Edgar Filing: SOUTHERN CO

Third Quarter 2008 vs. Third Quarter 2007

Year-to-Date 2008 vs. Year-to-Date 2007

(change in millions)

(% change)

(change in millions)

(% change)

SOUTHERN COMPANY

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, 2008

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 18^th 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

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


	Large			Smaller
	Accelerated	Accelerated	Non-accelerated	Reporting
Registrant	Filer	Filer	Filer	Company
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, 2008
The Southern Company	Par Value $5 Per Share		774,580,361
Alabama Power Company	Par Value $40 Per Share		23,600,000
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.

INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2008


		Page
		Number
DEFINITIONS			5
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION			7

PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	The Southern Company and Subsidiary Companies
	Condensed Consolidated Statements of Income		9
	Condensed Consolidated Statements of Cash Flows		10
	Condensed Consolidated Balance Sheets		11
	Condensed Consolidated Statements of Comprehensive Income		13
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
	Alabama Power Company
	Condensed Statements of Income		38
	Condensed Statements of Comprehensive Income		38
	Condensed Statements of Cash Flows		39
	Condensed Balance Sheets		40
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		42
	Georgia Power Company
	Condensed Statements of Income		59
	Condensed Statements of Comprehensive Income		59
	Condensed Statements of Cash Flows		60
	Condensed Balance Sheets		61
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		63
	Gulf Power Company
	Condensed Statements of Income		80
	Condensed Statements of Comprehensive Income		80
	Condensed Statements of Cash Flows		81
	Condensed Balance Sheets		82
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		84
	Mississippi Power Company
	Condensed Statements of Income		100
	Condensed Statements of Comprehensive Income		100
	Condensed Statements of Cash Flows		101
	Condensed Balance Sheets		102
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		104
	Southern Power Company and Subsidiary Companies
	Condensed Consolidated Statements of Income		123
	Condensed Consolidated Statements of Comprehensive Income		123
	Condensed Consolidated Statements of Cash Flows		124
	Condensed Consolidated Balance Sheets		125
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		127
	Notes to the Condensed Financial Statements		139
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		36
Item 4.	Controls and Procedures		36
Item 4T.	Controls and Procedures		36

INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2008


		Page
		Number
PART II — OTHER INFORMATION

Item 1.	Legal Proceedings		165
Item 1A.	Risk Factors		165
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.	Exhibits		166
	Signatures		169

DEFINITIONS


Term		Meaning
2007 Retail Rate Plan		Georgia Power’s retail rate plan for the years 2008 through 2010
Alabama Power		Alabama Power Company
Bcf		Billion cubic feet
Clean Air Act		Clean Air Act Amendments of 1990
Dalton Utilities		The City of Dalton, Georgia, an incorporated municipality in the State of Georgia acting by and through its Board of Water, Light and Sinking Fund Commissioners
DOE		U.S. Department of Energy
Duke Energy		Duke Energy Corporation
ECO Plan		Mississippi Power’s Environmental Compliance Overview Plan
EPA		U.S. Environmental Protection Agency
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, 2007
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
MEAG Power		Municipal Electric Authority of Georgia
Mirant		Mirant Corporation
Mississippi Power		Mississippi Power Company
mmBtu		Million British thermal unit
MW		Megawatt
MWH		Megawatt-hour
NRC		Nuclear Regulatory Commission
NSR		New Source Review
OPC		Oglethorpe Power Corporation
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 equilization rate mechanism
registrants		Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power

DEFINITIONS
(continued)


Term		Meaning
SCS		Southern Company Services, Inc.
SEC		Securities and Exchange Commission
SFAS No. 157		FASB Statement No. 157, “Fair Value Measurement”
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
Stone & Webster		Stone & Webster, Inc.
traditional operating companies		Alabama Power, Georgia Power, Gulf Power, and Mississippi Power
Westinghouse		Westinghouse Electric Company LLC
wholesale revenues		revenues generated from sales for resale

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 and other rate actions, environmental regulations and expenditures, earnings growth, dividend payout ratios, access to sources of capital, projections for postretirement benefit and nuclear decommissioning trust contributions, financing activities, completion of construction projects, plans and estimated costs for new generation resources, sales under new PPAs, impacts of adoption of new accounting rules, costs of implementing the IIC settlement with the FERC, cash flow impact of the Economic Stimulus Act of 2008 on tax payments in 2008, unrecognized tax benefits related to leveraged lease transactions, estimated sales under new power sale agreements, 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 water quality and 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;

•

effects of inflation;

•

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;

•

regulatory approvals related to the potential Plant Vogtle expansion, including Georgia PSC and NRC approvals;

•

the performance of projects undertaken by the non-utility businesses and the success of efforts to invest in and develop new opportunities;

•

internal restructuring or other restructuring options that may be pursued;

•

potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial to Southern Company or its subsidiaries;

•

the ability of counterparties of Southern Company and its subsidiaries to make payments as and when due and to perform as required;

•

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.

THE SOUTHERN COMPANY AND
SUBSIDIARY COMPANIES

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,
	2008			2007			2008			2007
	(in thousands)						(in thousands)
Operating Revenues:
Retail revenues	$	4,478,292		$	4,085,704		$	10,933,784		$	9,934,571
Wholesale revenues		774,847			563,233			1,880,311			1,530,809
Other electric revenues		142,459			130,590			413,811			381,467
Other revenues		30,901			52,516			96,690			165,793

Total operating revenues		5,426,499			4,832,043			13,324,596			12,012,640

Operating Expenses:
Fuel		2,152,828			1,738,693			5,226,845			4,512,718
Purchased power		378,259			281,489			668,423			445,698
Other operations		644,191			651,127			1,853,986			1,802,876
Maintenance		264,213			260,449			866,233			831,483
Depreciation and amortization		367,014			311,939			1,069,644			928,569
Taxes other than income taxes		215,298			206,763			602,612			574,329

Total operating expenses		4,021,803			3,450,460			10,287,743			9,095,673

Operating Income		1,404,696			1,381,583			3,036,853			2,916,967
Other Income and (Expense):
Allowance for equity funds used during construction		35,541			28,050			111,612			71,821
Interest income		9,744			11,638			20,737			31,853
Equity in income (losses) of unconsolidated subsidiaries		4,704			(410	)		6,129			(20,712	)
Leveraged lease income (losses)		6,343			12,359			(53,611	)		31,928
Interest expense, net of amounts capitalized		(219,067	)		(232,786	)		(665,123	)		(673,212	)
Preferred and preference dividends of subsidiaries		(16,194	)		(10,451	)		(48,584	)		(30,709	)
Other income (expense), net		(10,816	)		17,271			(14,386	)		8,325

Total other income and (expense)		(189,745	)		(174,329	)		(643,226	)		(580,706	)

Earnings Before Income Taxes		1,214,951			1,207,254			2,393,627			2,336,261
Income taxes		434,515			445,259			837,605			806,424

Consolidated Net Income	$	780,436		$	761,995		$	1,556,022		$	1,529,837

Common Stock Data:
Earnings per share —
Basic	$	1.01		$	1.00		$	2.02		$	2.03
Diluted	$	1.00		$	1.00		$	2.01		$	2.02
Average number of shares of common stock outstanding (in thousands)
Basic		772,622			758,308			769,298			754,568
Diluted		776,903			762,392			773,451			759,182
Cash dividends paid per share of common stock	$	0.4200		$	0.4025		$	1.2425		$	1.1925

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Nine Months
	Ended September 30,
	2008			2007
	(in thousands)
Operating Activities:
Consolidated net income	$	1,556,022		$	1,529,837
Adjustments to reconcile consolidated net income to net cash provided from operating activities —
Depreciation and amortization		1,265,696			1,108,475
Deferred income taxes and investment tax credits		46,006			102,314
Deferred revenues		94,924			(5,527	)
Allowance for equity funds used during construction		(111,612	)		(71,821	)
Equity in income (losses) of unconsolidated subsidiaries		(6,129	)		20,712
Leveraged lease income (losses)		53,611			(31,928	)
Pension, postretirement, and other employee benefits		75,965			75,303
Stock option expense		17,730			26,011
Hedge settlements		17,289			15,151
Hurricane Katrina grant proceeds-property reserve		—			60,000
Other, net		(57,111	)		15,981
Changes in certain current assets and liabilities —
Receivables		(522,004	)		(426,107	)
Fossil fuel stock		(112,328	)		(57,624	)
Materials and supplies		(25,347	)		(55,191	)
Other current assets		(33,896	)		(2,808	)
Hurricane Katrina grant proceeds		—			14,345
Accounts payable		(45,080	)		(3,951	)
Accrued taxes		409,684			303,781
Accrued compensation		(86,436	)		(148,274	)
Other current liabilities		49,651			(1,342	)

Net cash provided from operating activities		2,586,635			2,467,337

Investing Activities:
Property additions		(2,860,118	)		(2,469,059	)
Investment in restricted cash from pollution control bonds		(5,454	)		(96,052	)
Distribution of restricted cash from pollution control bonds		46,782			44,550
Nuclear decommissioning trust fund purchases		(581,171	)		(538,049	)
Nuclear decommissioning trust fund sales		574,291			531,169
Proceeds from property sales		5,718			31,333
Investment in unconsolidated subsidiaries		(1,000	)		(34,550	)
Cost of removal, net of salvage		(74,714	)		(65,601	)
Hurricane Katrina capital grant proceeds		7,314			10,869
Other		(91,419	)		25,908

Net cash used for investing activities		(2,979,771	)		(2,559,482	)

Financing Activities:
Increase (decrease) in notes payable, net		62,302			(656,348	)
Proceeds —
Long-term debt		2,416,035			3,081,500
Common stock		381,200			414,498
Preference stock		—			150,000
Redemptions —
Long-term debt		(769,790	)		(1,599,646	)
Preferred stock		(125,000	)		—
Payment of common stock dividends		(954,438	)		(898,766	)
Other		(11,704	)		(31,432	)

Net cash provided from financing activities		998,605			459,806

Net Change in Cash and Cash Equivalents		605,469			367,661
Cash and Cash Equivalents at Beginning of Period		200,550			166,846

Cash and Cash Equivalents at End of Period	$	806,019		$	534,507

Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $54,403 and $44,229 capitalized for 2008 and 2007, respectively)	$	575,597		$	600,634
Income taxes (net of refunds)	$	489,600		$	388,634

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	At September 30,			At December 31,
Assets	2008			2007
	(in thousands)
Current Assets:
Cash and cash equivalents	$	806,019		$	200,550
Restricted cash		31,007			68,013
Receivables —
Customer accounts receivable		1,310,242			999,264
Unbilled revenues		390,069			294,487
Under recovered regulatory clause revenues		630,336			715,744
Other accounts and notes receivable		272,367			347,573
Accumulated provision for uncollectible accounts		(27,723	)		(22,142	)
Fossil fuel stock, at average cost		826,460			709,823
Materials and supplies, at average cost		755,060			725,001
Vacation pay		134,622			134,806
Prepaid expenses		258,022			147,903
Other		438,220			411,210

Total current assets		5,824,701			4,732,232

Property, Plant, and Equipment:
In service		49,821,845			47,175,717
Less accumulated depreciation		18,105,660			17,412,658

		31,716,185			29,763,059
Nuclear fuel, at amortized cost		460,848			336,129
Construction work in progress		2,935,064			3,227,605

Total property, plant, and equipment		35,112,097			33,326,793

Other Property and Investments:
Nuclear decommissioning trusts, at fair value		978,450			1,131,798
Leveraged leases		929,824			984,441
Other		224,290			237,400

Total other property and investments		2,132,564			2,353,639

Deferred Charges and Other Assets:
Deferred charges related to income taxes		957,151			910,402
Prepaid pension costs		2,430,760			2,368,798
Unamortized debt issuance expense		199,191			190,700
Unamortized loss on reacquired debt		274,130			288,973
Deferred under recovered regulatory clause revenues		654,127			388,945
Other regulatory assets		914,500			769,226
Other		513,128			459,172

Total deferred charges and other assets		5,942,987			5,376,216


Total Assets	$	49,012,349		$	45,788,880

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	At September 30,			At December 31,
Liabilities and Stockholders’ Equity	2008			2007
	(in thousands)
Current Liabilities:
Securities due within one year	$	1,076,285		$	1,177,889
Notes payable		1,333,760			1,271,457
Accounts payable		1,187,460			1,213,766
Customer deposits		295,611			273,800
Accrued taxes —
Income taxes		203,673			52,237
Unrecognized tax benefits		241,676			164,599
Other		429,554			329,895
Accrued interest		256,974			217,883
Accrued vacation pay		170,279			170,574
Accrued compensation		323,059			407,543
Other		372,354			351,017

Total current liabilities		5,890,685			5,630,660

Long-term Debt		15,781,761			14,143,114

Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		5,996,905			5,838,674
Deferred credits related to income taxes		258,426			272,181
Accumulated deferred investment tax credits		461,431			479,302
Employee benefit obligations		1,575,486			1,492,472
Asset retirement obligations		1,164,770			1,200,094
Other cost of removal obligations		1,340,587			1,307,732
Other regulatory liabilities		1,665,155			1,613,004
Other		391,224			346,371

Total deferred credits and other liabilities		12,853,984			12,549,830

Total Liabilities		34,526,430			32,323,604

Preferred and Preference Stock of Subsidiaries		1,081,863			1,080,248

Common Stockholders’ Equity:
Common stock, par value $5 per share —
Authorized — 1 billion shares
Issued — September 30, 2008: 774,988,223 Shares;
— December 31, 2007: 763,502,427 Shares
Treasury — September 30, 2008: 407,862 Shares;
— December 31, 2007: 398,746 Shares
Par value		3,874,898			3,817,453
Paid-in capital		1,812,324			1,454,288
Treasury, at cost		(12,867	)		(11,143	)
Retained earnings		7,752,182			7,154,596
Accumulated other comprehensive loss		(22,481	)		(30,166	)

Total Common Stockholders’ Equity		13,404,056			12,385,028

Total Liabilities and Stockholders’ Equity	$	49,012,349		$	45,788,880

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2008		2007			2008			2007
	(in thousands)					(in thousands)
Consolidated Net Income	$	780,436	$	761,995		$	1,556,022		$	1,529,837
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $11,996, $(7,342), $579, and $6,087, respectively		18,604		(11,667	)		690			9,704
Reclassification adjustment for amounts included in net income, net of tax of $1,730, $1,548, $5,879, and $4,227, respectively		2,708		2,369			9,217			6,770
Marketable securities:
Change in fair value, net of tax of $163, $1,094, $(2,293), and $2,998, respectively		86		2,130			(3,940	)		4,757
Reclassification adjustment for amounts included in net income, net of tax of $3, $(127), $3, and $(488), respectively		4		(201	)		4			(774	)
Pension and other post retirement benefit plans:
Additional prior service costs from amendment to non-qualified plans, net of tax of $-, $-,$-, and $(1,510), respectively		—		—			—			(2,424	)
Reclassification adjustment for amounts included in net income, net of tax of $237, $263, $773, and $790, respectively		376		422			1,258			1,264

Total other comprehensive income (loss)		21,778		(6,947	)		7,229			19,297

COMPREHENSIVE INCOME	$	802,214	$	755,048		$	1,563,251		$	1,549,134

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIRD QUARTER 2008 vs. THIRD QUARTER 2007
AND
YEAR-TO-DATE 2008 vs. YEAR-TO-DATE 2007

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. The traditional operating companies are vertically integrated utilities providing electric service in four Southeastern states. Southern Power constructs, acquires, and manages generation assets and sells electricity at market-based rates in the wholesale market. Southern Company’s other business activities include investments in 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 Businesses” in Item 1 of the Form 10-K.

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

Southern Company’s third quarter 2008 earnings were $780.4 million ($1.01 per share) compared to $762.0 million ($1.00 per share) for the third quarter 2007. The increase for third quarter 2008 when compared to the same period in 2007 was primarily the result of an increase in contributions from market-response rates to large commercial and industrial customers and retail base rate increases at Alabama Power and Georgia Power. This increase was partially offset by higher depreciation and amortization.

Southern Company’s year-to-date 2008 earnings were $1.56 billion ($2.02 per share) compared to $1.53 billion ($2.03 per share) for year-to-date 2007. The increase for year-to-date 2008 when compared to the same period in 2007 was primarily the result of an increase in contributions from market-response rates to large commercial and industrial customers, retail base rate increases at Alabama Power and Georgia Power, and an increase in allowance for equity funds used during construction. This increase for year-to-date 2008 was partially offset by lower leveraged lease income related to a significant charge in the second quarter 2008, higher depreciation and amortization, and higher other operations and maintenance expenses.

Retail Revenues

In the third quarter 2008, retail revenues were $4.48 billion compared to $4.09 billion for the same period in 2007.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For year-to-date 2008, retail revenues were $10.93 billion compared to $9.93 billion for the same period in 2007.

Details of the change to retail revenues are as follows:


	Third Quarter						Year-to-Date
	2008						2008
	(in millions)			(% change)			(in millions)			(% change)
Retail – prior year	$	4,085.7					$	9,934.6
Estimated change in —
Rates and pricing		194.4			4.8			542.8			5.5
Sales growth		(21.5	)		(0.5	)		1.9			0.0
Weather		(84.4	)		(2.1	)		(97.8	)		(1.0	)
Fuel and other cost recovery		304.1			7.4			552.3			5.6

Retail – current year	$	4,478.3			9.6	%	$	10,933.8			10.1	%

Revenues associated with changes in rates and pricing increased in the third quarter and year-to-date 2008 when compared to the same periods in 2007 primarily as a result of an increase in revenues from market-response rates to large commercial and industrial customers and retail base rate increases at Alabama Power and Georgia Power.

Revenues attributable to changes in sales growth decreased in the third quarter 2008 when compared to the same period in 2007 due to a 1.4% decrease in weather-adjusted retail KWH sales. This decrease resulted primarily from a 2.1% decrease in electricity usage mainly due to a slowing economy and lower home occupancy rates in Southern Company’s service area as compared to the same period in 2007, partially offset by a 0.7% increase in customer growth. For the third quarter 2008, weather-adjusted residential KWH sales decreased 2.4%, weather-adjusted commercial KWH sales increased 1.1%, and weather-adjusted industrial KWH sales decreased 3.0%. Revenues attributable to changes in sales growth were insignificant for year-to-date 2008 when compared to the same period in 2007.

Revenues resulting from changes in weather decreased in the third quarter and year-to-date 2008 because of less favorable weather when compared to the same periods in 2007.

Fuel and other cost recovery revenues increased $304.1 million in the third quarter 2008 and $552.3 million for year-to-date 2008 when compared to the same periods in 2007. 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

In the third quarter 2008, wholesale revenues were $774.8 million compared to $563.2 million for the same period in 2007.

For year-to-date 2008, wholesale revenues were $1.88 billion compared to $1.53 billion for the same period in 2007.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The increases for the third quarter and year-to-date 2008 when compared to the same periods in 2007 were primarily the result of higher revenues associated with new and existing wholesale contracts, as well as increases in fuel revenues due to increases of 31.6% and 19.3% in the average unit cost of fuel per net KWH generated in the third quarter and year-to-date 2008, respectively. Lower revenues from short-term opportunity sales partially offset the third quarter and year-to-date 2008 increases. 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. Weather-related generation load reductions when compared to the same periods in 2007 also partially offset the third quarter and year-to-date 2008 increases.

Other Electric Revenues

In the third quarter 2008, other electric revenues were $142.5 million compared to $130.6 million for the same period in 2007. The increase was primarily the result of a $5.3 million increase in co-generation revenues due to higher natural gas prices, an increase in customer fees of $3.0 million, and a $2.0 million increase in transmission revenues.

For year-to-date 2008, other electric revenues were $413.8 million compared to $381.5 million for the same period in 2007. The increase was primarily the result of a $14.5 million increase in co-generation revenues due to higher natural gas prices, an increase in customer fees of $6.8 million, an increase in transmission revenues of $5.7 million, and an increase in outdoor lighting revenues of $5.2 million.

Co-generation revenues do not have a significant impact on earnings since they are generally offset by fuel expense.

Other Revenues

In the third quarter 2008, other revenues were $30.9 million compared to $52.5 million for the same period in 2007. The decrease was primarily the result of a $15.4 million decrease due to Southern Company ending its synthetic fuel production in December 2007.

For year-to-date 2008, other revenues were $96.7 million compared to $165.8 million for the same period in 2007. The decrease was primarily the result of a $47.2 million decrease due to Southern Company ending its synthetic fuel production in December 2007 and a $4.4 million decrease in revenues at a subsidiary that provides energy-related services.

Fuel and Purchased Power Expenses


	Third Quarter 2008				Year-to-Date 2008
	vs.				vs.
	Third Quarter 2007				Year-to-Date 2007
	(change in millions)		(% change)		(change in millions)		(% change)
Fuel	$	414.1		23.8	$	714.1		15.8
Purchased power		96.8		34.4		222.7		50.0

Total fuel and purchased power expenses	$	510.9			$	936.8

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In the third quarter 2008, fuel and purchased power expenses were $2.53 billion compared to $2.02 billion for the same period in 2007. The increase was primarily due to a $572.9 million net increase in the average cost of fuel and purchased power, primarily related to a 34.7% increase in the cost of coal per net KWH generated, partially offset by a $62.0 million net decrease related to lower total KWHs generated and purchased when compared to the same period in 2007.

For year-to-date 2008, fuel and purchased power expenses were $5.90 billion compared to $4.96 billion for the same period in 2007. The increase was primarily due to a $923.5 million net increase in the average cost of fuel and purchased power, primarily related to a 22.4% increase in the cost of coal per net KWH generated, and a $13.3 million net increase related to higher total KWHs generated and purchased when compared to the same period in 2007.

Increases in fuel expense 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.

Details of Southern Company’s cost of generation and purchased power are as follows:


	Third Quarter	Third Quarter	Percent	Year-to-Date	Year-to-Date	Percent
Average Cost	2008	2007	Change	2008	2007	Change
	(cents per net KWH)			(cents per net KWH)
Fuel	3.96	3.01	31.6	3.46	2.90	19.3
Purchased power	10.19	8.67	17.5	8.80	7.75	13.6

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 2008						Year-to-Date 2008
	vs.						vs.
	Third Quarter 2007						Year-to-Date 2007
	(change in millions)			(% change)			(change in millions)		(% change)
Other operations	$	(6.9	)		(1.1	)	$	51.1		2.8
Maintenance		3.7			1.4			34.8		4.2

Total other operations and maintenance	$	(3.2	)				$	85.9

In the third quarter 2008, other operations and maintenance expenses were $908.4 million compared to $911.6 million for the same period in 2007. The third quarter 2008 variance when compared to the third quarter 2007 is not material.

For year-to-date 2008, other operations and maintenance expenses were $2.72 billion compared to $2.63 billion for the same period in 2007. The increase was primarily due to a $62.6 million increase in fossil and hydro expenses due to costs incurred for scheduled outages, increases in commodity and labor costs, and expenses for new facilities; and a $27.5 million increase in nuclear expenses due to costs incurred for scheduled outages and increases in commodity and labor costs, partially offset by levelization of nuclear refueling outages.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Depreciation and Amortization

In the third quarter 2008, depreciation and amortization was $367.0 million compared to $311.9 million for the same period in 2007.

For year-to-date 2008, depreciation and amortization was $1.07 billion compared to $928.6 million for the same period in 2007.

The increases for the third quarter and year-to-date 2008 when compared to the same periods in 2007 were primarily due to an increase in plant in service related to environmental projects at Alabama Power and environmental, transmission, and distribution projects at Georgia Power. An increase in depreciation rates at Georgia Power and Southern Power also contributed to the third quarter and year-to-date 2008 increases, as well as the completion of Southern Power’s Plant Oleander Unit 5 in December 2007 and Plant Franklin Unit 3 in June 2008.

Taxes Other Than Income Taxes

In the third quarter 2008, taxes other than income taxes were $215.3 million compared to $206.8 million for the same period in 2007.

For year-to-date 2008, taxes other than income taxes were $602.6 million compared to $574.3 million for the same period in 2007.

The increases for the third quarter and year-to-date 2008 when compared to the same periods in 2007 were primarily due to increases in franchise fees and municipal gross receipt taxes associated with increases in revenues from energy sales.

Allowance for Equity Funds Used During Construction

In the third quarter 2008, allowance for equity funds used during construction was $35.5 million compared to $28.1 million for the same period in 2007.

For year-to-date 2008, allowance for equity funds used during construction was $111.6 million compared to $71.8 million for the same period in 2007.

The increases for the third quarter and year-to-date 2008 when compared to the same periods in 2007 were primarily due to additional investments in environmental projects mainly at Alabama Power, Georgia Power, and Gulf Power; transmission projects at Alabama Power and Georgia Power; generation facilities at Georgia Power; and distribution projects at Alabama Power.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Interest Income

In the third quarter 2008, interest income was $9.7 million compared to $11.6 million for the same period in 2007. The third quarter 2008 variance when compared to the third quarter 2007 is not material.

For year-to-date 2008, interest income was $20.7 million compared to $31.9 million for the same period in 2007. The decrease was primarily the result of the reversal of accrued interest income on IRS deposits related to sale-in-lease-out (SILO) transactions.

Equity in Income (Losses) of Unconsolidated Subsidiaries


N/M — Not Meaningful

In the third quarter 2008, equity in income (losses) of unconsolidated subsidiaries was $4.7 million compared to $(0.4) million for the same period in 2007. The third quarter 2008 variance when compared to the third quarter 2007 is not material.

For year-to-date 2008, equity in income (losses) of unconsolidated subsidiaries was $6.1 million compared to $(20.7) million for the same period in 2007. The increase was primarily the result of Southern Company ending its investment in synthetic fuel production facilities in December 2007.

Leveraged Lease Income (Losses)

In the third quarter 2008, leveraged lease income (losses) were $6.3 million compared to $12.4 million for the same period in 2007.

For year-to-date 2008, leveraged lease income (losses) were $(53.6) million compared to $31.9 million for the same period in 2007.

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 decreases in leveraged lease income for the third quarter and year-to-date 2008 when compared to the same periods in 2007 were primarily the result of the application of FASB Staff Position No. 13-2, “Accounting for a Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” (FSP 13-2), including a $51.2 million after tax adjustment in the second quarter 2008. 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.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Interest Expense, Net of Amounts Capitalized

In the third quarter 2008, interest expense, net of amounts capitalized was $219.1 million compared to $232.8 million for the same period in 2007. The decrease was primarily due to $25.5 million related to lower average interest rates on existing variable rate debt and a $5.6 million decrease related to other interest charges, partially offset by a $15.1 million increase associated with $1.37 billion in additional debt outstanding at September 30, 2008 compared to September 30, 2007. 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. Also partially offsetting this decrease was $2.3 million less capitalized interest in the third quarter 2008 compared to the third quarter 2007.

For year-to-date 2008, interest expense, net of amounts capitalized was $665.1 million compared to $673.2 million for the same period in 2007. The decrease was primarily due to $61.2 million related to lower average interest rates on existing variable rate debt and $10.2 million more capitalized interest year-to-date 2008 compared to year-to-date 2007. This decrease was partially offset by a $44.7 million increase associated with the additional debt outstanding and an $18.6 million increase related to other interest charges primarily resulting from a $15.7 million after tax adjustment in the second quarter 2008 relating to the application of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). 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.

Preferred and Preference Dividends of Subsidiaries

In the third quarter 2008, preferred and preference dividends of subsidiaries were $16.2 million compared to $10.5 million for the same period in 2007.

For year-to-date 2008, preferred and preference dividends of subsidiaries were $48.6 million compared to $30.7 million for the same period in 2007.

The increases for the third quarter and year-to-date 2008 resulted primarily from the issuance of $470 million of preference stock in September and October 2007, partially offset by the redemption of $125 million of preferred stock in January 2008. 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 further information.

Other Income (Expense), Net

In the third quarter 2008, other income (expense), net was $(10.8) million compared to $17.3 million for the same period in 2007.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For year-to-date 2008, other income (expense), net was $(14.4) million compared to $8.3 million for the same period in 2007.

The decreases in other income (expense), net for the third quarter and year-to-date 2008 when compared to the same periods in 2007 were primarily the result of gains during 2007 on hedge transactions associated with Southern Company’s investment in synthetic fuel production facilities, which ended in December 2007.

Income Taxes

In the third quarter 2008, income taxes were $434.5 million compared to $445.3 million for the same period in 2007. The decrease was primarily due to an increase in the net synthetic fuel tax credits reserve in 2007.

For year-to-date 2008, income taxes were $837.6 million compared to $806.4 million for the same period in 2007. The increase was primarily due to higher pre-tax earnings and a decrease in net synthetic fuel tax credits, partially offset by the tax benefit associated with an increase in allowance for equity funds used during construction. See Note (H) to the Condensed Financial Statements under “Effective Tax Rate” herein for further information.

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. Other major factors include profitability of the competitive wholesale supply business and federal regulatory policy (including the FERC’s market-based rate proceeding), 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. In addition, the level of future earnings for the wholesale supply business also depends on numerous factors including creditworthiness of customers, total generating capacity available in the Southeast, and the successful remarketing of capacity as current contracts expire. For additional information relating to these issues, see 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 statutes and regulations could affect earnings if such costs cannot continue to 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.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

New Source Review Actions

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 civil actions brought by the EPA against certain Southern Company subsidiaries. The EPA’s action against Alabama Power alleged 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. On July 24, 2008, the U.S. District Court for the Northern District of Alabama granted partial summary judgment in favor of Alabama Power regarding the proper legal test for determining whether projects are routine maintenance, repair, and replacement and therefore are excluded from NSR permitting. The decision does not resolve the case. The ultimate outcome of these matters cannot be determined at this time.

Clean Air Interstate Rule

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 background regarding the Clean Air Interstate Rule (CAIR). On July 11, 2008, in response to petitions brought by certain states and regulated industries challenging particular aspects of CAIR, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating CAIR in its entirety and remanding it to the EPA for further action consistent with its opinion. Southern Company’s overall environmental compliance strategy has been developed in response to numerous federal and state regulatory requirements, many of which remain unaffected by the court’s ruling; however, the court’s decision has the potential to impact future decision making regarding capital expenditures, the installation and operation of pollution control equipment, and the purchase, use, and associated carrying values of emissions allowances. The ultimate impact of the court’s decision cannot be determined at this time and may depend on subsequent legal action, including issuance of the court’s mandate, and future rulemaking and regulatory treatment.

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. In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and new nonattainment areas within Southern Company’s service territory are expected. The ultimate outcome of this matter cannot be determined at this time and will depend on subsequent legal action and/or future nonattainment designations and regulatory plans.

Carbon Dioxide Litigation

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which cost is alleged to be $95 million to $400 million. On June 30, 2008, all defendants filed motions to dismiss this case. Southern Company believes that these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this time.

Global Climate Issues

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 executive orders issued by the Governor of the State of Florida addressing reduction of greenhouse gas emissions within the state. On June 25, 2008, Florida’s Governor signed comprehensive energy-related legislation that includes authorization for the Florida Department of Environmental Protection to adopt rules for a cap-and-trade regulatory program to address greenhouse gas emissions from electric utilities, conditioned upon their ratification by the legislature no sooner than the 2010 legislative session. This legislation also authorizes the Florida PSC to adopt a renewable portfolio standard for public utilities, subject to legislative ratification. The impact of this legislation on Southern Company will depend on the development, adoption, legislative ratification, implementation, and potential legal challenges in connection with rules governing greenhouse gas emissions and mandates regarding the use of renewable energy, 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 market-based rate authority. In June 2007, the FERC issued its final rule in Order No. 697 regarding market-based rate authority. The FERC generally retained its current market-based rate standards. Responding to a number of requests for rehearing, the FERC issued Order No. 697-A on April 21, 2008. This order largely affirmed its prior revision and codification of the regulations governing market-based rates for public utilities. In accordance with the order, Southern Company submitted to the FERC an updated market power analysis on September 2, 2008 related to its continued market-based rate authority. The ultimate outcome of this matter cannot now be determined.

On October 17, 2008, Southern Company filed with the FERC a revised market-based rate (MBR) tariff and a new cost-based rate (CBR) tariff. The revised MBR tariff provides for a “must offer” energy auction whereby Southern Company offers all of its available energy for sale in a day-ahead auction and an hour-ahead auction, after considering Southern Company’s native load requirements, reliability obligations, and sales commitments to third parties. All sales under the energy auction would be at market clearing prices established under the auction rules. The new CBR tariff is designed to be an alternative means for conducting short-term transactions in the wholesale markets and provides for a cost-based cap for wholesale sales of less than a year. Both tariffs must be approved by the FERC. The final outcome of this matter cannot now be determined.

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 continued to experience

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2008 as compared to $1.1 billion at December 31, 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 continuously 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.

On February 29, 2008, Georgia Power filed a request with the Georgia PSC to change the fuel cost recovery rate effective June 1, 2008. The request was approved on May 20, 2008. Total annual fuel recovery billings increased by approximately $222 million. Georgia Power is required to file its next fuel cost recovery case by March 1, 2009.

Gulf Power filed a petition on June 20, 2008 with the Florida PSC requesting an adjustment to the fuel cost recovery factor. On July 29, 2008, the Florida PSC approved Gulf Power’s request for an increase of approximately 28.3% in the fuel factor for retail customers. This change represents an increase of 11.3% for a residential customer billing of 1,000 KWH per month. The increase will result in the recovery of $38.2 million of the projected under recovered balance during the period from September 2008 through December 2008. The remaining portion of the projected under recovered balance is expected to be recovered in 2009. On September 2, 2008, Gulf Power filed its 2009 projected fuel cost recovery filing with the Florida PSC which includes the fuel factors proposed for January through December 2009. The proposed 2009 fuel factor represents an increase of 12.9% over the fuel factor in place September 2008 through December 2008. This change represents an increase of 5.8% in the total bill for a residential customer using 1,000 KWH per month. The Florida PSC will hold hearings to address this filing in November 2008. On October 13, 2008, Gulf Power notified the Florida PSC that the projected fuel cost under recovery balance at year-end exceeds the 10% threshold, but no adjustment to the 2008 or the 2009 factor was requested.

On October 7, 2008, the Alabama PSC approved an increase in Alabama Power’s Rate ECR factor to 3.983 cents per KWH for a 24-month period beginning with October 9, 2008 billings. Thereafter, the Rate ECR factor shall be 5.910 cents per KWH, absent a contrary order by the Alabama PSC. During the 24-month period, Alabama Power will be allowed to continue 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 cost. Accordingly, this approved increase in the billing factor will have no significant effect on Southern Company’s revenues or net income, but will increase annual cash flow.

Alabama Retail Rate Adjustments

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Alabama Power” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Alabama Power Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information. On October 7, 2008, the Alabama PSC approved a corrective rate package effective in January 2009 providing for various adjustments to customer charges under Alabama Power’s rate structure which are expected to generate additional annual revenues of $168 million. Alabama Power expects that these additional revenues will preclude the need for a rate adjustment under the Rate RSE in 2009 and agreed to a moratorium on any increase in 2009 under Rate RSE.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On October 7, 2008, Alabama Power agreed to defer collection during 2009 of any increase in rates under the portion of Rate CNP which permits recovery of costs associated with environmental laws and regulations until 2010.

Mississippi Base Load Construction Legislation

In the 2008 regular session of the Mississippi legislature, a bill was passed and signed by the Governor on May 9, 2008 to enhance the Mississippi PSC’s authority to facilitate development and construction of base load generation in the State of Mississippi. The bill authorizes, but does not require, the Mississippi PSC to include in retail base rates, prior to and during construction, all or a portion of the prudently incurred pre-construction and construction costs incurred by a utility in constructing a base load electric generating plant. The bill also provides for periodic prudence reviews by the Mississippi PSC and prohibits the cancellation of any such generating plant without the approval of the Mississippi PSC. In the event of cancellation of the construction of the plant without approval of the Mississippi PSC, the bill authorizes the Mississippi PSC to make a public interest determination as to whether and to what extent the utility will be afforded rate recovery for costs incurred in connection with such cancelled generating plant. The effect of this legislation on Mississippi Power cannot now be determined.

Mirant Matters

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. On August 6, 2008, the court entered an order in regard to the defendants’ motions to dismiss and for partial summary judgment. The court granted the defendants’ motion for partial summary judgment in two respects concluding that certain holders of Mirant stock do not have standing under the securities laws. The court denied the defendants’ other motions and granted leave to the plaintiffs to re-plead their claims against the defendants. In accordance with the court’s order, the plaintiffs filed an amended complaint. Southern Company and the remaining defendants filed motions to dismiss the amended complaint on October 9, 2008. The ultimate outcome of this matter cannot now be determined.

Income Tax Matters

Leveraged Lease Transactions

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Income Tax Matters – Leveraged Lease Transactions” of Southern Company in Item 7 of the Form 10-K for information regarding pending litigation and proposed legislation related to the SILO transactions. Also see Note 1 to the financial statements of Southern Company under “Income and Other Taxes,” Note 3 to the financial statements of Southern Company under “Income Tax Matters,” and Note 5 to the financial statements of Southern Company under “Unrecognized Tax Benefits” in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements under “Unrecognized Tax Benefits” herein for information regarding Southern Company’s unrecognized tax benefit related to the SILO transactions.

During the second quarter 2008, decisions in favor of the IRS were reached in several court cases involving other tax payers with similar leveraged lease investments. Pursuant to the application of FIN 48 and FSP 13-2, management is required to assess, on a periodic basis, the likely outcome of the uncertain tax positions related to the SILO transactions. Based on these accounting standards and management’s review of the recent court

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

decisions, Southern Company recorded an after tax charge of approximately $67 million in the second quarter 2008. Of the total, approximately $16 million is associated with the application of FIN 48 and represents additional interest expense related to tax returns for years 2000 through 2007 and approximately $51 million represents non-cash charges related to the application of FSP 13-2. The charges related to FSP 13-2 reflect the reallocation of lease income and will be recognized as income over the remaining term of the affected leases. The tax benefit associated with the lease transactions represents timing differences that do not impact total net income over the life of the transactions.

Furthermore, on August 6, 2008, the Commissioner of the IRS announced a settlement initiative for more than 45 corporations with similar leveraged lease transactions. Southern Company did not receive a formal offer to settle. In addition, the U.S. Senate continues to consider legislation that would disallow tax benefits after December 31, 2007 for SILO losses and other international leveraged lease transactions (such as lease-in, lease-out or LILO transactions). The ultimate impact on Southern Company’s net income and cash flow will be dependent on the outcome of its pending litigation, associated settlement discussions, and proposed legislation and cannot be determined at this time.

Legislation

On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. The States of Alabama, Florida, Georgia, and Mississippi do not allow the bonus depreciation deduction allowed by the Stimulus Act for state income tax purposes. Southern Company estimates the cash flow reduction to tax payments as a result of the Stimulus Act for 2008 to be between $120 million and $215 million.

On October 3, 2008, President Bush signed the Economic Stabilization Act of 2008 (Stabilization Act) into law. In addition to addressing financial issues, the Stabilization Act includes renewable energy incentives as well as accelerated depreciation for smart meters and smart grid systems. Southern Company is currently assessing the financial implications of the Stabilization Act. The ultimate impact cannot be determined at this time.

Construction Projects

Integrated Coal Gasification Combined Cycle

As part of the evaluation and screening of alternatives to meet its future generation needs, Mississippi Power is considering the construction of an advanced coal gasification facility to be located in Kemper County, Mississippi, that would use locally mined lignite coal. The plant would use an air-blown IGCC technology that generates power from low-rank coals and coals with high moisture or high ash content. These coals, which include lignite, make up approximately half the proven United States and worldwide coal reserves. The feasibility assessment of the project is currently underway. Mississippi Power filed an application in June 2006 with the DOE for certain tax credits available to projects using clean coal technologies under the Energy Policy Act of 2005. The DOE subsequently certified the project and in November 2006, the IRS allocated IRC Section 48A tax credits of $133 million to Mississippi Power. The utilization of these credits is dependent upon meeting the certification requirements for the project, including an in-service date no later than November 2013. On February 14, 2008, Mississippi Power also requested that the DOE transfer the remaining funds previously granted to a cancelled Southern Company project that would have been located in Orlando, Florida.

In December 2006, the Mississippi PSC approved Mississippi Power’s requested accounting treatment to defer the costs associated with Mississippi Power’s generation resource planning, evaluation, and screening activities as a regulatory asset. In December 2007, Mississippi Power reported to the Mississippi PSC an updated

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

estimate and received an order directing Mississippi Power to continue charging all costs associated with the generation capacity assessment to the regulatory asset. At September 30, 2008, Mississippi Power had spent $36.2 million, of which $2.7 million related to land purchases capitalized. The remaining retail portion of $23.4 million was deferred in other regulatory assets.

The wholesale portion of $10.1 million was expensed, with $6.0 million through September 30, 2008 and $4.1 million during 2007. On August 29, 2008, Mississippi Power and its wholesale customers entered into an agreement regarding a wholesale rate increase. The FERC accepted the filing on October 24, 2008. This agreement will allow $9.3 million of the wholesale portion of the generation screening and evaluation costs associated with the IGCC project to be reclassified from expense to a regulatory asset in the fourth quarter 2008.

These costs will remain as a regulatory asset until the Mississippi PSC and the FERC determine the prudence and ultimate recovery of such costs. The balance of such regulatory asset is included in Mississippi Power’s rate base for ratemaking purposes. Approval by various regulatory agencies, including the Mississippi PSC, will also be required if the project proceeds. The Mississippi PSC, in its discretion, may exercise its additional rate authority granted to the Mississippi PSC in the Mississippi base load construction legislation if the project proceeds. See FUTURE EARNINGS POTENTIAL – “FERC and State PSC Matters – Mississippi Base Load Construction Legislation” herein for additional information.

The final 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 the potential expansion of Plant Vogtle.

In August 2006, Southern Nuclear, on behalf of Georgia Power, OPC, MEAG Power, and Dalton Utilities (collectively, Owners), filed an application with the NRC for an early site permit approving two additional nuclear units on the site of Plant Vogtle. On March 31, 2008, Southern Nuclear filed an application with the NRC for a combined construction and operating license (COL) for the new units.

On April 8, 2008, Georgia Power, acting for itself and as agent for the Owners, and a consortium consisting of Westinghouse and Stone & Webster (collectively, Consortium) entered into an engineering, procurement, and construction agreement to design, engineer, procure, construct, and test two AP1000 nuclear units with electric generating capacity of approximately 1,100 MWs each and related facilities, structures, and improvements at Plant Vogtle (Vogtle 3 and 4 Agreement).

The Vogtle 3 and 4 Agreement is an arrangement whereby the Consortium supplies and constructs the entire facility with the exception of certain items provided by the Owners. Under the terms of the Vogtle 3 and 4 Agreement, the Owners will pay a purchase price that will be subject to certain price escalation and adjustments, adjustments for change orders, and performance bonuses. Each Owner is severally (and not jointly) liable for its proportionate share, based on its ownership interest, of all amounts owed to the Consortium under the Vogtle 3 and 4 Agreement. Georgia Power’s proportionate share, based on its current ownership interest, is 45.7%. Under the terms of a separate joint development agreement, the Owners finalized their ownership percentages on July 2, 2008, except for allowed changes, under certain limited circumstances, during the Georgia PSC certification process.

Georgia Power submitted its self-build nuclear proposal to the Georgia PSC on May 1, 2008 in connection with its 2016-2017 base load capacity request for proposals (RFP). No other responses to the RFP were received.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On August 1, 2008, Georgia Power submitted an application for the Georgia PSC to certify the project. Hearings began November 3, 2008 and a final certification decision is expected in March 2009.

If certified by the Georgia PSC and licensed by the NRC, Vogtle Units 3 and 4 are scheduled to be placed in service in 2016 and 2017, respectively. The total plant value to be placed in service will also include financing costs for each of the Owners, the impacts of inflation on costs, and transmission and other costs that are the responsibility of the Owners. Georgia Power’s proportionate share of the estimated in-service costs, based on its current ownership interest, is approximately $6.4 billion, subject to adjustments and performance bonuses under the Vogtle 3 and 4 Agreement.

The Owners and the Consortium have agreed to certain liquidated damages upon the Consortium’s failure to comply with the schedule and performance guarantees. The Owners and the Consortium also have agreed to certain bonuses payable to the Consortium for early completion and unit performance. The Consortium’s liability to the Owners for schedule and performance liquidated damages and warranty claims is subject to a cap.

The obligations of Westinghouse and Stone & Webster under the Vogtle 3 and 4 Agreement are guaranteed by Toshiba Corporation and The Shaw Group, Inc., respectively. In the event of certain credit rating downgrades of any Owner, such Owner will be required to provide a letter of credit or other credit enhancement.

The Vogtle 3 and 4 Agreement is subject to certification by the Georgia PSC. In addition, the Owners may terminate the Vogtle 3 and 4 Agreement at any time for their convenience, provided that the Owners will be required to pay certain termination costs and, at certain stages of the work, cancellation fees to the Consortium. The Consortium may terminate the Vogtle 3 and 4 Agreement under certain circumstances, including delays in receipt of the COL or delivery of full notice to proceed, certain Owner suspension or delays of work, action by a governmental authority to permanently stop work, certain breaches of the Vogtle 3 and 4 Agreement by the Owners, Owner insolvency, and certain other events.

Other Matters

Southern Company is involved in various other matters being litigated, regulatory matters, and certain tax-related issues that could affect future earnings. In addition, Southern Company is subject to certain claims and legal actions arising in the ordinary course of business. 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 and water 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.

On July 3, 2008, Georgia Power self-reported to the SERC Reliability Council (SERC) a potential violation of the North American Electric Reliability Council reliability standard for transmission vegetation management programs related to a single tree. The SERC can impose penalties ranging from $1,000 to $1,000,000 per day, per violation, which can be adjusted according to certain risk factors and other aggravating or mitigating factors. On September 10, 2008, Georgia Power submitted a proposed settlement agreement, including a proposed mitigation plan. The SERC has not responded to the proposed settlement agreement and the penalty that SERC may assess remains uncertain. The ultimate outcome of this matter cannot be determined at this

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time; however, it could have a significant and potentially material impact on the net income and cash flow of Southern Company.

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, Unbilled Revenues, and Leveraged Leases.

New Accounting Standards

Business Combinations

In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), “Business Combinations (SFAS No. 141R). SFAS No. 141R, when adopted, will significantly change the accounting for business combinations, specifically the accounting for contingent consideration, contingencies, acquisition costs, and restructuring costs. Southern Company plans to adopt SFAS No. 141R on January 1, 2009. It is likely that the adoption of SFAS No. 141R will have a significant impact on the accounting for any business combinations completed by Southern Company after January 1, 2009.

In December 2007, the FASB issued FASB Statement No. 160, “Non-controlling Interests in Consolidated Financial Statements” (SFAS No. 160). SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary should be reported as equity in the consolidated financial statements and establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. Southern Company plans to adopt SFAS No. 160 on January 1, 2009. Southern Company is currently assessing its impact, if any.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Southern Company’s financial condition remained stable at September 30, 2008. Throughout the recent turmoil in the financial markets, Southern Company has maintained adequate access to capital without drawing any of its committed bank credit arrangements used to support its commercial paper programs and variable rate pollution control revenue bonds. Southern Company and the traditional operating companies have continued to issue commercial paper which has increased the balance of short-term debt while also increasing cash and cash equivalents as a precautionary measure. Since September 15, 2008, Southern Power has not needed to access

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

the commercial paper market or draw on its committed bank credit arrangements. Due to the recent contraction in the credit market, Southern Power’s access to commercial paper could have been limited. During the third quarter 2008 and subsequent to September 30, 2008, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power purchased a total of approximately $133 million of variable rate pollution control revenue bonds that were tendered for purchase, of which $86 million were remarketed by Alabama Power and Georgia Power. Southern Company intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital needs. No material changes in bank credit arrangements have occurred. Southern Company’s interest cost for short-term debt has not changed materially. The impact on future financing costs as a result of the recent financial turmoil cannot be determined at this time. See “Sources of Capital” and “Financing Activities” herein for additional information.

As a result of the turmoil in the financial markets, Southern Company experienced no material counterparty credit losses. Southern Company’s investments in pension and nuclear decommissioning trust funds declined in value as of September 30, 2008. No material changes in funding requirements related to these funds are currently expected; however, the ultimate outcome cannot be determined at this time.

Net cash provided from operating activities totaled $2.59 billion for the first nine months of 2008 compared to $2.47 billion for the first nine months of 2007. The $119 million increase in net cash provided from operating activities in 2008 as compared to the prior period is primarily due to increased revenues as a result of retail rate increases at Alabama Power and Georgia Power and an increase in cash flow of $106 million in accrued taxes primarily due to a difference between the periods in payments for federal taxes and property taxes. Net cash used for investing activities totaled $2.98 billion for the first nine months of 2008, compared to $2.56 billion in the same period of the prior year, an increase of $420 million, primarily due to property additions to utility plant. Net cash provided from financing activities totaled $999 million for the first nine months of 2008 compared to $460 million for the corresponding period in 2007, primarily due to the increased levels of notes payable and the amount and timing of financings in 2008 compared to 2007.

Significant balance sheet changes for the first nine months of 2008 include an increase in total property, plant, and equipment of $1.79 billion, an increase in long-term debt, excluding amounts due within one year, of $1.64 billion used primarily for construction expenditures and general corporate purposes, and an increase of $605 million in cash.

The market price of Southern Company’s common stock at September 30, 2008 was $37.69 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $17.30 per share, representing a market-to-book ratio of 218%, compared to $38.75, $16.23, and 239%, respectively, at the end of 2007. The dividend for the third quarter 2008 was $0.42 per share compared to $0.4025 per share in the third quarter 2007.

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, other purchase commitments, unrecognized tax benefits and interest, and derivative obligations. Revised funding requirements associated with unrecognized tax benefits and interest for 2008 are $290 million and $142 million for years after 2008. Approximately $1.1 billion will be required through September 30, 2009 for maturities of long-term debt. In addition, in connection with Georgia Power’s entering into the Vogtle 3 and 4 Agreement, as described under FUTURE EARNINGS POTENTIAL – “Construction Projects” herein, the revised estimated total construction

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

program for Southern Company is $4.4 billion in 2008, $5.2 billion in 2009, and $4.8 billion in 2010. In November 2008, Georgia Power’s management plans to request approval by the Georgia Power Board of Directors of a revised capital budget of approximately $2.9 billion for 2009 and $2.6 billion for 2010. The increases are primarily a result of changes in the timing of expenditures for environmental controls at Plant Bowen and Yates and the new generating units at Plant McDonough, as well as other project scope and price changes. In October 2008, Alabama Power’s Board of Directors approved a new capital budget for 2009 and 2010. The construction program of Alabama Power is estimated to be $1.6 billion for 2009 and $1.1 billion for 2010. The Southern Company system financial plan, including the Southern Company system capital budget, is expected to be reviewed by the Southern Company Board of Directors in early 2009. Actual construction costs may vary from these estimates because of changes in such factors as: business conditions; environmental statutes and regulations; nuclear plant regulation; FERC rules and regulations; load projections; the cost and efficiency of construction labor, equipment, and materials; and the cost and availability of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.

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 in 2008, as well as in subsequent years, will be contingent on Southern Company’s investment opportunities. 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 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 cash needs as well as scheduled maturities of long-term debt. 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 (which are backed by bank credit facilities) to meet liquidity needs. At September 30, 2008, Southern Company and its subsidiaries had approximately $806 million of cash and cash equivalents and approximately $4.3 billion of unused credit arrangements with banks, of which $234 million expire in 2008, $821 million expire in 2009, $25 million expire in 2011, and $3.2 billion expire in 2012. Approximately $79 million of the credit facilities expiring in 2008 and 2009 allow for the execution of term loans for an additional two-year period, and $584 million contain provisions allowing one-year term loans. At September 30, 2008, approximately $1.35 billion of the credit facilities were dedicated to providing liquidity support to the traditional operating companies’ variable rate pollution control revenue bonds, compared to $1.44 billion at June 30, 2008. During the third quarter 2008, Alabama Power, Georgia Power, and Mississippi Power were required to purchase a total of approximately $96 million of variable rate pollution control revenue bonds that were tendered by investors. Alabama Power remarketed all $11 million of its repurchased variable rate pollution control revenue bonds that were tendered by investors. Subsequent to September 30, 2008, Georgia Power and Gulf Power converted a total of approximately $134 million of variable rate pollution control revenue bonds to fixed interest rate modes. Also subsequent to September 30, 2008, Gulf Power purchased from investors $37 million of variable rate pollution control revenue bonds that were subject to mandatory tender. In addition, Georgia Power remarketed $75 million of its repurchased pollution control revenue bonds that were tendered by investors. Including the impact of the conversions, the tenders, and the remarketing of tendered bonds, $1.25 billion of the credit facilities are now dedicated to providing liquidity support to the traditional operating companies’ variable rate pollution control revenue

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bonds. See Note 6 to the financial statements of Southern Company under “Bank Credit Arrangements” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under “Bank Credit Arrangements” herein 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, 2008, the Southern Company system had outstanding commercial paper of $1.2 billion and short-term bank notes of $102 million. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and cash.

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 of certain subsidiaries to BBB and Baa2, or BBB- and/or Baa3 or below. These contracts are for physical electricity purchases and sales, fuel purchases, fuel transportation and storage, emissions allowances, energy price risk management, and construction of new generation. At September 30, 2008, the maximum potential collateral requirements under these contracts at a BBB and Baa2 rating were approximately $9 million and at a BBB- or Baa3 rating were approximately $398 million. At September 30, 2008, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $1.7 billion. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash.

Market Price Risk

Southern Company’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2007 reporting period. Since a significant portion of outstanding indebtedness is at fixed rates, Southern Company is not aware of any facts or circumstances that would significantly affect exposures on existing indebtedness in the near term. However, the impact on future financing costs cannot now be determined.

Due to cost-based rate regulation, the traditional operating companies continue to 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. However, during 2008, Southern Power is exposed to market volatility in energy-related commodity prices as a result of sales of uncontracted generating capacity. To mitigate residual risks relative to movements in electricity prices, the traditional operating companies 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 continue to manage fuel-hedging programs implemented at the instruction of their respective state PSCs. As such, the traditional operating companies have no material change in market risk exposures when compared with the December 31, 2007 reporting period.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The changes in fair value of energy-related derivative contracts for the three months and nine months ended September 30, 2008 were as follows:


	Third Quarter			Year-to-Date
	2008			2008
	Changes			Changes
	Fair Value
	(in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net	$	313.2		$	4.4
Contracts realized or settled		(131.4	)		(179.0	)
Current period changes^(a)		(281.6	)		74.8

Contracts outstanding at the end of the period, assets (liabilities), net	$	(99.8	)	$	(99.8	)

(a) Current period changes also include the changes in fair value of new contracts entered into during the period, if any.

The decreases in the fair value positions of the energy-related derivative contracts for the three months and nine months ended September 30, 2008 were $413 million and $104 million, respectively, substantially all of which is due to natural gas positions. These changes are attributable to both the volume and prices of natural gas. At September 30, 2008, Southern Company had a net hedge volume of 139.6 Bcf with a weighted average contract cost approximately $0.84 per mmBtu above market prices, compared to 106.5 Bcf at June 30, 2008 with a weighted average contract cost approximately $3.53 per mmBtu below market prices and compared to 99.0 Bcf at December 31, 2007 with a weighted average contract cost approximately $0.01 per mmBtu above market prices. The majority of the natural gas hedges are recovered through the traditional operating companies’ fuel cost recovery clauses.

At September 30, 2008 and December 31, 2007, the fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:


	September 30,			December 31,
	2008			2007
	(in millions)
Regulatory hedges	$	(111.3	)	$	(0.1	)
Cash flow hedges		8.6			1.5
Non-accounting hedges		2.9			3.0

Total fair value	$	(99.8	)	$	4.4

Energy-related derivative contracts which are designated as regulatory hedges relate to the traditional operating companies’ fuel hedging programs, where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the fuel cost recovery clauses. Gains and losses on energy-related derivatives designated as cash flow hedges are mainly used by Southern Power to hedge anticipated purchases and sales and are initially deferred in other comprehensive income before being recognized in income in the same period as the hedged transaction. Gains and losses on energy-related derivative contracts that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.

Unrealized pre-tax gains/(losses) recognized in income for the three months and nine months ended September 30, 2008 for energy-related derivative contracts that are not hedges were $6.5 million and $(0.1) million, respectively. For the three months and nine months ended September 30, 2007, the unrealized losses recognized in income were $(2.2) million and $(0.7) million, respectively.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at September 30, 2008 are as follows:


	September 30, 2008
	Fair Value Measurements
	Total			Maturity
	Fair Value			Year 1			Years 2&3			Years 4 & 5
	(in millions)
Level 1	$	—		$	—		$	—		$	—
Level 2		(99.8	)		(74.0	)		(24.0	)		(1.8	)
Level 3		—			—			—			—

Fair value of contracts outstanding at end of period	$	(99.8	)	$	(74.0	)	$	(24.0	)	$	(1.8	)

As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value measurements and related disclosures, the table above now uses the three-tier fair value hierarchy, as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously used descriptions “actively quoted,” “external sources,” and “models and other methods.” The three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the previous descriptions focused on the source of the inputs. Because Southern Company uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, the valuations of those contracts now appear in Level 2; previously they were shown as “actively quoted.”

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 2008, Southern Company and its subsidiaries issued $1.7 billion of senior notes, and Southern Company issued $381 million of common stock through the Southern Investment Plan and employee and director stock plans. In addition, Georgia Power, Gulf Power, and Mississippi Power entered into long-term bank loans of $300 million, $110 million, and $80 million, respectively. Alabama Power and Georgia Power also incurred obligations related to the issuance of pollution control revenue bonds totaling $120 million and $53 million, respectively. The proceeds were primarily used to repay short-term indebtedness and to fund ongoing construction projects. Also in September 2008, Georgia Power paid at maturity $75 million of Series 2007C floating rate Senior Notes. See Southern Company’s Condensed Consolidated Statements of Cash Flows herein for further details on financing activities during the first nine months of 2008. Also during the first nine months of 2008, interest rate hedges of $405 million notional amount were settled at a loss of $25.7 million related to the issuances. These losses were deferred in other comprehensive income and will be amortized to income over the original term of the hedges. See Note (F) to the Condensed Financial Statements herein for further details. Also during the first nine months of 2008, Southern Company and its subsidiaries repaid at maturity $769.8 million of long-term debt and also redeemed $125 million of preferred stock.

Also in 2008, Southern Company’s subsidiaries converted their entire $1.2 billion of obligations related to auction rate pollution control revenue bonds from auction rate modes to other interest rate modes. Initially, approximately $696 million of the auction rate pollution control revenue bonds were converted to fixed interest rate modes and approximately $553 million were converted to daily floating rate modes. In June 2008, approximately $98 million of the daily floating rate pollution control revenue bonds were converted to fixed interest rate modes. During the third quarter 2008, Alabama Power, Georgia Power, and Mississippi Power were required to purchase a total of approximately $96 million of variable rate pollution control revenue bonds

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

that were tendered by investors. Alabama Power remarketed all $11 million of its repurchased variable rate pollution control revenue bonds that were tendered by investors. Subsequent to September 30, 2008, Georgia Power and Gulf Power converted a total of approximately $134 million of variable rate pollution control revenue bonds to fixed interest rate modes. Also subsequent to September 30, 2008, Gulf Power purchased from investors $37 million of variable rate pollution control revenue bonds that were subject to mandatory tender. In addition, Georgia Power remarketed $75 million of its repurchased pollution control revenue bonds that were tendered by investors.

During the first nine months of 2008, Southern Company and its subsidiaries entered into additional derivative transactions designed to hedge interest rate risk related to variable rate obligations. The total notional amount of these derivatives is $1.2 billion.

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.

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 conducted an evaluation under the supervision and with the participation of Southern 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 this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective.

(b) Changes in internal controls.

There have been no changes in Southern Company’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 2008 that have materially affected or are reasonably likely to materially affect Southern Company’s internal control over financial reporting.

Item 4T. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

As of the end of the period covered by this quarterly report, 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.

(b) Changes in internal controls.

There have been no changes in 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 2008 that have materially affected or are reasonably likely to materially affect Alabama Power’s, Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s internal control over financial reporting.

ALABAMA POWER COMPANY

ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
	(in thousands)						(in thousands)
Operating Revenues:
Retail revenues	$	1,559,034		$	1,394,539		$	3,741,074		$	3,444,282
Wholesale revenues —
Non-affiliates		196,381			160,832			536,392			472,015
Affiliates		60,583			35,400			240,696			116,626
Other revenues		49,084			44,427			153,412			135,569

Total operating revenues		1,865,082			1,635,198			4,671,574			4,168,492

Operating Expenses:
Fuel		651,673			506,933			1,628,170			1,353,914
Purchased power —
Non-affiliates		104,238			71,622			153,907			94,330
Affiliates		121,651			100,054			286,147			249,261
Other operations		203,019			201,495			585,581			556,639
Maintenance		97,948			88,135			331,479			303,989
Depreciation and amortization		132,410			118,403			387,677			351,514
Taxes other than income taxes		76,200			72,503			227,585			216,752

Total operating expenses		1,387,139			1,159,145			3,600,546			3,126,399

Operating Income		477,943			476,053			1,071,028			1,042,093
Other Income and (Expense):
Allowance for equity funds used during construction		11,730			9,600			32,269			24,562
Interest income		4,794			4,935			13,694			12,942
Interest expense, net of amounts capitalized		(71,166	)		(69,977	)		(209,787	)		(206,743	)
Other income (expense), net		(5,731	)		(13,067	)		(19,661	)		(19,957	)

Total other income and (expense)		(60,373	)		(68,509	)		(183,485	)		(189,196	)

Earnings Before Income Taxes		417,570			407,544			887,543			852,897
Income taxes		156,109			152,956			323,335			319,840

Net Income		261,461			254,588			564,208			533,057
Dividends on Preferred and Preference Stock		9,866			8,504			29,598			24,867

Net Income After Dividends on Preferred and Preference Stock	$	251,595		$	246,084		$	534,610		$	508,190

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2008		2007			2008			2007
	(in thousands)					(in thousands)
Net Income After Dividends on Preferred and Preference Stock	$	251,595	$	246,084		$	534,610		$	508,190
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $50, $(932), $(989), and $256, respectively		83		(1,533	)		(1,627	)		420
Reclassification adjustment for amounts included in net income, net of tax of $82, $74, $710, and $206, respectively		135		121			1,168			339

Total other comprehensive income (loss)		218		(1,412	)		(459	)		759

COMPREHENSIVE INCOME	$	251,813	$	244,672		$	534,151		$	508,949

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Nine Months
	Ended September 30,
	2008			2007
	(in thousands)
Operating Activities:
Net income	$	564,208		$	533,057
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		451,182			410,695
Deferred income taxes and investment tax credits, net		109,459			10,545
Allowance for equity funds used during construction		(32,269	)		(24,562	)
Pension, postretirement, and other employee benefits		(133	)		6,941
Stock option expense		2,822			4,533
Tax benefit of stock options		641			1,051
Other, net		22,717			11,465
Changes in certain current assets and liabilities —
Receivables		(92,773	)		(168,447	)
Fossil fuel stock		(61,753	)		(17,123	)
Materials and supplies		(19,915	)		(30,412	)
Other current assets		(33,841	)		7,624
Accounts payable		(62,186	)		(53,611	)
Accrued taxes		92,749			213,510
Accrued compensation		(27,786	)		(23,986	)
Other current liabilities		22,248			17,130

Net cash provided from operating activities		935,370			898,410

Investing Activities:
Property additions		(1,024,668	)		(822,818	)
Investment in restricted cash from pollution control bonds		(5,454	)		(96,049	)
Distribution of restricted cash from pollution control bonds		24,585			44,550
Nuclear decommissioning trust fund purchases		(218,606	)		(201,523	)
Nuclear decommissioning trust fund sales		218,606			201,523
Cost of removal, net of salvage		(33,579	)		(33,194	)
Other		(26,839	)		(12,930	)

Net cash used for investing activities		(1,065,955	)		(920,441	)

Financing Activities:
Increase (decrease) in notes payable, net		94,891			(119,670	)
Proceeds —
Senior notes		600,000			450,000
Common stock issued to parent		225,000			140,000
Capital contributions		15,095			(146	)
Gross excess tax benefit of stock options		1,226			2,324
Preference Stock		—			150,000
Pollution control revenue bonds		131,100			246,500
Redemptions —
Senior notes		(250,000	)		(168,500	)
Preferred stock		(125,000	)		—
Pollution control revenue bonds		(11,100	)		—
Payment of preferred and preference stock dividends		(31,024	)		(22,875	)
Payment of common stock dividends		(368,475	)		(348,750	)
Other		(6,467	)		(14,676	)

Net cash provided from financing activities		275,246			314,207

Net Change in Cash and Cash Equivalents		144,661			292,176
Cash and Cash Equivalents at Beginning of Period		73,616			15,539

Cash and Cash Equivalents at End of Period	$	218,277		$	307,715

Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $14,649 and $12,455 capitalized for 2008 and 2007, respectively)	$	183,218		$	176,842
Income taxes (net of refunds)	$	197,907		$	157,501

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)


	At September 30,			At December 31,
Assets	2008			2007
	(in thousands)
Current Assets:
Cash and cash equivalents	$	218,277		$	73,616
Restricted cash		601			19,732
Receivables —
Customer accounts receivable		432,895			357,355
Unbilled revenues		108,775			95,278
Under recovered regulatory clause revenues		92,715			232,226
Other accounts and notes receivable		43,350			42,745
Affiliated companies		34,466			61,250
Accumulated provision for uncollectible accounts		(9,044	)		(7,988	)
Fossil fuel stock, at average cost		248,706			182,963
Materials and supplies, at average cost		307,258			287,994
Vacation pay		50,616			50,266
Prepaid expenses		115,095			72,952
Other		48,677			19,610

Total current assets		1,692,387			1,487,999

Property, Plant, and Equipment:
In service		17,450,685			16,669,142
Less accumulated provision for depreciation		6,173,487			5,950,373

		11,277,198			10,718,769
Nuclear fuel, at amortized cost		198,772			137,146
Construction work in progress		893,041			928,182

Total property, plant, and equipment		12,369,011			11,784,097

Other Property and Investments:
Equity investments in unconsolidated subsidiaries		51,002			48,664
Nuclear decommissioning trusts, at fair value		460,440			542,846
Other		40,995			31,146

Total other property and investments		552,437			622,656

Deferred Charges and Other Assets:
Deferred charges related to income taxes		359,519			347,193
Prepaid pension costs		1,034,226			989,085
Deferred under recovered regulatory clause revenues		247,382			81,650
Other regulatory assets		218,868			224,792
Other		261,530			209,153

Total deferred charges and other assets		2,121,525			1,851,873

Total Assets	$	16,735,360		$	15,746,625

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

ALABAMA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)


	At September 30,			At December 31,
Liabilities and Stockholder’s Equity	2008			2007
	(in thousands)
Current Liabilities:
Securities due within one year	$	410,117		$	535,152
Notes payable		94,891			—
Accounts payable —
Affiliated		177,140			193,518
Other		277,275			308,177
Customer deposits		74,798			67,722
Accrued taxes —
Income taxes		7,935			45,958
Other		96,978			29,198
Accrued interest		68,240			55,263
Accrued vacation pay		42,138			42,138
Accrued compensation		67,728			92,385
Other		95,375			55,331

Total current liabilities		1,412,615			1,424,842

Long-term Debt		5,221,120			4,750,196

Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		2,244,396			2,065,264
Deferred credits related to income taxes		90,949			93,709
Accumulated deferred investment tax credits		174,612			180,578
Employee benefit obligations		376,797			349,974
Asset retirement obligations		454,153			505,794
Other cost of removal obligations		632,364			613,616
Other regulatory liabilities		584,182			637,040
Other		39,764			31,417

Total deferred credits and other liabilities		4,597,217			4,477,392

Total Liabilities		11,230,952			10,652,430

Preferred and Preference Stock		685,127			683,512

Common Stockholder’s Equity:
Common stock, par value $40 per share —
Authorized - 40,000,000 shares
Outstanding - September 30, 2008: 23,600,000 shares
- December 31, 2007: 17,975,000 shares		944,000			719,000
Paid-in capital		2,084,904			2,065,298
Retained earnings		1,795,283			1,630,832
Accumulated other comprehensive loss		(4,906	)		(4,447	)

Total common stockholder’s equity		4,819,281			4,410,683

Total Liabilities and Stockholder’s Equity	$	16,735,360		$	15,746,625

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIRD QUARTER 2008 vs. THIRD QUARTER 2007
AND
YEAR-TO-DATE 2008 vs. YEAR-TO-DATE 2007

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 costs, capital expenditures, and restoration following major storms. Appropriately balancing the need to recover these increasing costs with customer prices will continue to challenge Alabama Power for the foreseeable future.

Alabama Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income after dividends on preferred and preference stock. 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

Alabama Power’s net income after dividends on preferred and preference stock for the third quarter 2008 was $251.6 million compared to $246.1 million for the corresponding period in 2007. Alabama Power’s net income after dividends on preferred and preference stock for year-to-date 2008 was $534.6 million compared to $508.2 million for the corresponding period in 2007. Revenues increased for the third quarter and year-to-date 2008 primarily due to retail base rate increases resulting from an increase in rates under Rate RSE and Rate CNP for environmental costs (Rate CNP Environmental) effective in January 2008. 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. These increases in revenues were partially offset by increases in operations and maintenance expenses related to steam power associated with environmental mandates and scheduled outages, nuclear operation expenses, and depreciation and amortization resulting from additional plant in service.

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Retail Revenues

In the third quarter 2008, retail revenues were $1.56 billion compared to $1.39 billion for the same period in 2007. For year-to-date 2008, retail revenues were $3.74 billion compared to $3.44 billion for the same period in 2007.

Details of the change to retail revenues are as follows:


	Third Quarter						Year-to-Date
	2008						2008

	(in millions)			(% change)			(in millions)			(% change)
Retail – prior year	$	1,394.5					$	3,444.3
Estimated change in —
Rates and pricing		76.4			5.5			187.7			5.4
Sales growth		(6.3	)		(0.4	)		23.0			0.7
Weather		(40.0	)		(2.9	)		(61.4	)		(1.8	)
Fuel and other cost recovery		134.4			9.6			147.5			4.3

Retail – current year	$	1,559.0			11.8	%	$	3,741.1			8.6	%

Revenues associated with changes in rates and pricing increased in the third quarter and year-to-date 2008 when compared to the same periods in 2007 primarily due to the Rate RSE and Rate CNP Environmental increases effective in January 2008. 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.

Revenues attributable to changes in sales growth decreased in the third quarter 2008 when compared to the same period in 2007. Weather-adjusted residential KWH energy sales decreased 2.0% due to a decline in customer demand due to customer energy efficiency efforts and a slowing economy. Industrial KWH energy sales decreased 2.7% due to a decline in sales demand in the chemical, forest products and textile sectors, partially offset by an increase in the primary metals sector. These decreases were partially offset by the 1.1% increase in weather-adjusted commercial KWH energy sales due to continued customer and demand growth. For year-to-date 2008, revenues attributable to changes in sales growth increased when compared to the same period in 2007, primarily due to increases in weather-adjusted residential and commercial KWH energy sales of 1.0% and 1.6%, respectively, related to customer and demand growth. These increases were partially offset by a 0.2% decrease in industrial KWH energy sales as a result of decreased sales demand in the chemical, forest products and textile sectors, partially offset by an increase in the primary metals sector.

Revenues resulting from changes in weather decreased due to normal weather conditions in the third quarter 2008 compared to favorable weather conditions in the third quarter 2007, which resulted in decreased KWH energy sales to residential and commercial customers of 7.7% and 4.7%, respectively. For year-to-date 2008, revenues resulting from changes in weather decreased due to normal weather conditions compared to favorable weather conditions in the same period in 2007, which resulted in decreased KWH energy sales to residential and commercial customers of 5.3% and 2.6%, respectively.

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Fuel and other cost recovery revenues increased in the third quarter and year-to-date 2008 when compared to the same periods in 2007 due to increases in fuel and purchased power costs. These revenues were partially offset by a reduction in the Rate NDR customer billing rate due to the full recovery of the 2005 storm costs related to Hurricanes Dennis and Katrina. Electric rates include provisions to recognize the full recovery of fuel costs, purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with the natural disaster reserve. Under these provisions, fuel and other cost recovery revenues generally equal fuel and other cost recovery expenses and do not impact net income.

Wholesale Revenues – Non-Affiliates

Wholesale revenues from non-affiliates will vary depending on the market cost of available energy compared to the cost of Alabama Power and Southern Company system-owned generation, demand for energy within the Southern Company service territory, and availability of Southern Company system generation.

In the third quarter 2008, wholesale revenues from non-affiliates were $196.4 million compared to $160.9 million for the same period in 2007. This increase was primarily due to a 28.5% increase related to higher fuel and purchased power cost, partially offset by a 5.0% decrease in KWH sales.

For year-to-date 2008, wholesale revenues from non-affiliates were $536.4 million compared to $472.0 million for the same period in 2007. This increase was primarily due to a 20.1% increase related to higher fuel and purchased power cost, partially offset by a 5.3% decrease in KWH sales.

Wholesale Revenues – Affiliates

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 the energy is generally sold at marginal cost.

In the third quarter 2008, wholesale revenues from affiliates were $60.6 million compared to $35.4 million for the same period in 2007. This increase was due to a 59.1% increase in KWH sales and a 7.5% increase in price related to fuel.

For year-to-date 2008, wholesale revenues from affiliates were $240.7 million compared to $116.6 million for the same period in 2007. This increase was due to a 45.8% increase in KWH sales and a 41.6% increase in price related to fuel.

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Other Revenues

In the third quarter 2008, other revenues were $49.1 million compared to $44.4 million in the same period in 2007. This increase was primarily due to an increase of $5.3 million in revenues from gas-fueled co-generation steam facilities resulting from higher gas prices.

For year-to-date 2008, other revenues were $153.4 million compared to $135.6 million for the same period in 2007. This increase was primarily due to an increase of $14.5 million in revenues from gas-fueled co-generation steam facilities resulting from higher gas prices and a $2.5 million increase in revenues from the settlement of transmission service agreements with Calpine Corporation.

Co-generation steam fuel revenues do not have a significant impact on earnings since they are generally offset by fuel expense.

Fuel and Purchased Power Expenses


	Third Quarter 2008				Year-to-Date 2008
	vs.				vs.
	Third Quarter 2007				Year-to-Date 2007

	(change in millions)		(% change)		(change in millions)		(% change)
Fuel	$	144.7		28.6	$	274.3		20.3
Purchased power – non-affiliates		32.6		45.5		59.6		63.2
Purchased power – affiliates		21.6		21.6		36.9		14.8

Total fuel and purchased power expenses	$	198.9			$	370.8

In the third quarter 2008, total fuel and purchased power expenses were $877.5 million compared to $678.6 million in the same period in 2007. This increase was primarily due to a $221.0 million increase in the cost of energy resulting from an increase in the average cost of fuel and purchased power, partially offset by a $22.1 million decrease in total KWHs generated and purchased.

For year-to-date 2008, total fuel and purchased power expenses were $2.07 billion compared to $1.70 billion in the same period in 2007. This increase was primarily due to a $393.3 million increase in the cost of energy resulting from an increase in the average cost of fuel and purchased power, partially offset by a $22.6 million decrease in total 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 Rate ECR. See FUTURE EARNINGS POTENTIAL – “FERC and Alabama PSC Matters – Retail Fuel Cost Recovery” herein for additional information.

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Details of Alabama Power’s cost of generation and purchased power are as follows:


	Third Quarter		Third Quarter		Percent		Year-to-Date		Year-to-Date		Percent
Average Cost	2008		2007		Change		2008		2007		Change
	(cents per net KWH)						(cents per net KWH)
Fuel		3.29		2.35		40.0		2.88		2.35		22.6
Purchased power		9.21		7.57		21.7		7.95		6.30		26.2

In the third quarter 2008, fuel expense was $651.6 million compared to $506.9 million for the same period in 2007. The increase was due to a 40.0% increase in the average cost of fuel per KWH generated, primarily due to an increase in fuel commodity prices resulting from global supply and demand conditions and increased transportation costs. The average cost of coal per KWH generated increased 53.2% primarily as a result of increases in commodity and transportation costs. The average cost of oil and natural gas per KWH generated increased 20.1% primarily as a result of increases in commodity prices.

For year-to-date 2008, fuel expense was $1.63 billion compared to $1.35 billion for the same period in 2007. The increase was due to a 22.6% increase in the average cost of fuel per KWH generated, resulting from global supply and demand conditions. The average cost of coal per KWH generated increased 30.5% primarily as a result of increases in commodity and transportation costs. The average cost of oil and natural gas per KWH generated increased 16.2% primarily as a result of increases in commodity prices.

Non-affiliates

In the third quarter 2008, purchased power from non-affiliates was $104.2 million compared to $71.6 million for the same period in 2007. This increase was primarily related to a 17.4% volume increase in the KWHs purchased from available, lower priced market energy alternatives and a 24.0% increase in price.

For year-to-date 2008, purchased power from non-affiliates was $153.9 million compared to $94.3 million for the same period in 2007. This increase was primarily related to a 31.2% volume increase in the KWHs purchased from available, lower priced market energy alternatives and a 24.4% increase in price.

Energy purchases from non-affiliates will vary depending on the market cost of available energy compared to the cost of Southern Company system-generated energy, demand for energy within the Southern Company system service territory, and availability of Southern Company system generation.

Affiliates

For the third quarter 2008, purchased power from affiliates was $121.7 million compared to $100.1 million for the same period in 2007. This increase was primarily related to a 27.5% increase in price, partially offset by a 4.6% decrease in the amount of energy purchased.

For year-to-date 2008, purchased power from affiliates was $286.2 million compared to $249.3 million for the same period in 2007. This increase was primarily related to a 25.7% increase in price, partially offset by an 8.7% decrease in the amount of energy purchased.

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 2008				Year-to-Date 2008
	vs.				vs.
	Third Quarter 2007				Year-to-Date 2007

	(change in millions)		(% change)		(change in millions)		(% change)
Other operations	$	1.5		0.8	$	28.9		5.2
Maintenance		9.8		11.1		27.5		9.0

Total other operations and maintenance	$	11.3			$	56.4

In the third quarter 2008, other operations and maintenance expenses were $300.9 million compared to $289.6 million for the corresponding period in 2007. This increase was primarily a result of an $11.4 million increase in steam power expense associated with compliance with environmental mandates, scheduled outages, and maintenance costs related to increases in contract labor and materials. Also contributing to the increase was a $6.8 million increase in nuclear production expense related to operations and a $1.0 million increase in customer accounts related to uncollectible accounts and supervision expense. These increases were partially offset by a $9.6 million decrease in administrative and general expenses primarily due to an adjustment in allocated overhead expenses and property insurance expense.

For year-to-date 2008, other operations and maintenance expenses were $917.0 million compared to $860.6 million for the corresponding period in 2007. This increase was primarily a result of a $34.4 million increase in steam power expense associated with compliance with environmental mandates, scheduled outages, and maintenance cost related to increases in contract labor and materials. Also contributing to the increase was a $16.8 million increase in nuclear production expense related to operations and a $5.2 million increase in customer accounts related to customer records expense and uncollectible accounts.

Depreciation and Amortization

In the third quarter 2008, depreciation and amortization was $132.4 million compared to $118.4 million for the same period in 2007. For year-to-date 2008, depreciation and amortization was $387.7 million compared to $351.5 million for the same period in 2007. These increases were the result of an increase in plant in service due to additions to property, plant, and equipment primarily related to environmental mandates.

Taxes Other Than Income Taxes

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In the third quarter 2008, taxes other than income taxes were $76.2 million compared to $72.5 million for the same period in 2007. The third quarter 2008 variance when compared to the same period in 2007 was not material.

For year-to-date 2008, taxes other than income taxes were $227.5 million compared to $216.7 million for the same period in 2007. This increase was 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

In the third quarter 2008, allowance for equity funds used during construction was $11.7 million compared to $9.6 million for the same period in 2007. The third quarter 2008 variance when compared to the same period in 2007 was not material.

For year-to-date 2008, allowance for equity funds used during construction was $32.3 million compared to $24.6 million for the same period in 2007. This increase was primarily due to increases in the amount of construction work in progress at generating facilities related to environmental mandates, as well as transmission and distribution projects, when compared to the same period in 2007.

Other Income (Expense), Net

In the third quarter 2008, other income (expense), net was $(5.8) million compared to $(13.1) million for the same period in 2007. This decrease to other expense was primarily due to a $5.0 million write-off of the net book value of certain equipment due to the discontinuation of a non-utility marketing program during the third quarter 2007. Also contributing to the variance was a $2.5 million increase in other income primarily due to customers’ contributions in aid of construction.

For year-to-date 2008, other income (expense), net was $(19.7) million compared to $(20.0) million for the same period in 2007. The year-to-date 2008 variance when compared to the same period in 2007 was not material.

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 weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 statutes and regulations could affect earnings if such costs cannot continue to 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 Actions

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. On July 24, 2008, the U.S. District Court for the Northern District of Alabama granted partial summary judgment in favor of Alabama Power regarding the proper legal test for determining whether projects are routine maintenance, repair, and replacement and therefore are excluded from NSR permitting. The decision does not resolve the case. The ultimate outcome of this matter cannot be determined at this time.

Clean Air Interstate Rule

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 background regarding the Clean Air Interstate Rule (CAIR). On July 11, 2008, in response to petitions brought by certain states and regulated industries challenging particular aspects of CAIR, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating CAIR in its entirety and remanding it to the EPA for further action consistent with its opinion. Alabama Power’s overall environmental compliance strategy has been developed in response to numerous federal and state regulatory requirements, many of which remain unaffected by the court’s ruling; however, the court’s decision has the potential to impact future decision making regarding capital expenditures, the installation and operation of pollution control equipment, and the purchase, use, and associated carrying values of emissions allowances. The ultimate impact of the court’s decision cannot be determined at this time and may depend on subsequent legal action, including issuance of the court’s mandate, and future rulemaking and regulatory treatment.

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. In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and new nonattainment areas

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

within Alabama Power’s service territory are expected. The ultimate outcome of this matter cannot be determined at this time and will depend on subsequent legal action and/or future nonattainment designations and regulatory plans.

Carbon Dioxide Litigation

On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the U.S. District Court for the Northern District of California against several electric utilities (including Southern Company), several oil companies, and a coal company. The plaintiffs are the governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The plaintiffs assert claims for public and private nuisance and contend that the defendants have acted in concert and are therefore jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which is alleged to be $95 million to $400 million. On June 30, 2008, all defendants filed motions to dismiss this case. Southern Company believes that these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this time.

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 market-based rate authority. In June 2007, the FERC issued its final rule in Order No. 697 regarding market-based rate authority. The FERC generally retained its current market-based rate standards. Responding to a number of requests for rehearing, the FERC issued Order No. 697-A on April 21, 2008. This order largely affirmed its prior revision and codification of the regulations governing market-based rates for public utilities. In accordance with the order, Southern Company submitted to the FERC an updated market power analysis on September 2, 2008 related to its continued market-based rate authority. The ultimate outcome of this matter cannot now be determined.

Retail Rate Adjustments

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 – Rate RSE” in Item 8 of the Form 10-K for additional

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

information. On October 7, 2008, the Alabama PSC approved a corrective rate package primarily providing for adjustments associated with customer charges to certain existing rate structures. This package, effective in January 2009, is expected to generate additional annual revenues of approximately $168 million. Alabama Power expects that these additional revenues will preclude the need for a rate adjustment under the Rate RSE in 2009 and agreed to a moratorium on any increase in 2009 under Rate RSE.

Retail Fuel Cost Recovery

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Fuel Cost Recovery” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters – Fuel Cost Recovery” in Item 8 of the Form 10-K for information regarding Alabama Power’s fuel cost recovery. Alabama Power’s under recovered fuel costs as of September 30, 2008 totaled $300.8 million as compared to $279.8 million at December 31, 2007. Alabama Power classified $247.4 million of the under recovered regulatory clause revenues as deferred charges and other assets in the Condensed Balance Sheets as of September 30, 2008. This classification is based on an estimate which includes such factors as weather, generation availability, energy demand, and the price of energy. A change in any of these factors could have a material impact on the timing of the recovery of the under recovered fuel costs.

On October 7, 2008, the Alabama PSC approved an increase in Alabama Power’s Rate ECR factor to 3.983 cents per KWH for a 24-month period beginning with October 9, 2008 billings. Thereafter, the Rate ECR factor shall be 5.910 cents per KWH, absent a contrary order by the Alabama PSC. Rate ECR revenues, as recorded on the financial statements, are adjusted for the difference in actual recoverable costs and amounts billed in current regulated rates. During the 24-month period, Alabama Power will be allowed to continue 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 cost. Accordingly, this approved increase in the billing factor will have no significant effect on Alabama Power’s revenues or net income, but will increase annual cash flow.

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. At September 30, 2008, Alabama Power had accumulated a balance of $29.2 million in the target reserve for future storms, which is included in the Condensed Balance Sheets herein under “Other Regulatory Liabilities.”

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Income Tax Matters

Legislation

On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. The State of Alabama income tax law does not allow the bonus depreciation deduction allowed by the Stimulus Act for state income tax purposes. Alabama Power estimates the cash flow reduction to tax payments as a result of the Stimulus Act for 2008 to be between $55 million and $100 million.

On October 3, 2008, President Bush signed the Economic Stabilization Act of 2008 (Stabilization Act) into law. In addition to addressing financial issues, the Stabilization Act includes renewable energy incentives as well as accelerated depreciation for smart meters and smart grid systems. Alabama Power is currently assessing the financial implications of the Stabilization Act. The ultimate impact cannot be determined at this time.

Other Matters

Alabama Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Alabama Power is subject to certain claims and legal actions arising in the ordinary course of business. 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 and water 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.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Alabama Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Alabama Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Alabama Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Alabama Power in Item 7 of the Form 10-K for a complete discussion of Alabama Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION AND LIQUIDITY

Overview

Alabama Power’s financial condition remained stable at September 30, 2008. Throughout the recent turmoil in the financial markets, Alabama Power has maintained adequate access to capital without drawing any of its committed bank credit arrangements used to support its commercial paper programs and variable rate pollution control revenue bonds. Alabama Power has continued to issue commercial paper which has increased the balance of short-term debt while also increasing cash and cash equivalents as a precautionary measure. During the third quarter 2008, Alabama Power was required to purchase a total of approximately $11 million of variable rate pollution control revenue bonds that were tendered by investors, all of which were subsequently remarketed. Alabama Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital needs. No material changes in bank credit arrangements have occurred. Alabama Power’s interest cost for short-term debt has not changed materially. The impact on future financing costs as a result of the recent financial turmoil cannot be determined at this time. See “Sources of Capital” and “Financing Activities” herein for additional information.

As a result of the turmoil in the financial markets, Alabama Power experienced no material counterparty credit losses. Alabama Power’s investments in pension and nuclear decommissioning trust funds declined in value as of September 30, 2008. No material changes in funding requirements related to these funds are currently expected; however, the ultimate outcome cannot be determined at this time.

Net cash provided from operating activities totaled $935.4 million for the first nine months of 2008, compared to $898.4 million for the corresponding period in 2007. The $37.0 million increase in cash provided from operating activities in the first nine months of 2008 is primarily due to an increase in net income, as previously discussed, as well as a decrease in receivables and an increase in deferred income tax expense, partially offset by a decrease in accrued tax liability and an increase in fossil fuel inventory. Net cash used for investing activities totaled $1.1 billion primarily due to gross property additions to utility plant of $1.0 billion in the first nine months of 2008. These additions were primarily related to construction of transmission and distribution facilities, replacement of steam generation equipment, purchases of nuclear fuel, and construction related to environmental mandates. Net cash provided from financing activities totaled $275.2 million for the first nine months of 2008, compared to $314.2 million for the corresponding period in 2007. The $39.0 million decrease is primarily due to greater cash outflows relating to the redemptions of senior notes and preferred stock and decreased cash inflows from the issuance of long-term debt as compared to the first nine months of 2007, partially offset by an increase in notes payable.

Significant balance sheet changes for the first nine months of 2008 include an increase of $781.5 million in gross plant primarily due to an increase in environmental-related equipment, an increase of $470.9 million in long-term debt, and an increase of $225 million in common stock.

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of 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, derivative obligations, preferred and preference stock dividends, leases, purchase commitments, and trust funding requirements. Approximately $410.1 million will be required through September 30, 2009 for maturities of long-term debt.

In October 2008, Alabama Power’s Board of Directors approved a new capital budget for 2009 and 2010. The construction program of Alabama Power is estimated to be $1.57 billion for 2009 and $1.08 billion for 2010. Over the next two years, Alabama Power estimates spending $715 million on environmental-related additions, $391 million on Plant Farley (including $219 million for nuclear fuel), $704 million on distribution facilities, and $297 million on transmission facilities. The Southern Company system financial plan, including the Southern Company system capital budget, is expected to be reviewed by the Southern Company Board of Directors in early 2009. Actual construction costs may vary from these estimates because of changes in such factors as: business conditions; environmental statutes and regulations; nuclear plant regulations; FERC rules and regulations; load projections; the cost and efficiency of construction labor, equipment, and materials; and the cost and availability of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. See Note 7 to the financial statements of Alabama Power under “COMMITMENTS – 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, unsecured debt, common stock, preferred stock, and preference stock. 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 sometimes exceed current assets because of Alabama Power’s debt due within one year and the periodic use of short-term debt as a funding source primarily 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, 2008 cash and cash equivalents of approximately $218.3 million, unused committed lines of credit of approximately $1.3 billion (including $582.4 million of such lines which are dedicated to funding purchase obligations related to variable rate pollution control revenue bonds), a commercial paper program, and an extendible commercial note program. Of the unused credit facilities, $75 million will expire in 2008, $416.1 million will expire in 2009, and $25 million will expire in 2011 (of the facilities that expire in 2008 and 2009, $404 million allow for one-year term loans). The remaining $765 million of credit facilities will expire 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 and Note (F) to the Condensed Financial Statements under “Bank Credit Arrangements” herein for additional information. During the third quarter 2008, Alabama Power was required to purchase a total of approximately $11 million of variable rate pollution control revenue bonds that were tendered by investors, all of which were subsequently remarketed. 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 $2.0 billion of

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

short-term borrowings. At September 30, 2008, Alabama Power had $94.9 million of commercial paper outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper, lines of credit, and cash.

Credit Rating Risk

Alabama Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- and/or Baa3 or below. These contracts are primarily for fuel purchases, fuel transportation and storage, emissions allowances, and energy price risk management. At September 30, 2008, the maximum potential collateral requirements under these contracts at a BBB- or Baa3 rating were approximately $4 million. At September 30, 2008, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $87 million. Included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash.

Market Price Risk

Alabama Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2007 reporting period. Since a significant portion of outstanding indebtedness is at fixed rates, Alabama Power is not aware of any facts or circumstances that would significantly affect exposures on existing indebtedness in the near term. However, the impact on future financing cost cannot now be determined.

Due to cost-based rate regulation, Alabama Power continues to have limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Alabama Power enters into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Alabama Power continues to manage a retail fuel-hedging program implemented at the instruction of the Alabama PSC. As such, Alabama Power has no material change in market risk exposures when compared with the December 31, 2007 reporting period.

The changes in fair value of energy-related derivative contracts for the three months and nine months ended September 30, 2008 were as follows:


	Third Quarter			Year-to-Date
	2008			2008
	Changes			Changes

	Fair Value

	(in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net	$	104.9		$	(0.4	)
Contracts realized or settled		(45.8	)		(59.2	)
Current period changes^(a)		(97.7	)		21.0

Contracts outstanding at the end of the period, assets (liabilities), net	$	(38.6	)	$	(38.6	)


(a)		Current period changes also include the changes in fair value of new contracts entered into during the period, if any.

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The decrease in the fair value positions of the energy-related derivative contracts for the three months and nine months ended September 30, 2008 was $143.5 million and $38.2 million, respectively, substantially all of which is due to natural gas positions. These changes are attributable to both the volume and prices of natural gas. At September 30, 2008, Alabama Power had a net hedge volume of 45.2 Bcf with a weighted average contract cost approximately $0.87 per mmBtu above market prices, compared to 31.0 Bcf at June 30, 2008 with a weighted average contract cost approximately $3.45 per mmBtu below market prices and compared to 27.4 Bcf at December 31, 2007 with a weighted average contract cost approximately $0.02 per mmBtu above market prices. The majority of the natural gas hedges are recovered through the fuel cost recovery clauses.

At September 30, 2008 and December 31, 2007, the fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:


	September 30,			December 31,
	2008			2007
	(in millions)
Regulatory hedges	$	(38.7	)	$	(0.7	)
Cash flow hedges		0.1			0.5
Non-accounting hedges		—			(0.2	)

Total fair value	$	(38.6	)	$	(0.4	)

Energy-related derivative contracts which are designated as regulatory hedges relate to Alabama Power’s fuel hedging program where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the fuel cost recovery clauses. Certain other gains and losses on energy-related derivatives, designated as cash flow hedges, are initially deferred in other comprehensive income before being recognized in income in the same period as the hedged transaction. Gains and losses on energy-related derivative contracts that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.

Unrealized pre-tax gains and losses recognized in income for the three months and nine months ended September 30, 2008 and 2007 for energy-related derivative contracts that are not hedges were not material.

The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at September 30, 2008 are as follows:


	September 30, 2008
	Fair Value Measurements

	Total			Maturity
	Fair Value			Year 1			Years 2&3			Years 4&5

	(in millions)
Level 1	$	—		$	—		$	—		$	—
Level 2		(38.6	)		(31.9	)		(6.7	)		—
Level 3		—			—			—			—

Fair value of contracts outstanding at end of period	$	(38.6	)	$	(31.9	)	$	(6.7	)	$	—

As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value measurements and related disclosures, the table above now uses the three-tier fair value hierarchy, as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously used descriptions “actively quoted,” “external sources,” and “models and other methods.” The three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the previous descriptions focused on the source of the inputs. Because Alabama Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices

ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

which are actively quoted, the valuations of those contracts now appear in Level 2; previously they were shown as “actively quoted.” For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Alabama Power in Item 7 and Notes 1 and 6 to the financial statements of Alabama Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.

Financing Activities

In January 2008, Alabama Power issued $300 million of additional Series 2007D 4.85% Senior Notes due December 15, 2012. The proceeds were used to repay short-term indebtedness and for other general corporate purposes. Additionally, Alabama Power redeemed 1,250 shares of its Flexible Money Market Class A Preferred Stock (Series 2003A), Stated Capital $100,000 Per Share ($125 million aggregate value).

In January 2008, Alabama Power also entered into $330 million notional amount of interest rate swaps related to variable rate tax-exempt debt to hedge changes in interest rates for the period February 2008 through February 2010. The weighted average fixed payment rate on these hedges is 2.49% and Alabama Power now has a total of $576 million of such hedges in place, with an overall weighted average fixed payment rate of 2.69%. See Note (F) to the Condensed Financial Statements herein for further details.

In February 2008, Alabama Power issued 3,750,000 shares of common stock to Southern Company at $40 a share ($150 million aggregate purchase price). The proceeds were used for general corporate purposes.

In March 2008, Alabama Power converted its $246.5 million obligations related to auction rate pollution control revenue bonds from an auction rate mode to fixed rate interest modes. With the completion of this conversion, none of the outstanding securities or obligations of Alabama Power is subject to an auction rate mode.

In May 2008, Alabama Power issued $300 million of Series 2008A 6.125% Senior Notes due May 15, 2038. The proceeds were used to repay short-term indebtedness and for other general corporate purposes. In addition, Alabama Power paid at maturity $250 million in aggregate principal amount of Series X 3.125% Senior Notes.

In July 2008, Alabama Power issued 1,875,000 shares of common stock to Southern Company at $40 a share ($75 million aggregate purchase price). The proceeds were used for general corporate purposes.

In July 2008, Alabama Power incurred obligations related to the issuance of $120 million of The Industrial Development Board of the City of Mobile Pollution Control Revenue Bonds (Alabama Power Barry Plant Project), Series 2008.

Subsequent to September 30, 2008, Alabama Power issued 1,875,000 shares of common stock to Southern Company at $40 a share ($75 million aggregate purchase price). The proceeds were used for general corporate purposes.

Also subsequent to September 30, 2008, Alabama Power paid at maturity $160 million in aggregate principal amount of Series G 5.375% Senior Notes.

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.

GEORGIA POWER COMPANY

GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
	(in thousands)						(in thousands)
Operating Revenues:
Retail revenues	$	2,317,817		$	2,143,511		$	5,723,577		$	5,141,403
Wholesale revenues —
Non-affiliates		148,933			127,810			443,901			406,632
Affiliates		106,659			107,451			252,733			208,065
Other revenues		70,836			64,965			200,043			188,956

Total operating revenues		2,644,245			2,443,737			6,620,254			5,945,056

Operating Expenses:
Fuel		859,778			786,021			2,181,000			2,030,745
Purchased power —
Non-affiliates		192,293			168,358			358,047			282,121
Affiliates		247,845			196,700			748,622			560,897
Other operations		260,575			258,865			767,691			739,151
Maintenance		118,739			129,812			372,219			391,070
Depreciation and amortization		162,325			128,268			472,137			381,679
Taxes other than income taxes		91,587			87,708			242,358			231,659

Total operating expenses		1,933,142			1,755,732			5,142,074			4,617,322

Operating Income		711,103			688,005			1,478,180			1,327,734
Other Income and (Expense):
Allowance for equity funds used during construction		20,887			17,846			72,625			45,712
Interest income		1,416			1,436			3,253			2,543
Interest expense, net of amounts capitalized		(86,201	)		(88,594	)		(256,266	)		(261,139	)
Other income (expense), net		(3,671	)		11,291			(5,593	)		7,376

Total other income and (expense)		(67,569	)		(58,021	)		(185,981	)		(205,508	)

Earnings Before Income Taxes		643,534			629,984			1,292,199			1,122,226
Income taxes		237,358			229,862			453,438			401,046

Net Income		406,176			400,122			838,761			721,180
Dividends on Preferred and Preference Stock		4,345			689			13,036			2,067

Net Income After Dividends on Preferred and Preference Stock	$	401,831		$	399,433		$	825,725		$	719,113

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
	(in thousands)						(in thousands)
Net Income After Dividends on Preferred and Preference Stock	$	401,831		$	399,433		$	825,725		$	719,113
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $(874), $(4,686), $(890), and $5,044, respectively		(1,386	)		(7,430	)		(1,410	)		7,996
Reclassification adjustment for amounts included in net income, net of tax of $574, $73, $1,269, and $75, respectively		911			116			2,012			120
Marketable securities:
Change in fair value, net of tax of $-, $71, $-, and $107, respectively		—			112			—			170

Total other comprehensive income (loss)		(475	)		(7,202	)		602			8,286

COMPREHENSIVE INCOME	$	401,356		$	392,231		$	826,327		$	727,399

The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Nine Months
	Ended September 30,
	2008			2007
	(in thousands)
Operating Activities:
Net income	$	838,761		$	721,180
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		561,987			458,522
Deferred income taxes and investment tax credits		97,752			34,267
Deferred revenues		96,557			(719	)
Deferred expenses — affiliates		(19,762	)		(19,460	)
Allowance for equity funds used during construction		(72,625	)		(45,712	)
Pension, postretirement, and other employee benefits		35,067			35,337
Hedge settlements		(20,486	)		12,121
Other, net		(21,598	)		2,980
Changes in certain current assets and liabilities —
Receivables		(284,993	)		(211,971	)
Fossil fuel stock		5,302			1,827
Prepaid income taxes		5,185			42,047
Other current assets		(19,981	)		(15,155	)
Accounts payable		(51,662	)		(1,122	)
Accrued taxes		151,112			25,779
Accrued compensation		(18,839	)		(62,643	)
Other current liabilities		30,285			31,179

Net cash provided from operating activities		1,312,062			1,008,457

Investing Activities:
Property additions		(1,419,885	)		(1,214,093	)
Distribution of restricted cash from pollution control bonds		22,197			—
Nuclear decommissioning trust fund purchases		(362,565	)		(336,526	)
Nuclear decommissioning trust fund sales		355,685			329,646
Cost of removal, net of salvage		(29,798	)		(28,811	)
Change in construction payables, net of joint owner portion		(22,265	)		48,074
Other		(30,542	)		(11,553	)

Net cash used for investing activities		(1,487,173	)		(1,213,263	)

Financing Activities:
Increase (decrease) in notes payable, net		172,789			(166,951	)
Proceeds —
Senior notes		500,000			1,400,000
Pollution control revenue bonds		94,935			—
Capital contributions from parent company		259,750			270,250
Other long-term debt		300,000			—
Redemptions —
Capital leases		(921	)		(2,073	)
Senior notes		(122,427	)		(300,000	)
Pollution control revenue bonds		(118,555	)		—
Other long-term debt		—			(453,608	)
Payment of preferred and preference stock dividends		(12,668	)		(2,255	)
Payment of common stock dividends		(540,900	)		(517,425	)
Other		(8,436	)		(24,662	)

Net cash provided from financing activities		523,567			203,276

Net Change in Cash and Cash Equivalents		348,456			(1,530	)
Cash and Cash Equivalents at Beginning of Period		15,392			16,850

Cash and Cash Equivalents at End of Period	$	363,848		$	15,320

Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $30,112 and $19,181 capitalized for 2008 and 2007, respectively)	$	216,572		$	229,282
Income taxes (net of refunds)	$	228,792		$	254,742

The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)


	At September 30,			At December 31,
Assets	2008			2007
	(in thousands)
Current Assets:
Cash and cash equivalents	$	363,848		$	15,392
Restricted cash		30,405			48,279
Receivables —
Customer accounts receivable		687,767			491,389
Unbilled revenues		200,990			137,046
Under recovered regulatory clause revenues		406,314			384,538
Other accounts and notes receivable		75,572			147,498
Affiliated companies		19,984			21,699
Accumulated provision for uncollectible accounts		(10,449	)		(7,636	)
Fossil fuel stock, at average cost		387,920			393,222
Materials and supplies, at average cost		353,947			337,652
Vacation pay		68,881			69,394
Prepaid income taxes		45,917			51,101
Other		113,139			55,169

Total current assets		2,744,235			2,144,743

Property, Plant, and Equipment:
In service		23,457,294			22,011,215
Less accumulated provision for depreciation		9,031,348			8,696,668

		14,425,946			13,314,547
Nuclear fuel, at amortized cost		262,076			198,983
Construction work in progress		1,625,598			1,797,642

Total property, plant, and equipment		16,313,620			15,311,172

Other Property and Investments:
Equity investments in unconsolidated subsidiaries		57,054			53,813
Nuclear decommissioning trusts, at fair value		518,010			588,952
Other		43,562			47,914

Total other property and investments		618,626			690,679

Deferred Charges and Other Assets:
Deferred charges related to income taxes		562,461			532,539
Prepaid pension costs		1,065,296			1,026,985
Deferred under recovered regulatory clause revenues		369,745			307,294
Other regulatory assets		669,131			541,014
Other		288,526			268,335

Total deferred charges and other assets		2,955,159			2,676,167

Total Assets	$	22,631,640		$	20,822,761

The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)


	At September 30,			At December 31,
Liabilities and Stockholder’s Equity	2008			2007
	(in thousands)
Current Liabilities:
Securities due within one year	$	369,396		$	198,576
Notes payable		888,381			715,591
Accounts payable —
Affiliated		259,676			236,332
Other		382,789			463,945
Customer deposits		183,483			171,553
Accrued taxes —
Income taxes		163,382			68,782
Other		241,346			219,585
Accrued interest		91,047			74,674
Accrued vacation pay		55,064			56,303
Accrued compensation		94,959			114,974
Other		130,320			103,225

Total current liabilities		2,859,843			2,423,540

Long-term Debt		6,418,570			5,937,792

Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		2,989,439			2,850,655
Deferred credits related to income taxes		139,329			146,886
Accumulated deferred investment tax credits		259,445			269,125
Employee benefit obligations		737,994			678,826
Asset retirement obligations		677,351			663,503
Other cost of removal obligations		417,779			414,745
Other regulatory liabilities		687,781			577,642
Other		190,176			158,670

Total deferred credits and other liabilities		6,099,294			5,760,052

Total Liabilities		15,377,707			14,121,384

Preferred and Preference Stock		265,957			265,957

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		3,641,907			3,374,777
Retained earnings		2,960,887			2,676,063
Accumulated other comprehensive loss		(13,291	)		(13,893	)

Total common stockholder’s equity		6,987,976			6,435,420

Total Liabilities and Stockholder’s Equity	$	22,631,640		$	20,822,761

The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIRD QUARTER 2008 vs. THIRD QUARTER 2007
AND
YEAR-TO-DATE 2008 vs. YEAR-TO-DATE 2007

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, increasingly stringent environmental standards, and fuel costs. Appropriately balancing the need to recover these increasing costs with customer prices will continue to challenge Georgia Power for the foreseeable future. In December 2007, the 2007 Retail Rate Plan was approved, which should provide earnings stability over its three-year term. This regulatory action enables the recovery of substantial capital investments to facilitate the continued reliability of the transmission and distribution networks, continued generation and other investments as well as the recovery of increased operating costs. The 2007 Retail Rate Plan also includes a tariff specifically for the recovery of costs related to environmental controls mandated by state and federal regulations. On May 20, 2008, Georgia Power received a final order from the Georgia PSC to increase its fuel cost recovery rate effective June 1, 2008. Georgia Power is required to file its next fuel cost recovery case by March 1, 2009.

Georgia Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income after dividends on preferred and preference stock. 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

Georgia Power’s net income after dividends on preferred and preference stock for the third quarter 2008 was $401.8 million compared to $399.4 million for the corresponding period in 2007. Georgia Power’s net income after dividends on preferred and preference stock for year-to-date 2008 was $825.7 million compared to $719.1 million for the corresponding period in 2007. These increases were primarily related to increased contributions from market-response rates to large commercial and industrial customers, higher retail base revenues resulting from the retail rate increase effective January 1, 2008, and the effects of the allowance for equity funds used during construction (AFUDC). These increases were partially offset by increased depreciation and amortization due to more plant in service and changes in depreciation rates.

GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Retail Revenues

In the third quarter 2008, retail revenues were $2.32 billion compared to $2.14 billion for the corresponding period in 2007. For year-to-date 2008, retail revenues were $5.72 billion compared to $5.14 billion for the corresponding period in 2007.

Details of the change to retail revenues are as follows:


	Third Quarter						Year-to-Date
	2008						2008
	(in millions)			(% change)			(in millions)			(% change)
Retail – prior year	$	2,143.5					$	5,141.4
Estimated change in —
Rates and pricing		109.2			5.1			336.2			6.5
Sales growth		(8.0	)		(0.4	)		(13.8	)		(0.3	)
Weather		(43.3	)		(2.0	)		(41.1	)		(0.8	)
Fuel and other cost recovery		116.4			5.4			300.9			5.9

Retail – current year	$	2,317.8			8.1	%	$	5,723.6			11.3	%

Revenues associated with changes in rates and pricing increased in the third quarter and year-to-date 2008 when compared to the corresponding periods in 2007 due to higher market-response rates for sales to large commercial and industrial customers and the application of new rates established in January 2008.

Revenues attributable to changes in sales growth decreased in the third quarter and year-to-date 2008 when compared to the corresponding periods in 2007. These decreases were primarily the result of a slowing economy within the Southeast. Weather-adjusted total retail KWH sales decreased 1.0% and 0.9% for the third quarter and year-to-date 2008, respectively. Weather-adjusted residential KWH sales decreased 1.3% and 1.2%, weather-adjusted commercial KWH sales increased 1.8% and 1.4%, and weather-adjusted industrial sales decreased 4.4% and 3.4% for the third quarter and year-to-date 2008, respectively, when compared to the corresponding periods in 2007.

Revenues attributable to changes in weather decreased in the third quarter and year-to-date 2008 when compared to the corresponding periods in 2007. The decline in the third quarter 2008 was primarily due to a significantly warmer August in 2007. The decline in year-to-date 2008 was primarily due to a significantly warmer August in 2007 partially offset by weather volatility in January and June 2008 compared to the corresponding periods in 2007.

Fuel cost recovery revenues increased by $116.4 million in the third quarter 2008 and by $300.9 million year-to-date 2008 when compared to the corresponding periods in 2007 as a result of higher fuel and purchased power expenses. Georgia Power’s 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.

GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Wholesale Revenues – Non-Affiliates

Wholesale revenues from 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.

In the third quarter 2008, wholesale revenues from non-affiliates were $148.9 million compared to $127.8 million for the corresponding period in 2007. For year-to-date 2008, wholesale revenues from non-affiliates were $443.9 million compared to $406.6 million for the corresponding period in 2007. These increases were primarily driven by the fuel component within non-affiliate wholesale prices which has increased with the effects of higher fuel and purchased power costs. These increases were partially offset by 1.6% and 1.8% decreases in KWH energy sales in the third quarter and year-to-date 2008, respectively, as well as decreased contributions from the emissions allowance component of market-based wholesale prices.

Wholesale Revenues – Affiliates

In the third quarter 2008, wholesale revenues from affiliates were $106.7 million compared to $107.5 million for the corresponding period in 2007. This decrease was primarily due to a 35.7% decrease in KWH sales that was partially offset by higher Power Pool rates for these sales due to higher fuel and purchased power costs.

For year-to-date 2008, wholesale revenues from affiliates were $252.7 million compared to $208.1 million for the corresponding period in 2007. This increase in wholesale revenues was due to higher Power Pool rates for these sales due to higher fuel and purchased power costs, partially offset by a 17.2% decrease in KWH sales.

Fuel and Purchased Power Expenses


	Third Quarter 2008				Year-to-Date 2008
	vs.				vs.
	Third Quarter 2007				Year-to-Date 2007
	(change in millions)		(% change)		(change in millions)		(% change)
Fuel	$	73.8		9.4	$	150.3		7.4
Purchased power – non-affiliates		23.9		14.2		75.9		26.9
Purchased power – affiliates		51.1		26.0		187.7		33.5

Total fuel and purchased power expenses	$	148.8			$	413.9

GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In the third quarter 2008, total fuel and purchased power expenses were $1.30 billion compared to $1.15 billion for the corresponding period in 2007. These increases were due to a $201.0 million increase in the average cost of fuel and purchased power, partially offset by a $52.2 million decrease in total KWHs generated and purchased.

For year-to-date 2008, total fuel and purchased power expenses were $3.29 billion compared to $2.87 billion for the corresponding period in 2007. These increases were due to a $421.5 million increase in the average cost of fuel and purchased power, partially offset by a $7.6 million decrease in total 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 Georgia Power’s energy 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		Percent		Year-to-Date		Year-to-Date		Percent
Average Cost	2008		2007		Change		2008		2007		Change
	(cents per net KWH)						(cents per net KWH)
Fuel		3.32		2.77		19.9		3.07		2.69		14.1
Purchased power		8.87		7.61		16.6		8.39		7.25		15.7

In the third quarter 2008, fuel expense was $859.8 million compared to $786.0 million for the corresponding period in 2007. For year-to-date 2008, fuel expense was $2.18 billion compared to $2.03 billion for the corresponding period in 2007. The increases in fuel expense were the result of 19.9% and 14.1% increases in the average cost of fuel per KWH generated for the third quarter and year-to-date 2008, respectively. These increases were primarily due to an increase in fuel commodity prices resulting from global demand pressures. The average cost of coal per KWH generated increased 23.0% and 17.8% in the third quarter and year-to-date 2008, respectively. The average cost of oil and natural gas per KWH generated increased 16.3% in both the third quarter and year-to-date 2008.

Non-affiliates

In the third quarter 2008, purchased power from non-affiliates was $192.3 million compared to $168.4 million for the corresponding period in 2007. For year-to-date 2008, purchased power from non-affiliates was $358.0 million compared to $282.1 million for the corresponding period in 2007. These increases were primarily the result of 2.4% and 13.1% volume increases in KWHs purchased from available lower priced market energy alternatives in the third quarter and year-to-date 2008, respectively, and increases in the average cost per KWH purchased.

GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Affiliates

In the third quarter 2008, purchased power from affiliates was $247.8 million compared with $196.7 million for the corresponding period in 2007. This increase was primarily the result of the higher average cost of KWHs purchased due to higher fuel costs within the purchase price partially offset by a 2.2% decrease in the volume of KWHs purchased.

For year-to-date 2008, purchased power from affiliates was $748.6 million compared with $560.9 million for the corresponding period in 2007. This increase was primarily the result of the higher average cost of KWHs purchased due to higher fuel costs within the purchase price and a 4.1% volume increase in KWHs purchased from available lower cost resources within the Power Pool.

Other Operations and Maintenance Expenses


	Third Quarter 2008						Year-to-Date 2008
	vs.						vs.
	Third Quarter 2007						Year-to-Date 2007
	(change in millions)			(% change)			(change in millions)			(% change)
Other operations	$	1.7			0.7		$	28.5			3.9
Maintenance		(11.1	)		(8.5	)		(18.8	)		(4.8	)

Total other operations and maintenance	$	(9.4	)				$	9.7

In the third quarter 2008, other operations and maintenance expenses were $379.3 million compared to $388.7 million for the corresponding period in 2007. The decrease was primarily due to an $8.1 million decrease in the timing of transmission and distribution maintenance activities.

For year-to-date 2008, other operations and maintenance expenses were $1.14 billion compared to $1.13 billion for the corresponding period in 2007. The increase was primarily the result of a $11.0 million increase in the accrual for property damage approved under the 2007 Retail Rate Plan. Also contributing to the increase were customer account expenses of $15.3 million primarily related to meter reading, records and collections, and uncollectible accounts, as well as $9.1 million related to medical expenses. These increases were partially offset by decreases of $22.8 million related to the timing of transmission and distribution operations and maintenance activities.

Depreciation and Amortization

In the third quarter 2008, depreciation and amortization was $162.3 million compared to $128.3 million for the corresponding period in 2007. For year-to-date 2008, depreciation and amortization was $472.1 million compared to $381.7 million for the corresponding period in 2007. These increases were primarily the result of increases in plant in service related to completed transmission, distribution, and environmental projects and changes in depreciation rates effective January 1, 2008, approved under the 2007 Retail Rate Plan.

GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Taxes Other Than Income Taxes

In the third quarter 2008, taxes other than income taxes were $91.6 million compared with $87.7 million for the corresponding period in 2007. For year-to-date 2008, taxes other than income taxes were $242.4 million compared with $231.7 million for the corresponding period in 2007. These increases were primarily the result of higher municipal franchise fees resulting from retail revenue increases during these periods.

Allowance for Equity Funds Used During Construction

In the third quarter 2008, AFUDC was $20.9 million compared with $17.8 million for the corresponding period in 2007. For year-to-date 2008, AFUDC was $72.6 million compared with $45.7 million for the corresponding period in 2007. These increases were primarily the result of increases in construction work in progress balances related to ongoing environmental and transmission projects as well as three combined cycle generating units at Plant McDonough.

Income Taxes

In the third quarter 2008, income taxes were $237.4 million compared with $229.9 million for the corresponding period in 2007. For year-to-date 2008, income taxes were $453.4 million compared with $401.0 million for the corresponding period in 2007. These increases were primarily the result of increased pre-tax income, partially offset by increases in non-taxable items, particularly AFUDC, as well as additional state tax credits and an increase in the federal production activities deduction amount. See Note (H) to the Condensed Financial Statements herein for additional information.

Dividends on Preferred and Preference Stock

N/M – Not Meaningful

In the third quarter 2008, dividends on preferred and preference stock were $4.3 million compared with $0.7 million for the corresponding period in 2007. For year-to-date 2008, dividends on preferred and preference stock were $13.0 million compared with $2.1 million for the corresponding period in 2007. These increases were primarily the result of the issuance of $225 million of preference stock in the fourth quarter 2007, which has quarterly dividends of approximately $3.7 million.

GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of 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 statutes and regulations could affect earnings if such costs cannot continue to 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.

New Source Review Actions

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – New Source Review Actions” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding civil actions brought by the EPA alleging that Georgia Power and Alabama Power had violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of their coal-fired generating facilities. The action against Georgia Power has been administratively closed since 2001, and the case has not been reopened. In the action involving Alabama Power, on July 24, 2008, the U.S. District Court for the Northern District of Alabama granted partial summary judgment in favor of Alabama Power regarding the proper legal test for determining whether projects are routine maintenance, repair, and replacement and therefore are excluded from NSR permitting. The decision does not resolve the case. The ultimate outcome of these matters cannot be determined at this time.

Clean Air Interstate Rule

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 background regarding the Clean Air Interstate Rule (CAIR). On July 11, 2008, in response to petitions brought by certain states and regulated industries challenging particular aspects of CAIR, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating CAIR in its entirety and remanding it to the EPA for further action consistent with its opinion. Georgia Power’s overall environmental compliance strategy has been developed in response to numerous federal and state regulatory requirements, many of which, including the State of Georgia’s Multi-Pollutant Rule, remain unaffected by the court’s ruling; however, the court’s decision has the potential to impact future decision making regarding capital expenditures, the installation and operation of pollution control equipment, and the purchase, use, and associated carrying values of emissions allowances. The ultimate impact of the court’s decision cannot be

GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

determined at this time and may depend on subsequent legal action, including issuance of the court’s mandate, and future rulemaking and regulatory treatment.

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. In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and new nonattainment areas within Georgia Power’s service territory are expected. The ultimate outcome of this matter cannot be determined at this time and will depend on subsequent legal action and/or future nonattainment designations and regulatory plans.

Carbon Dioxide Litigation

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 market-based rate authority. In June 2007, the FERC issued its final rule in Order No. 697 regarding market-based rate authority. The FERC generally retained its current market-based rate standards. Responding to a number of requests for rehearing, the FERC issued Order No. 697-A on April 21, 2008. This order largely affirmed its prior revision and codification of the regulations governing market-based rates for public utilities. In accordance with the order, Southern Company submitted to the FERC an updated market power analysis on September 2, 2008 related to its continued market-based rate authority. The ultimate outcome of this matter cannot now be determined.

GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

conducting short-term transactions in the wholesale markets and provides for a cost-based cap for wholesale sales of less than a year. Both tariffs must be approved by the FERC. The final outcome of this matter cannot now be determined.

Retail Fuel Cost Recovery

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. On February 29, 2008, the Georgia PSC approved an additional increase of approximately $222 million effective June 1, 2008. As of September 30, 2008, Georgia Power had an under recovered fuel balance of approximately $776 million as compared to $692 million at December 31, 2007. Georgia Power is required to file for a new fuel cost recovery rate no later than March 1, 2009. 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. 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 in the billing factor will not have a significant effect on Georgia Power’s revenues or net income, but will affect cash flow.

Nuclear

Nuclear Projects

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Nuclear – Nuclear Projects” of Georgia Power in Item 7 of the Form 10-K for information regarding the potential expansion of Plant Vogtle.

The Vogtle 3 and 4 Agreement is an arrangement whereby the Consortium supplies and constructs the entire facility with the exception of certain items provided by the Owners. Under the terms of the Vogtle 3 and 4 Agreement, the Owners will pay a purchase price that will be subject to certain price escalation and adjustments, adjustments for change orders, and performance bonuses. Each Owner is severally (and not jointly) liable for its proportionate share, based on its ownership interest, of all amounts owed to the Consortium under the Vogtle 3 and 4 Agreement. Georgia Power’s proportionate share, based on its current ownership interest, is 45.7%. Under the terms of a separate joint development agreement, the Owners finalized their ownership percentages on July 2, 2008, except for allowed changes under certain limited circumstances during the Georgia PSC certification process.

GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On August 1, 2008, Georgia Power submitted an application for the Georgia PSC to certify the project. Hearings began November 3, 2008 and a final certification decision is expected in March 2009.

Income Tax Matters

Legislation

On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. The State of Georgia does not allow the bonus depreciation deduction allowed by the Stimulus Act for state income tax purposes. Georgia Power estimates the cash flow reduction to tax payments as a result of the Stimulus Act for 2008 to be between $50 million and $90 million.

On October 3, 2008, President Bush signed the Economic Stabilization Act of 2008 (Stabilization Act) into law. In addition to addressing financial issues, the Stabilization Act includes renewable energy incentives as well as accelerated depreciation for smart meters and smart grid systems. Georgia Power is currently assessing the financial implications of the Stabilization Act. The ultimate impact cannot be determined at this time.

Other Matters

Georgia Power is involved in various other matters being litigated, regulatory matters, and certain tax-related issues that could affect future earnings. In addition, Georgia Power is subject to certain claims and legal actions arising in the ordinary course of business. Georgia Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and

GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air and water 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.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Georgia Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Georgia Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Georgia Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Georgia Power in Item 7 of the Form 10-K for a complete discussion of Georgia Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Georgia Power’s financial condition remained stable at September 30, 2008. Throughout the recent turmoil in the financial markets, Georgia Power has maintained adequate access to capital without drawing any of its committed bank credit arrangements used to support its commercial paper programs and variable rate pollution control revenue bonds. Georgia Power has continued to issue commercial paper which has increased the balance of short-term debt while also increasing cash and cash equivalents as a precautionary measure. During the third quarter 2008 and subsequent to September 30, 2008, Georgia Power was required to purchase a total of $76.6 million of variable rate pollution control revenue bonds that were tendered by investors, of which $75 million were subsequently remarketed. Georgia Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital needs. No material changes in bank credit arrangements have occurred. Georgia Power’s interest cost for short-term debt

GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

has not changed materially. The impact on future financing costs as a result of the recent financial turmoil cannot be determined at this time. See “Sources of Capital” and “Financing Activities” herein for additional information.

As a result of the turmoil in the financial markets, Georgia Power experienced no material counterparty credit losses. Georgia Power’s investments in pension and nuclear decommissioning trust funds declined in value as of September 30, 2008. No material changes in funding requirements related to these funds are currently expected; however, the ultimate outcome cannot be determined at this time.

Net cash provided from operating activities totaled $1.3 billion for the first nine months of 2008, compared to $1.0 billion for the corresponding period in 2007. The $303.6 million increase in cash provided from operating activities in the first nine months of 2008 is primarily due to higher retail operating revenues. Net cash used for investing activities totaled $1.5 billion for the first nine months of 2008 primarily due to gross property additions to utility plant of $1.5 billion. Net cash provided from financing activities totaled $523.6 million for the first nine months of 2008 compared to $203.3 million for the corresponding period in 2007. This was primarily due to the issuance of notes payable and the timing of financings in 2008 compared to 2007.

Significant balance sheet changes for the first nine months of 2008 include a $1.4 billion increase in plant in service.

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, derivative obligations, preferred and preference stock dividends, leases, purchase commitments, and trust funding requirements. Approximately $369 million will be required through September 30, 2009 to fund maturities of long-term debt. In addition, in connection with entering into the Vogtle 3 and 4 Agreement, as described under FUTURE EARNINGS POTENTIAL – “Nuclear – Nuclear Projects” herein, the Georgia Power Board of Directors approved revisions to Georgia Power’s capital budget of $600 million in 2009 and $700 million in 2010, for a revised estimated total construction program of $2.0 billion in 2008, $2.6 billion in 2009, and $2.5 billion in 2010. In November 2008, Georgia Power’s management plans to request approval by the Georgia Power Board of Directors of a revised capital budget of approximately $2.9 billion for 2009 and $2.6 billion for 2010. The increases are primarily a result of changes in the timing of expenditures for environmental controls at Plant Bowen and Yates and the new generating units at Plant McDonough, as well as other project scope and price changes. The Southern Company system financial plan, including the Southern Company system capital budget, is expected to be reviewed by the Southern Company Board of Directors in early 2009. Actual construction costs may vary from these estimates because of changes in such factors as: business conditions; environmental statutes and regulations; nuclear plant regulations; FERC rules and regulations; load projections; the cost and efficiency of construction labor, equipment, and materials; and the cost and availability of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.

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

GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2008 approximately $363.8 million of cash and cash equivalents and approximately $1.3 billion of unused credit arrangements with banks. See Note 6 to the financial statements of Georgia Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements under “Bank Credit Arrangements” herein for additional information. Of the unused credit arrangements, $225 million expire in 2009 and $1.1 billion expire in 2012. Of the facilities that expire in 2009, $40 million contain provisions allowing two-year term loans executable at expiration. Georgia Power expects to renew its credit facilities, as needed, prior to expiration.

At September 30, 2008, substantially all of these credit arrangements provided liquidity support to Georgia Power’s commercial paper program and purchase obligations related to variable rate pollution control revenue bonds. At September 30, 2008, such purchase obligations totaled $666.4 million compared to $743 million in the second quarter 2008. The decrease is due to Georgia Power’s required purchase of $76.6 million of variable rate pollution control revenue bonds that were tendered by investors. Subsequent to September 30, 2008, Georgia Power converted $104.6 million of variable rate pollution control revenue bonds to a fixed interest rate mode. In addition, Georgia Power remarketed approximately $75 million of the bonds that were tendered by investors. The net effect of these transactions decreased the amount of liquidity support dedicated to funding purchase obligations to $636.3 million. 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, 2008, Georgia Power had approximately $788.4 million of commercial paper and $100 million of short-term bank loans outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and cash.

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- and/or Baa3 or below. These contracts are for physical electricity purchases and sales, fuel purchases, fuel transportation and storage, emissions allowances, energy price risk management and for construction of new generation. At September 30, 2008, the maximum potential collateral requirements under these contracts at a BBB- or Baa3 rating were approximately $28 million. At September 30, 2008, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $933 million. Included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash.

Market Price Risk

Georgia Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2007 reporting period. Since a significant portion of outstanding indebtedness is at fixed rates, Georgia Power is not aware of any facts or circumstances that would significantly affect exposures

GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

on existing indebtedness in the near term. However, the impact on future financing costs cannot now be determined.

Due to cost-based rate regulation, Georgia Power continues to have limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, 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 implemented at the instruction of the Georgia PSC. As such, Georgia Power has no material change in market risk exposures when compared with the December 31, 2007 reporting period.

The changes in fair value of energy-related derivative contracts for the three months and nine months ended September 30, 2008 were as follows:


	Third Quarter			Year-to-Date
	2008			2008
	Changes			Changes
	Fair Value
	(in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net	$	168.5		$	(0.4	)
Contracts realized or settled		(65.4	)		(86.8	)
Current period changes^(a)		(150.5	)		39.8

Contracts outstanding at the end of the period, assets (liabilities), net	$	(47.4	)	$	(47.4	)


(a)		Current period changes also include the changes in fair value of new contracts entered into during the period, if any.

The decrease in the fair value positions of the energy-related derivative contracts for the three months and nine months ended September 30, 2008 was $215.9 million and $47.0 million, respectively, substantially all of which is due to natural gas positions. These changes are attributable to both the volume and prices of natural gas. At September 30, 2008, Georgia Power had a net hedge volume of 52.7 Bcf with a weighted average contract cost approximately $0.92 per mmBtu above market prices, compared to 51.3 Bcf at June 30, 2008 with a weighted average contract cost approximately $3.36 per mmBtu below market prices and compared to 44.1 Bcf at December 31, 2007 with a weighted average contract cost approximately $0.02 per mmBtu above market prices. The majority of the natural gas hedges are recovered through the fuel cost recovery mechanism.

At September 30, 2008 and December 31, 2007, the fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:


	September 30, 2008			December 31, 2007
	(in millions)
Regulatory hedges	$	(47.4	)	$	(0.4	)
Cash flow hedges		—			—
Non-accounting hedges		—			—

Total fair value	$	(47.4	)	$	(0.4	)

Energy-related derivative contracts which are designated as regulatory hedges relate to Georgia Power’s fuel hedging program where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the fuel cost recovery mechanism. Certain other gains and losses on energy-related derivatives, designated as cash flow hedges, are initially deferred in other comprehensive income before being recognized in income in the same period as the hedged transaction.

GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Gains and losses on energy-related derivative contracts that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.

The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at September 30, 2008 are as follows:


	September 30, 2008
	Fair Value Measurements
	Total			Maturity
	Fair Value			Year 1			Years 2&3			Years 4&5
				(in millions)
Level 1	$	—		$	—		$	—		$	—
Level 2		(47.4	)		(35.5	)		(11.9	)		—
Level 3		—			—			—			—

Fair value of contracts outstanding at end of period	$	(47.4	)	$	(35.5	)	$	(11.9	)	$	—

As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value measurements and related disclosures, the table above now uses the three-tier fair value hierarchy, as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously used descriptions “actively quoted,” “external sources,” and “models and other methods.” The three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the previous descriptions focused on the source of the inputs. Because Georgia Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, the valuations of those contracts now appear in Level 2; previously they were shown as “actively quoted.”

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 2008, Georgia Power issued $250 million of Series 2008A Floating Rate Senior Notes due March 17, 2010 and $250 million of Series 2008B 5.4% Senior Notes due June 1, 2018. In addition, Georgia Power entered into a three-year $300 million long-term floating rate bank loan that bears interest based on one-month LIBOR. Proceeds were used to repay a portion of Georgia Power’s short-term indebtedness, including the maturity of $45 million aggregate principal amount of its Savannah Electric and Power Company Series C 6.55% Senior Notes, and for other corporate purposes, including Georgia Power’s continuous construction activities. Georgia Power settled interest rate hedges of $225 million notional amount at a loss of $16 million. This loss will be amortized over the original term of the hedges. Georgia Power also terminated derivative contracts related to the issuance of $100 million of the Series 2008B Senior Notes at a loss of approximately $5 million, which will be amortized over the life of the Series 2008B Senior Notes. Also in 2008, Georgia Power entered into derivative transactions designed to mitigate interest rate risk related to floating rate obligations. The total notional amount of these derivatives was $901 million. See Note (F) to the Condensed Financial Statements herein for further details.

Also in the first nine months of 2008, Georgia Power converted its entire $819 million of obligations related to auction rate pollution control revenue bonds from auction rate modes to other interest rate modes. Initially,

GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

approximately $332 million of the auction rate pollution control revenue bonds were converted to fixed interest rate modes and approximately $487 million were converted to daily floating rate modes. Georgia Power converted approximately $98 million of its variable rate pollution control revenue bonds to fixed interest rate modes. In addition, Georgia Power incurred obligations related to the issuance of $53 million of pollution control revenue bonds for Georgia Power’s Plant Hammond Project. At September 30, 2008 the trustee held $30.4 million of the proceeds, which will be transferred to Georgia Power for reimbursement of project costs. In September 2008, Georgia Power was required to purchase a total of approximately $76.6 million of variable rate pollution control revenue bonds that were tendered by investors. Also in September 2008, Georgia Power paid at maturity $75 million of Series 2007C floating rate Senior Notes.

Subsequent to September 30, 2008, Georgia Power converted approximately $104.6 million of variable rate pollution control revenue bonds to a fixed interest rate mode.

Also subsequent to September 30, 2008, Georgia Power remarketed a total of approximately $75 million of variable rate pollution control revenue bonds that were tendered by investors.

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.

GULF POWER COMPANY

GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
	(in thousands)						(in thousands)
Operating Revenues:
Retail revenues	$	359,652		$	325,864		$	871,834		$	788,827
Wholesale revenues —
Non-affiliates		26,194			20,892			76,902			65,296
Affiliates		20,036			13,297			89,500			74,190
Other revenues		15,959			16,503			45,007			42,870

Total operating revenues		421,841			376,556			1,083,243			971,183

Operating Expenses:
Fuel		185,003			150,665			501,129			430,188
Purchased power — Non-affiliates		14,057			7,110			23,269			10,453
Affiliates		41,136			36,737			66,564			54,247
Other operations		48,879			53,987			143,758			147,000
Maintenance		16,344			16,491			53,670			49,148
Depreciation and amortization		22,295			21,540			66,205			63,840
Taxes other than income taxes		25,088			25,027			66,587			65,516

Total operating expenses		352,802			311,557			921,182			820,392

Operating Income		69,039			64,999			162,061			150,791
Other Income and (Expense):
Allowance for equity funds used during construction		2,673			539			6,196			1,403
Interest income		914			1,295			2,332			4,192
Interest expense, net of amounts capitalized		(10,489	)		(11,545	)		(32,164	)		(34,075	)
Other income (expense), net		(357	)		(389	)		(1,366	)		(1,264	)

Total other income and (expense)		(7,259	)		(10,100	)		(25,002	)		(29,744	)

Earnings Before Income Taxes		61,780			54,899			137,059			121,047
Income taxes		22,886			19,911			48,542			44,271

Net Income		38,894			34,988			88,517			76,776
Dividends on Preference Stock		1,551			825			4,652			2,475

Net Income After Dividends on Preference Stock	$	37,343		$	34,163		$	83,865		$	74,301

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2008		2007			2008			2007
	(in thousands)					(in thousands)
Net Income After Dividends on Preference Stock	$	37,343	$	34,163		$	83,865		$	74,301
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $-, $(976), $(1,077), and $1,561, respectively		—		(1,554	)		(1,715	)		2,485
Reclassification adjustment for amounts included in net income, net of tax of $104, $54, $261, and $214, respectively		167		87			416			342

Total other comprehensive income (loss)		167		(1,467	)		(1,299	)		2,827

COMPREHENSIVE INCOME	$	37,510	$	32,696		$	82,566		$	77,128

The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Nine Months
	Ended September 30,
	2008			2007
	(in thousands)
Operating Activities:
Net income	$	88,517		$	76,776
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		69,926			67,644
Deferred income taxes		24,850			(11,540	)
Allowance for equity funds used during construction		(6,196	)		(1,403	)
Pension, postretirement, and other employee benefits		1,413			1,809
Stock option expense		656			1,022
Tax benefit of stock options		200			268
Hedge settlements		(5,220	)		3,030
Other, net		(4,115	)		1,472
Changes in certain current assets and liabilities —
Receivables		(75,430	)		(18,793	)
Fossil fuel stock		(26,408	)		(19,667	)
Materials and supplies		7,135			(1,521	)
Prepaid income taxes		(3,929	)		7,177
Property damage cost recovery		20,038			19,467
Other current assets		2,371			1,735
Accounts payable		(2,154	)		7,500
Accrued taxes		3,825			31,826
Accrued compensation		(3,063	)		(5,217	)
Other current liabilities		(2,058	)		2,890

Net cash provided from operating activities		90,358			164,475

Investing Activities:
Property additions		(232,398	)		(164,217	)
Cost of removal, net of salvage		(5,246	)		(7,890	)
Construction payables		13,830			(6,354	)
Other		(3,956	)		(232	)

Net cash used for investing activities		(227,770	)		(178,693	)

Financing Activities:
Increase (decrease) in notes payable, net		57,813			(94,881	)
Proceeds —
Senior Notes		—			85,000
Common stock issued to parent		—			80,000
Gross excess tax benefit of stock options		283			646
Capital contributions from parent company		75,304			—
Other long-term debt		110,000			—
Redemptions — Senior notes		(974	)		—
Payment of preference stock dividends		(4,507	)		(2,475	)
Payment of common stock dividends		(61,275	)		(55,575	)
Other		(2,135	)		(1,104	)

Net cash provided from financing activities		174,509			11,611

Net Change in Cash and Cash Equivalents		37,097			(2,607	)
Cash and Cash Equivalents at Beginning of Period		5,348			7,526

Cash and Cash Equivalents at End of Period	$	42,445		$	4,919

Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $2,470 and $619 capitalized for 2008 and 2007, respectively)	$	27,940		$	24,875
Income taxes (net of refunds)	$	37,353		$	25,659

The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)


	At September 30,			At December 31,
Assets	2008			2007
	(in thousands)
Current Assets:
Cash and cash equivalents	$	42,445		$	5,348
Receivables —
Customer accounts receivable		88,988			63,227
Unbilled revenues		54,455			39,000
Under recovered regulatory clause revenues		71,105			58,435
Other accounts and notes receivable		7,569			7,162
Affiliated companies		2,327			19,377
Accumulated provision for uncollectible accounts		(2,101	)		(1,711	)
Fossil fuel stock, at average cost		97,739			71,012
Materials and supplies, at average cost		38,627			45,763
Property damage cost recovery		—			18,585
Other regulatory assets		22,146			10,220
Other		18,760			14,878

Total current assets		442,060			351,296

Property, Plant, and Equipment:
In service		2,755,543			2,678,952
Less accumulated provision for depreciation		966,499			931,968

		1,789,044			1,746,984
Construction work in progress		291,455			150,870

Total property, plant, and equipment		2,080,499			1,897,854

Other Property and Investments		4,745			4,563

Deferred Charges and Other Assets:
Deferred charges related to income taxes		22,728			17,847
Prepaid pension costs		109,407			107,151
Other regulatory assets		134,462			97,492
Other		36,301			22,784

Total deferred charges and other assets		302,898			245,274

Total Assets	$	2,830,202		$	2,498,987

The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

GULF POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)


	At September 30,			At December 31,
Liabilities and Stockholder’s Equity	2008			2007
	(in thousands)
Current Liabilities:
Securities due within one year	$	37,000		$	—
Notes payable		102,439			44,625
Accounts payable —
Affiliated		51,664			39,375
Other		66,916			56,823
Customer deposits		27,202			24,885
Accrued taxes —
Income taxes		44,039			30,026
Other		22,494			10,577
Accrued interest		10,025			7,698
Accrued compensation		12,034			15,096
Other regulatory liabilities		5,699			6,027
Other		30,447			32,023

Total current liabilities		409,959			267,155

Long-term Debt		812,429			740,050

Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		248,502			240,101
Accumulated deferred investment tax credits		11,688			12,988
Employee benefit obligations		76,888			74,021
Other cost of removal obligations		179,467			172,876
Other regulatory liabilities		85,087			82,741
Other		80,460			79,802

Total deferred credits and other liabilities		682,092			662,529

Total Liabilities		1,904,480			1,669,734

Preference Stock		97,998			97,998

Common Stockholder’s Equity:
Common stock, without par value—
Authorized - 20,000,000 shares
Outstanding - 1,792,717 shares		118,060			118,060
Paid-in capital		511,400			435,008
Retained earnings		203,362			181,986
Accumulated other comprehensive loss		(5,098	)		(3,799	)

Total common stockholder’s equity		827,724			731,255

Total Liabilities and Stockholder’s Equity	$	2,830,202		$	2,498,987

The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.

GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIRD QUARTER 2008 vs. THIRD QUARTER 2007
AND
YEAR-TO-DATE 2008 vs. YEAR-TO-DATE 2007

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 costs, and storm restoration costs. Appropriately balancing the need to recover these increasing costs 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 after dividends on preference stock. 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

Gulf Power’s net income after dividends on preference stock for the third quarter 2008 was $37.3 million compared to $34.1 million for the corresponding period in 2007. The increase was primarily due to higher wholesale revenues from non-affiliates and increased allowance for equity funds used during construction (AFUDC), partially offset by a decrease in sales growth.

Gulf Power’s net income after dividends on preference stock for year-to-date 2008 was $83.9 million compared to $74.3 million for the corresponding period in 2007. The increase was primarily due to higher wholesale revenues from non-affiliates and increased AFUDC.

Retail Revenues

In the third quarter 2008, retail revenues were $359.7 million compared to $325.9 million for the corresponding period in 2007. For year-to-date 2008, retail revenues were $871.8 million compared to $788.8 million for the corresponding period in 2007.

GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Details of the change to retail revenues are as follows:


	Third Quarter						Year-to-Date
	2008						2008
	(in millions)			(% change)			(in millions)			(% change)
Retail – prior year	$	325.9					$	788.8
Estimated change in —
Rates and pricing		2.0			0.6			4.8			0.6
Sales growth		(4.3	)		(1.3	)		(3.9	)		(0.5	)
Weather		0.1			0.0			4.5			0.6
Fuel and other cost recovery		36.0			11.1			77.6			9.8

Retail – current year	$	359.7			10.4	%	$	871.8			10.5	%

Revenues associated with changes in rates and pricing increased in the third quarter and year-to-date 2008 when compared to the same periods in 2007 primarily due to cost recovery provisions for 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. These 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 Note 3 to the financial statements of Gulf Power under “Environmental Remediation” and “Retail Regulatory Matters – Environmental Cost Recovery” in Item 8 of the Form 10-K for additional information.

Revenues attributable to changes in sales growth decreased in the third quarter 2008 when compared to the same period in 2007. Weather-adjusted KWH energy sales to residential customers and commercial customers decreased 7.2% and 1.9%, respectively. The decrease in weather-adjusted KWH energy sales to residential and commercial customers was primarily due to decreased customer usage mainly due to a slowing economy, which has negatively impacted the housing market, residential construction, and caused unemployment to rise in the past year in Gulf Power’s service area. Industrial KWH energy sales increased 11.3% primarily as a result of decreased customer co-generation due to the higher cost of natural gas.

Revenues attributable to changes in sales growth decreased year-to-date 2008 when compared to the same period in 2007. Weather-adjusted KWH energy sales to residential customers and commercial customers decreased 5.2% and 0.3%, respectively. The decrease in weather-adjusted KWH energy sales to residential customers was primarily due to decreased customer usage mainly due to a slowing economy, which has negatively impacted the housing market, residential construction, and caused unemployment to rise in the past year in Gulf Power’s service area. The decrease in weather-adjusted KWH energy sales to commercial customers was primarily due to a decrease in number of customers as a result of a slowing economy. Industrial KWH energy sales increased 11.7% primarily as a result of decreased customer co-generation due to the higher cost of natural gas.

Revenues attributable to changes in weather were immaterial in the third quarter 2008 and increased year-to-date 2008 when compared to the corresponding periods in 2007. The increase was due to more favorable weather in 2008 compared to 2007.

Fuel and other cost recovery revenues increased in the third quarter and year-to-date 2008 when compared to the corresponding periods in 2007 primarily due to higher fuel and purchased power expenses. Fuel and other cost recovery revenues include fuel expenses, the energy component of purchased power costs, purchased power capacity costs, and revenues related to the recovery of storm damage restoration costs. Annually, Gulf Power petitions the Florida PSC for recovery of projected fuel and purchased power costs including any true-up

GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

amount from prior periods, and approved rates are implemented each January. Gulf Power received approval from the Florida PSC to increase the fuel factor for the period from September 2008 through December 2008 to recover a portion of the estimated December 31, 2008 fuel cost under-recovery balance. 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 of Gulf Power under “Retail Regulatory Matters – Storm Damage Cost Recovery” in Item 8 of the Form 10-K for additional information.

Wholesale Revenues – Non-Affiliates

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.

In the third quarter 2008, wholesale revenues from non-affiliates were $26.2 million compared to $20.9 million for the corresponding period in 2007. For year-to-date 2008, wholesale revenues from non-affiliates were $76.9 million compared to $65.3 million for the corresponding period in 2007. These increases were primarily a result of higher capacity revenues associated with new and existing territorial wholesale contracts and higher energy revenues as a result of increased fuel costs.

Wholesale Revenues – Affiliates

In the third quarter 2008, wholesale revenues from affiliates were $20.0 million compared to $13.3 million for the corresponding period in 2007. The increase was due to a 67.9% increase in price related to fuel, partially offset by a 10.2% decrease in KWH sales.

For year-to-date 2008, wholesale revenues from affiliates were $89.5 million compared to $74.2 million for the corresponding period in 2007. The increase was due to a 54.6% increase in price related to fuel, partially offset by a 22.0% decrease in KWH sales.

GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Fuel and Purchased Power Expenses


	Third Quarter 2008				Year-to-Date 2008
	vs.				vs.
	Third Quarter 2007				Year-to-Date 2007
	(change in millions)		(% change)		(change in millions)		(% change)
Fuel	$	34.3		22.8	$	70.9		16.5
Purchased power – non-affiliates		6.9		97.7		12.8		122.6
Purchased power – affiliates		4.4		12.0		12.3		22.7

Total fuel and purchased power expenses	$	45.6			$	96.0

In the third quarter 2008, total fuel and purchased power expenses were $240.1 million compared to $194.5 million for the corresponding period in 2007. The net increase in fuel and purchased power expenses was due to a $44.7 million increase in the average cost of fuel and purchased power as well as an $11.3 million increase in KWHs purchased, partially offset by a $10.4 million decrease in KWHs generated.

For year-to-date 2008, total fuel and purchased power expenses were $590.9 million compared to $494.9 million for the corresponding period in 2007. The net increase in fuel and purchased power expenses was due to a $106.9 million increase in the average cost of fuel and purchased power as well as an $11.6 million increase in KWHs purchased, partially offset by a $22.5 million decrease in KWHs generated.

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. See FUTURE EARNINGS POTENTIAL – “FERC and Florida PSC Matters – Retail Fuel Cost Recovery” herein for additional information.

Details of Gulf Power’s cost of generation and purchased power are as follows:


	Third Quarter	Third Quarter	Percent	Year-to-Date	Year-to-Date	Percent
Average Cost	2008	2007	Change	2008	2007	Change
	(cents per net KWH)		(cents per net KWH)
Fuel	4.54	3.44	32.0	4.20	3.42	22.8
Purchased power	13.09	13.08	0.1	11.07	9.41	17.6

In the third quarter 2008, fuel expense was $185.0 million compared to $150.7 million in the same period in 2007. The increase was due to a $44.7 million increase in the average cost of fuel, partially offset by a $10.4 million decrease related to total KWHs generated. The average cost of coal per KWH generated increased 36.0% primarily as a result of increases in commodity and transportation costs. The average cost of oil and natural gas per KWH generated increased 20.3% primarily as a result of increases in commodity prices.

For year-to-date 2008, fuel expense was $501.1 million compared to $430.2 million in the same period in 2007. The increase was due to a $93.4 million increase in the average cost of fuel, partially offset by a $22.5 million decrease related to total KWHs generated. The average cost of coal per KWH generated increased 23.5% primarily as a result of increases in commodity and transportation costs. The average cost of oil and natural gas per KWH generated increased 18.4% primarily as a result of increases in commodity prices.

GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Non-affiliates

In the third quarter 2008, purchased power from non-affiliates was $14.0 million compared to $7.1 million for the same period in 2007. The increase was due to a $4.1 million increase in total KWHs purchased and a $2.8 million increase resulting from the higher average cost per KWH.

For year-to-date 2008, purchased power from non-affiliates was $23.3 million compared to $10.5 million for the same period in 2007. The increase was due to a $10.0 million increase resulting from the higher average cost per KWH and a $2.8 million increase in total KWHs purchased.

Affiliates

In the third quarter 2008, purchased power from affiliates was $41.1 million compared to $36.7 million for the corresponding period in 2007. The increase was due to a $7.2 million increase in total KWHs purchased, partially offset by a $2.8 million decrease resulting from the lower average cost per KWH.

For year-to-date 2008, purchased power from affiliates was $66.5 million compared to $54.2 million for the corresponding period in 2007. The increase was due to an $8.8 million increase in total KWHs purchased as well as a $3.5 million increase resulting from the higher average cost per KWH.

Other Operations and Maintenance Expenses


	Third Quarter 2008						Year-to-Date 2008
	vs.						vs.
	Third Quarter 2007						Year-to-Date 2007
	(change in millions)			(% change)			(change in millions)			(% change)
Other operations	$	(5.1	)		(9.5	)	$	(3.2	)		(2.2	)
Maintenance		(0.1	)		(0.9	)		4.5			9.2

Total other operations and maintenance	$	(5.2	)				$	1.3

In the third quarter 2008, other operations and maintenance expenses were $65.2 million compared to $70.4 million for the same period in 2007. The decrease was primarily due to a $1.6 million decrease in other energy services, a $1.1 million decrease due to an adjustment in allocated overhead expenses, a $0.8 million decrease in distribution contract labor costs, and a $0.7 million decrease in miscellaneous administrative and general expenses. This decrease was partially offset by a $1.3 million increase in unscheduled maintenance at generation facilities. The decreased expenses from other energy services did not have a material impact on earnings since they were offset by decreased associated revenues.

For year-to-date 2008, other operations and maintenance expenses were $197.4 million compared to $196.1 million for the same period in 2007. The increase was primarily due to a $3.7 million increase in scheduled

GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

and unscheduled maintenance at generation facilities. This increase was partially offset by a $1.3 million decrease in other energy services and a $1.1 million decrease due to an adjustment in allocated overhead expenses. The decreased expenses from other energy services did not have a material impact on earnings since they were offset by decreased associated revenues.

Allowance for Equity Funds Used During Construction

In the third quarter 2008, AFUDC was $2.7 million compared to $0.5 million for the corresponding period in 2007. For year-to-date 2008, AFUDC was $6.2 million compared to $1.4 million for the corresponding period in 2007. These increases were primarily due to the construction of environmental control projects.

Interest Income

In the third quarter 2008, interest income was $0.9 million compared to $1.3 million for the same period in 2007. For year-to-date 2008, interest income was $2.3 million compared to $4.2 million for the same period in 2007. These decreases were primarily a result of lower variable interest rates charged against the under recovered fuel balance and a decrease in the property damage reserve balance. The Florida PSC has authorized the calculation of interest on under recovered regulatory clause revenues at 30-day commercial paper rates.

Interest Expense, Net of Amounts Capitalized

In the third quarter 2008, interest expense was $10.5 million compared to $11.5 million for the same period in 2007. For year-to-date 2008, interest expense was $32.2 million compared to $34.1 million for the same period in 2007. These decreases were primarily due to a $0.8 million increase in third quarter 2008 and a $1.9 million increase year-to-date 2008 in capitalization of the allowance for debt funds used during construction related to the construction of environmental control projects.

Income Taxes

In the third quarter 2008, income taxes were $22.9 million compared to $19.9 million for the same period in 2007. The increase was primarily due to higher earnings before income taxes and a decrease in the federal production activities deduction, partially offset by the tax benefit associated with an increase in AFUDC. See

GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Note (H) to the Condensed Financial Statements herein for additional information related to the federal production activities deduction.

For year-to-date 2008, income taxes were $48.5 million compared to $44.3 million for the same period in 2007. The increase was primarily a result of higher earnings before income taxes partially offset by the tax benefit associated with an increase in AFUDC.

Dividends on Preference Stock

In the third quarter 2008, dividends on preference stock were $1.5 million compared to $0.8 million for the same period in 2007. For year-to-date 2008, dividends on preference stock were $4.7 million compared to $2.5 million for the same period in 2007. These increases resulted from the issuance of $45 million of 6.45% Preference Stock in October 2007.

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 statutes and regulations could affect earnings if such costs cannot continue to 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.

New Source Review Actions

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – New Source Review Actions” of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding notices of violation issued by the EPA relating to Gulf Power’s Plant Crist and a unit partially owned by Gulf Power at Plant Scherer and civil actions brought by the EPA against Alabama Power and Georgia Power alleging that these companies had violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of their coal-fired generating facilities. In the action involving Alabama Power, on July 24, 2008, the U.S. District Court for the Northern District of Alabama

GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

granted partial summary judgment in favor of Alabama Power regarding the proper legal test for determining whether projects are routine maintenance, repair, and replacement and therefore are excluded from NSR permitting. The decision does not resolve the case. The ultimate outcome of these matters cannot be determined at this time.

Clean Air Interstate Rule

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 background regarding the Clean Air Interstate Rule (CAIR). On July 11, 2008, in response to petitions brought by certain states and regulated industries challenging particular aspects of CAIR, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating CAIR in its entirety and remanding it to the EPA for further action consistent with its opinion. Gulf Power’s overall environmental compliance strategy has been developed in response to numerous federal and state regulatory requirements, many of which remain unaffected by the court’s ruling; however, the court’s decision has the potential to impact future decision making regarding capital expenditures, the installation and operation of pollution control equipment, and the purchase, use, and associated carrying values of emissions allowances. The ultimate impact of the court’s decision cannot be determined at this time and may depend on subsequent legal action, including issuance of the court’s mandate, and future rulemaking and regulatory treatment.

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. In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and new nonattainment areas within Gulf Power’s service territory are expected. The ultimate outcome of this matter cannot be determined at this time and will depend on subsequent legal action and/or future nonattainment designations and regulatory plans.

Carbon Dioxide Litigation

GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Global Climate Issues

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 executive orders issued by the Governor of the State of Florida addressing reduction of greenhouse gas emissions within the state. On June 25, 2008, Florida’s Governor signed comprehensive energy-related legislation that includes authorization for the Florida Department of Environmental Protection to adopt rules for a cap-and-trade regulatory program to address greenhouse gas emissions from electric utilities, conditioned upon their ratification by the legislature no sooner than the 2010 legislative session. This legislation also authorizes the Florida PSC to adopt a renewable portfolio standard for public utilities, subject to legislative ratification. The impact of this legislation on Gulf Power will depend on the development, adoption, legislative ratification, implementation, and potential legal challenges in connection with rules governing greenhouse gas emissions and mandates regarding the use of renewable energy, and the ultimate outcome cannot be determined at this time.

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 market-based rate authority. In June 2007, the FERC issued its final rule in Order No. 697 regarding market-based rate authority. The FERC generally retained its current market-based rate standards. Responding to a number of requests for rehearing, the FERC issued Order No. 697-A on April 21, 2008. This order largely affirmed its prior revision and codification of the regulations governing market-based rates for public utilities. In accordance with the order, Southern Company submitted to the FERC an updated market power analysis on September 2, 2008 related to its continued market-based rate authority. The ultimate outcome of this matter cannot now be determined.

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 cost over or under recovery balance at year-end exceeds 10% of the projected fuel revenue applicable for the period, Gulf Power is required to notify the Florida PSC and indicate if an adjustment to the fuel cost recovery factor is being requested. Gulf Power filed a petition on June 20, 2008 with the Florida PSC requesting an adjustment to the fuel cost recovery factor. On July 29, 2008, the Florida PSC approved Gulf Power’s request for an increase of approximately 28.3% in the fuel factor for retail customers. This change represents an increase of 11.3% for a

GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

residential customer billing of 1,000 KWH per month. The increase will result in the recovery of $38.2 million of the projected under recovered balance during the period from September 2008 through December 2008. The remaining portion of the projected under recovered balance is expected to be recovered in 2009. On September 2, 2008, Gulf Power filed its 2009 projected fuel cost recovery filing with the Florida PSC which includes the fuel factors proposed for January through December 2009. The proposed 2009 fuel factor represents an increase of 12.9% over the fuel factor in place September 2008 through December 2008. This change represents an increase of 5.8% in the total bill for a residential customer using 1,000 KWH per month. The Florida PSC will hold hearings to address this filing in November 2008. On October 13, 2008, Gulf Power notified the Florida PSC that the projected fuel cost under recovery balance at year-end exceeds the 10% threshold, but no adjustment to the 2008 or the 2009 factor was requested.

Under recovered fuel costs at September 30, 2008 totaled $101.5 million, compared to $56.6 million at December 31, 2007. Approximately $64.5 million is included in under recovered regulatory clause revenues and approximately $37.0 million is included in deferred charges and other assets on Gulf Power’s Condensed Balance Sheets herein. 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 change in the billing factor would have no significant effect on Gulf Power’s revenues or net income, but would 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.

Income Tax Matters

Legislation

On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. The State of Florida does not allow the bonus depreciation deduction allowed by the Stimulus Act for state income tax purposes. Gulf Power estimates the cash flow reduction to tax payments as a result of the Stimulus Act for 2008 to be between $7 million and $12 million.

On October 3, 2008, President Bush signed the Economic Stabilization Act of 2008 (Stabilization Act) into law. In addition to addressing financial issues, the Stabilization Act includes renewable energy incentives as well as accelerated depreciation for smart meters and smart grid systems. Gulf Power is currently assessing the financial implications of the Stabilization Act. The ultimate impact cannot be determined at this time.

Other Matters

Gulf Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Gulf Power is subject to certain claims and legal actions arising in the ordinary course of business. 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 and water 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

GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

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.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Gulf Power’s financial condition remained stable at September 30, 2008. Throughout the recent turmoil in the financial markets, Gulf Power has maintained adequate access to capital without drawing any of its committed bank credit arrangements used to support its commercial paper programs and variable rate pollution control revenue bonds. Gulf Power has continued to issue commercial paper which has increased the balance of short-term debt while also increasing cash and cash equivalents as a precautionary measure. Gulf Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital needs. No material changes in bank credit arrangements have occurred. Gulf Power’s interest cost for short-term debt has not changed materially. The impact on future financing costs as a result of the recent financial turmoil cannot be determined at this time. See “Sources of Capital” and “Financing Activities” herein for additional information.

As a result of the turmoil in the financial markets, Gulf Power experienced no material counterparty credit losses. Gulf Power’s investments in pension trust funds declined in value as of September 30, 2008. No material changes in funding requirements related to these funds are currently expected; however, the ultimate outcome cannot be determined at this time.

Net cash provided from operating activities totaled $90.4 million for the first nine months of 2008, compared to $164.5 million for the corresponding period in 2007. The $74.1 million decrease in cash provided from operating activities was primarily due to an increase in under recovered regulatory clauses related to fuel of $58.1 million, and a $28.0 million decrease in cash flows from accrued taxes liability, partially offset by a decrease in materials and supplies of $8.7 million. Net cash used for investing activities totaled $227.8 million primarily due to gross property additions to utility plant of $240.8 million in the first nine months of 2008. These additions were primarily related to installation of equipment to comply with environmental requirements. Net cash provided from financing activities totaled $174.5 million for the first nine months of 2008, compared to $11.6 million for the corresponding period in 2007. The $162.9 million increase in cash provided from

GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

financing activities was primarily due to increased cash flows of $152.7 million related to notes payable and the issuance of $110 million in long-term debt, partially offset by the issuance of $85.0 million in senior notes in 2007.

Significant balance sheet changes for the first nine months of 2008 include a net increase of $182.6 million in property, plant, and equipment, primarily related to environmental control projects, an $11.8 million change in energy-related derivative contracts, and a $44.9 million increase in under recovered regulatory clause revenues related to fuel. In the third quarter 2008, Gulf Power entered into an energy services contract. This contract is expected to result in an additional liability of $5.6 million through the third quarter 2009. Subsequent to September 30, 2008, Gulf Power sold a building and land resulting in a gain of $3.8 million which will be recognized in the fourth quarter 2008.

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, maturities of long-term debt, leases, derivative obligations, preference stock dividends, purchase commitments, and trust funding requirements. Gulf Power redeemed, prior to maturity, $1.0 million of senior notes in the first nine months of 2008. At September 30, 2008, Gulf Power had $37 million of securities due within one year.

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 utilized funds from operating cash flows, short-term debt, external security offerings, a long term bank note, 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.

Gulf Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet cash needs which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Gulf Power had at September 30, 2008 approximately $42.4 million of cash and cash equivalents and $130 million of unused committed lines of credit with banks. Of these credit agreements, $80 million expire in 2008, $50 million expire in 2009, and $105 million contain provisions allowing one-year term loans executable at expiration. 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 and Note (F) to the Condensed Financial Statements under “Bank Credit Arrangements” herein for additional information. These credit arrangements provide liquidity support to Gulf Power’s obligations with respect to variable rate pollution control revenue 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, 2008, Gulf Power had approximately $98.6 million of commercial paper outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and cash.

Subsequent to September 30, 2008, Gulf Power renewed $60 million of the $80 million of credit facilities that were set to expire in 2008. In addition, Gulf Power entered into a new committed line of credit for $10 million

GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

that will expire in 2009. Subsequent to September 30, 2008, approximately $29 million of Gulf Power’s variable rate pollution control revenue bonds were converted to a fixed interest rate mode and no longer require committed credit support.

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- and/or Baa3 or below. These contracts are for physical electricity purchases and sales, fuel purchases, fuel transportation and storage, emissions allowances and energy price risk management. At September 30, 2008, the maximum potential collateral requirements under these contracts at a BBB- or Baa3 rating were approximately $44 million. At September 30, 2008, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $163 million. Included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash.

Market Price Risk

Gulf Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2007 reporting period. Since a significant portion of outstanding indebtedness is at fixed rates, Gulf Power is not aware of any facts or circumstances that would significantly affect exposures on existing indebtedness in the near term. However, the impact on future financing costs cannot now be determined.

Due to cost-based rate regulation, Gulf Power continues to have limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Gulf Power enters into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Gulf Power continues to manage a fuel-hedging program implemented with the approval of the Florida PSC. As such, Gulf Power has no material change in market risk exposures when compared with the December 31, 2007 reporting period.

The changes in fair value of energy-related derivative contracts for the three months and nine months ended September 30, 2008 were as follows:


	Third Quarter			Year-to-Date
	2008			2008
	Changes			Changes
	Fair Value
	(in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net	$	25.4		$	(0.2	)
Contracts realized or settled		(9.4	)		(12.4	)
Current period changes^(a)		(28.0	)		0.6

Contracts outstanding at the end of the period, assets (liabilities), net	$	(12.0	)	$	(12.0	)



(a)		Current period changes also include the changes in fair value of new contracts entered into during the period, if any.

GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The decrease in the fair value positions of the energy-related derivative contracts for the three months and nine months ended September 30, 2008 was $37.4 million and $11.8 million, respectively, substantially all of which is due to natural gas positions. These changes are attributable to both the volume and prices of natural gas. At September 30, 2008, Gulf Power had a net hedge volume of 15 Bcf with a weighted average contract cost approximately $0.81 per mmBtu above market prices, compared to 6.8 Bcf at June 30, 2008 with a weighted average contract cost approximately $3.82 per mmBtu below market prices and compared to 7.5 Bcf at December 31, 2007 with a weighted average contract cost approximately $0.03 per mmBtu above market prices. The majority of the natural gas hedges are recovered through the fuel cost recovery clause.

At September 30, 2008 and December 31, 2007, the fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:


	September 30,			December 31,
	2008			2007
	(in millions)
Regulatory hedges	$	(12.0	)	$	(0.2	)
Cash flow hedges		—			—
Non-accounting hedges		—			—

Total fair value	$	(12.0	)	$	(0.2	)

Energy-related derivative contracts which are designated as regulatory hedges relate to Gulf Power’s fuel hedging program where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the fuel cost recovery clause. Certain other gains and losses on energy-related derivatives, designated as cash flow hedges, are initially deferred in other comprehensive income before being recognized in income in the same period as the hedged transaction. Gains and losses on energy-related derivative contracts that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.

The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at September 30, 2008 are as follows:


	September 30, 2008
	Fair Value Measurements
	Total			Maturity
	Fair Value			Year 1			Years 2&3			Years 4&5
	(in millions)
Level 1	$	—		$	—		$	—		$	—
Level 2		(12.0	)		(11.1	)		(0.9	)		—
Level 3		—			—			—			—

Fair value of contracts outstanding at end of period	$	(12.0	)	$	(11.1	)	$	(0.9	)	$	—

GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value measurements and related disclosures, the table above now uses the three-tier fair value hierarchy, as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously used descriptions “actively quoted,” “external sources,” and “models and other methods.” The three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the previous descriptions focused on the source of the inputs. Because Gulf Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, the valuations of those contracts now appear in Level 2; previously they were shown as “actively quoted.”

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.

Financing Activities

In April 2008, Gulf Power entered into a $110 million term loan agreement that bears interest based on one-month LIBOR and borrowed $80 million under such agreement. In June 2008, Gulf Power borrowed the remaining $30 million under the term loan agreement. Proceeds were used to repay a portion of Gulf Power’s short-term indebtedness and for other general corporate purposes, including Gulf Power’s continuous construction activities. In connection with the term loan agreement, Gulf Power terminated $80 million of derivative transactions at a loss of $5.2 million. The loss was deferred in accumulated other comprehensive income and will be amortized over the original life of the hedge, which is a 10-year period.

Also in 2008, Gulf Power converted its entire $141 million of obligations related to auction rate pollution control revenue bonds from auction rate modes to other interest rate modes. Approximately $75 million of the auction rate pollution control revenue bonds were converted to fixed interest rate modes and approximately $66 million were converted to daily floating rate modes.

Subsequent to September 30, 2008, approximately $29 million of the $66 million variable rate pollution control revenue bonds were converted to a fixed interest rate mode and no longer require committed credit support. Also subsequent to September 30, 2008, Gulf Power purchased from investors the remaining $37 million variable rate pollution control revenue bonds that were subject to mandatory tender.

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.

MISSISSIPPI POWER COMPANY

MISSISSIPPI POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
	(in thousands)						(in thousands)
Operating Revenues:
Retail revenues	$	241,788		$	221,790		$	597,298		$	560,059
Wholesale revenues —
Non-affiliates		106,595			93,750			274,996			247,746
Affiliates		28,908			13,657			79,833			42,229
Other revenues		4,124			3,826			12,636			13,031

Total operating revenues		381,415			333,023			964,763			863,065

Operating Expenses:
Fuel		174,300			146,864			443,273			390,781
Purchased power —
Non-affiliates		13,777			5,960			21,458			8,173
Affiliates		35,421			27,506			78,903			56,970
Other operations		45,302			46,264			137,605			133,220
Maintenance		19,526			14,941			55,364			46,219
Depreciation and amortization		17,229			15,302			52,327			44,683
Taxes other than income taxes		17,142			16,651			48,993			44,989

Total operating expenses		322,697			273,488			837,923			725,035

Operating Income		58,718			59,535			126,840			138,030
Other Income and (Expense):
Interest income		403			538			996			1,537
Interest expense, net of amounts capitalized		(4,503	)		(4,593	)		(13,336	)		(14,030	)
Other income (expense), net		1,506			184			6,025			5,161

Total other income and (expense)		(2,594	)		(3,871	)		(6,315	)		(7,332	)

Earnings Before Income Taxes		56,124			55,664			120,525			130,698
Income taxes		19,474			20,781			42,832			49,033

Net Income		36,650			34,883			77,693			81,665
Dividends on Preferred Stock		433			433			1,299			1,299

Net Income After Dividends on Preferred Stock	$	36,217		$	34,450		$	76,394		$	80,366

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
	(in thousands)						(in thousands)
Net Income After Dividends on Preferred Stock	$	36,217		$	34,450		$	76,394		$	80,366
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $1,285, $(200), $(169), and $(154), respectively		2,075			(322	)		(272	)		(249	)

COMPREHENSIVE INCOME	$	38,292		$	34,128		$	76,122		$	80,117

The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

100

MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Nine Months
	Ended September 30,
	2008			2007
	(in thousands)
Operating Activities:
Net income	$	77,693		$	81,665
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		56,025			51,809
Deferred income taxes and investment tax credits, net		5,112			(5,806	)
Plant Daniel capacity		—			(4,244	)
Pension, postretirement, and other employee benefits		6,088			6,877
Stock option expense		639			935
Tax benefit of stock options		473			253
Hurricane Katrina grant proceeds-property reserve		—			60,000
Other, net		(27,388	)		(14,443	)
Changes in certain current assets and liabilities —
Receivables		(36,440	)		(2,501	)
Fossil fuel stock		(26,810	)		(18,687	)
Materials and supplies		(2,961	)		22
Prepaid income taxes		1,187			4,822
Other current assets		4,098			915
Hurricane Katrina grant proceeds		—			14,345
Hurricane Katrina accounts payable		—			3,309
Other accounts payable		10,195			(14,032	)
Accrued taxes		(6,998	)		(9,897	)
Accrued compensation		(8,066	)		(7,236	)
Other current liabilities		17,355			(716	)

Net cash provided from operating activities		70,202			147,390

Investing Activities:
Property additions		(100,490	)		(84,383	)
Cost of removal, net of salvage		(3,497	)		6,274
Construction payables		(5,202	)		3,327
Hurricane Katrina capital grant proceeds		7,314			10,869
Other		2,423			(90	)

Net cash used for investing activities		(99,452	)		(64,003	)

Financing Activities:
Increase in notes payable, net		44,608			8,939
Proceeds —
Capital contributions		4,222			(3	)
Gross excess tax benefit of stock options		892			508
Other long-term debt		80,000			—
Redemptions —
Pollution control revenue bonds		(7,900	)		—
Other long-term debt		—			(36,082	)
Payment of preferred stock dividends		(1,299	)		(1,299	)
Payment of common stock dividends		(51,300	)		(50,475	)
Other		(1,475	)		—

Net cash provided from (used for) financing activities		67,748			(78,412	)

Net Change in Cash and Cash Equivalents		38,498			4,975
Cash and Cash Equivalents at Beginning of Period		4,827			4,214

Cash and Cash Equivalents at End of Period	$	43,325		$	9,189

Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $113 and $- capitalized for 2008 and 2007, respectively)	$	12,054		$	13,098
Income taxes (net of refunds)	$	38,710		$	48,048

The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

101

MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)


	At September 30,			At December 31,
Assets	2008			2007
	(in thousands)
Current Assets:
Cash and cash equivalents	$	43,325		$	4,827
Receivables —
Customer accounts receivable		54,193			43,946
Unbilled revenues		25,850			23,163
Under recovered regulatory clause revenues		60,201			40,545
Other accounts and notes receivable		8,842			5,895
Affiliated companies		15,654			11,838
Accumulated provision for uncollectible accounts		(1,326	)		(924	)
Fossil fuel stock, at average cost		74,276			47,466
Materials and supplies, at average cost		30,401			27,440
Other regulatory assets		34,871			32,234
Other		14,132			18,422

Total current assets		360,419			254,852

Property, Plant, and Equipment:
In service		2,171,087			2,130,835
Less accumulated provision for depreciation		914,207			880,148

		1,256,880			1,250,687
Construction work in progress		86,328			50,015

Total property, plant, and equipment		1,343,208			1,300,702

Other Property and Investments		8,524			9,556

Deferred Charges and Other Assets:
Deferred charges related to income taxes		8,430			8,867
Prepaid pension costs		65,663			66,099
Other regulatory assets		81,210			62,746
Other		28,538			24,843

Total deferred charges and other assets		183,841			162,555

Total Assets	$	1,895,992		$	1,727,665

The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

102

MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)


	At September 30,		At December 31,
Liabilities and Stockholder’s Equity	2008		2007
	(in thousands)
Current Liabilities:
Securities due within one year	$	41,207	$	1,138
Notes payable		54,551		9,944
Accounts payable —
Affiliated		48,089		40,394
Other		62,312		60,758
Customer deposits		10,128		9,640
Accrued taxes —
Income taxes		2,123		—
Other		40,661		48,853
Accrued interest		3,085		2,713
Accrued compensation		13,899		21,965
Over recovered regulatory clause revenues		17,555		—
Other regulatory liabilities		11,476		11,082
Other		27,024		23,882

Total current liabilities		332,110		230,369

Long-term Debt		313,170		281,963

Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		209,896		206,818
Deferred credits related to income taxes		13,221		15,156
Accumulated deferred investment tax credits		14,393		15,254
Employee benefit obligations		91,023		88,300
Other cost of removal obligations		95,916		90,485
Other regulatory liabilities		105,564		119,458
Other		43,093		33,252

Total deferred credits and other liabilities		573,106		568,723

Total Liabilities		1,218,386		1,081,055

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		320,498		314,324
Retained earnings		286,336		261,242
Accumulated other comprehensive income		301		573

Total common stockholder’s equity		644,826		613,830

Total Liabilities and Stockholder’s Equity	$	1,895,992	$	1,727,665

The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.

103

MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIRD QUARTER 2008 vs. THIRD QUARTER 2007
AND
YEAR-TO-DATE 2008 vs. YEAR-TO-DATE 2007

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 costs, and major storm restoration. Appropriately balancing the need to recover these increasing costs with customer prices will continue to challenge Mississippi Power for the foreseeable future.

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 after dividends on preferred stock. 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

Mississippi Power’s net income after dividends on preferred stock for the third quarter 2008 was $36.2 million compared to $34.4 million for the corresponding period in 2007. The increase was primarily due to increases in wholesale capacity revenues, retail revenues for System Restoration Rider (SRR), a retail base rate increase effective January 2008, and a decrease in income taxes primarily resulting from a State of Mississippi manufacturing investment tax credit. These increases were partially offset by an increase in other operations and maintenance expenses.

Mississippi Power’s net income after dividends on preferred stock for year-to-date 2008 was $76.4 million compared to $80.4 million for the corresponding period in 2007. The decrease in net income was primarily the result of increases in other operations and maintenance expenses, depreciation and amortization, and a decrease in retail revenues for SRR. These items were partially offset by an increase in territorial base revenues due to a retail base rate increase effective January 2008, an increase in wholesale capacity revenues, a decrease in income taxes primarily resulting from the amortization of a regulatory liability, and a State of Mississippi manufacturing investment tax credit.

104

MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For additional information on SRR, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – System Restoration Rider” of Mississippi Power in Item 7 of the Form 10-K.

Retail Revenues

In the third quarter 2008, retail revenues were $241.8 million compared to $221.8 million for the same period in 2007. For year-to-date 2008, retail revenues were $597.3 million compared to $560.1 million for the same period in 2007.

Details of the change to retail revenues are as follows:


	Third Quarter						Year-to-Date
	2008						2008
	(in millions)			(% change)			(in millions)			(% change)
Retail – prior year	$	221.8					$	560.1
Estimated change in —
Rates and pricing		6.9			3.1			14.1			2.5
Sales growth		(2.8	)		(1.3	)		(3.3	)		(0.6	)
Weather		(1.3	)		(0.6	)		0.1			0.0
Fuel and other cost recovery		17.2			7.8			26.3			4.7

Retail – current year	$	241.8			9.0	%