975  
 
           
Total current liabilities
    313,973       345,548  
 
           
Long-term Debt
    739,577       654,860  
 
           
Long-term Debt Payable to Affiliated Trusts
          41,238  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    233,252       237,862  
Accumulated deferred investment tax credits
    13,335       14,721  
Employee benefit obligations
    77,401       73,922  
Other cost of removal obligations
    170,432       165,410  
Other regulatory liabilities
    47,164       46,485  
Other
    84,098       72,533  
 
           
Total deferred credits and other liabilities
    625,682       610,933  
 
           
Total Liabilities
    1,679,232       1,652,579  
 
           
Preference Stock
    53,886       53,887  
 
           
Common Stockholder’s Equity:
               
Common stock, without par value—
               
Authorized — 20,000,000 shares
               
Outstanding — September 30, 2007: 1,792,717 shares
               
— December 31, 2006: 992,717 shares
    118,060       38,060  
Paid-in capital
    430,498       428,592  
Retained earnings
    190,694       171,968  
Accumulated other comprehensive loss
    (1,770 )     (4,597 )
 
           
Total common stockholder’s equity
    737,482       634,023  
 
           
Total Liabilities and Stockholder’s Equity
  $ 2,470,600     $ 2,340,489  
 
           
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2007 vs. THIRD QUARTER 2006
AND
YEAR-TO-DATE 2007 vs. YEAR-TO-DATE 2006
OVERVIEW
Gulf Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located in northwest Florida and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Gulf Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth, and to effectively manage and secure timely recovery of rising costs. These costs include those related to growing demand, increasingly stringent environmental standards, fuel prices, and storm restoration costs. Appropriately balancing environmental expenditures with customer prices will continue to challenge Gulf Power for the foreseeable future.
Gulf Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Gulf Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
                         
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$(0.4)
    (1.2 )   $ 5.3       7.7  
 
Gulf Power’s net income after dividends on preference stock for the third quarter 2007 was $34.2 million compared to $34.6 million for the corresponding period in 2006. The decrease in the third quarter 2007 compared to the corresponding period in 2006 was primarily due to increases in maintenance expense and interest expense, net of amounts capitalized offset by an increase in retail revenues.
Gulf Power’s net income after dividends on preference stock for year-to-date 2007 was $74.3 million compared to $69.0 million for the corresponding period in 2006. The year-to-date increase was primarily due to increases in retail revenues, earnings on additional investments in environmental controls through the environmental cost recovery provision, and related allowance for equity funds used during construction.
Retail Revenues
                         
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$8.3
    2.6     $ 46.2       6.2  
 
In the third quarter 2007, retail revenues were $325.9 million compared to $317.6 million in the corresponding period in 2006.
For year-to-date 2007, retail revenues were $788.8 million compared to $742.6 million for the corresponding period in 2006.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of retail revenues are as follows:
                                 
    Third Quarter   Year-to-Date
    2007   2007
    (in millions)   (% change)   (in millions)   (% change)
Retail – prior year
  $ 317.6             $ 742.6          
Estimated change in
                               
— Rates and pricing
    0.8       0.4       2.0       0.3  
Sales growth
    1.1       0.3       5.1       0.7  
Weather
    2.9       0.9       1.7       0.2  
Fuel and other cost recovery
    3.5       1.0       37.4       5.0  
 
Retail – current year
  $ 325.9       2.6     $ 788.8       6.2  
 
Revenues associated with changes in rates and pricing increased in the third quarter 2007 and year-to-date 2007, when compared to corresponding periods in 2006, due to cost recovery provisions. These cost recovery provisions include energy conservation costs and environmental compliance costs. Annually, Gulf Power petitions the Florida PSC for recovery of projected costs including any true-up amount from prior periods, and approved rates are implemented each January. The recovery provisions include related expenses and a return on average net investment. See Note 1 to the financial statements of Gulf Power under “Revenues,” and “Environmental Remediation Cost Recovery” and Note 3 to the financial statements under “Retail Regulatory Matters – Environmental Cost Recovery” in Item 8 of the Form 10-K for additional information.
Revenues attributable to changes in sales growth increased in the third quarter of 2007 when compared to the same period in 2006 primarily from a 4.2% increase and a 2.2% increase in KWH energy sales to commercial and residential customers, respectively. These increases were offset by a decrease of 3.6% in KWH sales to industrial customers.
For the year-to-date 2007, revenues attributable to changes in sales growth increased when compared to the corresponding period in 2006 primarily from a 3.4% increase and a 1.8% increase in KWH energy sales to commercial and residential customers, respectively. These increases were offset by a decrease of 7.1% in KWH sales to industrial customers.
Revenues associated with changes in weather increased in the third quarter 2007 and year-to-date 2007 when compared to the corresponding periods in 2006. The increases for both periods were the result of more favorable weather in 2007 compared to 2006.
Revenues associated with changes in fuel and other cost recovery increased in the third quarter 2007 and year-to-date 2007, when compared to corresponding periods in 2006. These cost recovery provisions include fuel expenses, the energy component of purchased power costs, and purchased power capacity costs. Annually, Gulf Power petitions the Florida PSC for recovery of projected fuel and purchased power costs including any true-up amount from prior periods, and approved rates are implemented each January. Cost recovery provisions also include revenues related to the recovery of storm damage restoration costs. The recovery provisions generally equal the related expenses and have no material effect on net income. See FUTURE EARNINGS POTENTIAL – “FERC and Florida PSC Matters – Retail Fuel Cost Recovery” herein and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Gulf Power in Item 7 and Note 1 to the financial statements of Gulf Power under “Revenues,” and “Property Damage Reserve” and Note 3 to the financial statements under “Retail Regulatory Matters – Storm Damage Cost Recovery” in Item 8 of the Form 10-K for additional information.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale Revenues – Non-Affiliates
                         
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$(2.1)
    (9.1 )   $ 1.1       1.7  
 
In the third quarter 2007, wholesale revenues from non-affiliates were $20.9 million compared to $23.0 million in the corresponding period in 2006. The decrease was primarily a result of lower KWH sales to wholesale customers due to increased retail demand within Gulf Power’s service territory.
For year-to-date 2007, wholesale revenues from non-affiliates were $65.3 million compared to $64.2 million for the same period in 2006. The increase was primarily a result of higher KWH sales to wholesale customers.
Wholesale revenues from non-affiliates are predominantly unit power sales under long-term contracts to other Florida utilities. Revenues from these contracts have both capacity and energy components. Capacity revenues reflect the recovery of fixed costs and a return on investment under the contracts. Energy is generally sold at variable cost.
Wholesale Revenues – Affiliates
                         
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$(6.0)
    (31.2 )   $ (13.1 )     (15.1 )
 
In the third quarter 2007, wholesale revenues from affiliates were $13.3 million compared to $19.3 million in the corresponding period in 2006. The decrease was primarily a result of higher retail customer demand within Gulf Power’s service territory.
For year-to-date 2007, wholesale revenues from affiliates were $74.2 million compared to $87.3 million for the same period in 2006. The decrease was primarily a result of higher retail customer demand within Gulf Power’s service territory in peak months of the year.
Wholesale revenues from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost.
Other Revenues
                         
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$3.4
    25.8     $ 8.2       23.5  
 
In the third quarter 2007, other revenues were $16.5 million compared to $13.1 million in the same period in 2006. For year-to-date 2007, other revenues were $42.9 million compared to $34.7 million for the same period in 2006. These increases were primarily a result of other energy services and higher franchise fees, which have no impact on earnings. Franchise fees are generally proportional to sales revenue and are offset by franchise and gross receipt taxes. The increased revenues from other energy services did not have a material impact on earnings since they were offset by associated expenses.

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Table of Contents

GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
                                 
    Third Quarter 2007     Year-to-Date 2007  
    vs.     vs.  
    Third Quarter 2006     Year-to-Date 2006  
    (change in millions)     (% change)     (change in millions)     (% change)  
Fuel
  $ (15.1 )     (9.1)     $ 22.3       5.5  
Purchased power-non-affiliates
    1.3       21.8       (4.7 )     (31.1)  
Purchased power-affiliates
    7.9       27.5       3.3       6.5  
                       
Total fuel and purchased power expenses
  $ (5.9 )           $ 20.9          
                       
Fuel and purchased power transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Gulf Power’s fuel cost recovery clause.
Details of Gulf Power’s cost of generation and purchased power are as follows:
                                                 
    Third Quarter   Third Quarter           Year-to-Date   Year-to-Date    
Average Cost   2007   2006   % change   2007   2006   % change
    (cents per net KWH)           (cents per net KWH)        
Fuel
    3.44       3.55       (3.1 )     3.42       3.26       4.9  
Purchased power
    13.08       17.94       (27.1 )     9.41       9.67       (2.7 )
 
In the third quarter 2007, fuel expense was $150.7 million compared to $165.8 million in the same period in 2006. The decrease was due to a $4.6 million decrease in the average cost of fuel and a $10.5 million decrease in the KWH volume generated. See FUTURE EARNINGS POTENTIAL – “FERC and Florida PSC Matters – Retail Fuel Cost Recovery” herein for additional information.
For year-to-date 2007, fuel expense was $430.2 million compared to $407.9 million for the same period in 2006. The increase was due to a $20.2 million increase in the average cost of fuel as well as a $2.1 million increase due to the KWH volume generated. See FUTURE EARNINGS POTENTIAL – “FERC and Florida PSC Matters – Retail Fuel Cost Recovery” herein for additional information.
Non-affiliates
In the third quarter 2007, purchased power expense – non-affiliates was $7.1 million compared to $5.8 million for the corresponding period in 2006. The increase was due to a $1.4 million increase resulting from higher average cost per net KWH offset by a $0.1 million decrease in KWH purchases.
For year-to-date 2007, purchased power expense – non-affiliates was $10.5 million compared to $15.2 million in the corresponding period in 2006. The decrease was due to a $2.2 million decrease in KWH purchases and a $2.5 million decrease resulting from lower cost per net KWH.
Energy purchases from non-affiliates will vary depending on market cost of available energy being lower than Southern Company system-generated energy, demand for energy within the system service territory, and availability of Southern Company system generation.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Affiliates
In the third quarter 2007, purchased power – affiliates was $36.7 million compared to $28.8 million for the corresponding period in 2006. The increase was due to a $44.3 million increase in KWH purchases offset by a $36.4 million decrease resulting from lower average cost per net KWH.
For year-to-date 2007, purchased power – affiliates was $54.2 million compared to $50.9 million for the corresponding period in 2006. The increase was due to a $5.5 million increase in KWH purchases offset by a $2.2 million decrease resulting from lower average cost per net KWH.
Energy purchases from affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. These purchases are made in accordance with the IIC, as approved by the FERC.
Other Operations and Maintenance Expenses
                                 
    Third Quarter 2007     Year-to-Date 2007  
    vs.     vs.  
    Third Quarter 2006     Year-to-Date 2006  
    (change in millions)     (% change)     (change in millions)     (% change)  
Other operations
  $ 6.8       14.4     $ 9.5       6.9  
Maintenance
    3.3       24.6       5.2       11.8  
                       
Total other operations and maintenance expenses
  $ 10.1             $ 14.7          
                       
In the third quarter 2007, other operations and maintenance expenses were $70.5 million compared to $60.4 million in the same period in 2006. This was primarily a result of a $1.0 million increase in employee benefit expenses, a $2.4 million increase in production expenses associated with increased operating expenses and maintenance performed on power generation facilities, a $2.1 million increase in other energy services, which did not have a material impact on earnings since they were offset by associated revenues, a $2.1 million increase in distribution expenses related to vegetation management and labor cost, and a $0.6 million increase in customer accounts related to uncollectible accounts.
For year-to-date 2007, other operations and maintenance expenses were $196.1 million compared to $181.4 million for the same period in 2006. The increase was primarily the result of a $4.7 million increase in other energy services, which did not have a material impact on earnings since they were offset by associated revenues, and a $2.9 million increase in production operating expense. Also contributing to the increase was a $4.5 million in additional scheduled and unscheduled maintenance performed on power generation facilities and a $1.5 million in additional vegetation management expense.
Depreciation and Amortization
                         
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$(0.8)
    (3.5 )   $ (2.8 )     (4.3 )
 
In the third quarter 2007, depreciation and amortization expenses were $21.5 million compared to $22.3 million in the same period in 2006. For year-to-date 2007, depreciation and amortization expenses were $63.8 million compared to $66.6 million in the same period in 2006. The decreases for both periods were the result of new depreciation rates implemented in January 2007.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Taxes Other than Income Taxes
                         
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$1.7
    7.3     $ 3.5       5.6  
 
In the third quarter 2007, taxes other than income taxes were $25.0 million compared to $23.3 million in the same period in 2006. For year-to-date 2007, taxes other than income taxes were $65.5 million compared to $62.0 million for the same period in 2006. These increases were primarily a result of increases in franchise and gross receipts taxes, which are directly related to increases in retail revenues.
Interest Expense, Net of Amounts Capitalized
                         
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$0.9
    9.3     $ 3.2       11.2  
 
In the third quarter 2007, interest expense was $10.9 million compared to $10.0 million in the same period in 2006. For year-to-date 2007, interest expense was $32.3 million compared to $29.1 million in the same period in 2006. These increases were primarily due to the issuance of $110 million in senior notes in December 2006 and the issuance of $85 million in senior notes in June 2007.
Interest Expense to Affiliate Trusts
                         
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$(0.6)
    (49.7 )   $ (1.7 )     (49.7 )
 
In the third quarter 2007, interest expense to affiliate trusts was $0.6 million compared to $1.2 million in the same period in 2006. For year-to-date 2007, interest expense to affiliate trusts was $1.7 million compared to $3.4 million for the same period in 2006. These decreases were due to the redemption of long-term debt payable to affiliated trusts in December 2006.
Other Income (Expense), Net
                         
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$0.5
    146.3     $ 1.3       111.4  
 
In the third quarter 2007, other income (expense), net was $0.2 million compared to other income (expense), net of $(0.3) million in the same period in 2006. For year-to-date 2007, other income (expense), net was $0.1 million compared to other income (expense), net of $(1.2) million in the same period in 2006. For both periods, other income (expense), net increased primarily due to an increase in allowance for equity funds used during construction related to increased construction activities for environmental controls.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Taxes
                         
Third Quarter 2007 vs. Third Quarter 2006                  Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$(1.6)
    (7.6 )   $ 1.4       3.2  
 
In the third quarter 2007, income tax expense was $19.9 million compared to $21.5 million in the same period in 2006. The decrease was primarily a result of lower earnings before income taxes, the tax benefit associated with an increase in allowance for equity funds used during construction, and an increase in the deduction created by the American Jobs Creation Act of 2004. See Note (H) to the Condensed Financial Statements herein for additional information.
For year-to-date 2007, income tax expense was $44.3 million compared to $42.9 million for the same period in 2006. The increase was primarily a result of higher earnings before income taxes. The increase was partially offset by the tax benefit associated with an increase in allowance for equity funds used during construction and an increase in the deduction created by the American Jobs Creation Act of 2004.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Gulf Power’s future earnings potential. The level of Gulf Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Gulf Power’s business of selling electricity. These factors include Gulf Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Gulf Power’s service area. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Gulf Power in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be fully recovered in rates on a timely basis. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.
Eight-Hour Ozone Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Gulf Power in Item 7 of the Form 10-K for additional information regarding revisions to the eight-hour ozone air quality standard. On June 20, 2007, the EPA proposed additional revisions to the current eight-hour ozone standard which, if enacted, could result in designation of new nonattainment areas within Gulf Power’s service territory. The EPA has requested comment and is expected to make a determination regarding finalization of a revised standard in 2008. The ultimate outcome of this matter cannot be determined at this time.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fine Particulate Matter Regulations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Gulf Power in Item 7 of the Form 10-K for additional information regarding nonattainment designations for the fine particulate matter air quality standard. In March 2007, the EPA finalized its fine particulate matter implementation rule, requiring submittal of state plans for addressing the nonattainment designations by April 2008. The ultimate outcome of this matter depends on the development and submittal of those state plans and the resolution of pending legal challenges and, therefore, cannot be determined at this time.
Florida Greenhouse Gas Executive Orders
See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL – “Environmental Matters - Global Climate Issues” of Gulf Power in Item 7 of the Form 10-K for additional information regarding domestic efforts to reduce greenhouse gases. On July 13, 2007, the Governor of the State of Florida signed three executive orders addressing reduction of greenhouse gas emissions within the state, including statewide emission reduction targets beginning in 2017. Included in the orders is a directive to the Secretary of Environmental Protection to develop rules adopting maximum allowable emissions levels of greenhouse gases for electric utilities, consistent with the statewide emission reduction targets, and a request to the Florida PSC to initiate rulemaking requiring utilities to produce at least 20% of their electricity from renewable sources. The impact of these orders on Gulf Power will depend on the development, adoption, and implementation of any rules governing greenhouse gas emissions, and the ultimate outcome cannot be determined at this time.
Georgia Multi-Pollutant Rule
On June 27, 2007, the State of Georgia approved a new “multi-pollutant” rule for certain existing coal-fired electric utility steam generating units in Georgia. The rule is designed to reduce emissions of mercury, sulfur dioxide, nitrogen oxide, and fine particulates state-wide by requiring installation of specified control technologies at each affected unit by a date certain between December 31, 2008 and June 1, 2015. This rule will require the installation of a new pollution control system at Plant Scherer Unit 3 which Gulf Power co-owns with Georgia Power. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – General” in Item 7 of the Form 10-K for a discussion of estimated compliance costs for 2007 through 2009. The ultimate impact of this rule on Gulf Power cannot be determined at this time.
Environmental Remediation
During the second quarter 2007, Gulf Power increased its estimated liability for environmental remediation projects by $12.8 million as a result of changes in the cost estimates to remediate substation sites. These projects have been approved by the Florida PSC for recovery through the environmental cost recovery clause; therefore, there was no impact on Gulf Power’s net income as a result of these revised estimates. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Remediation” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “Environmental Matters – Environmental Remediation” in Item 8 of the Form 10-K for additional information.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FERC and Florida PSC Matters
Market-Based Rate Authority
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Market-Based Rate Authority” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information regarding the proceedings initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory and in May 2005 to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing.
In late June and July 2007, hearings were held in the December 2004 proceeding and briefs to the presiding ALJ were filed in August and September. Gulf Power anticipates an initial decision from the ALJ in November 2007 on the issues that were set for hearing. The ultimate outcome of this generation dominance proceeding cannot now be determined, but an adverse decision by the FERC in a final order could result in refunds of approximately $0.8 million, plus interest.
On June 21, 2007, the FERC issued an order terminating the May 2005 proceeding pertaining to the other three parts of the market-based rate analysis. In addition, on June 21, 2007, the FERC issued its final rule regarding market-based rate authority. The FERC generally retained its current market-based rate standards. The impact of this order and its effect on the generation dominance proceeding cannot now be determined.
Intercompany Interchange Contract
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Intercompany Interchange Contract” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “FERC Matters – Intercompany Interchange Contract” in Item 8 of the Form 10-K for information regarding the proceeding initiated by the FERC in May 2005 to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the Power Pool is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (2) whether any parties to the IIC have violated the FERC’s standards of conduct applicable to utility companies that are transmission providers, and (3) whether Southern Company’s code of conduct defining Southern Power as a “system company” rather than a “marketing affiliate” is just and reasonable.
On April 19, 2007, the FERC approved, with certain modifications, the compliance filing submitted by Southern Company on November 6, 2006. The compliance plan largely involves functional separation and information restrictions related to marketing activities conducted on behalf of Southern Power. Implementation of the plan is not expected to have a material impact on Gulf Power’s financial statements.
Retail Fuel Cost Recovery
Gulf Power has established fuel cost recovery rates approved by the Florida PSC. In recent years, Gulf Power has experienced higher than expected fuel costs for coal and natural gas. If the projected fuel over or under recovery exceeds 10% of the projected fuel revenue applicable for the period, Gulf Power is required to notify the Florida PSC and to indicate if an adjustment to the fuel cost recovery factor is being requested. Gulf Power filed such notice with the Florida PSC on June 15, 2007, but no adjustment to the factor was requested. Under recovered fuel costs at September 30, 2007 totaled $64.2 million, and are included in under recovered regulatory clause revenues on Gulf Power’s Condensed Balance Sheets herein. Fuel cost recovery

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
revenues, as recorded on the financial statements, are adjusted for differences in actual recoverable costs and amounts billed in current regulated rates. Accordingly, any changes in the billing factor would have no significant effect on Gulf Power’s revenues or net income, but will affect cash flow. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Gulf Power in Item 7 and Note 1 to the financial statements of Gulf Power under “Revenues” in Item 8 of the Form 10-K for additional information.
Other
On August 14, 2007, the Florida PSC voted to approve a stipulation among Gulf Power, the Office of Public Counsel, and the Florida Industrial Power Users Group regarding Gulf Power’s plan for complying with certain federal and state regulations addressing air quality. Gulf Power’s environmental compliance plan as filed on March 29, 2007 contemplates implementation of specific projects identified in the plan from 2007 through 2018. The stipulation covers all elements of the current plan that are scheduled to be implemented in the 2007-2011 timeframe. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Gulf Power in Item 7 and Note 7 to the financial statements of Gulf Power under “Construction Program” in Item 8 of the Form 10-K for additional information.
Other Matters
See Note 3 to the financial statements of Gulf Power under “Property Tax Dispute” in Item 8 of the Form 10-K for information on the property tax dispute with Monroe County, Georgia. The administrative appeals and notices of arbitration have been expanded to include tax year 2006. The appeals remain stayed pending the outcome of the related litigation. On March 30, 2007, the Georgia Court of Appeals reversed the trial court and ruled that the Monroe County Board of Tax Assessors (Monroe Board) had exceeded its legal authority and remanded the case for entry of an injunction prohibiting the Monroe Board from collecting taxes based on its independent valuation of Plant Scherer. In April 2007, the Monroe Board filed a petition with the Georgia Supreme Court requesting review of the decision of the Georgia Court of Appeals. On July 16, 2007, the Georgia Supreme Court agreed to hear the Monroe Board’s requested review of this decision. The Georgia Supreme Court heard oral arguments regarding the matter on October 15, 2007. Gulf Power could be subject to total taxes through September 30, 2007 of up to $3.9 million, plus penalties and interest. In accordance with Gulf Power’s unit power sales contract for Plant Scherer, such property taxes would be recoverable from the customer. The ultimate outcome of this matter cannot currently be determined.
Gulf Power is in the process of offering both voluntary and involuntary severance to a number of employees in connection with a reorganization of certain functions. Gulf Power expects to incur approximately $4.9 million in expenses related to severance benefits and termination costs. A portion of these anticipated severance benefits resulted in expenses during the third quarter 2007. The remainder of the anticipated severance benefits is expected to be expensed during the fourth quarter 2007. The actual amount and timing of these charges may differ materially from the estimate described above and will depend upon the final composition and seniority of the affected employees and the actual timing of completion of the planned reorganization.
See Note 3 to the financial statements of Gulf Power under “Right of Way Litigation” in Item 8 of the Form 10-K for information on the lawsuits related to the telecommunication use of rights of way. In September 2007, Gulf Power and its co-defendant in the Gadsden County litigation reached a proposed settlement agreement with the plaintiffs that, if approved by the trial court, will resolve all outstanding claims against Gulf Power in both the Gadsden County litigation and the 2001 telecommunications company litigation. If so approved, the settlement will have no material impact on Gulf Power’s financial statements. Pending final settlement approval, the ultimate outcome of this matter cannot now be determined.

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

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fair Value Option
In February 2007, the FASB issued FASB Statement No. 159 (SFAS No. 159), “Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Gulf Power plans to adopt SFAS No. 159 on January 1, 2008 and is currently assessing its impact to the extent the fair value option is elected.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Gulf Power’s financial condition and liquidity position remained stable at September 30, 2007. Net cash provided from operating activities totaled $164.5 million for the first nine months of 2007, compared to $117.3 million for the corresponding period in 2006. The $47.2 million increase in cash provided from operating activities in the first nine months of 2007 is primarily due to increased cash inflows for fuel cost recovery. Net cash used for investing activities totaled $178.7 million primarily due to gross property additions to utility plant of $160.9 million in the first nine months of 2007. These additions were primarily related to installation of equipment to comply with environmental standards and distribution facilities construction. Net cash provided from financing activities totaled $11.6 million for the first nine months of 2007, compared to $11.1 million for the corresponding period in 2006. The change in net cash provided from financing activities was not material.
Capital Requirements and Contractual Obligations
See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY “Capital Requirements and Contractual Obligations” of Gulf Power in Item 7 of the Form 10-K for a description of Gulf Power’s capital requirements for its construction program, lease obligations, preference stock dividends, purchase commitments, and trust funding requirements. Approximately $41.2 million will be required through September 30, 2008 for redemptions and maturities of long-term debt.
On April 16, 2007 the Florida PSC issued an order approving two PPAs that Gulf Power had previously entered into, one of which is with Southern Power, for a total of 487 MW annually from June 2009 through May 2014. The PPA with Southern Power was approved by the FERC on July 13, 2007. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Gulf Power in Item 7 of the Form 10-K for additional information.
Sources of Capital
Gulf Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Recently, Gulf Power has primarily utilized funds from operating cash flows, short-term debt, external security offerings, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Gulf Power in Item 7 of the Form 10-K for additional information.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gulf Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt as well as cash needs which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Gulf Power had at September 30, 2007 approximately $4.9 million of cash and cash equivalents and $125 million of unused committed lines of credit with banks. Of the unused credit agreements, $60 million expire in 2007 and $65 million expire in 2008. Subsequent to September 30, 2007, Gulf Power renewed the $60 million of its facilities that were set to expire in 2007. All $125 million of facilities now contain a 2008 expiration date and $100 million include one-year term loan options. Gulf Power expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Gulf Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. These credit arrangements provide liquidity support to Gulf Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Gulf Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Gulf Power and other Southern Company subsidiaries. At September 30, 2007, Gulf Power had $25.6 million of commercial paper outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.
Credit Rating Risk
Gulf Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- or Baa3, or below. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit, or cash. These contracts are primarily for physical electricity purchases and sales. At September 30, 2007, the maximum potential collateral requirements at a BBB- or Baa3 rating were approximately $23.1 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $46.3 million.
Gulf Power, along with all members of the Power Pool, is also party to certain agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas and power price risk management activities. At September 30, 2007, Gulf Power’s total exposure to these types of agreements was $26.7 million.
Market Price Risk
Gulf Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2006 reporting period. In addition, Gulf Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulation, Gulf Power has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Gulf Power enters into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Gulf Power has also implemented a fuel-hedging program with the approval of the Florida PSC.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The fair value of derivative energy contracts at September 30, 2007 was as follows:
                 
    Third Quarter   Year-to-Date
    2007   2007
    Changes   Changes
    Fair Value
    (in thousands)
Contracts beginning of period
  $ (2,139 )   $ (7,186 )
Contracts realized or settled
    1,910       5,043  
New contracts at inception
           
Changes in valuation techniques
           
Current period changes (a)
    (1,739 )     175  
 
Contracts at September 30, 2007
  $ (1,968 )   $ (1,968 )
 
(a)   Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
                         
    Source of September 30, 2007
    Valuation Prices
    Total   Maturity
    Fair Value   Year 1   1-3 Years
            (in thousands)        
Actively quoted
  $ (1,968 )   $ (2,183 )   $ 215  
External sources
                 
Models and other methods
                 
 
Contracts at September 30, 2007
  $ (1,968 )   $ (2,183 )   $ 215  
 
Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to Gulf Power’s fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through Gulf Power’s fuel cost recovery clause. Gains and losses on derivative energy contracts that are not designated as hedges are recognized in the statements of income as incurred.
At September 30, 2007, the fair value gain/(loss) of derivative energy contracts was reflected in the financial statements as follows:
         
    Amounts
    (in thousands)
Regulatory assets, net
  $ (1,968 )
Accumulated other comprehensive income
     
Net income
     
 
Total fair value
  $ (1,968 )
 
Unrealized pre-tax gains and losses recognized in income were not material for any period presented.
For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Gulf Power in Item 7 and Notes 1 and 6 to the financial statements of Gulf Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.

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GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financing Activities
In January 2007, Gulf Power issued 800,000 shares of common stock to Southern Company at $100 stated value per share ($80 million aggregate purchase price). The proceeds were used to repay a portion of Gulf Power’s short-term indebtedness and for other general corporate purposes.
In March 2007, Gulf Power entered into derivative transactions designed to mitigate interest rate risk related to future planned debt issuances. The total notional amount of these derivatives was $165 million. Of this $165 million, $85 million was terminated in June 2007 when the underlying security was issued at a gain of $3 million. This gain will be amortized over a 10-year period. See Note (F) to the Condensed Financial Statements herein for further details.
In June 2007, Gulf Power issued $85 million of Series 2007A 5.90% Senior Notes due June 15, 2017. Proceeds were used to repay a portion of its outstanding short-term indebtedness and for general corporate purposes, including Gulf Power’s continuous construction program.
Subsequent to September 30, 2007, Gulf Power issued $45 million of 6.45% Preference Stock. Proceeds were used to repay a portion of its outstanding short-term indebtedness and for general corporate purposes, including its continuous construction program.
In October 2007, Gulf Power issued a notice of redemption to the holders of the $41.2 million of Gulf Power Series E Junior Subordinated Notes due November 30, 2042 and the related trust preferred and common securities of Gulf Power Capital Trust IV. All securities in this series will be redeemed in November 2007.
In addition to any financings that may be necessary to meet capital requirements, contractual obligations, and storm-recovery, Gulf Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

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MISSISSIPPI POWER COMPANY

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MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2007     2006     2007     2006  
    (in thousands)     (in thousands)  
Operating Revenues:
                               
Retail revenues
  $ 221,790     $ 200,873     $ 560,059     $ 505,382  
Wholesale revenues —
                               
Non-affiliates
    93,750       76,523       247,746       204,451  
Affiliates
    13,657       29,541       42,229       52,094  
Other revenues
    3,826       3,810       13,031       12,681  
 
                       
Total operating revenues
    333,023       310,747       863,065       774,608  
 
                       
Operating Expenses:
                               
Fuel
    146,864       147,979       390,781       330,628  
Purchased power —
                               
Non-affiliates
    5,960       5,793       8,173       15,110  
Affiliates
    27,506       8,851       56,970       45,268  
Other operations
    46,264       43,204       133,220       121,615  
Maintenance
    14,941       16,122       46,219       49,897  
Depreciation and amortization
    15,302       10,586       44,683       34,908  
Taxes other than income taxes
    16,651       15,997       44,989       45,847  
 
                       
Total operating expenses
    273,488       248,532       725,035       643,273  
 
                       
Operating Income
    59,535       62,215       138,030       131,335  
Other Income and (Expense):
                               
Interest income
    538       2,831       1,537       2,902  
Interest expense
    (4,593 )     (3,644 )     (13,344 )     (12,156 )
Interest expense to affiliate trusts
          (649 )     (686 )     (1,948 )
Other income (expense), net
    184       (1,291 )     5,161       1,202  
 
                       
Total other income and (expense)
    (3,871 )     (2,753 )     (7,332 )     (10,000 )
 
                       
Earnings Before Income Taxes
    55,664       59,462       130,698       121,335  
Income taxes
    20,781       22,391       49,033       45,350  
 
                       
Net Income
    34,883       37,071       81,665       75,985  
Dividends on Preferred Stock
    433       433       1,299       1,299  
 
                       
Net Income After Dividends on Preferred Stock
  $ 34,450     $ 36,638     $ 80,366     $ 74,686  
 
                       
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2007     2006     2007     2006  
    (in thousands)     (in thousands)  
Net Income After Dividends on Preferred Stock
  $ 34,450     $ 36,638     $ 80,366     $ 74,686  
Other comprehensive income (loss):
                               
Qualifying hedges:
                               
Changes in fair value, net of tax of $(200), $106, $(154), and $310, respectively
    (322 )     171       (249 )     501  
 
                       
COMPREHENSIVE INCOME
  $ 34,128     $ 36,809     $ 80,117     $ 75,187  
 
                       
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

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MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    For the Nine Months  
    Ended September 30,  
    2007     2006  
    (in thousands)  
Operating Activities:
               
Net income
  $ 81,665     $ 75,985  
Adjustments to reconcile net income to net cash provided from operating activities —
               
Depreciation and amortization
    51,809       50,835  
Deferred income taxes and investment tax credits, net
    (5,806 )     34,853  
Plant Daniel capacity
    (4,244 )     (9,756 )
Pension, postretirement, and other employee benefits
    6,877       4,527  
Stock option expense
    935       957  
Tax benefit of stock options
    253       71  
Hurricane Katrina grant proceeds-property reserve
    60,000        
Other, net
    (14,443 )     (3,583 )
Changes in certain current assets and liabilities —
               
Receivables
    (2,501 )     24,714  
Fossil fuel stock
    (18,687 )     4,591  
Materials and supplies
    22       (387 )
Prepaid income taxes
    4,822       34,764  
Other current assets
    915       (3,718 )
Hurricane Katrina grant proceeds
    14,345        
Hurricane Katrina accounts payable
    3,309       (42,418 )
Other accounts payable
    (14,032 )     (43,375 )
Accrued taxes
    (9,897 )     11,601  
Accrued compensation
    (7,236 )     (8,703 )
Over recovered regulatory clause revenues
          (26,188 )
Other current liabilities
    (716 )     (1,682 )
 
           
Net cash provided from operating activities
    147,390       103,088  
 
           
Investing Activities:
               
Property additions
    (84,383 )     (106,490 )
Cost of removal, net of salvage
    6,274       (2,866 )
Construction payables
    3,327       (11,069 )
Hurricane Katrina capital grant proceeds
    10,869        
Other
    (90 )     (2,138 )
 
           
Net cash used for investing activities
    (64,003 )     (122,563 )
 
           
Financing Activities:
               
Increase in notes payable, net
    8,939       83,283  
Proceeds — Gross excess tax benefit of stock options
    508       90  
Redemptions — Long-term debt to affiliate trusts
    (36,082 )      
Capital contributions from parent company
    (3 )     (2,378 )
Payment of preferred stock dividends
    (1,299 )     (1,299 )
Payment of common stock dividends
    (50,475 )     (48,900 )
 
           
Net cash provided from (used for) financing activities
    (78,412 )     30,796  
 
           
Net Change in Cash and Cash Equivalents
    4,975       11,321  
Cash and Cash Equivalents at Beginning of Period
    4,214       14,301  
 
           
Cash and Cash Equivalents at End of Period
  $ 9,189     $ 25,622  
 
           
Supplemental Cash Flow Information:
               
Cash paid during the period for —
               
Interest
  $ 13,098     $ 23,257  
Income taxes (net of refunds)
  $ 48,048     $ (43,365 )
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

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MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At September 30,     At December 31,  
Assets   2007     2006  
    (in thousands)  
Current Assets:
               
Cash and cash equivalents
  $ 9,189     $ 4,214  
Receivables —
               
Customer accounts receivable
    56,712       42,099  
Unbilled revenues
    26,026       23,807  
Under recovered regulatory clause revenues
    45,850       50,778  
Other accounts and notes receivable
    3,766       5,870  
Insurance receivable
    7,942       20,551  
Affiliated companies
    20,423       23,696  
Accumulated provision for uncollectible accounts
    (868 )     (855 )
Fossil fuel stock, at average cost
    61,366       42,679  
Materials and supplies, at average cost
    27,905       27,927  
Prepaid income taxes
    17,209       22,031  
Other regulatory assets
    32,212       42,391  
Other
    9,635       15,091  
 
           
Total current assets
    317,367       320,279  
 
           
Property, Plant, and Equipment:
               
In service
    2,097,877       2,054,151  
Less accumulated provision for depreciation
    869,166       836,922  
 
           
 
    1,228,711       1,217,229  
Construction work in progress
    51,758       40,608  
 
           
Total property, plant, and equipment
    1,280,469       1,257,837  
 
           
Other Property and Investments
    9,807       4,636  
 
           
Deferred Charges and Other Assets:
               
Deferred charges related to income taxes
    8,901       9,280  
Prepaid pension costs
    35,580       36,424  
Other regulatory assets
    67,023       61,086  
Other
    23,758       18,834  
 
           
Total deferred charges and other assets
    135,262       125,624  
 
           
Total Assets
  $ 1,742,905     $ 1,708,376  
 
           
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

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MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
                 
    At September 30,     At December 31,  
Liabilities and Stockholder’s Equity   2007     2006  
    (in thousands)  
Current Liabilities:
               
Securities due within one year
  $ 1,116     $  
Notes payable
    60,316       51,377  
Accounts payable —
               
Affiliated
    26,296       24,615  
Other
    61,495       73,236  
Customer deposits
    9,533       8,676  
Accrued taxes —
               
Income taxes
    4,016       4,171  
Other
    39,542       50,346  
Accrued interest
    2,094       2,332  
Accrued compensation
    16,722       23,958  
Plant Daniel capacity
    1,415       5,659  
Other regulatory liabilities
    19,540       11,386  
Other
    24,410       28,880  
 
           
Total current liabilities
    266,495       284,636  
 
           
Long-term Debt
    247,479       242,553  
 
           
Long-term Debt Payable to Affiliated Trusts
          36,082  
 
           
Deferred Credits and Other Liabilities:
               
Accumulated deferred income taxes
    231,754       236,202  
Deferred credits related to income taxes
    15,397       16,218  
Accumulated deferred investment tax credits
    15,604       16,402  
Employee benefit obligations
    97,781       92,403  
Other cost of removal obligations
    90,127       82,397  
Other regulatory liabilities
    88,753       22,559  
Other
    35,598       56,324  
 
           
Total deferred credits and other liabilities
    575,014       522,505  
 
           
Total Liabilities
    1,088,988       1,085,776  
 
           
Preferred Stock
    32,780       32,780  
 
           
Common Stockholder’s Equity:
               
Common stock, without par value —
               
Authorized - 1,130,000 shares
               
Outstanding - 1,121,000 shares
    37,691       37,691  
Paid-in capital
    308,694       307,019  
Retained earnings
    274,402       244,511  
Accumulated other comprehensive income
    350       599  
 
           
Total common stockholder’s equity
    621,137       589,820  
 
           
Total Liabilities and Stockholder’s Equity
  $ 1,742,905     $ 1,708,376  
 
           
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2007 vs. THIRD QUARTER 2006
AND
YEAR-TO-DATE 2007 vs. YEAR-TO-DATE 2006
OVERVIEW
Mississippi Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the State of Mississippi and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Mississippi Power’s business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth, and to effectively manage and secure timely recovery of rising costs. These costs include those related to growing demand, increasingly stringent environmental standards, fuel prices, and storm restoration following Hurricane Katrina.
Mississippi Power continues to focus on several key performance indicators. In recognition that Mississippi Power’s long-term financial success is dependent upon how well it satisfies its customers’ needs, Mississippi Power’s retail base rate mechanism, PEP, includes performance indicators that directly tie customer service indicators to Mississippi Power’s allowed return. In addition to the PEP performance indicators, Mississippi Power focuses on other performance measures, including broader measures of customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Mississippi Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$(2.1)
  (6.0)   $5.7   7.6
 
Mississippi Power’s net income after dividends on preferred stock for the third quarter 2007 was $34.5 million compared to $36.6 million for the corresponding period in 2006. The decrease was primarily due to the regulatory liability created with the establishment of the System Restoration Rider (SRR). Currently, Mississippi Power estimates a credit due to retail customers for the SRR clause when the regulatory liability is settled. See FUTURE EARNINGS POTENTIAL – “FERC and Mississippi PSC Matters – Retail Regulatory Matters” herein for additional information. The decrease in net income is also attributable to an increase in depreciation and amortization due to the amortization of a regulatory liability related to Plant Daniel capacity for the third quarter 2007, an increase in other operations and maintenance expenses, and a decrease in total other income and (expense). These items were partially offset by increases in territorial base revenues and in wholesale energy revenues.
Mississippi Power’s net income after dividends on preferred stock for year-to-date 2007 was $80.4 million compared to $74.7 million for the corresponding period in 2006. The increase was primarily due to increases in territorial base revenues which was a result of a retail base rate increase effective April 1, 2006, sales growth, wholesale energy revenues, and total other income and (expense). These increases were partially offset by an increase in other operations and maintenance expenses, an increase in depreciation and amortization due to the amortization of a regulatory liability related to Plant Daniel capacity for the year-to-date 2007, and a decrease in SRR retail revenues as discussed above.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$20.9   10.4   $54.7   10.8
       
In the third quarter 2007, retail revenues were $221.8 million compared to $200.9 million in the same period in 2006.
For year-to-date 2007, retail revenues were $560.1 million compared to $505.4 million for the same period in 2006.
Details of the change to retail revenues are as follows:
                                 
    Third Quarter   Year-to-Date
    2007   2007
    (in millions)   (% change)   (in millions)   (% change)
Retail – prior year
  $ 200.9             $ 505.4          
Estimated change in —
                               
Rates and pricing
    (1.1 )     (0.5 )     5.6       1.1  
Sales growth
    3.2       1.5       10.3       2.0  
Weather
    (0.7 )     (0.3 )     (2.2 )     (0.4 )
Fuel and other cost recovery
    19.5       9.7       41.0       8.1  
 
Retail – current year
  $ 221.8       10.4 %   $ 560.1       10.8 %
 
Revenue associated with changes in rates and pricing decreased in the third quarter 2007 when compared to the same period of 2006 primarily due to retail revenue reductions of approximately $2.2 million related to the SRR and a one time credit to retail customers of approximately $1.1 million related to PEP. This decrease was partially offset by an increase in the ECO Plan rate effective May 2007 of approximately $2.3 million. See FUTURE EARNINGS POTENTIAL – “FERC and Mississippi PSC Matters – Retail Regulatory Matters” herein for additional information.
Revenue associated with changes in rates and pricing increased for year-to-date 2007 when compared to the same period of 2006 due to a base rate increase effective April 2006 and increase in the ECO Plan rate effective May 2007 of approximately $8.5 million. This increase was partially offset by retail revenue reductions of approximately $1.8 million related to the SRR and a one time credit to retail customers of approximately $1.1 million related to PEP.
Revenues attributable to changes in sales growth increased in the third quarter 2007 when compared to the same period in 2006 due to 0.9% and 6.5% increases in KWH sales to residential and commercial customers, respectively, primarily due to increase in usage and customer loads returning after Hurricane Katrina.
Revenues attributable to changes in sales growth increased for year-to-date 2007 when compared to the same period in 2006 due to 1.7%, 8.5%, and 4.5% increases in KWH sales to residential, commercial, and industrial customers, respectively, primarily due to increase in usage and customer loads returning after Hurricane Katrina.
Revenues resulting from changes in weather decreased because of mild weather in the third quarter and year-to-date 2007 compared to normal weather in the third quarter and year-to-date 2006.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel revenues increased in the third quarter and year-to-date 2007 when compared to the same periods in 2006. Electric rates include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the fuel component of purchased power costs, and do not affect net income.
Wholesale Revenues – Non-Affiliates
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$17.3
  22.5   $43.2   21.2
 
In the third quarter 2007, wholesale revenues from non-affiliates were $93.8 million compared to $76.5 million in the same period in 2006. The increase was primarily due to increased sales to customers within Mississippi Power’s service territory of $9.5 million and increased sales to customers outside Mississippi Power’s service territory of $7.7 million. The $9.5 million increase in revenues to customers within Mississippi Power’s service territory was primarily due to an $8.5 million increase in fuel costs and a $1.0 million increase in base revenue due to higher demand by customers. The $7.7 million increase in sales to customers outside Mississippi Power’s service territory was primarily due to a $6.8 million increase in energy revenues and a $0.9 million increase in capacity revenues.
For year-to-date 2007, wholesale revenues to non-affiliates were $247.7 million compared to $204.5 million for the same period in 2006. The increase was primarily due to increased sales to customers outside Mississippi Power’s service territory of $21.8 million and increased sales to customers within Mississippi Power’s service territory of $21.4 million. The $21.8 million increase in sales to customers outside Mississippi Power’s service territory was primarily due to a $19.0 million increase in energy revenues and a $2.8 million increase in capacity revenues. The $21.4 million increase in revenues to customers within Mississippi Power’s service territory was primarily due to a $17.3 million increase in fuel costs and a $4.1 million increase in base revenue due to higher demand by customers.
Revenues from wholesale sales to non-affiliates will vary depending on the market cost of available energy compared to the cost of Mississippi Power and Southern Company system owned generation, demand for energy within the Southern Company service territory, and availability of Southern Company system generation.
Wholesale Revenues – Affiliates
             
Third Quarter 2007 vs. Third Quarter 2006   Year-to-Date 2007 vs. Year-to-Date 2006
(change in millions)   (% change)   (change in millions)   (% change)
$(15.8)   (53.8)   $(9.9)   (18.9)
       
In the third quarter 2007, wholesale revenues to affiliates were $13.7 million compared to $29.5 million in the same period in 2006. The decrease was primarily due to a $14.4 million decrease in energy revenues, of which a $16.6 million decrease was associated with decreased sales, partially offset by a $2.2 million increase associated with higher prices. Capacity revenues decreased $1.5 million.
For year-to-date 2007, wholesale revenues to affiliates were $42.2 million compared to $52.1 million for the same period in 2006. The decrease was primarily due to a $6.9 million decrease in energy revenues, of which a $2.3 million decrease was associated with decreased sales and a $4.6 million decrease was associated with lower prices. Capacity revenues decreased $2.9 million.

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MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues from wholesale sales to affiliates will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since the energy is generally sold at marginal cost.
Fuel and Purchased Power Expenses
                                 
    Third Quarter 2007     Year-to-Date 2007  
    vs.     vs.