Edgar Filing: SOUTHERN POWER CO

THE 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 March 31, 2009

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 (A Delaware Corporation)	58-0690070
	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 registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). Yes o 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 March 31, 2009
The Southern Company	Par Value $5 Per Share		782,433,682
Alabama Power Company	Par Value $40 Per Share		25,475,000
Georgia Power Company	Without Par Value		9,261,500
Gulf Power Company	Without Par Value		3,142,717
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
March 31, 2009



		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		30
	Condensed Statements of Comprehensive Income		30
	Condensed Statements of Cash Flows		31
	Condensed Balance Sheets		32
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		34
	Georgia Power Company
	Condensed Statements of Income		47
	Condensed Statements of Comprehensive Income		47
	Condensed Statements of Cash Flows		48
	Condensed Balance Sheets		49
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		51
	Gulf Power Company
	Condensed Statements of Income		64
	Condensed Statements of Comprehensive Income		64
	Condensed Statements of Cash Flows		65
	Condensed Balance Sheets		66
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		68
	Mississippi Power Company
	Condensed Statements of Income		82
	Condensed Statements of Comprehensive Income		82
	Condensed Statements of Cash Flows		83
	Condensed Balance Sheets		84
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		86
	Southern Power Company and Subsidiary Companies
	Condensed Consolidated Statements of Income		100
	Condensed Consolidated Statements of Comprehensive Income		100
	Condensed Consolidated Statements of Cash Flows		101
	Condensed Consolidated Balance Sheets		102
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		104
	Notes to the Condensed Financial Statements		115
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.		28
Item 4.	Controls and Procedures.		28
Item 4T.	Controls and Procedures.		28

INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2009


		Page
		Number
	PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	141
Item 1A.	Risk Factors	141
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	142
	Signatures	145

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
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, 2008
Georgia Power		Georgia Power Company
Gulf Power		Gulf Power Company
IGCC		Integrated coal gasification combined cycle
IIC		Intercompany Interchange Contract
IRC		Internal Revenue Code of 1986, as amended
IRS		Internal Revenue Service
KWH		Kilowatt-hour
LIBOR		London Interbank Offered Rate
Mirant		Mirant Corporation
Mississippi Power		Mississippi Power Company
mmBtu		Million British thermal unit
MW		Megawatt
MWH		Megawatt-hour
NRC		Nuclear Regulatory Commission
NSR		New Source Review
OCI		Other Comprehensive Income
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 ECR		Alabama Power’s energy cost recovery rate mechanism
registrants		Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power
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

DEFINITIONS
(continued)


Term		Meaning
SouthernLINC Wireless		Southern Communications Services, Inc.
Southern Nuclear		Southern Nuclear Operating Company, Inc.
Southern Power		Southern Power Company
traditional operating companies		Alabama Power, Georgia Power, Gulf Power, and Mississippi Power
wholesale revenues		revenues generated from sales for resale

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, impacts of adoption of new accounting rules, unrecognized tax benefits related to leveraged lease transactions, impact of the American Recovery and Reinvestment Act of 2009, estimated sales and purchases under new power sale and purchase 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 and avoid cost overruns during the development and construction of facilities;

•		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 and other wholesale customers;

•		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 or other 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
	Ended March 31,
	2009			2008
	(in thousands)
Operating Revenues:
Retail revenues	$	3,064,659		$	3,005,614
Wholesale revenues		451,414			513,662
Other electric revenues		122,798			130,190
Other revenues		27,436			33,444

Total operating revenues		3,666,307			3,682,910

Operating Expenses:
Fuel		1,406,267			1,451,943
Purchased power		107,644			92,904
Other operations and maintenance		871,081			896,817
MC Asset Recovery litigation settlement		202,000			—
Depreciation and amortization		389,758			343,885
Taxes other than income taxes		199,880			189,272

Total operating expenses		3,176,630			2,974,821

Operating Income		489,677			708,089

Other Income and (Expense):
Allowance for equity funds used during construction		42,612			40,585
Interest income		6,908			9,805
Equity in income (losses) of unconsolidated subsidiaries		(976	)		328
Leveraged lease income (losses)		9,441			10,925
Interest expense, net of amounts capitalized		(225,727	)		(217,109	)
Other income (expense), net		(12,850	)		914

Total other income and (expense)		(180,592	)		(154,552	)

Earnings Before Income Taxes		309,085			553,537
Income taxes		167,169			178,138

Consolidated Net Income		141,916			375,399
Dividends on Preferred and Preference Stock of Subsidiaries		16,195			16,195

Consolidated Net Income After Dividends on Preferred and Preference Stock of Subsidiaries	$	125,721		$	359,204

Common Stock Data:
Earnings per share—
Basic	$	0.16		$	0.47
Diluted	$	0.16		$	0.47
Average number of shares of common stock outstanding (in thousands)
Basic		779,858			766,150
Diluted		781,645			770,322
Cash dividends paid per share of common stock	$	0.4200		$	0.4025

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 Three Months
	Ended March 31,
	2009			2008
	(in thousands)
Operating Activities:
Consolidated net income	$	141,916		$	375,399
Adjustments to reconcile consolidated net income to net cash provided from operating activities —
Depreciation and amortization		456,833			407,689
Deferred income taxes and investment tax credits		(30,386	)		(2,342	)
Deferred revenues		(10,732	)		33,446
Allowance for equity funds used during construction		(42,612	)		(40,585	)
Equity in income (losses) of unconsolidated subsidiaries		976			(328	)
Leveraged lease income (losses)		(9,441	)		(10,925	)
Pension, postretirement, and other employee benefits		7,974			30,916
Stock option expense		16,955			13,427
Derivative fair value adjustments		659			14,380
Hedge settlements		(16,167	)		27,180
MC Asset Recovery litigation settlement		202,000			—
Other, net		6,915			(6,372	)
Changes in certain current assets and liabilities —
Receivables		292,162			188,538
Fossil fuel stock		(160,992	)		(53,305	)
Materials and supplies		(12,648	)		(22,762	)
Other current assets		(67,717	)		(61,320	)
Accounts payable		80,995			(114,636	)
Accrued taxes		(185,215	)		13,865
Accrued compensation		(319,715	)		(265,386	)
Other current liabilities		49,371			10,212

Net cash provided from operating activities		401,131			537,091

Investing Activities:
Property additions		(1,136,212	)		(1,012,907	)
Investment in restricted cash from pollution control revenue bonds		(49,348	)		(145	)
Distribution of restricted cash from pollution control revenue bonds		23,079			35,716
Nuclear decommissioning trust fund purchases		(379,332	)		(160,752	)
Nuclear decommissioning trust fund sales		381,280			153,872
Investment in unconsolidated subsidiaries		(1,800	)		(2,780	)
Cost of removal, net of salvage		(30,231	)		(25,581	)
Other		70,534			17,336

Net cash used for investing activities		(1,122,030	)		(995,241	)

Financing Activities:
Increase (decrease) in notes payable, net		121,274			(100,215	)
Proceeds —
Long-term debt		1,255,925			930,000
Common stock		151,379			132,107
Redemptions —
Long-term debt		(193,417	)		(4,653	)
Preferred and preference stock		—			(125,000	)
Payment of common stock dividends		(326,780	)		(307,960	)
Payment of dividends on preferred and preference stock of subsidiaries		(16,265	)		(17,060	)
Other		(15,618	)		(770	)

Net cash provided from financing activities		976,498			506,449

Net Change in Cash and Cash Equivalents		255,599			48,299
Cash and Cash Equivalents at Beginning of Period		416,581			200,550

Cash and Cash Equivalents at End of Period	$	672,180		$	248,849

Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $18,298 and $21,800 capitalized for 2009 and 2008, respectively)	$	178,560		$	197,570
Income taxes (net of refunds)	$	172,517		$	3,719

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 March 31,			At December 31,
Assets	2009			2008
	(in thousands)
Current Assets:
Cash and cash equivalents	$	672,180		$	416,581
Restricted cash and cash equivalents		131,609			102,537
Receivables —
Customer accounts receivable		996,427			1,053,674
Unbilled revenues		287,126			320,439
Under recovered regulatory clause revenues		677,665			646,318
Other accounts and notes receivable		353,119			301,028
Accumulated provision for uncollectible accounts		(26,308	)		(26,326	)
Fossil fuel stock, at average cost		1,175,688			1,018,314
Materials and supplies, at average cost		768,777			756,746
Vacation pay		134,581			140,283
Prepaid expenses		337,898			301,570
Other regulatory assets		378,662			275,424
Other		61,324			51,044

Total current assets		5,948,748			5,357,632

Property, Plant, and Equipment:
In service		51,127,521			50,618,219
Less accumulated depreciation		18,517,683			18,285,800

		32,609,838			32,332,419
Nuclear fuel, at amortized cost		547,981			510,274
Construction work in progress		3,609,909			3,035,795

Total property, plant, and equipment		36,767,728			35,878,488

Other Property and Investments:
Nuclear decommissioning trusts, at fair value		809,181			864,396
Leveraged leases		906,805			897,338
Other		223,069			226,757

Total other property and investments		1,939,055			1,988,491

Deferred Charges and Other Assets:
Deferred charges related to income taxes		989,180			972,781
Unamortized debt issuance expense		215,783			207,763
Unamortized loss on reacquired debt		265,711			270,919
Deferred under recovered regulatory clause revenues		366,045			606,483
Other regulatory assets		2,670,820			2,636,217
Other		394,044			428,432

Total deferred charges and other assets		4,901,583			5,122,595


Total Assets	$	49,557,114		$	48,347,206

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 March 31,			At December 31,
Liabilities and Stockholders’ Equity	2009			2008
	(in thousands)
Current Liabilities:
Securities due within one year	$	686,441		$	616,415
Notes payable		1,074,711			953,437
Accounts payable		1,639,403			1,249,694
Customer deposits		312,993			302,495
Accrued taxes —
Income taxes		221,875			195,922
Unrecognized tax benefits		143,858			131,641
Other		183,549			396,206
Accrued interest		225,139			195,500
Accrued vacation pay		169,121			178,519
Accrued compensation		131,092			446,718
Liabilities from risk management activities		354,349			260,977
Other		315,766			298,711

Total current liabilities		5,458,297			5,226,235

Long-term Debt		17,805,963			16,816,438

Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		6,064,938			6,080,104
Deferred credits related to income taxes		254,883			259,156
Accumulated deferred investment tax credits		449,263			455,398
Employee benefit obligations		2,056,981			2,057,424
Asset retirement obligations		1,199,752			1,182,769
Other cost of removal obligations		1,333,078			1,320,558
Other regulatory liabilities		251,438			261,970
Other		347,950			329,534

Total deferred credits and other liabilities		11,958,283			11,946,913

Total Liabilities		35,222,543			33,989,586

Redeemable Preferred Stock of Subsidiaries		374,496			374,496

Stockholders’ Equity:
Common Stockholders’ Equity:
Common stock, par value $5 per share —
Authorized — 1 billion shares
Issued — March 31, 2009: 782,865,285 Shares;
— December 31, 2008: 777,615,751 Shares
Treasury — March 31, 2009: 431,603 Shares;
— December 31, 2008: 423,477 Shares
Par value		3,914,294			3,888,041
Paid-in capital		2,036,731			1,892,802
Treasury, at cost		(12,949	)		(12,279	)
Retained earnings		7,411,087			7,611,977
Accumulated other comprehensive loss		(96,455	)		(104,784	)

Total Common Stockholders’ Equity		13,252,708			13,275,757
Preferred and Preference Stock of Subsidiaries		707,367			707,367

Total Stockholders’ Equity		13,960,075			13,983,124

Total Liabilities and Stockholders’ Equity	$	49,557,114		$	48,347,206

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
	Ended March 31,
	2009			2008
	(in thousands)
Consolidated Net Income	$	141,916		$	375,399
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $762 and $(13,988), respectively		1,147			(22,251	)
Reclassification adjustment for amounts included in net income, net of tax of $3,833 and $1,778, respectively		6,098			2,775
Marketable securities:
Change in fair value, net of tax of $91 and $(2,137), respectively		734			(3,101	)
Pension and other post retirement benefit plans:
Reclassification adjustment for amounts included in net income, net of tax of $222 and $259, respectively		350			411

Total other comprehensive income (loss)		8,329			(22,166	)

Dividends on preferred and preference stock of subsidiaries		(16,195	)		(16,195	)

Comprehensive Income	$	134,050		$	337,038

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

FIRST QUARTER 2009 vs. FIRST QUARTER 2008

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, owns, 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


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$(233.5)		(65.0)

Southern Company’s first quarter 2009 net income after dividends on preferred and preference stock of subsidiaries was $125.7 million ($0.16 per share) compared to $359.2 million ($0.47 per share) for the first quarter 2008. The decrease for the first quarter 2009 when compared to the same period in 2008 was primarily the result of a litigation settlement agreement with MC Asset Recovery, LLC (MC Asset Recovery); a decrease in contributions from market-response rates to large commercial and industrial customers; and higher depreciation and amortization. The decrease for the first quarter 2009 was partially offset by an increase in customer charges at Alabama Power, increased environmental compliance cost recovery revenues at Georgia Power, and lower other operations and maintenance expenses.

Retail Revenues


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$59.0		2.0

In the first quarter 2009, retail revenues were $3.06 billion compared to $3.01 billion for the same period in 2008. Details of the change to retail revenues follow:


	First Quarter
	2009
	(in millions)			(% change)
Retail – prior year	$	3,005.6
Estimated change in —
Rates and pricing		78.4			2.6
Sales growth (decline)		(56.8	)		(1.9	)
Weather		(4.0	)		(0.1	)
Fuel and other cost recovery		41.5			1.4

Retail – current year	$	3,064.7			2.0	%

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

Revenues associated with changes in rates and pricing increased in the first quarter 2009 when compared to the same period in 2008 primarily as a result of an increase in customer charges at Alabama Power and increased environmental compliance cost recovery revenues at Georgia Power in accordance with its 2007 Retail Rate Plan, partially offset by a decrease in contributions from market-response rates to large commercial and industrial customers.

Revenues attributable to changes in sales growth declined in the first quarter 2009 when compared to the same period in 2008 due to a 6.3% decrease in weather-adjusted retail KWH sales mainly due to recessionary economic conditions. For the first quarter 2009, weather-adjusted residential KWH sales decreased 0.4%, weather-adjusted commercial KWH sales decreased 1.3%, and weather-adjusted industrial KWH sales decreased 16.9%. Reduced demand in the primary and fabricated metal sectors, as well as in the chemicals, textiles, and transportation sectors, contributed to the decrease in weather-adjusted industrial KWH sales in the first quarter 2009 when compared to the same period in 2008.

Revenues resulting from changes in weather were not material in the first quarter 2009 when compared to the same period in 2008 due to near normal weather in both periods.

Fuel and other cost recovery revenues increased $41.5 million in the first quarter 2009 when compared to the same period in 2008. 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


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$(62.3)		(12.1)

In the first quarter 2009, wholesale revenues were $451.4 million compared to $513.7 million for the same period in 2008. Wholesale fuel revenues, which are generally offset by wholesale fuel expenses and do not affect net income, decreased $81.7 million in the first quarter 2009 when compared to the same period in 2008. Excluding wholesale fuel revenues, wholesale revenues increased $19.4 million in the first quarter 2009 when compared to the same period in 2008. The increase for the first quarter 2009 was primarily the result of additional revenues associated with Plant Franklin Unit 3 at Southern Power, renegotiated wholesale contracts, and changes in mark-to-market positions on sales of uncontracted generating capacity. Decreases in energy revenues and fewer short-term opportunity sales due to lower energy prices partially offset the first quarter 2009 increase. Short-term opportunity sales are made at market-based rates that generally provide a margin above Southern Company’s variable cost to produce the energy.

Other Electric Revenues


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$(7.4)		(5.7)

In the first quarter 2009, other electric revenues were $122.8 million compared to $130.2 million for the same period in 2008. The decrease for the first quarter 2009 when compared to the same period in 2008 was primarily the result of a $9.5 million decrease in co-generation revenues due to lower natural gas prices and a $6.5 million decrease in transmission revenues. The decrease for the first quarter 2009 was partially offset by an increase in revenues from other energy services of $3.3 million, an increase in customer fees of $2.5 million,

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

and an increase in outdoor lighting revenues of $1.3 million. Revenues from co-generation and other energy services are generally offset by related expenses and do not affect net income.

Other Revenues


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$(6.0)		(18.0)

In the first quarter 2009, other revenues were $27.4 million compared to $33.4 million for the same period in 2008. The decrease for the first quarter 2009 when compared to the same period in 2008 was primarily the result of a $5.7 million decrease in revenues at SouthernLINC Wireless related to lower average revenue per subscriber and fewer subscribers due to increased competition in the industry.

Fuel and Purchased Power Expenses


	First Quarter 2009 vs. First Quarter 2008
	(change in millions)			(% change)
Fuel	$	(45.7	)		(3.1	)
Purchased power		14.7			15.9

Total fuel and purchased power expenses	$	(31.0	)

Fuel and purchased power expenses for the first quarter 2009 were $1.51 billion compared to $1.54 billion for the same period in 2008. The decrease for the first quarter 2009 when compared to the same period in 2008 was primarily the result of a $139.0 million net decrease related to total KWHs generated and purchased, partially offset by a $108.0 million net increase in the average cost of fuel and purchased power, primarily related to a 27.9% increase in the cost of coal per net KWH generated.

Fuel expenses at the traditional operating companies are generally offset by fuel revenues and do not affect net income. See FUTURE EARNINGS POTENTIAL – “FERC and State PSC Matters – Retail Fuel Cost Recovery” herein for additional information. Fuel expenses incurred under Southern Power’s PPAs are generally the responsibility of the counterparties and do not significantly affect net income.

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


	First Quarter		First Quarter		Percent
Average Cost	2009		2008		Change
	(cents per net KWH)
Fuel		3.40		3.07		10.8
Purchased power		5.09		6.35		(19.8)

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


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$(25.7)		(2.9)

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

In the first quarter 2009, other operations and maintenance expenses were $871.1 million compared to $896.8 million for the same period in 2008. The decrease for the first quarter 2009 when compared to the same period in 2008 was primarily the result of a $25.3 million decrease in fossil and hydro expenses mainly due to fewer scheduled and unplanned outages; a $13.3 million decrease in transmission and distribution expenses mainly due to lower maintenance expenses; a $7.1 million decrease in expenses primarily related to lower advertising, litigation, and property insurance costs; and a $4.5 million decrease in expenses primarily related to lower sales volume at SouthernLINC Wireless. The decrease for the first quarter 2009 was partially offset by a $27.1 million increase in administration and general expenses largely related to the voluntary attrition program at Georgia Power under which 579 employees elected to resign their positions effective March 31, 2009. The related charge will be largely offset by lower salary costs for the remainder of the year and is not expected to have a material impact on Southern Company’s financial statements for the year ending December 31, 2009.

MC Asset Recovery Litigation Settlement


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$202.0		N/M

N/M — Not Meaningful

In the first quarter 2009, Southern Company entered into a litigation settlement agreement with MC Asset Recovery which resulted in a charge of $202.0 million. See Note (B) to the Condensed Financial Statements under “Mirant Matters — MC Asset Recovery Litigation” herein for additional information.

Depreciation and Amortization


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$45.9		13.3

In the first quarter 2009, depreciation and amortization was $389.8 million compared to $343.9 million for the same period in 2008. The increase for the first quarter 2009 when compared to the same period in 2008 was primarily the result of an increase in plant in service related to environmental and transmission projects at Alabama Power and environmental, transmission, and distribution projects at Georgia Power. An increase in depreciation rates at Southern Power also contributed to the first quarter 2009 increase, as well as the completion of Southern Power’s Plant Franklin Unit 3 in June 2008.

Taxes Other Than Income Taxes


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$10.6		5.6

In the first quarter 2009, taxes other than income taxes were $199.9 million compared to $189.3 million for the same period in 2008. The increase for the first quarter 2009 when compared to the same period in 2008 was primarily the result of increases in franchise fees and municipal gross receipt taxes associated with increases in revenues from retail energy sales. Higher ad valorem taxes at Georgia Power also contributed to the first quarter 2009 increase.

Other Income (Expense), Net


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$(13.8)		N/M

N/M — Not Meaningful

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

In the first quarter 2009, other income (expense), net was $(12.9) million compared to $0.9 million for the same period in 2008. The decrease for the first quarter 2009 when compared to the same period in 2008 was primarily the result of the 2008 recognition of a $6.4 million fee received for participating in an asset auction and a $6.0 million gain on the sale of an undeveloped tract of land to the Orlando Utilities Commission.

Income Taxes


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$(10.9)		(6.2)

In the first quarter 2009, income taxes were $167.2 million compared to $178.1 million for the same period in 2008. The decrease for the first quarter 2009 when compared to the same period in 2008 was primarily the result of lower pre-tax earnings, partially offset by a decrease in the IRC Section 199 production activities deduction. See Note (H) to the Condensed Financial Statements under “Effective Tax Rate” herein for details regarding the impact of the MC Asset Recovery litigation settlement on the effective tax rate.

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 constructive 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, 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 maintaining energy sales which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities and other wholesale customers, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline 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. Recent recessionary conditions have negatively impacted sales growth for the traditional operating companies and have negatively impacted wholesale capacity revenues at Southern Power. The current economic recession is expected to continue to have a negative impact on energy sales, particularly to industrial customers. The timing and extent of the economic recovery will impact future earnings. 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

Water Quality

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Water Quality” of Southern Company in Item 7 of the Form 10-K for additional information regarding the EPA’s regulation of cooling water intake structures. On April 1, 2009, the U.S. Supreme Court reversed the U.S. Court of Appeals for the Second Circuit’s decision with respect to the rule’s use of cost-benefit analysis and held that the EPA could consider costs in arriving at its standards and in providing variances from those standards for existing power plant cooling water intake structures. Other aspects of the court’s decision were not appealed and remain unaffected by the U.S. Supreme Court’s ruling. While the U.S. Supreme Court’s decision may ultimately result in greater flexibility for demonstrating compliance with the standards, the full scope of the regulations will depend on subsequent legal proceedings, further rulemaking by the EPA, the results of studies and analyses performed as part of the rules’ implementation, and the actual requirements established by state regulatory agencies and, therefore, 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 information regarding the potential for legislation and regulation addressing greenhouse gas emissions. On April 17, 2009, the EPA released a proposed finding that certain greenhouse gas emissions from new motor vehicles endanger public health and welfare due to climate change. The ultimate outcome of the proposed endangerment finding cannot be determined at this time and will depend on additional regulatory action and potential legal challenges. However, regulatory decisions that may follow from such a finding could have implications for both new and existing stationary sources, such as power plants. In addition, federal legislative proposals that would impose mandatory requirements related to greenhouse gas emissions, renewable energy standards, and energy efficiency standards continue to be actively considered in Congress, and the reduction of greenhouse gas emissions has been identified as a high priority by the current Administration. The ultimate outcome of these matters cannot be determined at this time; however, mandatory restrictions on Southern Company’s greenhouse gas emissions, or requirements relating to renewable energy or energy efficiency, could result in significant additional compliance costs that could affect future unit retirement and replacement decisions and results of operations, cash flows, and financial condition if such costs are not recovered through regulated rates.

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 October 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 with reserve prices not to exceed the CBR tariff price, 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 provides for a cost-based price for wholesale sales of less than a year. On March 5, 2009, the FERC accepted Southern Company’s CBR tariff for filing. On March 25, 2009, the FERC accepted Southern Company’s compliance filing related to the MBR tariff and directed Southern Company to commence the energy auction in 30 days. Southern Company commenced the energy auction on April 23, 2009. Implementation of the energy auction in accordance with the MBR tariff order is expected to adequately mitigate going forward any presumption of market power that Southern Company may have in the Southern

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

Company retail service territory. The original generation dominance proceeding initiated by the FERC in December 2004 remains pending before the FERC. The ultimate outcome of this matter cannot be determined at this time.

Retail Fuel Cost Recovery

The traditional operating companies each have established fuel cost recovery rates approved by their respective state PSCs. Over the past several years, the traditional operating companies have experienced higher than expected fuel costs for coal, natural gas, and uranium. These higher fuel costs have resulted in under recovered fuel costs included in the balance sheets of approximately $1.0 billion at March 31, 2009 as compared to $1.2 billion at December 31, 2008. 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,” “Georgia Power Retail Regulatory Matters,” and “Gulf Power Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information.

On March 10, 2009, the Georgia PSC granted Georgia Power’s request to delay its fuel case filing until September 4, 2009. The extension was requested as a result of difficulty in establishing a forward-looking fuel rate due to volatile coal and gas prices, uncertain sales forecasts, and a continuing decline in the State of Georgia’s economy. New fuel rates are expected to become effective January 1, 2010. The ultimate outcome of this matter cannot now be determined.

Income Tax Matters

Legislation

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA). Major tax incentives in the ARRA include an extension of bonus depreciation and multiple renewable energy incentives, which could have a significant impact on the future cash flow and net income of Southern Company. Southern Company estimates the cash flow reduction to 2009 tax payments as a result of the bonus depreciation provisions of the ARRA to be between approximately $225 million and $275 million. Southern Company is currently assessing the other financial implications of the ARRA. The ultimate impact cannot be determined at this time.

Construction Projects

Integrated Coal Gasification Combined Cycle

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Construction Projects – Integrated Coal Gasification Combined Cycle” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Integrated Coal Gasification Combined Cycle” in Item 8 of the Form 10-K for information regarding the Kemper IGCC.

On April 6, 2009, the Governor of the State of Mississippi signed into law a bill that will provide an ad valorem tax exemption for a portion of the assessed value of all property utilized in certain electric generating facilities with integrated gasification process facilities. This tax exemption, which may not exceed 50% of the total value of the project, is for projects with a capital investment from private sources of $1 billion or more.

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

screening costs to regulatory assets including those costs associated with activities to obtain a certificate of public convenience and necessity and costs necessary and prudent to preserve the availability, economic viability, and/or required schedule of the selected generation resource until the Mississippi PSC makes findings and determination as to the recovery of Mississippi Power’s prudent expenditures.

As of March 31, 2009, Mississippi Power had spent a total of $50.7 million associated with Mississippi Power’s generation resource planning, evaluation, and screening activities, including regulatory filings costs. Costs incurred during the first quarter 2009 totaled $8.4 million as compared to $7.2 million during the first quarter 2008. Of the total $50.7 million, $46.2 million was deferred in other regulatory assets, $3.7 million was related to land purchases capitalized, and $0.8 million was previously expensed.

Several motions have been filed by intervenors in this proceeding, most of which are procedural in nature and seek to stay or delay the timely and orderly administration of the docket. In addition to these procedural motions, a motion has been filed by the Attorney General for the State of Mississippi which questions whether the Mississippi PSC has authority to approve the gasification portion of the Kemper IGCC. All of these motions were heard by the Mississippi PSC on May 5, 2009.

The ultimate outcome of these matters cannot now be determined.

Nuclear

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Construction Projects – Nuclear” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Nuclear” in Item 8 of the Form 10-K for information regarding the potential expansion of Plant Vogtle.

On March 17, 2009, the Georgia PSC voted to certify construction of Plant Vogtle Units 3 and 4 at an in-service cost of $6.4 billion. In addition, the Georgia PSC voted to approve inclusion of the related construction work in progress accounts in rate base and to recover financing costs during the construction period beginning in 2011.

On April 21, 2009, the Governor of the State of Georgia signed into law The Georgia Nuclear Energy Financing Act that will allow Georgia Power to recover financing costs for nuclear construction projects by including the related construction work in progress accounts in rate base during the construction period. The cost recovery provisions will become effective January 1, 2011.

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.

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

See the Notes to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

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

FINANCIAL CONDITION AND LIQUIDITY

Overview

Southern Company’s financial condition remained stable at March 31, 2009. Throughout the recent turmoil in the financial markets, Southern Company has maintained adequate access to capital without drawing on 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 other registrants have continued to issue commercial paper at reasonable rates. 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 and liquidity needs. Market rates for committed credit have increased, and Southern Company and its subsidiaries have been and expect to continue to be subject to higher costs as existing facilities are replaced or renewed. Of the $215 million of facilities expiring in the first quarter 2009, $160 million of them were replaced or renewed. In addition, Gulf Power entered into a $20 million facility and Mississippi Power increased an existing facility by $10 million. Subsequent to March 31, 2009, Georgia Power, Gulf Power, and Mississippi Power entered into new credit arrangements resulting in a net increase of $425 million, $75 million, and $40 million, respectively. These additional facilities all expire in 2010. Total committed credit fees at Southern Company and its subsidiaries average less than ¹/4 of 1% per year. Southern Company’s interest cost for short-term debt has decreased as market short-term interest rates have declined from 2008 levels. The ultimate impact on future financing costs as a result of the financial turmoil cannot be determined at this time. Southern Company experienced no material counterparty credit losses as a result of the turmoil in the financial markets. See “Sources of Capital” and “Financing Activities” herein for additional information.

Southern Company’s investments in pension and nuclear decommissioning trust funds have continued to decline in value during the first quarter 2009. Southern Company expects that the earliest that cash may have to be contributed to the pension trust fund is 2011 and such contribution could be significant; however, projections of the amount vary significantly depending on interpretations of and decisions related to federal legislation passed during 2008 as well as other key variables including future trust fund performance and cannot be determined at this time. Southern Company does not expect any changes to funding obligations to the nuclear decommissioning trusts prior to 2011.

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

Net cash provided from operating activities totaled $401 million for the first quarter 2009, a decrease of $136 million from the same period in 2008. Significant changes in operating cash flow for the first quarter 2009 as compared to the prior period include increases in the use of funds for federal tax and property tax payments of $199 million and fuel purchases of $108 million. These uses of funds were partially offset by increased cash inflows as a result of higher fuel rates included in customer billings. Net cash used for investing activities totaled $1.12 billion for the first quarter 2009, an increase of $127 million over the prior period, primarily due to property additions to utility plant. For the first quarter 2009, net cash provided from financing activities totaled $976 million compared to $506 million for the first quarter 2008. The $470 million increase is primarily due to higher levels of short-term borrowings and the issuance of new long-term debt.

Significant balance sheet changes for the first quarter 2009 include an increase of $256 million in cash and cash equivalents primarily due to an increase in temporary cash investments and an increase of $889 million in total property, plant, and equipment for the installation of equipment to comply with environmental standards, construction of generation, transmission and distribution facilities, and purchases of nuclear fuel. Other significant changes include an increase in long-term debt, excluding amounts due within one year, of $990 million used primarily for construction expenditures and general corporate purposes.

The market price of Southern Company’s common stock at March 31, 2009 was $30.62 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $16.94 per share, representing a market-to-book ratio of 181%, compared to $37.00, $17.08, and 217%, respectively, at the end of 2008. The dividend for the first quarter 2009 was $0.42 per share compared to $0.4025 per share in the first quarter 2008. In April 2009, the quarterly dividend payable in June 2009 was increased to $0.4375 per share.

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. Approximately $686 million will be required through March 31, 2010 for maturities of long-term debt. The construction programs are subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; changes in environmental statutes and regulations; changes in nuclear plants to meet new regulatory requirements; changes in FERC rules and regulations; PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; and the cost 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 2009, 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.

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

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 March 31, 2009, Southern Company and its subsidiaries had approximately $672 million of cash and cash equivalents and approximately $4.2 billion of unused credit arrangements with banks, of which $775 million expire in 2009, $160 million expire in 2010, $25 million expire in 2011, and $3.2 billion expire in 2012. Approximately $94 million of the credit facilities expiring in 2009 and 2010 allow for the execution of term loans for an additional two-year period, and $504 million contain provisions allowing one-year term loans. At March 31, 2009, approximately $1.3 billion of the credit facilities were dedicated to providing liquidity support to the traditional operating companies’ variable rate pollution control revenue 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 at the request and for the benefit of each of the traditional operating companies. At March 31, 2009, the Southern Company system had outstanding commercial paper of $915.6 million and short-term bank notes of $150 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 March 31, 2009, the maximum potential collateral requirements under these contracts at a BBB and Baa2 rating were approximately $9 million and at a BBB- and/or Baa3 rating were approximately $403 million. At March 31, 2009, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $1.9 billion. In addition, certain nuclear fuel agreements could require collateral of up to $251 million in the event of a rating change to below investment grade for Southern Company. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, any credit rating downgrade could impact Southern Company’s ability to access capital markets, particularly the short-term debt market.

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

Market Price Risk

Southern Company’s market risk exposure relative to interest rate changes has not changed materially compared with the December 31, 2008 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 2009, Southern Power is exposed to market volatility in energy-related commodity prices as a result of sales of uncontracted generating capacity. The traditional operating companies continue to manage fuel-hedging programs implemented per the guidelines of their respective state PSCs. 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. To mitigate residual risks relative to movements in gas prices, the registrants may enter into fixed-price contracts for natural gas purchases; however, a significant portion of contracts are priced at market. As such, the traditional operating companies have no material change in market risk exposure when compared with the December 31, 2008 reporting period.

The changes in fair value of energy-related derivative contracts for the three months ended March 31, 2009 were as follows:


	First Quarter
	2009
	Changes
	Fair Value
	(in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net	$	(285	)
Contracts realized or settled		60
Current period changes^(a)		(198	)

Contracts outstanding at the end of the period, assets (liabilities), net	$	(423	)

(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 ended March 31, 2009 was $138 million, substantially all of which is due to natural gas positions. This change is attributable to both the volume and prices of natural gas. At March 31, 2009, Southern Company had a net hedge volume of 172.6 Bcf (includes location basis of 2 Bcf) with a weighted average contract cost approximately $2.53 per mmBtu above market prices, compared to 148.8 Bcf at December 31, 2008 with a weighted average contract cost approximately $1.97 per mmBtu above market prices. The majority of the natural gas hedges are recovered through the traditional operating companies’ fuel cost recovery clauses.

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

At March 31, 2009, the fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:


	March 31, 2009
	(in millions)
Regulatory hedges	$	(427	)
Cash flow hedges		1
Not designated		3

Total fair value	$	(423	)

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.

Total net unrealized pre-tax losses recognized in the statements of income for the three months ended March 31, 2009 for energy-related derivative contracts that are not hedges were $1 million. For the three months ended March 31, 2008, the total net unrealized losses recognized in the statements of income were $14 million. See Note (F) to the Condensed Financial Statements herein for further details of these losses.

The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at March 31, 2009 are as follows:


	March 31, 2009
	Fair Value Measurements
	Total			Maturity
	Fair Value			Year 1			Years 2&3			Years 4&5
	(in millions)
Level 1	$	—		$	—		$	—		$	—
Level 2		(423	)		(319	)		(99	)		(5	)
Level 3		—			—			—			—

Fair value of contracts outstanding at end of period	$	(423	)	$	(319	)	$	(99	)	$	(5	)

Southern Company uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, and thus fall into Level 2. See Note (C) to the Condensed Financial Statements herein for further discussion on fair value measurements.

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.

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

Financing Activities

In the first three months of 2009, Southern Company’s subsidiaries issued $1.1 billion of senior notes, and Southern Company issued $151 million of common stock through the Southern Investment Plan and employee and director stock plans. The proceeds were primarily used to fund ongoing construction projects and to repay short-term and long-term indebtedness. Alabama Power issued $500 million of Series 2009A 6.00% Senior Notes due March 1, 2039. Alabama Power used the proceeds to repay short-term indebtedness and for other general corporate purposes, including Alabama Power’s continuous construction program. Georgia Power issued $500 million of Series 2009A 5.95% Senior Notes due February 1, 2039. Georgia Power used the proceeds to repay $150 million aggregate principal amount of its Series U Floating Rate Senior Notes at maturity, to repay a portion of short-term indebtedness, and for general corporate purposes, including Georgia Power’s continuous construction program. Georgia Power settled $100 million of hedges related to the Series 2009A issuance at a loss of approximately $16 million, and this loss will be amortized to interest expense, in earnings, together with a previously settled loss of approximately $2 million, over 10 years. Mississippi Power issued $125 million of Series 2009A 5.55% Senior Notes due March 1, 2019. Mississippi Power used the proceeds to repay at maturity Mississippi Power’s $40 million aggregate principal amount of Series F Floating Rate Senior Notes due March 9, 2009, to repay a portion of short-term indebtedness, and for general corporate purposes, including Mississippi Power’s continuous construction program. Gulf Power also incurred obligations related to the issuance of pollution control revenue bonds totaling approximately $130 million. Gulf Power is using the proceeds for acquisition, construction, installation, and equipping of certain solid waste disposal facilities located at Plant Crist. See Southern Company’s Condensed Consolidated Statements of Cash Flows herein for further details regarding financing activities during the first three months of 2009.

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 first quarter 2009 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 first quarter 2009 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

CONDENSED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months
	Ended March 31,
	2009			2008
	(in thousands)
Operating Revenues:
Retail revenues	$	1,058,137		$	1,034,254
Wholesale revenues —
Non-affiliates		158,695			170,040
Affiliates		84,352			83,692
Other revenues		38,582			48,693

Total operating revenues		1,339,766			1,336,679

Operating Expenses:
Fuel		483,233			453,149
Purchased power —
Non-affiliates		15,544			11,219
Affiliates		41,560			88,707
Other operations and maintenance		276,859			309,550
Depreciation and amortization		143,416			124,637
Taxes other than income taxes		80,281			75,771

Total operating expenses		1,040,893			1,063,033

Operating Income		298,873			273,646
Other Income and (Expense):
Allowance for equity funds used during construction		16,725			11,304
Interest income		4,122			4,642
Interest expense, net of amounts capitalized		(72,207	)		(68,976	)
Other income (expense), net		(6,372	)		(7,222	)

Total other income and (expense)		(57,732	)		(60,252	)

Earnings Before Income Taxes		241,141			213,394
Income taxes		85,009			73,428

Net Income		156,132			139,966
Dividends on Preferred and Preference Stock		9,866			9,866

Net Income After Dividends on Preferred and Preference Stock	$	146,266		$	130,100

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months
	Ended March 31,
	2009			2008
	(in thousands)
Net Income After Dividends on Preferred and Preference Stock	$	146,266		$	130,100
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $(886) and $(2,211), respectively		(1,457	)		(3,637	)
Reclassification adjustment for amounts included in net income, net of tax of $1,061 and $185, respectively		1,745			305

Total other comprehensive income (loss)		288			(3,332	)

COMPREHENSIVE INCOME	$	146,554		$	126,768

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 Three Months
	Ended March 31,
	2009			2008
	(in thousands)
Operating Activities:
Net income	$	156,132		$	139,966
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		164,488			146,208
Deferred income taxes and investment tax credits, net		(25,795	)		4,513
Allowance for equity funds used during construction		(16,725	)		(11,304	)
Pension, postretirement, and other employee benefits		(4,933	)		(3,995	)
Stock option expense		2,851			2,178
Tax benefit of stock options		24			347
Other, net		8,834			9,223
Changes in certain current assets and liabilities —
Receivables		173,032			62,227
Fossil fuel stock		(11,654	)		(34,750	)
Materials and supplies		(6,775	)		(7,751	)
Other current assets		(73,518	)		(63,757	)
Accounts payable		(136,678	)		(124,727	)
Accrued taxes		123,746			79,338
Accrued compensation		(64,030	)		(64,851	)
Other current liabilities		7,928			9,357

Net cash provided from operating activities		296,927			142,222

Investing Activities:
Property additions		(337,984	)		(349,683	)
Investment in restricted cash from pollution control revenue bonds		(160	)		(145	)
Distribution of restricted cash from pollution control revenue bonds		13,774			19,622
Nuclear decommissioning trust fund purchases		(60,600	)		(46,941	)
Nuclear decommissioning trust fund sales		60,600			46,941
Cost of removal, net of salvage		(5,109	)		(8,863	)
Other		3,025			13,453

Net cash used for investing activities		(326,454	)		(325,616	)

Financing Activities:
Decrease in notes payable, net		(24,995	)		—
Proceeds —
Common stock issued to parent		—			150,000
Capital contributions		6,682			6,016
Gross excess tax benefit of stock options		47			607
Senior notes		500,000			300,000
Redemptions —
Preferred stock		—			(125,000	)
Payment of preferred and preference stock dividends		(9,868	)		(11,275	)
Payment of common stock dividends		(130,700	)		(122,825	)
Other		(5,869	)		(1,684	)

Net cash provided from financing activities		335,297			195,839

Net Change in Cash and Cash Equivalents		305,770			12,445
Cash and Cash Equivalents at Beginning of Period		28,181			73,616

Cash and Cash Equivalents at End of Period	$	333,951		$	86,061

Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $6,992 and $5,130 capitalized for 2009 and 2008, respectively)	$	54,875		$	63,324
Income taxes (net of refunds)	$	(640	)	$	1,550

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 March 31,			At December 31,
Assets	2009			2008
	(in thousands)
Current Assets:
Cash and cash equivalents	$	333,951		$	28,181
Restricted cash and cash equivalents		66,466			80,079
Receivables —
Customer accounts receivable		343,870			350,410
Unbilled revenues		89,450			98,921
Under recovered regulatory clause revenues		204,804			153,899
Other accounts and notes receivable		29,649			44,645
Affiliated companies		60,765			70,612
Accumulated provision for uncollectible accounts		(9,161	)		(8,882	)
Fossil fuel stock, at average cost		330,134			322,089
Materials and supplies, at average cost		312,416			305,880
Vacation pay		52,701			52,577
Prepaid expenses		130,271			88,219
Other regulatory assets		105,654			74,825
Other		12,772			12,915

Total current assets		2,063,742			1,674,370

Property, Plant, and Equipment:
In service		17,789,435			17,635,129
Less accumulated provision for depreciation		6,346,622			6,259,720

		11,442,813			11,375,409
Nuclear fuel, at amortized cost		255,818			231,862
Construction work in progress		1,243,412			1,092,516

Total property, plant, and equipment		12,942,043			12,699,787

Other Property and Investments:
Equity investments in unconsolidated subsidiaries		51,745			50,912
Nuclear decommissioning trusts, at fair value		376,606			403,966
Other		63,496			62,782

Total other property and investments		491,847			517,660

Deferred Charges and Other Assets:
Deferred charges related to income taxes		369,991			362,596
Prepaid pension costs		176,613			166,334
Deferred under recovered regulatory clause revenues		—			180,874
Other regulatory assets		761,831			732,367
Other		206,178			202,018

Total deferred charges and other assets		1,514,613			1,644,189

Total Assets	$	17,012,245		$	16,536,006

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 March 31,			At December 31,
Liabilities and Stockholder’s Equity	2009			2008
	(in thousands)
Current Liabilities:
Securities due within one year	$	250,040		$	250,079
Notes payable		—			24,995
Accounts payable —
Affiliated		140,190			178,708
Other		272,427			358,176
Customer deposits		81,730			77,205
Accrued taxes —
Income taxes		143,306			18,299
Other		49,447			30,372
Accrued interest		67,393			56,375
Accrued vacation pay		44,217			44,217
Accrued compensation		26,973			91,856
Liabilities from risk management activities		116,330			83,873
Other		43,075			53,777

Total current liabilities		1,235,128			1,267,932

Long-term Debt		6,103,870			5,604,791

Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		2,192,025			2,243,117
Deferred credits related to income taxes		90,806			90,083
Accumulated deferred investment tax credits		170,653			172,638
Employee benefit obligations		399,844			396,923
Asset retirement obligations		468,632			461,284
Other cost of removal obligations		655,389			634,792
Other regulatory liabilities		79,371			79,151
Other		51,638			45,858

Total deferred credits and other liabilities		4,108,358			4,123,846

Total Liabilities		11,447,356			10,996,569

Preferred and Preference Stock		685,127			685,127

Common Stockholder’s Equity:
Common stock, par value $40 per share —
Authorized - 40,000,000 shares
Outstanding - 25,475,000 shares		1,019,000			1,019,000
Paid-in capital		2,101,062			2,091,462
Retained earnings		1,769,361			1,753,797
Accumulated other comprehensive loss		(9,661	)		(9,949	)

Total common stockholder’s equity		4,879,762			4,854,310

Total Liabilities and Stockholder’s Equity	$	17,012,245		$	16,536,006

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

FIRST QUARTER 2009 vs. FIRST QUARTER 2008

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 constructive regulatory environment, to maintain energy sales in the midst of the current economic downturn, and to effectively manage and secure timely recovery of rising costs. These costs include those related to projected long-term demand growth, increasingly stringent environmental standards, fuel prices, 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


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$16.2		12.4

Alabama Power’s financial performance remained stable in the first quarter 2009 despite the continued challenges of a recessionary economy. Alabama Power’s net income after dividends on preferred and preference stock for the first quarter 2009 was $146.3 million compared to $130.1 million for the same period in 2008. The increase was primarily due to the corrective rate package providing for adjustments associated with customer charges to certain existing rate structures effective in January 2009, and a decrease in other operations and maintenance expenses related to steam power associated with fewer scheduled outages. The increase was partially offset by a decline in sales growth and increases in income taxes and depreciation and amortization resulting from additional plant in service.

Retail Revenues


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$23.9		2.3

In the first quarter 2009, retail revenues were $1.06 billion compared to $1.03 billion for the same period in 2008.

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

Details of the change to retail revenues are as follows:


	First Quarter
	2009

	(in millions)			(% change)
Retail – prior year	$	1,034.3
Estimated change in —
Rates and pricing		49.6			4.8
Sales growth (decline)		(32.4	)		(3.1	)
Weather		(0.7	)		(0.1	)
Fuel and other cost recovery		7.3			0.7

Retail – current year	$	1,058.1			2.3	%

Revenues associated with changes in rates and pricing increased in the first quarter 2009 when compared to the same period in 2008 primarily due to the corrective rate package increase effective January 2009, which mainly provided for adjustments associated with customer charges to certain existing rate structures. 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 declined due to a recessionary economy in the first quarter 2009 when compared to the same period in 2008. Weather-adjusted residential KWH energy sales decreased 2.6% driven by a decline in customer demand related to customer energy efficiency efforts in addition to a recessionary economy. Industrial KWH energy sales decreased 21.6% due to a broad decline in demand across all industrial segments. Weather-adjusted commercial KWH energy sales decreased 2.5% due to a decline in customer demand.

Revenues resulting from changes in weather were relatively flat in the first quarter 2009 when compared to the same period in 2008.

Fuel and other cost recovery revenues increased in the first quarter 2009 when compared to the same period in 2008 due to increases in fuel costs. 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


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$(11.3)		(6.7)

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 first quarter 2009, wholesale revenues from non-affiliates were $158.7 million compared to $170.0 million for the same period in 2008. This decrease was primarily due to a 7.8% reduction in price.

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

Other Revenues


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$(10.1)		(20.8)

In the first quarter 2009, other revenues were $38.6 million compared to $48.7 million for the same period in 2008. This decrease was primarily due to a decrease of $9.5 million in revenues from gas-fueled co-generation steam facilities resulting from lower gas prices.

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


	First Quarter 2009 vs. First Quarter 2008
	(change in millions)			(% change)
Fuel	$	30.1			6.6
Purchased power – non-affiliates		4.3			38.6
Purchased power – affiliates		(47.1	)		(53.1	)

Total fuel and purchased power expenses	$	(12.7	)

In the first quarter 2009, total fuel and purchased power expenses were $540.4 million compared to $553.1 million for the same period in 2008. This decrease was primarily due to a $68.8 million decrease in total KWHs generated and purchased, partially offset by a $56.1 million increase in the cost of energy resulting from an increase in the average cost of coal.

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.

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


	First Quarter		First Quarter		Percent
Average Cost	2009		2008		Change
	(cents per net KWH)
Fuel		2.92		2.60		12.3
Purchased power		6.14		5.67		8.3

In the first quarter 2009, fuel expense was $483.3 million compared to $453.2 million for the same period in 2008. The increase was due to a 12.3% increase in the average cost of fuel per KWH generated, primarily due to the price of fuels. The average cost of coal per KWH generated increased 33.3% primarily as a result of increases in commodity and transportation costs. The average cost of natural gas per KWH generated decreased 25.1% primarily as a result of decreases in commodity prices.

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

Non-Affiliates

In the first quarter 2009, purchased power expense from non-affiliates was $15.5 million compared to $11.2 million for the same period in 2008. This increase was primarily related to a 37.8% volume increase in KWHs purchased from available lower-priced market energy alternatives.

Energy purchases from non-affiliates will vary depending on the market cost of available energy being lower than 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

In the first quarter 2009, purchased power expense from affiliates was $41.6 million compared to $88.7 million for the same period in 2008. This decrease was primarily related to a 57.5% decrease in the amount of energy purchased because of the availability of lower-priced market energy alternatives, partially offset by a 10.4% increase in price.

Energy purchases from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC, as approved by the FERC.

Other Operations and Maintenance Expenses


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$(32.7)		(10.6)

In the first quarter 2009, other operations and maintenance expenses were $276.8 million compared to $309.5 million for the same period in 2008. This decrease was primarily a result of a $35.9 million decrease in steam power expense associated with fewer scheduled outages, primarily offset by a $5.0 million increase in nuclear production expense related to operations and scheduled outage cost.

Depreciation and Amortization


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$18.8		15.1

For the first quarter 2009, depreciation and amortization was $143.4 million compared to $124.6 million for the same period in 2008. This increase was the result of an increase in plant in service due to additions to property, plant, and equipment primarily related to steam power, environmental mandates, and transmission projects. See MANAGEMENT’S DISCUSSION AND ANALYSIS – RESULTS OF OPERATIONS – “Depreciation and Amortization” of Alabama Power in Item 7 of the Form 10-K for additional information.

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

Allowance for Equity Funds Used During Construction


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$5.4		48.0

For the first quarter 2009, allowance for equity funds used during construction (AFUDC) was $16.7 million compared to $11.3 million for the same period in 2008. This increase was primarily due to increases in the amount of construction work in progress at generating facilities related to environmental mandates.

Income Taxes


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$11.6		15.8

For the first quarter 2009, income taxes were $85.0 million compared to $73.4 million for the same period in 2008. This increase was primarily due to higher pre-tax income and a decrease in the tax benefit from the production activities deduction, partially offset by the increase in non-taxable AFUDC and a decrease in expense related to tax contingencies.

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 constructive 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 maintaining 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 or decline in Alabama Power’s service area. Recent recessionary conditions have negatively impacted sales growth and are expected to continue to have a negative impact on energy sales, particularly to industrial customers. The timing and extent of the economic recovery will impact future earnings.

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.

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

Water Quality

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Water Quality” of Alabama Power in Item 7 of the Form 10-K for additional information regarding the EPA’s regulation of cooling water intake structures. On April 1, 2009, the U.S. Supreme Court reversed the U.S. Court of Appeals for the Second Circuit’s decision with respect to the rule’s use of cost-benefit analysis and held that the EPA could consider costs in arriving at its standards and in providing variances from those standards for existing power plant cooling water intake structures. Other aspects of the court’s decision were not appealed and remain unaffected by the U.S. Supreme Court’s ruling. While the U.S. Supreme Court’s decision may ultimately result in greater flexibility for demonstrating compliance with the standards, the full scope of the regulations will depend on subsequent legal proceedings, further rulemaking by the EPA, the results of studies and analyses performed as part of the rules’ implementation, and the actual requirements established by state regulatory agencies and, therefore, cannot be determined at this time.

Global Climate Issues

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Global Climate Issues” of Alabama Power in Item 7 of the Form 10-K for information regarding the potential for legislation and regulation addressing greenhouse gas emissions. On April 17, 2009, the EPA released a proposed finding that certain greenhouse gas emissions from new motor vehicles endanger public health and welfare due to climate change. The ultimate outcome of the proposed endangerment finding cannot be determined at this time and will depend on additional regulatory action and potential legal challenges. However, regulatory decisions that may follow from such a finding could have implications for both new and existing stationary sources, such as power plants. In addition, federal legislative proposals that would impose mandatory requirements related to greenhouse gas emissions, renewable energy standards, and energy efficiency standards continue to be actively considered in Congress, and the reduction of greenhouse gas emissions has been identified as a high priority by the current Administration. The ultimate outcome of these matters cannot be determined at this time; however, mandatory restrictions on Alabama Power’s greenhouse gas emissions, or requirements relating to renewable energy or energy efficiency, could result in significant additional compliance costs that could affect future unit retirement and replacement decisions and results of operations, cash flows, and financial condition if such costs are not recovered through regulated rates.

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 October 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 with reserve prices not to exceed the CBR tariff price, 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 provides for a cost-based price for wholesale sales of less than a year. On March 5, 2009, the FERC accepted Southern Company’s CBR tariff for filing. On March 25, 2009, the FERC accepted Southern Company’s compliance filing related to the MBR tariff and directed Southern Company to commence

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

the energy auction in 30 days. Southern Company commenced the energy auction on April 23, 2009. Implementation of the energy auction in accordance with the MBR tariff order is expected to adequately mitigate going forward any presumption of market power that Southern Company may have in the Southern Company retail service territory. The original generation dominance proceeding initiated by the FERC in December 2004 remains pending before the FERC. The ultimate outcome of this matter cannot be determined at this time.

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 March 31, 2009 totaled $189.0 million as compared to $305.8 million at December 31, 2008. These under recovered fuel costs at March 31, 2009 are included in under recovered regulatory clause revenues on Alabama Power’s Condensed Balance Sheets herein. 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.

Rate ECR revenues, as recorded on the financial statements, are adjusted for differences in actual recoverable costs and amounts billed in current regulated rates.

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 March 31, 2009, Alabama Power had accumulated a balance of $37.1 million in the target reserve for future storms, which is included in the Condensed Balance Sheets herein under “Other Regulatory Liabilities.”

Steam Service

On February 5, 2009, the Alabama PSC granted a Certificate of Abandonment of Steam Service in the downtown area of the City of Birmingham. The order allows Alabama Power to discontinue steam service by the earlier of three years from May 14, 2008 or when it has no remaining steam service customers. Currently, Alabama Power has contractual obligations to provide steam service until 2013. Impacts related to the abandonment of steam service are recognized in operating income and are not material to the earnings of Alabama Power.

Income Tax Matters

Legislation

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA). Major tax incentives in the ARRA include an extension of bonus depreciation and multiple renewable energy incentives, which could have a significant impact on the future cash flow and net income of Alabama Power. Alabama Power estimates the cash flow reduction to 2009 tax payments as a result of the bonus depreciation provisions of the ARRA to be between approximately $75 million and $90 million. Alabama

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

Power is currently assessing the other financial implications of the ARRA. 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.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Alabama Power’s financial condition remained stable at March 31, 2009. Throughout the recent turmoil in the financial markets, Alabama Power has maintained adequate access to capital without drawing on 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 at reasonable rates. 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 and liquidity needs. Market rates for committed credit have increased, and Alabama Power has been and expects to continue to be subject to higher costs as its existing

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

facilities are replaced or renewed. Total committed credit fees average less than ¹/4 of 1% per year for Alabama Power. Alabama Power’s interest cost for short-term debt has decreased as market short-term interest rates have declined from 2008 levels. The ultimate impact on future financing costs as a result of the financial turmoil cannot be determined at this time. Alabama Power experienced no material counterparty credit losses as a result of the turmoil in the financial markets. See “Sources of Capital” and “Financing Activities” herein for additional information.

Alabama Power’s investments in pension and nuclear decommissioning trust funds have continued to decline in value during the first quarter 2009. Alabama Power expects that the earliest that cash may have to be contributed to the pension trust fund is 2011 and such contribution could be significant; however, projections of the amount vary significantly depending on interpretations of and decisions related to federal legislation passed during 2008 as well as other key variables including future trust fund performance and cannot be determined at this time. Alabama Power does not expect any changes to the funding obligations to the nuclear decommissioning trust at this time.

Net cash provided from operating activities totaled $296.9 million for the first three months of 2009, compared to $142.2 million for the corresponding period in 2008. Significant changes in operating cash flow for the first three months of 2009 include a lower receivables balance from increased collections and lower cash outflows for fossil fuel inventory as compared to the first three months of 2008. Net cash used for investing activities totaled $326.5 million primarily due to gross property additions to utility plant of $338.0 million in the first three months of 2009. 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 $335.3 million for the first three months of 2009, compared to $195.8 million for the corresponding period in 2008. The $139.5 million increase is primarily due to greater issuances of securities and no redemption of securities in the first three months of 2009 as compared to the first three months of 2008. Fluctuations in cash flow from financing activities vary from year-to-year based on capital needs and securities redeemed.

Significant balance sheet changes for the first quarter 2009 include an increase of $305.8 million in cash and cash equivalents primarily due to an increase in temporary cash investments, an increase of $154.3 million in gross plant primarily due to increases in transmission and distribution projects and other production expenses. Long-term debt increased $499.1 million.

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 $250.0 million will be required through March 31, 2010 for maturities of long-term debt. The construction program is subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; revised load growth estimates; changes in environmental statutes and regulations; changes in nuclear plants to meet new regulatory requirements; changes in FERC rules and regulations; Alabama PSC approvals; the cost and efficiency of construction labor, equipment, and materials; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.

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

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 March 31, 2009 cash and cash equivalents of approximately $334 million, unused committed lines of credit of approximately $1.3 billion (including $582 million of such lines which are dedicated to funding purchase obligations related to variable rate pollution control revenue bonds), and commercial paper programs. Of the unused credit facilities, $466 million will expire in 2009, $25 million will expire in 2011, and $765 million will expire in 2012. Of the facilities that expire in 2009, $379 million allow for one-year term loans. 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. Alabama Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Alabama Power and other Southern Company subsidiaries. At March 31, 2009, Alabama Power had no commercial paper outstanding and no outstanding borrowings under its committed lines of credit. 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

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 March 31, 2009, the maximum potential collateral requirements under these contracts at a BBB- and/or Baa3 rating were approximately $4 million. At March 31, 2009, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $203 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. In addition, certain nuclear fuel agreements could require collateral of up to $64 million in the event of a rating change to below investment grade for Southern Company. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, any credit rating downgrade could impact Alabama Power’s ability to access capital markets, particularly the short-term debt market.

Market Price Risk

Alabama Power’s market risk exposure relative to interest rate changes has not changed materially compared with the December 31, 2008 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

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

existing indebtedness in the near term. However, the impact on future financing costs 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 per the guidelines of the Alabama PSC. As such, Alabama Power has no material change in market risk exposure when compared with the December 31, 2008 reporting period.

The changes in fair value of energy-related derivative contracts for the three months ended March 31, 2009 were as follows:


	First Quarter
	2009
	Changes
	Fair Value

	(in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net	$	(91.9	)
Contracts realized or settled		23.2
Current period changes^(a)		(61.5	)

Contracts outstanding at the end of the period, assets (liabilities), net	$	(130.2	)


(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 ended March 31, 2009 was $38 million, substantially all of which is due to natural gas positions. This change is attributable to both the volume and prices of natural gas. At March 31, 2009, Alabama Power had a net hedge volume of 49.3 Bcf with a weighted average contract cost approximately $2.70 per mmBtu above market prices, compared to 44.5 Bcf at December 31, 2008 with a weighted average contract cost approximately $2.12 per mmBtu above market prices. The majority of the natural gas hedges are recovered through the fuel cost recovery clause.

At March 31, 2009, the fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:


	March 31, 2009

	(in millions)
Regulatory hedges	$	(130.2	)
Cash flow hedges		—
Not designated		—
-
Total fair value	$	(130.2	)

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.

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

Unrealized pre-tax gains and losses recognized in income for the three months ended March 31, 2009 and 2008 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 March 31, 2009 are as follows:


	March 31, 2009
	Fair Value Measurements

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

	(in millions)
Level 1	$	—		$	—		$	—		$	—
Level 2		(130.2	)		(105.4	)		(24.8	)		—
Level 3		—			—			—			—

Fair value of contracts outstanding at end of period	$	(130.2	)	$	(105.4	)	$	(24.8	)	$	—

Alabama Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, and thus fall into Level 2. See Note (C) to the Condensed Financial Statements herein for further discussion on fair value measurements.

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 March 2009, Alabama Power issued $500 million of Series 2009A 6.00% Senior Notes due March 1, 2039. The proceeds were used to repay short-term indebtedness and for other general corporate purposes, including Alabama Power’s continuous construction program.

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

CONDENSED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months
	Ended March 31,
	2009			2008
	(in thousands)
Operating Revenues:
Retail revenues	$	1,592,395		$	1,575,007
Wholesale revenues —
Non-affiliates		95,986			152,692
Affiliates		15,210			73,910
Other revenues		62,250			63,238

Total operating revenues		1,765,841			1,864,847

Operating Expenses:
Fuel		600,490			637,923
Purchased power —
Non-affiliates		61,953			58,031
Affiliates		197,223			252,935
Other operations and maintenance		390,493			368,815
Depreciation and amortization		167,111			150,608
Taxes other than income taxes		76,248			71,286

Total operating expenses		1,493,518			1,539,598

Operating Income		272,323			325,249
Other Income and (Expense):
Allowance for equity funds used during construction		20,754			27,757
Interest income		1,230			787
Interest expense, net of amounts capitalized		(98,390	)		(86,338	)
Other income (expense), net		(6,720	)		(3,293	)

Total other income and (expense)		(83,126	)		(61,087	)

Earnings Before Income Taxes		189,197			264,162
Income taxes		62,628			83,801

Net Income		126,569			180,361
Dividends on Preferred and Preference Stock		4,345			4,345

Net Income After Dividends on Preferred and Preference Stock	$	122,224		$	176,016

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months
	Ended March 31,
	2009		2008
	(in thousands)
Net Income After Dividends on Preferred and Preference Stock	$	122,224	$	176,016
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $1,180 and $(6,043), respectively		1,870		(9,580	)
Reclassification adjustment for amounts included in net income, net of tax of $1,743 and $206, respectively		2,763		327

Total other comprehensive income (loss)		4,633		(9,253	)

COMPREHENSIVE INCOME	$	126,857	$	166,763

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 Three Months
	Ended March 31,
	2009			2008
	(in thousands)
Operating Activities:
Net income	$	126,569		$	180,361
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		199,773			178,735
Deferred income taxes and investment tax credits		(7,130	)		(5,709	)
Deferred revenues		(7,685	)		35,046
Deferred expenses		26,387			27,996
Allowance for equity funds used during construction		(20,754	)		(27,757	)
Pension, postretirement, and other employee benefits		(386	)		9,863
Hedge settlements		(16,167	)		(15,816	)
Other, net		26,708			(25,593	)
Changes in certain current assets and liabilities —
Receivables		13,563			77,074
Fossil fuel stock		(112,255	)		1,293
Prepaid income taxes		(5,139	)		22,380
Other current assets		4,562			(4,042	)
Accounts payable		174,347			(44,570	)
Accrued taxes		(135,100	)		(79,097	)
Accrued compensation		(96,144	)		(72,174	)
Other current liabilities		61,917			22,630

Net cash provided from operating activities		233,066			280,620

Investing Activities:
Property additions		(640,486	)		(517,606	)
Distribution of restricted cash from pollution control revenue bonds		9,305			16,094
Nuclear decommissioning trust fund purchases		(318,732	)		(113,811	)
Nuclear decommissioning trust fund sales		320,681			106,931
Cost of removal, net of salvage		(16,368	)		(11,346	)
Change in construction payables, net of joint owner portion		55,767			8,608
Other		14,125			(11,239	)

Net cash used for investing activities		(575,708	)		(522,369	)

Financing Activities:
Decrease in notes payable, net		(76,509	)		(359,113	)
Proceeds —
Capital contributions from parent company		280,016			241,800
Senior notes		500,000			250,000
Other long-term debt		750			300,000
Redemptions —
Senior notes		(150,361	)		(417	)
Payment of preferred and preference stock dividends		(4,413	)		(3,947	)
Payment of common stock dividends		(184,725	)		(180,300	)
Other		(7,554	)		(3,313	)

Net cash provided from financing activities		357,204			244,710

Net Change in Cash and Cash Equivalents		14,562			2,961
Cash and Cash Equivalents at Beginning of Period		132,739			15,392

Cash and Cash Equivalents at End of Period	$	147,301		$	18,353

Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $9,143 and $11,837 capitalized for 2009 and 2008, respectively)	$	60,905		$	70,452
Income taxes (net of refunds)	$	13,330		$	450

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 March 31,			At December 31,
Assets	2009			2008
	(in thousands)
Current Assets:
Cash and cash equivalents	$	147,301		$	132,739
Restricted cash and cash equivalents		15,879			22,381
Receivables —
Customer accounts receivable		505,440			554,219
Unbilled revenues		131,520			147,978
Under recovered regulatory clause revenues		351,964			338,780
Other accounts and notes receivable		228,555			97,899
Affiliated companies		20,874			13,091
Accumulated provision for uncollectible accounts		(11,291	)		(10,732	)
Fossil fuel stock, at average cost		597,012			484,757
Materials and supplies, at average cost		361,226			356,537
Vacation pay		65,390			71,217
Prepaid income taxes		71,126			65,987
Other regulatory assets		164,748			118,961
Other		45,489			63,464

Total current assets		2,695,233			2,457,278

Property, Plant, and Equipment:
In service		24,266,916			23,975,262
Less accumulated provision for depreciation		9,204,865			9,101,474

		15,062,051			14,873,788
Nuclear fuel, at amortized cost		292,163			278,412
Construction work in progress		1,773,995			1,434,989

Total property, plant, and equipment		17,128,209			16,587,189

Other Property and Investments:
Equity investments in unconsolidated subsidiaries		57,796			57,163
Nuclear decommissioning trusts, at fair value		432,575			460,430
Other		37,970			40,945

Total other property and investments		528,341			558,538

Deferred Charges and Other Assets:
Deferred charges related to income taxes		578,218			572,528
Deferred under recovered regulatory clause revenues		366,045			425,609
Other regulatory assets		1,435,775			1,449,352
Other		205,278			265,174

Total deferred charges and other assets		2,585,316			2,712,663

Total Assets	$	22,937,099		$	22,315,668

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 March 31,			At December 31,
Liabilities and Stockholder’s Equity	2009			2008
	(in thousands)
Current Liabilities:
Securities due within one year	$	380,323		$	280,443
Notes payable		280,586			357,095
Accounts payable —
Affiliated		195,395			260,545
Other		748,629			422,485
Customer deposits		191,356			186,919
Accrued taxes —
Income taxes		102,591			70,916
Unrecognized tax benefits		141,095			128,712
Other		91,672			278,172
Accrued interest		107,411			79,432
Accrued vacation pay		51,563			57,643
Accrued compensation		43,734			135,191
Liabilities from risk management activities		143,271			113,432
Other		186,851			136,176

Total current liabilities		2,664,477			2,507,161

Long-term Debt		7,254,092			7,006,275

Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		3,076,923			3,064,580
Deferred credits related to income taxes		136,630			140,933
Accumulated deferred investment tax credits		252,788			256,218
Employee benefit obligations		882,380			882,965
Asset retirement obligations		696,930			688,019
Other cost of removal obligations		385,140			396,947
Other regulatory liabilities		97,502			115,865
Other		119,370			111,505

Total deferred credits and other liabilities		5,647,663			5,657,032

Total Liabilities		15,566,232			15,170,468

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		3,939,265			3,655,731
Retained earnings		2,795,289			2,857,789
Accumulated other comprehensive loss		(28,117	)		(32,750	)

Total common stockholder’s equity		7,104,910			6,879,243

Total Liabilities and Stockholder’s Equity	$	22,937,099		$	22,315,668

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

FIRST QUARTER 2009 vs. FIRST QUARTER 2008

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 constructive regulatory environment, to maintain energy sales in the midst of the current economic downturn, and to effectively manage and secure timely recovery of rising costs. These costs include those related to projected long-term demand growth, increasingly stringent environmental standards, and fuel prices. Appropriately balancing the need to recover these increasing costs with customer prices will continue to challenge Georgia Power for the foreseeable future. Georgia Power is required to file a general rate case by July 1, 2010, which will determine whether the 2007 Retail Rate Plan should be continued, modified, or discontinued. Georgia Power also expects to file a fuel cost recovery case in the third quarter 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


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$(53.8)		(30.6)

Georgia Power’s net income after dividends on preferred and preference stock for the first quarter 2009 was $122.2 million compared to $176.0 million for the corresponding period in 2008. The decrease was primarily due to lower industrial base revenues resulting from the recessionary economy and a charge in the first quarter 2009 in connection with a voluntary attrition plan under which 579 employees elected to resign from their positions effective March 31, 2009.

Retail Revenues


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$17.4		1.1

In the first quarter 2009, retail revenues were $1.59 billion compared to $1.57 billion for the corresponding period in 2008.

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

Details of the change to retail revenues are as follows:


	First Quarter
	2009
	(in millions)			(% change)
Retail – prior year	$	1,575.0
Estimated change in —
Rates and pricing		19.7			1.3
Sales growth (decline)		(18.1	)		(1.2	)
Weather		(0.6	)		—
Fuel cost recovery		16.4			1.0

Retail – current year	$	1,592.4			1.1	%

Revenues associated with changes in rates and pricing increased in the first quarter 2009 when compared to the corresponding period in 2008 due to increased environmental compliance cost recovery revenues of $49.4 million in accordance with the 2007 Retail Rate Plan, partially offset by decreased revenues from market-response rates to large commercial and industrial customers.

Revenues attributable to changes in sales growth declined in the first quarter 2009 when compared to the corresponding period for 2008. This decrease was primarily due to the recessionary economy, partially offset by a 0.4% increase in retail customers. Weather-adjusted residential KWH sales increased 1.3%, weather-adjusted commercial KWH sales decreased 0.6%, and weather-adjusted industrial KWH sales decreased 13.9% for the first quarter 2009 when compared to the corresponding period in 2008. Weather-adjusted industrial KWH sales decreased due to a broad decline in demand across all industrial segments.

Fuel revenues and costs are allocated between retail and wholesale jurisdictions. Retail fuel cost recovery revenues increased by $16.4 million in the first quarter 2009 when compared to the corresponding period in 2008 due to a higher proportion of retail fuel revenues compared to wholesale fuel revenues during the period, partially offset by decreased fuel and purchased power expenses. Electric rates include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the fuel component of purchased power costs, and do not affect net income.

Wholesale Revenues – Non-Affiliates


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$(56.7)		(37.1)

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 the availability of Southern Company system generation. In the first quarter 2009, wholesale revenues from non-affiliates were $96.0 million compared to $152.7 million in the same period in 2008. This decrease was due to a 53.1% decrease in KWH sales due to lower demand.

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

Wholesale Revenues – Affiliates


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$(58.7)		(79.4)

Wholesale revenues from affiliated companies 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 first quarter 2009, wholesale revenues from affiliates were $15.2 million compared to $73.9 million in the same period in 2008. This decrease was due to an 83.6% decrease in KWH sales due to lower demand primarily caused by the recessionary economy.

Fuel and Purchased Power Expenses


	First Quarter 2009 vs. First Quarter 2008
	(change in millions)			(% change)
Fuel	$	(37.4	)		(5.9	)
Purchased power – non-affiliates		3.9			6.8
Purchased power – affiliates		(55.7	)		(22.0	)

Total fuel and purchased power expenses	$	(89.2	)

In the first quarter 2009, total fuel and purchased power expenses were $859.7 million compared to $948.9 million in the same period in 2008. This decrease was due to a $104.8 million decrease related to fewer KWHs generated and purchased, partially offset by a $15.6 million net increase in the average cost of fuel and purchased power.

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


	First Quarter		First Quarter		Percent
Average Cost	2009		2008		Change
	(cents per net KWH)
Fuel		3.23		2.84		13.7
Purchased power		6.40		7.32		(12.6	)

In the first quarter 2009, fuel expense was $600.5 million compared to $637.9 million in the same period in 2008. This decrease was due to an 18.2% decrease in volume of KWHs generated primarily as a result of the lower KWH demand and lower natural gas prices, partially offset by a 28.8% increase in the average cost of coal per KWH generated.

Fuel and purchased power transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Georgia Power’s fuel cost recovery clause. See FUTURE EARNINGS POTENTIAL – “FERC and Georgia PSC Matters – Retail Fuel Cost Recovery” herein for additional information.

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

Non-Affiliates

In the first quarter 2009, purchased power expense from non-affiliates was $62.0 million compared to $58.0 million in the same period in 2008. This increase was due to a 45.9% volume increase in KWHs purchased from available lower-priced market energy alternatives partially offset by a 26.9% decrease in the average cost per KWH purchased.

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

Affiliates

In the first quarter 2009, purchased power expense from affiliates was $197.2 million compared to $252.9 million in the same period in 2008. This decrease was due to a 9.5% decrease in the average cost per KWH purchased and a 7.6% volume decrease in KWHs purchased because of the availability of lower-priced market energy alternatives within the Power Pool.

Energy purchases from affiliated companies 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


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$21.7		5.9

In the first quarter 2009, other operations and maintenance expenses were $390.5 million compared to $368.8 million in the same period in 2008. This increase was primarily due to a $29.4 million charge in the first quarter 2009 in connection with a voluntary attrition plan under which 579 employees elected to resign their positions effective March 31, 2009. The first quarter 2009 charge will be largely offset by lower salary costs for the remainder of the year and is not expected to have a material impact on Georgia Power’s financial statements for the year ending December 31, 2009. This increase was partially offset by an $8.5 million decrease in fossil and distribution maintenance as a result of the timing of maintenance activities.

Depreciation and Amortization


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$16.5		11.0

In the first quarter 2009, depreciation and amortization was $167.1 million compared to $150.6 million in the same period in 2008. This increase was due primarily to additional plant in service related to completed transmission, distribution, and environmental projects.

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

Allowance for Equity Funds Used During Construction


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$(7.0)		(25.2)

In the first quarter 2009, allowance for equity funds used during construction was $20.8 million compared to $27.8 million in the same period in 2008. This decrease was primarily due to a decrease in the average construction work in progress balances in the first quarter 2009 compared to the same period in 2008 as a result of projects completed during 2008.

Taxes Other Than Income Taxes


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$4.9		7.0

In the first quarter 2009, taxes other than income taxes were $76.2 million compared to $71.3 million in the same period in 2008. This increase is primarily due to increased ad valorem taxes.

Income Taxes


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$(21.2)		(25.3)

In the first quarter 2009, income taxes were $62.6 million compared to $83.8 million in the same period in 2008. This decrease was primarily due to lower pre-tax net income.

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 constructive 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 maintaining 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 or decline in Georgia Power’s service area. Recent recessionary conditions have negatively impacted sales growth and are expected to continue to have a negative impact on energy sales, particularly to industrial customers. The timing and extent of the economic recovery will impact future earnings. 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.

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

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.

Water Quality

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Water Quality” of Georgia Power in Item 7 of the Form 10-K for additional information regarding the EPA’s regulation of cooling water intake structures. On April 1, 2009, the U.S. Supreme Court reversed the U.S. Court of Appeals for the Second Circuit’s decision with respect to the rule’s use of cost-benefit analysis and held that the EPA could consider costs in arriving at its standards and in providing variances from those standards for existing power plant cooling water intake structures. Other aspects of the court’s decision were not appealed and remain unaffected by the U.S. Supreme Court’s ruling. While the U.S. Supreme Court’s decision may ultimately result in greater flexibility for demonstrating compliance with the standards, the full scope of the regulations will depend on subsequent legal proceedings, further rulemaking by the EPA, the results of studies and analyses performed as part of the rules’ implementation, and the actual requirements established by state regulatory agencies and, therefore, cannot be determined at this time.

Global Climate Issues

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Global Climate Issues” of Georgia Power in Item 7 of the Form 10-K for information regarding the potential for legislation and regulation addressing greenhouse gas emissions. On April 17, 2009, the EPA released a proposed finding that certain greenhouse gas emissions from new motor vehicles endanger public health and welfare due to climate change. The ultimate outcome of the proposed endangerment finding cannot be determined at this time and will depend on additional regulatory action and potential legal challenges. However, regulatory decisions that may follow from such a finding could have implications for both new and existing stationary sources, such as power plants. In addition, federal legislative proposals that would impose mandatory requirements related to greenhouse gas emissions, renewable energy standards, and energy efficiency standards continue to be actively considered in Congress, and the reduction of greenhouse gas emissions has been identified as a high priority by the current Administration. The ultimate outcome of these matters cannot be determined at this time; however, mandatory restrictions on Georgia Power’s greenhouse gas emissions, or requirements relating to renewable energy or energy efficiency, could result in significant additional compliance costs that could affect future unit retirement and replacement decisions and results of operations, cash flows, and financial condition if such costs are not recovered through regulated rates.

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 October 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

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

in a day-ahead auction and an hour-ahead auction with reserve prices not to exceed the CBR tariff price, 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 provides for a cost-based price for wholesale sales of less than a year. On March 5, 2009, the FERC accepted Southern Company’s CBR tariff for filing. On March 25, 2009, the FERC accepted Southern Company’s compliance filing related to the MBR tariff and directed Southern Company to commence the energy auction in 30 days. Southern Company commenced the energy auction on April 23, 2009. Implementation of the energy auction in accordance with the MBR tariff order is expected to adequately mitigate going forward any presumption of market power that Southern Company may have in the Southern Company retail service territory. The original generation dominance proceeding initiated by the FERC in December 2004 remains pending before the FERC. The ultimate outcome of this matter cannot be determined at this time.

Retail Fuel Cost Recovery

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. In May 2008, the Georgia PSC approved an additional increase of approximately $222 million effective June 2008. On March 10, 2009, the Georgia PSC granted Georgia Power’s request to delay its fuel case filing until September 4, 2009. The extension was requested as a result of difficulty in establishing a forward-looking fuel rate due to volatile coal and gas prices, uncertain sales forecasts, and a continuing decline in the State of Georgia’s economy. New fuel rates are expected to become effective January 1, 2010. As of March 31, 2009, Georgia Power had a total under recovered fuel cost balance of approximately $718 million compared to $764 million at December 31, 2008.

Fuel cost recovery revenues as recorded on the financial statements are adjusted for differences in actual recoverable fuel 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.

Income Tax Matters

Legislation

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA). Major tax incentives in the ARRA include an extension of bonus depreciation and multiple renewable energy incentives, which could have a significant impact on the future cash flow and net income of Georgia Power. Georgia Power estimates the cash flow reduction to 2009 tax payments as a result of the bonus depreciation provisions of the ARRA to be between approximately $120 million and $150 million. Georgia Power is currently assessing the other financial implications of the ARRA. The ultimate impact cannot be determined at this time.

Construction

Nuclear

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

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

Other

On March 17, 2009, the Georgia PSC approved Georgia Power’s request to convert Plant Mitchell from coal-fueled to wood biomass-fueled at an in-service cost of approximately $103 million. The conversion is expected to be completed in 2012. The Georgia PSC also approved Georgia Power’s plan to install additional environmental controls at Plants Branch and Yates.

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 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.

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

FINANCIAL CONDITION AND LIQUIDITY

Overview

Georgia Power’s financial condition remained stable at March 31, 2009. Throughout the recent turmoil in the financial markets, Georgia Power has maintained adequate access to capital without drawing on 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 at reasonable rates. 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 and liquidity needs. Market rates for committed credit have increased, and Georgia Power has been and expects to continue to be subject to higher costs as its existing facilities are replaced or renewed. Of the $185 million of facilities expiring in the first quarter 2009, $130 million were replaced or renewed. Subsequent to March 31, 2009, Georgia Power entered into additional credit agreements totaling $425 million. Total committed credit fees at Georgia Power average less than ³/₈ of 1% per year. Georgia Power’s interest cost for short-term debt has decreased as market short-term interest rates have declined. The ultimate impact on future financing costs as a result of the financial turmoil cannot be determined at this time. Georgia Power experienced no material counterparty credit losses as a result of the turmoil in the financial markets. See “Sources of Capital” and “Financing Activities” herein for additional information.

Georgia Power’s investments in pension and nuclear decommissioning trust funds have continued to decline in value during the first quarter 2009. Georgia Power expects that the earliest that cash may have to be contributed to the pension trust fund is 2011 and such contribution could be significant; however, projections of the amount vary significantly depending on interpretations of and decisions related to federal legislation passed during 2008 as well as other key variables including future trust fund performance and cannot be determined at this time. Georgia Power does not expect any changes to funding obligations to the nuclear decommissioning trusts prior to 2011.

Net cash provided from operating activities totaled $233.1 million for the first three months of 2009, compared to $280.6 million for the corresponding period in 2008. The $47.5 million decrease in cash provided from operating activities in the first three months of 2009 is primarily due to a decrease in net income and higher fuel and materials inventory additions. Net cash used for investing activities totaled $575.7 million primarily due to gross property additions to utility plant in the first three months of 2009. Net cash provided from financing activities totaled $357.2 million for the first three months of 2009, compared to $244.7 million for the corresponding period in 2008. The $112.5 million increase is primarily due to higher capital contributions from Southern Company and a smaller decrease in short-term debt compared to the corresponding period in 2008.

Significant balance sheet changes for the first three months of 2009 include an increase of $541.0 million in total property, plant, and equipment and an increase of $247.8 million in long-term debt to replace short-term debt and provide funds for Georgia Power’s continuous construction program.

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, trust funding requirements, and unrecognized tax benefits. Approximately $380.3 million will be required through March 31, 2010 to fund maturities of long-term debt. The construction programs are subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; revised load growth estimates; changes in environmental statutes and regulations; changes in nuclear plants to meet new

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

regulatory requirements; changes in FERC rules and regulations; Georgia PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; and the cost 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, security issuances, term-loans, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Georgia Power in Item 7 of the Form 10-K for additional information.

Georgia Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt as well as cash needs which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Georgia Power had at March 31, 2009 approximately $147.3 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 in place at March 31, 2009, $40 million expire in 2009, $130 million expire in 2010, and $1.1 billion expire in 2012. As described above, Georgia Power entered into additional credit agreements totaling $425 million subsequent to March 31, 2009. These facilities all expire in 2010. Of the facilities that expire in 2009 and 2010, $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.

Credit arrangements provide liquidity support to Georgia Power’s commercial paper program and purchase obligations related to variable rate pollution control revenue bonds. Georgia Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Georgia Power and other Southern Company subsidiaries. At March 31, 2009, Georgia Power had approximately $179.7 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 construction of new generation. At March 31, 2009, the maximum potential collateral requirements under these contracts at a BBB- and/or Baa3 rating were approximately $27 million. At March 31, 2009, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $1.0 billion. 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. In addition, certain nuclear fuel agreements could require collateral of up to $187 million in the event of a rating change to below investment grade for Southern Company. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, any credit

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

rating downgrade could impact Georgia Power’s ability to access capital markets, particularly the short-term debt market.

Market Price Risk

Georgia Power’s market risk exposure relative to interest rate changes has not changed materially compared with the December 31, 2008 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 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 per the guidelines of the Georgia PSC. As such, Georgia Power has no material change in market risk exposure when compared with the December 31, 2008 reporting period.

The changes in fair value of energy-related derivative contracts for the three months ended March 31, 2009 were as follows:


	First Quarter
	2009
	Changes
	Fair Value
	(in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net	$	(113.2	)
Contracts realized or settled		19.8
Current period changes^(a)		(83.2	)

Contracts outstanding at the end of the period, assets (liabilities), net	$	(176.6	)


(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 ended March 31, 2009 was $63 million, substantially all of which is due to natural gas positions. This change is attributable to both the volume and prices of natural gas. At March 31, 2009, Georgia Power had a net hedge volume of 71.5 Bcf with a weighted average contract cost approximately $2.53 per mmBtu above market prices, compared to 59.3 Bcf at December 31, 2008 with a weighted average contract cost approximately $1.96 per mmBtu above market prices. The natural gas hedges are recovered through the fuel cost recovery mechanism.

At March 31, 2009, the fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:


	March 31, 2009
	(in millions)
Regulatory hedges	$	(176.6	)
Not designated		—

Total fair value	$	(176.6	)

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

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. 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 ended March 31, 2009 and 2008 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 March 31, 2009 are as follows:


	March 31, 2009
	Fair Value Measurements
	Total			Maturity
	Fair Value			Year 1			Years 2&3			Years 4&5
	(in millions)
Level 1	$	—		$	—		$	—		$	—
Level 2		(176.6	)		(135.8	)		(40.8	)		—
Level 3		—			—			—			—

Fair value of contracts outstanding at end of period	$	(176.6	)	$	(135.8	)	$	(40.8	)	$	—

Georgia Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, and thus fall into Level 2. See Note (C) to the Condensed Financial Statements herein for further discussion on fair value measurements.

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

During the first quarter 2009, Georgia Power issued $500 million of Series 2009A 5.95% Senior Notes due February 1, 2039. The proceeds were used to repay at maturity $150 million aggregate principal amount of Series U Floating Rate Senior Notes due February 7, 2009, to repay a portion of short-term indebtedness, and for general corporate purposes, including Georgia Power’s continuous construction program. Georgia Power settled $100 million of hedges related to the Series 2009A issuance at a loss of approximately $16 million, and this loss will be amortized to interest expense, in earnings, together with a previously settled loss of approximately $2 million, over 10 years.

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

CONDENSED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months
	Ended March 31,
	2009			2008
	(in thousands)
Operating Revenues:
Retail revenues	$	238,391		$	227,964
Wholesale revenues —
Non-affiliates		21,966			25,656
Affiliates		5,360			42,940
Other revenues		18,567			14,975

Total operating revenues		284,284			311,535

Operating Expenses:
Fuel		115,553			150,127
Purchased power —
Non-affiliates		4,438			3,126
Affiliates		15,381			8,743
Other operations and maintenance		72,491			66,431
Depreciation and amortization		23,059			21,704
Taxes other than income taxes		22,448			20,696

Total operating expenses		253,370			270,827

Operating Income		30,914			40,708
Other Income and (Expense):
Allowance for equity funds used during construction		4,818			1,483
Interest income		209			709
Interest expense, net of amounts capitalized		(9,832	)		(10,996	)
Other income (expense), net		(616	)		(666	)

Total other income and (expense)		(5,421	)		(9,470	)

Earnings Before Income Taxes		25,493			31,238
Income taxes		7,400			10,157

Net Income		18,093			21,081
Dividends on Preference Stock		1,551			1,551

Net Income After Dividends on Preference Stock	$	16,542		$	19,530

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months
	Ended March 31,
	2009		2008
	(in thousands)
Net Income After Dividends on Preference Stock	$	16,542	$	19,530
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $- and $(1,481), respectively		—		(2,358	)
Reclassification adjustment for amounts included in net income, net of tax of $105 and $54, respectively		167		87

Total other comprehensive income (loss)		167		(2,271	)

COMPREHENSIVE INCOME	$	16,709	$	17,259

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 Three Months
	Ended March 31,
	2009			2008
	(in thousands)
Operating Activities:
Net income	$	18,093		$	21,081
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		24,269			22,981
Deferred income taxes		(4,022	)		569
Allowance for equity funds used during construction		(4,818	)		(1,483	)
Pension, postretirement, and other employee benefits		(391	)		1,319
Stock option expense		479			408
Tax benefit of stock options		3			85
Other, net		(5,325	)		430
Changes in certain current assets and liabilities —
Receivables		32,887			11,189
Fossil fuel stock		(18,231	)		(13,622	)
Materials and supplies		(205	)		(1,005	)
Prepaid income taxes		416			—
Property damage cost recovery		5,428			5,742
Other current assets		916			1,063
Accounts payable		(13,344	)		(1,438	)
Accrued taxes		6,361			6,094
Accrued compensation		(11,576	)		(9,847	)
Other current liabilities		5,761			6,230

Net cash provided from operating activities		36,701			49,796

Investing Activities:
Property additions		(109,737	)		(76,305	)
Investment in restricted cash from pollution control revenue bonds		(49,188	)		—
Cost of removal, net of salvage		(2,330	)		(3,583	)
Contruction payables		2,362			1,014
Other		(1,578	)		(54	)

Net cash used for investing activities		(160,471	)		(78,928	)

Financing Activities:
Decrease in notes payable, net		(89,930	)		(21,413	)
Proceeds —
Common stock issued to parent		135,000			—
Capital contributions from parent company		1,106			72,106
Gross excess tax benefit of stock options		9			194
Pollution control revenue bonds		130,400			—
Payment of preference stock dividends		(1,551	)		(1,406	)
Payment of common stock dividends		(22,350	)		(20,425	)
Other		(847	)		(271	)

Net cash provided from financing activities		151,837			28,785

Net Change in Cash and Cash Equivalents		28,067			(347	)
Cash and Cash Equivalents at Beginning of Period		3,443			5,348

Cash and Cash Equivalents at End of Period	$	31,510		$	5,001

Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $1,920 and $654 capitalized for 2009 and 2008, respectively)	$	8,347		$	8,241
Income taxes (net of refunds)	$	3,281		$	1,200

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 March 31,			At December 31,
Assets	2009			2008
	(in thousands)
Current Assets:
Cash and cash equivalents	$	31,510		$	3,443
Restricted cash and cash equivalents		49,188			—
Receivables —
Customer accounts receivable		67,112			69,531
Unbilled revenues		42,597			48,742
Under recovered regulatory clause revenues		78,850			98,644
Other accounts and notes receivable		10,300			7,201
Affiliated companies		1,015			8,516
Accumulated provision for uncollectible accounts		(1,557	)		(2,188	)
Fossil fuel stock, at average cost		126,352			108,129
Materials and supplies, at average cost		37,041			36,836
Other regulatory assets		48,058			38,908
Other		24,030			25,655

Total current assets		514,496			443,417

Property, Plant, and Equipment:
In service		2,835,502			2,785,561
Less accumulated provision for depreciation		982,542			971,464

		1,852,960			1,814,097
Construction work in progress		453,749			391,987

Total property, plant, and equipment		2,306,709			2,206,084

Other Property and Investments		15,904			15,918

Deferred Charges and Other Assets:
Deferred charges related to income taxes		27,888			24,220
Other regulatory assets		174,115			170,836
Other		19,945			18,550

Total deferred charges and other assets		221,948			213,606

Total Assets	$	3,059,057		$	2,879,025

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 March 31,			At December 31,
Liabilities and Stockholder’s Equity	2009			2008
	(in thousands)
Current Liabilities:
Pollution control revenue bonds	$	9,930		$	—
Notes payable		58,309			148,239
Accounts payable —
Affiliated		35,822			50,304
Other		94,762			90,381
Customer deposits		29,371			28,017
Accrued taxes —
Income taxes		36,718			39,983
Other		10,504			11,855
Accrued interest		11,113			8,959
Accrued compensation		4,346			15,667
Other regulatory liabilities		12,199			4,602
Liabilities from risk management activities		35,309			26,928
Other		22,603			29,047

Total current liabilities		360,986			453,982

Long-term Debt		969,843			849,265

Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		265,516			254,354
Accumulated deferred investment tax credits		10,855			11,255
Employee benefit obligations		96,436			97,389
Other cost of removal obligations		183,002			180,325
Other regulatory liabilities		34,367			28,597
Other		86,981			83,768

Total deferred credits and other liabilities		677,157			655,688

Total Liabilities		2,007,986			1,958,935

Preference Stock		97,998			97,998

Common Stockholder’s Equity:
Common stock, without par value—
Authorized - 20,000,000 shares
Outstanding - March 31, 2009: 3,142,717 shares
- December 31, 2008: 1,792,717 shares		253,060			118,060
Paid-in capital		513,143			511,547
Retained earnings		191,635			197,417
Accumulated other comprehensive loss		(4,765	)		(4,932	)

Total common stockholder’s equity		953,073			822,092

Total Liabilities and Stockholder’s Equity	$	3,059,057		$	2,879,025

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

FIRST QUARTER 2009 vs. FIRST QUARTER 2008

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 constructive regulatory environment, to maintain energy sales in the midst of the current economic downturn, and to effectively manage and secure timely recovery of rising costs. These costs include those related to projected long-term demand growth, increasingly stringent environmental standards, fuel prices, 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


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$(3.0)		(15.3)

Gulf Power’s net income after dividends on preference stock for the first quarter 2009 was $16.5 million compared to $19.5 million for the corresponding period in 2008. The decrease was primarily due to a decline in sales growth, less favorable weather, and increased other operations and maintenance expenses, partially offset by increased allowance for equity funds used during construction (AFUDC).

Retail Revenues


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$10.4		4.6

In the first quarter 2009, retail revenues were $238.4 million compared to $228.0 million for the corresponding period in 2008.

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:


	First Quarter
	2009
	(in millions)			(% change)
Retail – prior year	$	228.0
Estimated change in —
Rates and pricing		7.4			3.2
Sales growth (decline)		(4.1	)		(1.8	)
Weather		(1.6	)		(0.7	)
Fuel and other cost recovery		8.7			3.8

Retail – current year	$	238.4			4.5	%

Revenues associated with changes in rates and pricing increased in the first quarter 2009 when compared to the same period in 2008 primarily due to increased revenue associated with higher projected environmental compliance costs in 2009. 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 declined in the first quarter 2009 when compared to the same period in 2008. Weather-adjusted KWH energy sales to residential and commercial customers decreased 3.0% and 4.1%, respectively, due to decreased customer usage driven by the recession. KWH energy sales to industrial customers decreased 20.1% as a result of recessionary economic conditions and increased customer co-generation due to the lower cost of natural gas.

Revenues attributable to changes in weather decreased in the first quarter 2009 when compared to the corresponding period for 2008 due to less favorable weather.

Fuel and other cost recovery revenues increased in the first quarter 2009 when compared to the corresponding period for 2008 primarily due to higher projected fuel and purchased power costs. 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 amount from prior periods, and approved rates are implemented each January. 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” and “Fuel Cost Recovery” in Item 8 of the Form 10-K for additional information.

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

Wholesale Revenues – Non-Affiliates


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$(3.7)		(14.4)

Wholesale revenues from non-affiliates will vary depending on the market cost of available energy compared to the cost of Gulf Power and Southern Company system owned generation, demand for energy within the Southern Company service territory, and availability of Southern Company system generation. Wholesale revenues 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 first quarter 2009, wholesale revenues from non-affiliates were $22.0 million compared to $25.7 million for the corresponding period in 2008. The decrease was primarily a result of lower energy revenues related to a 25.1% decrease in KWH sales.

Wholesale Revenues – Affiliates


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$(37.6)		(87.5)

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 first quarter 2009, wholesale revenues from affiliates were $5.3 million compared to $42.9 million for the corresponding period in 2008. The decrease was due to reduced customer demand resulting in an 85.5% decrease in KWH sales and a 13.8% decrease in price resulting from lower Power Pool interchange energy rates.

Other Revenues


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$3.6		24.0

In the first quarter 2009, other revenues were $18.6 million compared to $15.0 million for the corresponding period in 2008. The increase was primarily due to other energy services. The increased revenues from other energy services did not have a material impact on earnings since they were generally offset by associated expenses.

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

Fuel and Purchased Power Expenses


	First Quarter 2009 vs. First Quarter 2008
	(change in millions)			(% change)
Fuel	$	(34.5	)		(23.0	)
Purchased power – non-affiliates		1.3			42.0
Purchased power – affiliates		6.6			75.9

Total fuel and purchased power expenses	$	(26.6	)

In the first quarter 2009, total fuel and purchased power expenses were $135.4 million compared to $162.0 million for the corresponding period in 2008. The net decrease in fuel and purchased power expenses was due to a $48.1 million decrease related to KWHs generated and a $5.8 million decrease in the average cost of purchased power, partially offset by a $13.7 million increase related to KWHs purchased and a $13.6 million increase in the average cost of fuel.

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:


	First Quarter		First Quarter		Percent
Average Cost	2009		2008		Change
	(cents per net KWH)
Fuel		4.31		3.80		13.4
Purchased power		5.19		6.70		(22.5	)

In the first quarter 2009, fuel expense was $115.6 million compared to $150.1 million in the same period in 2008. The decrease was due to a $48.1 million decrease related to total KWHs generated, offset by a $13.6 million increase in the average cost of fuel. The average cost of coal per KWH generated increased 20.6% primarily as a result of increases in commodity and transportation costs. The average cost of oil and natural gas per KWH generated decreased 25.9% primarily as a result of decreases in commodity prices.

Non-Affiliates

In the first quarter 2009, purchased power expense from non-affiliates was $4.4 million compared to $3.1 million for the same period in 2008. The increase was due to a $1.6 million increase related to total KWHs purchased, partially offset by a $0.3 million decrease resulting from the lower average cost per KWH.

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

Affiliates

In the first quarter 2009, purchased power expense from affiliates was $15.3 million compared to $8.7 million for the same period in 2008. The increase was due to a $13.4 million increase related to total KWHs purchased, partially offset by a $6.8 million decrease resulting from the lower average cost per KWH.

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

Other Operations and Maintenance Expenses


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$6.1		9.1

In the first quarter 2009, other operations and maintenance expenses were $72.5 million compared to $66.4 million for the corresponding period in 2008. The increase was primarily due to a $4.0 million increase in scheduled maintenance at generation facilities and a $3.0 million increase in other energy services, partially offset by a $0.4 million decrease related to the storm recovery costs associated with previous hurricanes. The increased expenses from other energy services and the decreased storm recovery costs did not have a material impact on earnings since they were offset by increased associated revenues.

Depreciation and Amortization


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$1.4		6.2

For the first quarter 2009, depreciation and amortization was $23.1 million compared to $21.7 million for the corresponding period in 2008. The increase was primarily due to net additions to generation and distribution facilities.

Taxes Other Than Income Taxes


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$1.7		8.5

For the first quarter 2009, taxes other than income taxes were $22.4 million compared to $20.7 million for the corresponding period in 2008. The increase was primarily due to increases in franchise and gross receipts taxes, which were directly related to the increase in retail revenues.

Allowance for Equity Funds Used During Construction


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$3.3		N/M


N/M-Not Meaningful

In the first quarter 2009, allowance for equity funds used during construction was $4.8 million compared to $1.5 million for the corresponding period in 2008. The increase was primarily due to construction of environmental control projects.

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

Interest Expense, Net of Amounts Capitalized


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$(1.2)		(10.6)

In the first quarter 2009, interest expense, net of amounts capitalized was $9.8 million compared to $11.0 million for the corresponding period in 2008. The decrease was primarily the result of an increase in capitalization of AFUDC related to the construction of environmental control projects.

Income Taxes


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$(2.8)		(27.1)

In the first quarter 2009, income taxes were $7.4 million compared to $10.2 million for the corresponding period in 2008. The decrease was primarily due to lower earnings before income taxes and an increase in the tax benefit associated with an increase in AFUDC, which is non-taxable, partially offset by a decrease in the federal production activities deduction.

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 constructive 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 maintaining 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 or decline in Gulf Power’s service area. Recent recessionary conditions have negatively impacted sales growth and are expected to continue to have a negative impact on energy sales, particularly to industrial customers. The timing and extent of the economic recovery will impact future earnings. 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.

Water Quality

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters - Environmental Statutes and Regulations – Water Quality” of Gulf Power in Item 7 of the Form 10-K for additional information regarding the EPA’s regulation of cooling water intake structures. On April 1, 2009, the U.S. Supreme Court reversed the U.S. Court of Appeals for the Second Circuit’s decision with respect to the rule’s use of cost-benefit analysis and held that the EPA could consider costs in arriving at its

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

standards and in providing variances from those standards for existing power plant cooling water intake structures. Other aspects of the court’s decision were not appealed and remain unaffected by the U.S. Supreme Court’s ruling. While the U.S. Supreme Court’s decision may ultimately result in greater flexibility for demonstrating compliance with the standards, the full scope of the regulations will depend on subsequent legal proceedings, further rulemaking by the EPA, the results of studies and analyses performed as part of the rules’ implementation, and the actual requirements established by state regulatory agencies and, therefore, cannot be determined at this time.

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 information regarding the potential for legislation and regulation addressing greenhouse gas emissions. On April 17, 2009, the EPA released a proposed finding that certain greenhouse gas emissions from new motor vehicles endanger public health and welfare due to climate change. The ultimate outcome of the proposed endangerment finding cannot be determined at this time and will depend on additional regulatory action and potential legal challenges. However, regulatory decisions that may follow from such a finding could have implications for both new and existing stationary sources, such as power plants. In addition, federal legislative proposals that would impose mandatory requirements related to greenhouse gas emissions, renewable energy standards, and energy efficiency standards continue to be actively considered in Congress, and the reduction of greenhouse gas emissions has been identified as a high priority by the current Administration. The ultimate outcome of these matters cannot be determined at this time; however, mandatory restrictions on Gulf Power’s greenhouse gas emissions, or requirements relating to renewable energy or energy efficiency, could result in significant additional compliance costs that could affect future unit retirement and replacement decisions and results of operations, cash flows, and financial condition if such costs are not recovered through regulated rates.

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 October 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 with reserve prices not to exceed the CBR tariff price, 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 provides for a cost-based price for wholesale sales of less than a year. On March 5, 2009, the FERC accepted Southern Company’s CBR tariff for filing. On March 25, 2009, the FERC accepted Southern Company’s compliance filing related to the MBR tariff and directed Southern Company to commence the energy auction in 30 days. Southern Company commenced the energy auction on April 23, 2009. Implementation of the energy auction in accordance with the MBR tariff order is expected to adequately mitigate going forward any presumption of market power that Southern Company may have in the Southern Company retail service territory. The original generation dominance proceeding initiated by the FERC in December 2004 remains pending before the FERC. The ultimate outcome of this matter cannot be determined at this time.

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

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.

Under recovered fuel costs at March 31, 2009 totaled $76.9 million, compared to $96.7 million at December 31, 2008. This amount is included in under recovered regulatory clause revenues 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 Notes 1 and 3 to the financial statements of Gulf Power under “Revenues” and “Retail Regulatory Matters – Fuel Cost Recovery,” respectively, in Item 8 of the Form 10-K for additional information.

Income Tax Matters

Legislation

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA). Major tax incentives in the ARRA include an extension of bonus depreciation and multiple renewable energy incentives, which could have a significant impact on the future cash flow and net income of Gulf Power. Gulf Power estimates the cash flow reduction to 2009 tax payments as a result of the bonus depreciation provisions of the ARRA to be between approximately $13 million and $16 million. Gulf Power is currently assessing the other financial implications of the ARRA. The ultimate impact cannot be determined at this time.

Other Matters

On March 16, 2009, Gulf Power entered into a PPA (the Agreement) with Shell Energy North America (US), L.P. (Shell). Under the terms of the Agreement, Gulf Power will be entitled to all of the capacity and energy from an approximately 885 MW combined cycle power plant (the Plant) located in Autauga County, Alabama that is owned and operated by Tenaska Alabama II Partners, L.P. (Tenaska). Shell is entitled to all of the capacity and energy from the Plant under a 20-year Energy Conversion Agreement between Shell and Tenaska that expires on May 24, 2023. On April 3, 2009, Gulf Power filed a petition with the Florida PSC requesting approval of the Agreement. The Agreement will commence on the later of June 1, 2009 or the first day of the month following receipt by Gulf Power of a final, non-appealable order of the Florida PSC approving the Agreement. Unless earlier terminated in accordance with its terms, the Agreement will terminate on May 24, 2023. Gulf Power may terminate the Agreement if the Florida PSC approval imposes material qualifications or conditions that are not acceptable to Gulf Power. Payments under the Agreement will be material but are expected to be recovered through Gulf Power’s fuel clause and purchased power capacity clause; therefore, no material impact is expected on Gulf Power’s net income. The ultimate outcome of this matter cannot now be determined.

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

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 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 March 31, 2009. Throughout the recent turmoil in the financial markets, Gulf Power has maintained adequate access to capital without drawing on 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 at reasonable rates. 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 and liquidity needs. Market rates for committed credit have increased, and Gulf Power has been and expects to continue to be subject to higher costs as its existing facilities are replaced or renewed. In the first quarter 2009, Gulf Power renewed $30 million of expiring credit facilities. In addition, Gulf Power entered into a $20 million facility. Subsequent to March 31, 2009, Gulf Power entered into additional credit arrangements totaling $75 million. Total committed credit fees at Gulf Power average less than ¹/2 of 1% per year. Gulf Power’s interest cost for short-term debt has decreased as market short-term interest rates have declined from 2008 levels. The ultimate impact on future financing costs as a result of the financial turmoil cannot be determined at this time. Gulf Power experienced no material counterparty credit losses as a result of the turmoil in the financial markets. See “Sources of Capital” and “Financing Activities” herein for additional information.

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

Gulf Power’s investments in pension trust funds have continued to decline in value during the first quarter 2009. Gulf Power expects that the earliest that cash may have to be contributed to the pension trust fund is 2011 and such contribution could be significant; however, projections of the amount vary significantly depending on interpretations of and decisions related to federal legislation passed during 2008 as well as other key variables including future trust fund performance and cannot be determined at this time.

Net cash provided from operating activities totaled $36.7 million for the first three months of 2009 compared to $49.8 million for the corresponding period in 2008. The $13.1 million decrease in cash provided from operating activities was primarily due to an $18.0 million increase in payments to affiliates related to higher fuel cost; an increase of $4.6 million in the use of funds for fossil fuel inventory; a decrease of $4.6 million in deferred income taxes; and a decrease of $3.0 million in net income, as previously discussed. These changes were partially offset by a decrease of $19.0 million in under recovered regulatory clause revenues related to fuel. Net cash used for investing activities in the first three months of 2009 totaled $160.5 million primarily due to gross property additions to utility plant of $114.9 million and the issuance of pollution control revenue bonds, the proceeds of which are restricted for installation of certain solid waste disposal facilities. These additions were primarily related to installation of equipment to comply with environmental requirements. Net cash provided from financing activities totaled $151.8 million for the first three months of 2009, compared to $28.8 million for the corresponding period in 2008. The $123.0 million increase in cash provided from financing activities was primarily due to the issuances of $135.0 million in common stock and $130.4 million in pollution control revenue bonds in 2009, partially offset by a $68.5 million increase in cash payments related to notes payable and a $71 million decrease in capital contributions from Southern Company.

Significant balance sheet changes for the first quarter 2009 include a net increase of $100.6 million in property, plant, and equipment, primarily related to environmental control projects; the issuance of common stock to Southern Company for $135 million; the issuance of $130.4 million in pollution control revenue bonds, with a related restricted cash balance of $49.2 million; a $19.8 million decrease in under recovered regulatory clause revenues related to fuel; and a $12.0 million change in energy-related derivative contracts.

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. The construction program is subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; revised load growth estimates; storm impacts; changes in environmental statutes and regulations; changes in FERC rules and regulations; Florida PSC approvals; the cost and efficiency of construction labor, equipment, and materials; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.

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

Gulf Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet 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 March 31, 2009 approximately $31.5 million of cash and cash equivalents and $140 million of unused committed lines of credit with banks. Of these credit agreements, $110 million expire in 2009, $30 million expire in 2010, and $60 million of these facilities contain provisions allowing one-year term loans executable at expiration. Subsequent to March 31, 2009, Gulf Power entered into an additional $75 million of credit agreements that expire in 2010. 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 at the request and for the benefit of Gulf Power and other Southern Company subsidiaries. At March 31, 2009, Gulf Power had $50 million of short-term bank debt outstanding and no commercial paper outstanding. Management believes that the need for working capital can be adequately met by utilizing the commercial paper program, lines of credit, and cash.

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 transportation and storage, emissions allowances, and energy price risk management. At March 31, 2009, the maximum potential collateral requirements under these contracts at a BBB- and/or Baa3 rating were approximately $50 million. At March 31, 2009, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $271 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. Additionally, any credit rating downgrade could impact Gulf Power’s ability to access capital markets, particularly the short-term debt market.

Market Price Risk

Gulf Power’s market risk exposure relative to interest rate changes has not changed materially compared with the December 31, 2008 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 per the guidelines of the Florida PSC. As such, Gulf Power has no material change in market risk exposure when compared with the December 31, 2008 reporting period.

GULF POWER COMPANY
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 ended March 31, 2009 were as follows:


	First Quarter
	2009
	Changes
	Fair Value
	(in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net	$	(31.2	)
Contracts realized or settled		8.0
Current period changes^(a)		(20.0	)

Contracts outstanding at the end of the period, assets (liabilities), net	$	(43.2	)


(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 ended March 31, 2009 was $12 million, substantially all of which is due to natural gas positions. This change is attributable to both the volume and prices of natural gas. At March 31, 2009, Gulf Power had a net hedge volume of 16.0 Bcf with a weighted average contract cost approximately $2.76 per mmBtu above market prices, compared to 14.2 Bcf at December 31, 2008 with a weighted average contract cost approximately $2.24 per mmBtu above market prices. Natural gas hedges are recovered through the fuel cost recovery clause.

At March 31, 2009, the fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:


	March 31, 2009
	(in millions)
Regulatory hedges	$	(43.2	)
Not designated		—

Total fair value	$	(43.2	)

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. 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 ended March 31, 2009 and 2008 for energy-related derivative contracts that are not hedges were not material.

GULF POWER COMPANY
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 March 31, 2009 are as follows:


	March 31, 2009
	Fair Value Measurements
	Total			Maturity
	Fair Value			Year 1			Years 2&3			Years 4&5
	(in millions)
Level 1	$	—		$	—		$	—		$	—
Level 2		(43.2	)		(35.2	)		(7.7	)		(0.3	)
Level 3		—			—			—			—

Fair value of contracts outstanding at end of period	$	(43.2	)	$	(35.2	)	$	(7.7	)	$	(0.3	)

Gulf Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, and thus fall into Level 2. See Note (C) to the Condensed Financial Statements herein for further discussion on fair value measurements.

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

On January 22, 2009, Gulf Power issued to Southern Company 1,350,000 shares of Gulf Power common stock, without par value, and realized proceeds of $135 million. The proceeds were used to repay a portion of Gulf Power’s short-term debt and for other general corporate purposes.

Also during the first quarter 2009, Gulf Power incurred obligations related to the issuance of $130.4 million in pollution control revenue bonds. As of March 31, 2009, $9.9 million of these pollution control revenue bonds have been classified as current liabilities, since short-term credit facilities are being used to provide liquidity support for these bonds. The proceeds are being used for the acquisition, construction, installation, and equipping of certain solid waste disposal facilities located at Plant Crist.

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

CONDENSED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months
	Ended March 31,
	2009			2008
	(in thousands)
Operating Revenues:
Retail revenues	$	175,735		$	168,389
Wholesale revenues —
Non-affiliates		80,154			84,806
Affiliates		9,418			28,379
Other revenues		3,416			3,842

Total operating revenues		268,723			285,416

Operating Expenses:
Fuel		119,965			130,116
Purchased power —
Non-affiliates		2,835			2,255
Affiliates		21,805			25,998
Other operations and maintenance		59,761			64,773
Depreciation and amortization		18,015			17,997
Taxes other than income taxes		14,924			15,565

Total operating expenses		237,305			256,704

Operating Income		31,418			28,712
Other Income and (Expense):
Interest income		632			409
Interest expense, net of amounts capitalized		(4,762	)		(4,441	)
Other income (expense), net		1,629			1,619

Total other income and (expense)		(2,501	)		(2,413	)

Earnings Before Income Taxes		28,917			26,299
Income taxes		10,513			9,694

Net Income		18,404			16,605
Dividends on Preferred Stock		433			433

Net Income After Dividends on Preferred Stock	$	17,971		$	16,172

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months
	Ended March 31,
	2009		2008
	(in thousands)
Net Income After Dividends on Preferred Stock	$	17,971	$	16,172
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $166 and $(1,310), respectively		268		(2,114	)

Total other comprehensive income (loss)		268		(2,114	)

COMPREHENSIVE INCOME	$	18,239	$	14,058

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

MISSISSIPPI POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Three Months
	Ended March 31,
	2009			2008
	(in thousands)
Operating Activities:
Net income	$	18,404		$	16,605
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		19,479			18,556
Deferred income taxes and investment tax credits, net		(4,562	)		(4,498	)
Pension, postretirement, and other employee benefits		1,902			1,606
Stock option expense		657			458
Tax benefit of stock options		10			80
Other, net		(8,523	)		(4,878	)
Changes in certain current assets and liabilities —
Receivables		32,327			(4,768	)
Fossil fuel stock		(20,315	)		(3,852	)
Materials and supplies		(379	)		(12,769	)
Prepaid income taxes		1,061			4,305
Other current assets		(2,592	)		1,775
Other accounts payable		(17,890	)		8,247
Accrued taxes		(18,604	)		(21,608	)
Accrued compensation		(15,483	)		(15,825	)
Other current liabilities		1,629			2,109

Net cash used for operating activities		(12,879	)		(14,457	)

Investing Activities:
Property additions		(26,476	)		(25,983	)
Cost of removal, net of salvage		(2,941	)		(151	)
Construction payables		1,082			2,410
Other		(506	)		(565	)

Net cash used for investing activities		(28,841	)		(24,289	)

Financing Activities:
Increase (decrease) in notes payable, net		(26,293	)		1,850
Proceeds —
Capital contributions		1,294			1,180
Gross excess tax benefit of stock options		50			215
Senior notes		125,000			—
Other long-term debt		—			80,000
Redemptions —
Senior notes		(40,000	)		—
Payment of preferred stock dividends		(433	)		(433	)
Payment of common stock dividends		(17,125	)		(17,100	)
Other		(1,792	)		—

Net cash provided from financing activities		40,701			65,712

Net Change in Cash and Cash Equivalents		(1,019	)		26,966
Cash and Cash Equivalents at Beginning of Period		22,413			4,827

Cash and Cash Equivalents at End of Period	$	21,394		$	31,793

Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $125 and $29 capitalized for 2009 and 2008, respectively)	$	3,847		$	3,847
Income taxes (net of refunds)	$	(2,325	)	$	(35	)

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

MISSISSIPPI POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)


	At March 31,			At December 31,
Assets	2009			2008
	(in thousands)
Current Assets:
Cash and cash equivalents	$	21,394		$	22,413
Receivables —
Customer accounts receivable		39,623			40,262
Unbilled revenues		23,558			24,798
Under recovered regulatory clause revenues		42,047			54,994
Other accounts and notes receivable		5,243			8,995
Affiliated companies		10,360			24,108
Accumulated provision for uncollectible accounts		(842	)		(1,039	)
Fossil fuel stock, at average cost		105,853			85,538
Materials and supplies, at average cost		27,523			27,143
Other regulatory assets		76,691			59,220
Other		12,782			10,898

Total current assets		364,232			357,330

Property, Plant, and Equipment:
In service		2,244,657			2,234,573
Less accumulated provision for depreciation		932,791			923,269

		1,311,866			1,311,304
Construction work in progress		80,809			70,665

Total property, plant, and equipment		1,392,675			1,381,969

Other Property and Investments		7,976			8,280

Deferred Charges and Other Assets:
Deferred charges related to income taxes		9,260			9,566
Other regulatory assets		185,461			171,680
Other		24,742			23,870

Total deferred charges and other assets		219,463			205,116

Total Assets	$	1,984,346		$	1,952,695

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

MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)


	At March 31,		At December 31,
Liabilities and Stockholder’s Equity	2009		2008
	(in thousands)
Current Liabilities:
Securities due within one year	$	1,254	$	41,230
Notes payable		—		26,293
Accounts payable —
Affiliated		37,175		36,847
Other		46,569		63,704
Customer deposits		10,536		10,354
Accrued taxes —
Income taxes		19,815		8,842
Other		17,148		50,700
Accrued interest		4,683		3,930
Accrued compensation		5,120		20,604
Other regulatory liabilities		8,846		9,718
Liabilities from risk management activities		47,045		29,291
Other		17,964		19,144

Total current liabilities		216,155		320,657

Long-term Debt		494,360		370,460

Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		222,009		222,324
Deferred credits related to income taxes		13,854		14,074
Accumulated deferred investment tax credits		13,716		14,014
Employee benefit obligations		143,308		142,188
Other cost of removal obligations		97,243		96,191
Other regulatory liabilities		52,714		51,340
Other		58,632		52,216

Total deferred credits and other liabilities		601,476		592,347

Total Liabilities		1,311,991		1,283,464

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		321,968		319,958
Retained earnings		279,648		278,802
Accumulated other comprehensive income (loss)		268		—

Total common stockholder’s equity		639,575		636,451

Total Liabilities and Stockholder’s Equity	$	1,984,346	$	1,952,695

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

MISSISSIPPI POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FIRST QUARTER 2009 vs. FIRST QUARTER 2008

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 constructive regulatory environment, to maintain energy sales in the midst of the current economic downturn, and to effectively manage and secure timely recovery of rising costs. Mississippi Power has various regulatory mechanisms that operate to address cost recovery. Appropriately balancing required costs and capital expenditures with reasonable retail rates 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


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$1.8		11.1

Mississippi Power’s net income after dividends on preferred stock for the first quarter 2009 was $18.0 million compared to $16.2 million for the corresponding period in 2008. The increase was primarily due to a decrease in operations and maintenance expenses, an increase related to the reclassification of 2008 System Restoration Rider (SRR) revenue reductions to expense pursuant to an order from the Mississippi PSC dated January 9, 2009, and an increase in territorial base revenues resulting from an increase in wholesale demand, partially offset by a decrease in wholesale energy revenues.

Retail Revenues


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$7.3		4.4

In the first quarter 2009, retail revenues were $175.7 million compared to $168.4 million for the same period in 2008.

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

Details of the change to retail revenues are as follows:


	First Quarter
	2009
	(in millions)			(% change)

Retail – prior year	$	168.4
Estimated change in —
Rates and pricing		1.6			1.0
Sales growth (decline)		(2.2	)		(1.3	)
Weather		(1.1	)		(0.7	)
Fuel and other cost recovery		9.0			5.4

Retail – current year	$	175.7			4.4	%

Revenues associated with changes in rates and pricing increased in the first quarter 2009 when compared to the same period in 2008 due to a $1.0 million increase related to the reclassification of 2008 SRR revenue reductions to expense pursuant to an order from the Mississippi PSC dated January 9, 2009 and an increase in base rates of $0.9 million related to a rate change effective in mid-January 2008. These increases were partially offset by decreases in retail revenues of approximately $0.3 million related to the ECO Plan rate. 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.

Revenues attributable to changes in sales growth declined in the first quarter 2009 when compared to the same period in 2008 due to 3.0% and 0.9% decreases in weather-adjusted KWH sales to residential and commercial customers, respectively, and a 6.6% decrease in KWH sales to industrial customers. The decrease in weather-adjusted KWH sales to residential and commercial customers is primarily due to a recessionary economy. The decrease in industrial sales is primarily due to lower production levels experienced by industrial customers resulting from a recessionary economy.

Revenues resulting from changes in weather were minimal although weather conditions were milder for the first quarter 2009 when compared to the first quarter 2008.

Fuel and other cost recovery revenues increased in the first quarter 2009 when compared to the same period in 2008 primarily as a result of higher recoverable fuel costs. Recoverable fuel costs include fuel and purchased power expenses reduced by the fuel portion of wholesale revenues from energy sold to customers outside Mississippi Power’s service territory. Electric rates include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the fuel component of purchased power costs, and do not affect net income.

Wholesale Revenues – Non-Affiliates


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$(4.6)		(5.5)

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

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

In the first quarter 2009, wholesale revenues from non-affiliates were $80.2 million compared to $84.8 million for the same period in 2008. The decrease was due to decreased revenues from customers outside Mississippi Power’s service territory of $11.9 million, partially offset by $7.3 million increased revenues from customers inside Mississippi Power’s service territory. The $11.9 million decrease in revenues from customers outside Mississippi Power’s service territory was due to a $7.4 million decrease associated with lower prices resulting from lower marginal cost of fuel, a $4.2 million decrease in sales, and a $0.3 million decrease in capacity revenues. The $7.3 million increase in revenues from customers inside Mississippi Power’s service territory was due to a $3.9 million increase in recoverable fuel costs and higher demand by customers of approximately $3.4 million.

Wholesale Revenues – Affiliates


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$(19.0)		(66.8)

In the first quarter 2009, wholesale revenues from affiliates were $9.4 million compared to $28.4 million for the same period in 2008. The decrease was primarily due to a $19.2 million decrease in energy revenues, of which $18.0 million was associated with decreased sales and $1.2 million was associated with lower prices. Capacity revenues increased $0.2 million.

Fuel and Purchased Power Expenses


	First Quarter 2009
	vs.
	First Quarter 2008
	(change in millions)			(% change)

Fuel	$	(10.1	)		(7.8	)
Purchased power – non-affiliates		0.5			25.7
Purchased power – affiliates		(4.2	)		(16.1	)

Total fuel and purchased power expenses	$	(13.8	)

In the first quarter 2009, total fuel and purchased power expenses were $144.6 million compared to $158.4 million for the same period in 2008. This decrease was primarily due to an $18.7 million decrease in total KWHs generated and purchased, partially offset by a $4.9 million net increase in the cost of fuel and purchased power.

Fuel and purchased power transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Mississippi Power’s fuel cost recovery clause. See FUTURE EARNINGS POTENTIAL – “FERC and Mississippi PSC Matters – Retail Regulatory Matters” herein for additional information.

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

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


	First Quarter		First Quarter		Percent
Average Cost	2009		2008		Change
	(cents per net KWH)

Fuel		4.44		3.91		13.6
Purchased power		3.91		5.40		(27.6	)

In the first quarter 2009, fuel expense was $120.0 million compared to $130.1 million for the same period in 2008. The decrease was primarily due to an 18.8% decrease in generation from Mississippi Power facilities resulting from lower energy sales and purchased power available at a lower cost, partially offset by a 13.6% increase in the price of fuel primarily due to an increase in coal prices.

Non-Affiliates

In the first quarter 2009, purchased power expense from non-affiliates was $2.8 million compared to $2.3 million for the same period in 2008. The increase was primarily the result of a 77.0% increase in KWH volume purchased, partially offset by a 29.0% decrease in the average cost of purchased power per KWH. The increase in volume was a result of lower cost opportunity purchases, while the decrease in prices was due to a lower marginal cost of fuel.

Affiliates

In the first quarter 2009, purchased power expense from affiliates was $21.8 million compared to $26.0 million for the same period in 2008. The decrease was primarily due to a 20.7% decrease in the average cost of purchased power per KWH, partially offset by a 5.8% increase in KWH volume purchased.

Other Operations and Maintenance Expenses


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$(4.9)		(7.7)

In the first quarter 2009, other operations and maintenance expenses were $59.8 million compared to $64.7 million for the same period in 2008. This decrease was primarily due to generation construction screening expenses of $1.7 million incurred in the first quarter 2008 which were originally expensed and subsequently reclassified in the fourth quarter 2008 to a regulatory asset upon the FERC’s acceptance of the wholesale rate filing in October 2008. Also contributing to the decrease were a $1.6 million decrease in generation related environmental expenses and a $1.5 million decrease in distribution expenses as a result of the timing of normal maintenance activities.

See Note 3 to the financial statements of Mississippi Power under “FERC Matters” in Item 8 of the Form 10-K for additional information.

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

Taxes Other Than Income Taxes


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$(0.7)		(4.1)

In the first quarter 2009, taxes other than income taxes were $14.9 million compared to $15.6 million for the same period in 2008. The decrease was primarily due to a decrease in ad valorem taxes. The retail portion of the decrease in ad valorem taxes is recoverable under Mississippi Power’s ad valorem tax cost recovery clause and, therefore, does not affect net income.

Income Taxes


First Quarter 2009 vs. First Quarter 2008

(change in millions)		(% change)
$0.8		8.4

In the first quarter 2009, income taxes were $10.5 million compared to $9.7 million for the same period in 2008. The change of $0.8 million was primarily due to an increase in pre-tax income.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Mississippi Power’s future earnings potential. The level of Mississippi Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Mississippi Power’s business of selling electricity. These factors include Mississippi Power’s ability to maintain a constructive 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 maintaining 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 or decline in Mississippi Power’s service area. Recent recessionary conditions have negatively impacted sales growth and are expected to continue to have a negative impact on energy sales, particularly to industrial customers. The timing and extent of the economic recovery will impact future earnings. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Mississippi 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 Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.

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

Water Quality

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Water Quality” of Mississippi Power in Item 7 of the Form 10-K for additional information regarding the EPA’s regulation of cooling water intake structures. On April 1, 2009, the U.S. Supreme Court reversed the U.S. Court of Appeals for the Second Circuit’s decision with respect to the rule’s use of cost-benefit analysis and held that the EPA could consider costs in arriving at its standards and in providing variances from those standards for existing power plant cooling water intake structures. Other aspects of the court’s decision were not appealed and remain unaffected by the U.S. Supreme Court’s ruling. While the U.S. Supreme Court’s decision may ultimately result in greater flexibility for demonstrating compliance with the standards, the full scope of the regulations will depend on subsequent legal proceedings, further rulemaking by the EPA, the results of studies and analyses performed as part of the rules’ implementation, and the actual requirements established by state regulatory agencies and, therefore, cannot be determined at this time.

Global Climate Issues

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Global Climate Issues” of Mississippi Power in Item 7 of the Form 10-K for information regarding the potential for legislation and regulation addressing greenhouse gas emissions. On April 17, 2009, the EPA released a proposed finding that certain greenhouse gas emissions from new motor vehicles endanger public health and welfare due to climate change. The ultimate outcome of the proposed endangerment finding cannot be determined at this time and will depend on additional regulatory action and potential legal challenges. However, regulatory decisions that may follow from such a finding could have implications for both new and existing stationary sources, such as power plants. In addition, federal legislative proposals that would impose mandatory requirements related to greenhouse gas emissions, renewable energy standards, and energy efficiency standards continue to be actively considered in Congress, and the reduction of greenhouse gas emissions has been identified as a high priority by the current Administration. The ultimate outcome of these matters cannot be determined at this time; however, mandatory restrictions on Mississippi Power’s greenhouse gas emissions, or requirements relating to renewable energy or energy efficiency, could result in significant additional compliance costs that could affect future unit retirement and replacement decisions and results of operations, cash flows, and financial condition if such costs are not recovered through regulated rates.

FERC and Mississippi PSC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Market-Based Rate Authority” of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information regarding market-based rate authority. In October 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 with reserve prices not to exceed the CBR tariff price, 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 provides for a cost-based price for wholesale sales of less than a year. On March 5, 2009, the FERC accepted Southern Company’s CBR tariff for filing. On March 25, 2009, the FERC accepted Southern Company’s compliance filing related to the MBR tariff and directed Southern Company to commence the energy auction in 30 days. Southern Company commenced the energy auction on April 23, 2009.

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

Implementation of the energy auction in accordance with the MBR tariff order is expected to adequately mitigate going forward any presumption of market power that Southern Company may have in the Southern Company retail service territory. The original generation dominance proceeding initiated by the FERC in December 2004 remains pending before the FERC. The ultimate outcome of this matter cannot be determined at this time.

Retail Regulatory Matters

Performance Evaluation Plan

The Mississippi Public Utilities Staff, pursuant to the Mississippi PSC’s 2004 order approving the current PEP, is reviewing the PEP to determine if any modifications should be made. On March 2, 2009, concurrent with this review, the annual PEP evaluation filing for 2009 was suspended. Mississippi Power anticipates that, as a result of this required review, changes to the PEP will be made. Annual evaluations will resume for 2010 under the current PEP or a revised PEP. Mississippi Power does not anticipate that the suspension of the PEP filing for 2009 will have a material impact on 2009 earnings. While the final outcome is not known, it is likely that any modifications made to the PEP will result in a lower performance incentive under the PEP and therefore smaller and/or less frequent rate changes in the future. See Note 3 to the financial statements of Mississippi Power under “Retail Regulatory Matters – Performance Evaluation Plan” in Item 8 of the Form 10-K for additional information regarding Mississippi Power’s base rates.

On March 16, 2009, Mississippi Power submitted its annual PEP lookback filing for 2008, which recommended no surcharge or refund. The ultimate outcome of this matter cannot now be determined.

Fuel Cost Recovery

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Mississippi Power in Item 7 of the Form 10-K for information regarding Mississippi Power’s fuel cost recovery. The Mississippi PSC approved the retail fuel cost recovery factor on March 3, 2009, with the new rates effective in March 2009. The retail fuel cost recovery factor will result in an annual increase in an amount equal to 10.3% of total 2008 retail revenues based on ten months of recovery under the new rate. At March 31, 2009, the amount of under recovered retail fuel costs included in the balance sheet was $32.4 million compared to $36.0 million at December 31, 2008. Mississippi Power also has a wholesale Municipal and Rural Associations (MRA) and Market Base (MB) fuel cost recovery factor. Effective January 1, 2009, the wholesale MRA fuel rate increased resulting in an annual increase in an amount equal to 13.9% of total 2008 MRA revenues. Effective February 1, 2009, the wholesale MB fuel rate increased resulting in an annual increase in an amount equal to 16.7% of total 2008 MB revenues. At March 31, 2009, the amount of under recovered wholesale MRA and MB fuel costs included in the balance sheet was $7.0 million and $2.6 million compared to $15.4 million and $3.7 million, respectively, at December 31, 2008. Mississippi Power’s operating revenues are adjusted for differences in actual recoverable fuel cost and amounts billed in accordance with the currently approved cost recovery rate. Accordingly, this increase to the billing factor will have no significant effect on Mississippi Power’s revenues or net income, but will increase annual cash flow.

In October 2008, the Mississippi PSC opened a docket to investigate and review interest and carrying charges under the fuel adjustment clause for utilities within the State of Mississippi including Mississippi Power. A hearing was held in November 2008 to hear testimony regarding the method of calculating carrying charges on over and under recoveries of fuel-related costs. On March 4, 2009, the Mississippi PSC issued an order to apply the prime rate in calculating the carrying costs on the retail over or under recovery balances related to fuel cost recovery. The order also requires Mississippi Power to file a proposed carrying cost calculation methodology as part of its compliance filing. Mississippi Power is currently in the process of submitting the compliance filing. The ultimate outcome of this matter cannot now be determined.

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

Integrated Coal Gasification Combined Cycle

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Integrated Coal Gasification Combined Cycle” of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under “Integrated Coal Gasification Combined Cycle” in Item 8 of the Form 10-K for information regarding the Kemper IGCC.

On April 6, 2009, Mississippi Power received an accounting order from the Mississippi PSC directing Mississippi Power to continue to charge all Kemper IGCC generation resources planning, evaluation, and screening costs to regulatory assets including those costs associated with activities to obtain a certificate of public convenience and necessity and costs necessary and prudent to preserve the availability, economic viability, and/or required schedule of the selected generation resource until the Mississippi PSC makes findings and determination as to the recovery of Mississippi Power’s prudent expenditures.

The ultimate outcome of these matters cannot now be determined.

Income Tax Matters

Legislation

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA). Major tax incentives in the ARRA include an extension of bonus depreciation and multiple renewable energy incentives, which could have a significant impact on the future cash flow and net income of Mississippi Power. Mississippi Power estimates the cash flow reduction to 2009 tax payments as a result of the bonus depreciation provisions of the ARRA to be between approximately $11 million and $14 million. Mississippi Power is currently assessing the other financial implications of the ARRA. The ultimate impact cannot be determined at this time.

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

Other Matters

Mississippi Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Mississippi Power is subject to certain claims and legal actions arising in the ordinary course of business. Mississippi Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, 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 Mississippi Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Mississippi 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 Mississippi Power’s financial statements.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

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

FINANCIAL CONDITION AND LIQUIDITY

Overview

Mississippi Power’s financial condition remained stable at March 31, 2009. Throughout the recent turmoil in the financial markets, Mississippi Power has maintained adequate access to capital without drawing on any of its committed bank credit arrangements used to support its commercial paper programs and variable rate pollution control revenue bonds. Mississippi Power has continued to issue commercial paper at reasonable rates. Mississippi 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 and liquidity needs. Market rates for committed credit have increased, and Mississippi Power has been and expects to continue to be subject to higher costs as its existing facilities are replaced or renewed. In the first quarter 2009, Mississippi Power increased an existing facility by $10 million. Subsequent to March 31, 2009, Mississippi Power entered into an additional committed credit facility resulting in a net increase of $40 million. Total committed credit fees at Mississippi Power average less than ¹/4 of 1% per year. Mississippi Power’s interest cost for short-term debt has decreased as market short-term interest rates have declined from 2008 levels. Mississippi Power experienced no material counterparty credit losses as a result of the turmoil in the financial markets. The ultimate impact on future financing costs as a result of the financial turmoil cannot be determined at this time. See “Sources of Capital” and “Financing Activities” herein for additional information.

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

Mississippi Power’s investments in pension trust funds have continued to decline in value during the first quarter 2009. Mississippi Power expects that the earliest that cash may have to be contributed to the pension trust fund is 2011 and such contribution could be significant; however, projections of the amount vary significantly depending on interpretations of and decisions related to federal legislation passed during 2008 as well as other key variables including future trust fund performance and cannot be determined at this time.

Net cash used for operating activities totaled $12.9 million for the first three months of 2009, compared to $14.5 million for the corresponding period in 2008. The $1.6 million decrease in cash used for operating activities is primarily due to increases in joint ownership billings of $13.7 million and cash inflows resulting from fuel cost recovery of $12.9 million, partially offset by cash outflows in other accounts payable of $9.6 million related to fuel purchases and increases in fossil fuel stock of $15.7 million. The $4.6 million increase in net cash used for investing activities is primarily due to a $2.8 million cash outflow for cost of removal. The $25.0 million decrease in net cash provided from financing activities was primarily due to cash outflows resulting from $40 million of long-term senior notes that matured on March 9, 2009 and a $26 million decrease in borrowings from commercial paper in 2009, partially offset by an increase in the issuance of long-term debt in the first quarter 2009 of $45 million as compared to the same period in 2008.

Significant balance sheet changes for the first three months of 2009 include a decrease in under recovered regulatory clause revenues of $12.9 million primarily due to lower fuel costs and the implementation of a higher fuel cost recovery factor in 2009. Receivables from affiliated companies decreased by $13.7 million primarily due to a decrease in joint owner billings related to Plants Daniel and Greene County. Fossil fuel inventory increased $20.3 million primarily due to increases in coal inventory and emissions allowances of $15.7 million and $6.0 million, respectively. Other regulatory assets increased $31.2 million primarily due to mark-to-market losses on forward gas contracts. Securities due within one year decreased by $40.0 million due to senior notes maturing during the first quarter 2009. Notes payable decreased by $26.3 million primarily due to a decrease in commercial paper borrowings. Accrued taxes, other decreased by $33.6 million primarily due to property tax payments of $39.8 million in the first quarter 2009. Long-term debt increased by $124 million primarily due to the issuance of senior notes in the first quarter 2009.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Mississippi Power in Item 7 of the Form 10-K for a description of Mississippi Power’s capital requirements for its construction program, lease obligations, purchase commitments, derivative obligations, preferred stock dividends, and trust funding requirements. Approximately $1.3 million will be required through March 31, 2010 for maturities of long-term debt. The construction program is subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; revised load growth estimates; storm impacts; changes in environmental statutes and regulations; changes in FERC rules and regulations; Mississippi PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.

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

Sources of Capital

Mississippi Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Mississippi Power has primarily utilized funds from operating cash flows, short-term borrowings, external security offerings, and capital 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 Mississippi Power in Item 7 of the Form 10-K for additional information.

Mississippi Power’s current liabilities sometimes 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, Mississippi Power had at March 31, 2009 approximately $21.4 million of cash and cash equivalents and $108.5 million of unused committed credit arrangements with banks. All expire in 2009; however, approximately $53.5 million of these credit arrangements contain provisions allowing two-year term loans executable at expiration and $15 million contain provisions allowing one-year term loans executable at expiration. Mississippi Power expects to renew its credit facilities, as needed, prior to expiration. Subsequent to March 31, 2009, Mississippi Power entered into an additional committed credit facility resulting in a net increase of $40 million. The new credit facility expires in 2010. See Note 6 to the financial statements of Mississippi 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 Mississippi Power’s commercial paper program and $40 million are dedicated to funding purchase obligations related to variable rate pollution control revenue bonds. Mississippi Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Mississippi Power and other Southern Company subsidiaries. At March 31, 2009, Mississippi Power had no commercial paper outstanding. Management believes that the need for working capital can be adequately met by utilizing commercial paper, 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 Mississippi Power in Item 7 and Note 7 to the financial statements of Mississippi Power under “Operating Leases” in Item 8 of the Form 10-K for information related to Mississippi Power’s lease of a combined cycle generating facility at Plant Daniel.

Credit Rating Risk

Mississippi Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. 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 March 31, 2009, the maximum potential collateral requirements under these contracts at a BBB- and/or Baa3 rating were approximately $9 million. At March 31, 2009, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $231 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. Additionally, any credit rating downgrade could impact Mississippi Power’s ability to access capital markets, particularly the short-term debt market.

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

Market Price Risk

Mississippi Power’s market risk exposure relative to interest rate changes has not changed materially compared with the December 31, 2008 reporting period. Since a significant portion of outstanding indebtedness is at fixed rates, Mississippi 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, Mississippi 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, Mississippi Power enters into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. Mississippi Power continues to manage retail fuel-hedging programs implemented per the guidelines of the Mississippi PSC and wholesale fuel-hedging programs under agreements with wholesale customers. As such, Mississippi Power has no material change in market risk exposure when compared with the December 31, 2008 reporting period.

The changes in fair value of energy-related derivative contracts for the three months ended March 31, 2009 were as follows:


	First Quarter
	2009
	Changes
	Fair Value
	(in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net	$	(52.0	)
Contracts realized or settled		9.0
Current period changes^(a)		(33.0	)

Contracts outstanding at the end of the period, assets (liabilities), net	$	(76.0	)

(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 ended March 31, 2009 was $24 million, substantially all of which is due to natural gas positions. This change is attributable to both the volume and prices of natural gas. At March 31, 2009, Mississippi Power had a net hedge volume of 30.3 Bcf with a weighted average contract cost approximately $2.60 per mmBtu above market prices, compared to 28.9 Bcf at December 31, 2008 with a weighted average contract cost approximately $1.89 per mmBtu above market prices. The majority of the natural gas hedges are recovered through the energy cost management clause.

At March 31, 2009, the fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:


	March 31, 2009
	(in millions)
Regulatory hedges	$	(76.4	)
Cash flow hedges		0.4
Not designated		—

Total fair value	$	(76.0	)

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

Energy-related derivative contracts which are designated as regulatory hedges relate to Mississippi 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 energy cost management 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.

Unrealized pre-tax gains and losses recognized in income for the three months ended March 31, 2009 and 2008 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 March 31, 2009 are as follows:


	March 31, 2009
	Fair Value Measurements
	Total			Maturity
	Fair Value			Year 1			Years 2&3			Years 4&5
	(in millions)

Level 1	$	—		$	—		$	—		$	—
Level 2		(76.0	)		(45.2	)		(26.1	)		(4.7	)
Level 3		—			—			—			—

Fair value of contracts outstanding at end of period	$	(76.0	)	$	(45.2	)	$	(26.1	)	$	(4.7	)

Mississippi Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, and thus fall into Level 2. See Note (C) to the Condensed Financial Statements herein for further discussion on fair value measurements.

For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Mississippi Power in Item 7 and Notes 1 and 6 to the financial statements of Mississippi Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.

Financing Activities

During the first quarter 2009, Mississippi Power issued $125 million of Series 2009A 5.55% Senior Notes due March 1, 2019. The proceeds were used to repay at maturity Mississippi Power’s $40 million aggregate principal amount of Series F Floating Rate Senior Notes due March 9, 2009, to repay a portion of short-term indebtedness, and for general corporate purposes including Mississippi Power’s continuous construction program.

In addition to any financings that may be necessary to meet capital requirements, contractual obligations, and storm restoration costs, Mississippi 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.

SOUTHERN POWER COMPANY
AND SUBSIDIARY COMPANIES

SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months
	Ended March 31,
	2009			2008
	(in thousands)
Operating Revenues:
Wholesale revenues —
Non-affiliates		94,612			80,469
Affiliates		135,284			133,493
Other revenues		1,621			1,570

Total operating revenues		231,517			215,532

Operating Expenses:
Fuel		65,781			36,047
Purchased power —
Non-affiliates		21,482			16,556
Affiliates		15,202			50,708
Other operations and maintenance		32,973			35,031
Depreciation and amortization		24,339			19,987
Taxes other than income taxes		4,759			4,542

Total operating expenses		164,536			162,871

Operating Income		66,981			52,661
Other Income and (Expense):
Interest expense, net of amounts capitalized		(21,559	)		(19,357	)
Other income (expense), net		(211	)		12,580

Total other income and (expense)		(21,770	)		(6,777	)

Earnings Before Income Taxes		45,211			45,884
Income taxes		17,295			16,909

Net Income	$	27,916		$	28,975

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months
	Ended March 31,
	2009		2008
	(in thousands)
Net Income	$	27,916	$	28,975
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $302 and $(2,944), respectively		466		(4,561	)
Reclassification adjustment for amounts included in net income, net of tax of $935 and $1,342, respectively		1,440		2,073

Total other comprehensive income (loss)		1,906		(2,488	)

COMPREHENSIVE INCOME	$	29,822	$	26,487

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

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Three Months
	Ended March 31,
	2009			2008
	(in thousands)
Operating Activities:
Net income	$	27,916		$	28,975
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization		27,371			24,016
Deferred income taxes		18,763			11,067
Deferred revenues		(22,020	)		(26,767	)
Mark-to-market adjustments		883			14,406
Accumulated billings on construction contract		11,520			18,737
Accumulated costs on construction contract		(20,145	)		(18,630	)
Gain on sale of property		—			(6,029	)
Other, net		(134	)		1,660
Changes in certain current assets and liabilities —
Receivables		2,439			(2,355	)
Fossil fuel stock		1,464			(2,375	)
Materials and supplies		(497	)		(155	)
Prepaid income taxes		7,870			—
Other current assets		652			(214	)
Accounts payable		(19,840	)		(5,718	)
Accrued taxes		3,628			8,356
Accrued interest		(12,194	)		(12,210	)
Other current liabilities		88			(2,881	)

Net cash provided from operating activities		27,764			29,883

Investing Activities:
Property additions		(4,632	)		(24,332	)
Sale of property		—			4,999
Change in construction payables, net		(271	)		4,854
Payments pursuant to long-term service agreements		(6,136	)		(5,671	)
Other		—			(726	)

Net cash used for investing activities		(11,039	)		(20,876	)

Financing Activities:
Increase in notes payable, net		—			13,720
Proceeds — Capital contributions		1,060			897
Payment of common stock dividends		(26,525	)		(23,625	)

Net cash used for financing activities		(25,465	)		(9,008	)

Net Change in Cash and Cash Equivalents		(8,740	)		(1	)
Cash and Cash Equivalents at Beginning of Period		37,894			5

Cash and Cash Equivalents at End of Period	$	29,154		$	4

Supplemental Cash Flow Information:
Cash paid during the period for —
Interest (net of $78 and $4,142 capitalized for 2009 and 2008, respectively)	$	30,791		$	27,717
Income taxes (net of refunds)	$	(10,003	)	$	495

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

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	At March 31,		At December 31,
Assets	2009		2008
	(in thousands)
Current Assets:
Cash and cash equivalents	$	29,154	$	37,894
Receivables —
Customer accounts receivable		25,777		23,640
Other accounts receivable		1,795		2,162
Affiliated companies		31,651		33,401
Fossil fuel stock, at average cost		16,337		17,801
Materials and supplies, at average cost		27,024		26,527
Prepaid service agreements — current		18,423		26,304
Prepaid income taxes		13,602		18,066
Other prepaid expenses		2,109		2,756
Assets from risk management activities		15,563		10,799
Other		4,532		4,532

Total current assets		185,967		203,882

Property, Plant, and Equipment:
In service		2,865,524		2,847,757
Less accumulated provision for depreciation		376,361		351,193

		2,489,163		2,496,564
Construction work in progress		11,117		8,775

Total property, plant, and equipment		2,500,280		2,505,339

Deferred Charges and Other Assets:
Prepaid long-term service agreements		78,525		81,542
Other—
Affiliated		3,756		3,827
Other		18,354		18,550

Total deferred charges and other assets		100,635		103,919

Total Assets	$	2,786,882	$	2,813,140

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

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	At March 31,			At December 31,
Liabilities and Stockholder’s Equity	2009			2008
	(in thousands)
Current Liabilities:
Accounts payable —
Affiliated	$	43,185		$	62,732
Other		9,767			11,278
Accrued taxes —
Income taxes		3,394			88
Other		5,910			2,343
Accrued interest		17,722			29,916
Liabilities from risk management activities		12,394			7,452
Billings in excess of cost on construction contract		3,283			11,907
Other		310			224

Total current liabilities		95,965			125,940

Long-term Debt		1,297,416			1,297,353

Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		229,973			209,960
Deferred capacity revenues — Affiliated		12,884			32,211
Other—
Affiliated		6,408			6,667
Other		1,518			2,648

Total deferred credits and other liabilities		250,783			251,486

Total Liabilities		1,644,164			1,674,779

Common Stockholder’s Equity:
Common stock, par value $.01 per share —
Authorized - 1,000,000 shares
Outstanding - 1,000 shares		—			—
Paid-in capital		863,169			862,109
Retained earnings		303,700			302,309
Accumulated other comprehensive loss		(24,151	)		(26,057	)

Total common stockholder’s equity		1,142,718			1,138,361

Total Liabilities and Stockholder’s Equity	$	2,786,882		$	2,813,140

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

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

FIRST QUARTER 2009 vs. FIRST QUARTER 2008

OVERVIEW

Southern Power and its wholly-owned subsidiaries construct, acquire, own, and manage generation assets and sell electricity at market-based prices in the southeastern wholesale market. Southern Power continues to execute its regional strategy through a combination of acquiring and constructing new power plants and by entering into PPAs with investor owned utilities, independent power producers, municipalities, and electric cooperatives.

To evaluate operating results and to ensure Southern Power’s ability to meet its contractual commitments to customers, Southern Power focuses on several key performance indicators. These indicators include peak season equivalent forced outage rate (EFOR), return on invested capital (ROIC), and net income. EFOR defines the hours during peak demand times when Southern Power’s generating units are not available due to forced outages (the lower the better). ROIC is focused on earning a return on all invested capital that meets or exceeds Southern Power’s weighted average cost of capital. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Southern Power in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Net Income


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$(1.1)		(3.7)

Southern Power’s net income for the first quarter 2009 was $27.9 million compared to $29.0 million for the corresponding period in 2008. The decrease was primarily due to a gain on the sale of an undeveloped tract of land in Orange County, Florida to the Orlando Utilities Commission (OUC) and the receipt of a fee for participating in an asset auction that were both recognized in income in the first quarter 2008. The decrease was also due to increased depreciation associated with Plant Franklin Unit 3 being placed into commercial operation in June 2008 and increased depreciation associated with an increase in depreciation rates. These unfavorable impacts were partially offset by increased revenues associated with Plant Franklin Unit 3 being placed into commercial operation in June 2008 and increased generation from Southern Power’s combined cycle units due to lower natural gas prices.

Wholesale Revenues – Affiliates and Wholesale Revenues – Non-Affiliates


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$15.9		7.4

Wholesale revenues for the first quarter 2009 were $229.9 million compared to $214.0 million for the corresponding period in 2008. Wholesale energy sales to non-affiliates will vary depending on the energy demand of those customers and their generation capacity, as well as the market cost of available

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energy compared to the cost of Southern Power’s energy. Energy sales to affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. Sales to affiliate companies that are not covered by PPAs are made in accordance with the IIC, as approved by the FERC. Wholesale revenues from non-affiliates increased $14.1 million during the period, primarily due to revenues from Plant Franklin Unit 3 of $8.6 million and mark-to-market gains on sales of uncontracted generating capacity of $4.5 million in the first quarter 2009. Southern Power recognized $28.3 million in mark-to-market losses in the first quarter 2008. Decreases in revenues of $27.3 million due to lower natural gas prices and reduced sales of uncontracted generating capacity partially offset these increases in the first quarter 2009. Wholesale revenues from affiliates increased $1.8 million during the period, primarily due to increased energy revenues from non-PPA power sales under the IIC.

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Power Sales Agreements” of Southern Power in Item 7 of the Form 10-K and FUTURE EARNINGS POTENTIAL – “Power Sales Agreements” herein for additional information.

Fuel and Purchased Power Expenses


	First Quarter 2009 vs. First Quarter 2008
	(change in millions)			(% change)
Fuel	$	29.7			82.5
Purchased power – non-affiliates		4.9			29.8
Purchased power – affiliates		(35.5	)		(70.0	)

Total fuel and purchased power expenses	$	(0.8	)

In the first quarter 2009, total fuel and purchased power expenses were $102.5 million compared to $103.3 million for the corresponding period in 2008. Fuel expense increased $67.0 million due to a 40.7% increase in generation associated with Plant Franklin Unit 3 being placed into commercial operation in June 2008 and increased generation at Southern Power’s other combined cycle units due to lower natural gas prices. Additionally, $11.9 million in mark-to-market gains were recognized in the first quarter 2008 versus $3.9 million in mark-to-market losses recognized in the first quarter 2009. These increases were offset by a $51.4 million reduction in fuel expense due to a 24.7% decrease in the average cost of natural gas. Purchased power decreased $30.6 million due to increased generation at Southern Power’s combined cycle units during the first quarter 2009 due to the lower natural gas prices.

Other Operations and Maintenance Expenses


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$(2.1)		(5.9)

In the first quarter 2009, other operations and maintenance expenses were $33.0 million compared to $35.0 million for the same period in 2008. The decrease was primarily due to transmission tariff penalties of $3.6 million recognized in 2008, partially offset by an increase in plant maintenance activities of $1.5 million.

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Depreciation and Amortization


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$4.3		21.8

In the first quarter 2009, depreciation and amortization was $24.3 million compared to $20.0 million for the corresponding period in 2008. The increase was primarily due to completion of Plant Franklin Unit 3 in June 2008 and higher depreciation rates implemented in January 2009. See Note 1 to the financial statements of Southern Power under “Depreciation” in Item 8 of the Form 10-K and Note (A) to the Condensed Financial Statements under “Southern Power Depreciation Policy” herein for additional information.

Interest Expense, Net of Amounts Capitalized


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$2.2		11.4

In the first quarter 2009, interest expense, net of amounts capitalized was $21.6 million compared to $19.4 million for the corresponding period in 2008. The increase was primarily the result of a decrease in capitalized interest as a result of the completion of Plant Franklin Unit 3 in June 2008, partially offset by a decrease in short-term borrowing levels in the first quarter 2009.

Other Income (Expense), Net


First Quarter 2009 vs. First Quarter 2008
(change in millions)		(% change)
$(12.8)		(101.7)

In the first quarter 2009, other income (expense), net was $(0.2) million compared to $12.6 million for the corresponding period in 2008. The change was primarily due to a $6.0 million gain on the sale of an undeveloped tract of land in Orange County, Florida to the OUC and a $6.4 million fee received for participating in an asset auction that were both recognized in the first quarter 2008. Southern Power was not a successful bidder in the auction.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Southern Power’s future earnings potential. The level of Southern Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Power’s competitive wholesale business. These factors include Southern Power’s ability to achieve sales growth while containing costs. Another major factor is federal regulatory policy, which may impact Southern Power’s level of participation in the market. The level of future earnings also depends on numerous factors including regulatory matters (such as those related to affiliate contracts), creditworthiness of customers, total generating capacity

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

available in the Southeast, the successful remarketing of capacity as current contracts expire, and Southern Power’s ability to execute its acquisition strategy. Recent recessionary conditions have negatively impacted capacity revenues. The timing and extent of the economic recovery will impact future earnings. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Power in Item 7 of the Form 10-K.

Environmental Matters

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Southern Power in Item 7 of the Form 10-K for information on the development by federal and state environmental regulatory agencies of additional control strategies for emissions of air pollution from industrial sources, including electric generating facilities. Compliance with possible additional federal or state legislation or regulations related to global climate change, air quality, or other environmental and health concerns could also affect earnings. While Southern Power’s PPAs generally contain provisions that permit charging the counterparty with some of the new costs incurred as a result of changes in environmental laws and regulations, the full impact of any such regulatory or legislative changes 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 Power in Item 7 of the Form 10-K for information regarding the potential for legislation and regulation addressing greenhouse gas emissions. On April 17, 2009, the EPA released a proposed finding that certain greenhouse gas emissions from new motor vehicles endanger public health and welfare due to climate change. The ultimate outcome of the proposed endangerment finding cannot be determined at this time and will depend on additional regulatory action and potential legal challenges. However, regulatory decisions that may follow from such a finding could have implications for both new and existing stationary sources, such as power plants. In addition, federal legislative proposals that would impose mandatory requirements related to greenhouse gas emissions, renewable energy standards, and energy efficiency standards continue to be actively considered in Congress, and the reduction of greenhouse gas emissions has been identified as a high priority by the current Administration. The ultimate outcome of these matters cannot be determined at this time; however, mandatory restrictions on Southern Power’s greenhouse gas emissions, or requirements relating to renewable energy or energy efficiency, could result in significant additional compliance costs that could affect future results of operations, cash flows, and financial condition.

FERC Matters

Market-Based Rate Authority

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “FERC Matters – Market-Based Rate Authority” of Southern Power in Item 7 and Note 3 to the financial statements of Southern Power under “FERC Matters – Market-Based Rate Authority” in Item 8 of the Form 10-K for information regarding market-based rate authority. In October 2008, Southern Company filed with the FERC a revised market-based rate (MBR) tariff and a new cost-based rate (CBR) tariff.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
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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 with reserve prices not to exceed the CBR tariff price, 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 provides for a cost-based price for wholesale sales of less than a year. On March 5, 2009, the FERC accepted Southern Company’s CBR tariff for filing. On March 25, 2009, the FERC accepted Southern Company’s compliance filing related to the MBR tariff and directed Southern Company to commence the energy auction in 30 days. Southern Company commenced the energy auction on April 23, 2009. Implementation of the energy auction in accordance with the MBR tariff order is expected to adequately mitigate going forward any presumption of market power that Southern Company may have in the Southern Company retail service territory. The original generation dominance proceeding initiated by the FERC in December 2004 remains pending before the FERC. The ultimate outcome of this matter cannot be determined at this time.

Income Tax Matters

Legislation

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA). Major tax incentives in the ARRA include an extension of bonus depreciation and multiple renewable energy incentives. Southern Power estimates the cash flow reduction to 2009 tax payments as a result of the bonus depreciation provisions of the ARRA to be immaterial. Southern Power is currently assessing the other financial implications of the ARRA. The ultimate impact cannot be determined at this time.

Construction Projects

Cleveland County Units 1-4

In December 2008, Southern Power announced that it will build an electric generating plant in Cleveland County, North Carolina. The plant will consist of four combustion turbine natural gas generating units with a total generating capacity of 720 MW. The units are expected to go into commercial operation in 2012. Costs incurred through March 31, 2009 were $7.1 million. The total estimated construction cost is expected to be between $350 million and $400 million.

Power Sales Agreements

Southern Power has entered into PPAs with North Carolina Electric Membership Corporation (NCEMC) and North Carolina Municipal Power Agency No. 1 (NCMPA1) for a portion of the generating capacity from the Cleveland County plant that will begin in 2012 and expire in 2036 and 2031, respectively. NCEMC will purchase 180 MW of capacity that will be supported by one unit at the plant and will purchase capacity from a second unit at the plant that will increase to 180 MW over a seven-year phase-in period. NCMPA1 will purchase 180 MW from a third unit at the plant.

The NCEMC PPAs were approved by Rural Utilities Service on March 6, 2009.

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

Potential Acquisition

On April 2, 2009, Southern Power signed an agreement to acquire all of the outstanding general and limited partnership interests of Hartwell Energy Limited Partnership (Hartwell). Hartwell owns a dual fueled generating plant near Hartwell, Georgia with installed capacity of 318 MWs. The plant consists of two combustion turbine natural gas generating units with oil back-up. The entire output of the plant is sold under a PPA with Oglethorpe Power Corporation (Oglethorpe) through May 31, 2019.

The acquisition is subject to a right of first refusal held by Oglethorpe, certain regulatory approvals, and other conditions. Oglethorpe’s right of first refusal expires July 31, 2009. The ultimate outcome of this matter cannot be determined at this time.

Other Matters

Southern Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Southern Power is subject to certain claims and legal actions arising in the ordinary course of business. Southern Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, 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 potential litigation against Southern Power 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 Power in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from any such proceedings would have a material adverse effect on Southern Power’s financial statements.

See Note (B) to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Southern Power 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 Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Southern Power in Item 7 of the Form 10-K for a complete discussion of Southern Power’s critical accounting policies and estimates related to Revenue Recognition, Normal Sale and Non-Derivative Transactions, Cash Flow Hedge Transactions, Mark-to-Market Transactions, Percentage of Completion, Asset Impairments, Acquisition Accounting, Contingent Obligations, and Depreciation.

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FINANCIAL CONDITION AND LIQUIDITY

Overview

Southern Power’s financial condition remained stable at March 31, 2009. Throughout the recent turmoil in the financial markets, Southern Power has maintained cash balances to cover the majority of its capital needs and has had limited need to issue commercial paper or draw on committed credit arrangements. During the first quarter 2009, Southern Power successfully accessed the commercial paper market when needed. There was no commercial paper outstanding at March 31, 2009. Southern Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements as needed to meet future capital and liquidity needs. Market rates for committed credit have increased, and Southern Power may be subject to higher costs as its existing facilities are replaced or renewed. The current facility expires in 2012 and the commitment fee is less than ¹/₈ of 1%. Southern Power experienced no material counterparty credit losses as a result of the turmoil in the financial markets. The ultimate impact on future financing costs as a result of the financial turmoil cannot be determined at this time. See “Sources of Capital” herein for additional information on lines of credit.

Net cash provided from operating activities totaled $27.8 million for the first three months of 2009, compared to $29.9 million for the corresponding period in 2008. The $2.1 million decrease in cash provided from operating activities was primarily due to cash outflows for engineering, procurement, and construction services to build a combined cycle unit for the OUC. The OUC contract is not expected to have any positive or negative impacts to Southern Power over the term of the contract as Southern Power is not anticipating any profit or loss from this transaction at this time. Additionally, a fee for participating in an asset auction was received in the first quarter 2008. These decreases were partially offset by the receipt of an income tax refund in 2009 and collection of accounts receivable balances from 2008. Net cash used for investing activities totaled $11.0 million for the first three months of 2009, compared to $20.9 million for the corresponding period in 2008. The $9.9 million decrease is primarily due to reduced property additions as Plant Franklin Unit 3 was completed in June 2008. Net cash used in financing activities totaled $25.5 million for the first three months of 2009 compared to $9.0 million for the corresponding period in 2008. The increase was primarily due to a reduction in short-term borrowing in 2009 and an increase in dividends paid to Southern Company.

Significant asset changes in the balance sheet for the first three months of 2009 include a reduction in affiliate accounts receivable due to reduced energy sales under the IIC, a reduction in prepaid long-term service agreements due to completion of scheduled outages.

Significant liability and stockholder’s equity changes in the balance sheet for the first three months of 2009 include a reduction in affiliate accounts payable due to timing of payments to SCS, a reduction in accrued interest due to interest payments, a reduction in billings in excess of cost due to increased spending on the OUC construction contract, and a reduction in deferred capacity revenues due to levelization.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Southern Power in Item 7 of the Form 10-K for a description of Southern Power’s capital requirements for its construction program,

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maturing debt, interest, leases, derivative obligations, purchase commitments, and long-term service agreements. The construction programs are subject to periodic review and revision; these amounts include estimates for potential plant acquisitions and new construction as well as ongoing capital improvements. Planned expenditures for plant acquisitions may vary due to market opportunities and Southern Power’s ability to execute its growth strategy. Actual construction costs may vary from these estimates because of changes in factors such as: business conditions; environmental statutes and regulations; FERC rules and regulations; load projections; the cost and efficiency of construction labor, equipment, and materials; and the cost of capital.

Sources of Capital

Southern Power may use operating cash flows, external funds, equity capital, or loans from Southern Company to finance any new projects, acquisitions, and ongoing capital requirements. Southern Power expects to generate external funds from the issuance of unsecured senior debt and commercial paper or utilization of credit arrangements from banks. 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 Power in Item 7 of the Form 10-K for additional information.

Southern Power’s current liabilities frequently exceed current assets due to the use of short-term indebtedness as a funding source, as well as cash needs which can fluctuate significantly due to the seasonality of the business. To meet liquidity and capital resource requirements, Southern Power had at March 31, 2009 $400 million in committed credit arrangements with banks that will expire in 2012. Proceeds from these credit arrangements may be used for working capital and general corporate purposes as well as liquidity support for Southern Power’s commercial paper program. See Note 6 to the financial statements of Southern 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.

Southern Power’s commercial paper program is used to finance acquisition and construction costs related to electric generating facilities and for general corporate purposes.

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

Southern Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change 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, and energy price risk management. At March 31, 2009, the maximum potential collateral requirements under these contracts at a BBB and Baa2 rating were approximately $9 million and at a BBB- and/or Baa3 rating were approximately $338 million. At March 31, 2009, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $798 million. Included in these amounts are certain agreements that

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

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. Additionally, any credit rating downgrade could impact Southern Power’s ability to access capital markets, particularly the short-term debt market.

In addition, through the acquisition of Plant Rowan, Southern Power assumed a PPA with Duke Energy that could require collateral, but not accelerated payment, in the event of a downgrade to Southern Power’s credit rating to below BBB- or Baa3. The amount of collateral required would depend upon actual losses, if any, resulting from a credit downgrade.

Market Price Risk

Southern Power is exposed to market risks, including changes in interest rates and certain energy-related commodity prices. To manage the volatility attributable to these exposures, Southern Power takes advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to Southern Power’s policies in areas such as counterparty exposure and hedging practices. It is Southern Power’s policy that derivatives be used primarily for hedging purposes. Derivative positions are monitored using techniques that include market valuation and sensitivity analysis.

Southern Power’s market risk exposure relative to interest rate changes has not changed materially compared with the December 31, 2008 reporting period. Since a significant portion of outstanding indebtedness is at fixed rates, Southern Power is not aware of any facts or circumstances that would significantly affect exposure on existing indebtedness in the near term. However, the impact on future financing costs cannot now be determined.

Because energy from Southern Power’s facilities is primarily sold under long-term PPAs with tolling agreements and provisions shifting substantially all of the responsibility for fuel cost to the counterparties, Southern Power’s exposure to market volatility in commodity fuel prices and prices of electricity is generally limited. However, Southern Power has been and may continue to be exposed to market volatility in energy-related commodity prices as a result of sales of uncontracted generating capacity.

The changes in fair value of energy-related derivative contracts for the three months ended March 31, 2009 were as follows:


	First Quarter
	2009
	Changes
	Fair Value
	(in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net	$	3.4
Contracts realized or settled		0.1
Current period changes^(a)		(0.2	)

Contracts outstanding at the end of the period, assets (liabilities), net	$	3.3


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

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SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
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 ended March 31, 2009 was $0.1 million, which is due to both power and natural gas positions. This change is attributable to both the volume and prices of power and natural gas as follows:


	March 31, 2009

Power (net sold)

MWHs (in millions)		0.7
Weighted average contract cost per MWH above (below) market prices (in dollars)	$	3.71

Natural gas (net purchase)

Commodity – Bcf		3.5
Location basis – Bcf		2.0

Commodity – Weighted average contract cost per mmBtu above (below) market prices (in dollars)	$	(0.27	)

Location basis – Weighted average contract cost per mmBtu above (below) market prices (in dollars)	$	0.06

At March 31, 2009, the fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:


	March 31, 2009
	(in millions)
Cash flow hedges	$	—
Not designated		3.3

Total fair value	$	3.3

Gains and losses on energy-related derivatives used by Southern Power to hedge anticipated purchases and sales are initially deferred in other comprehensive income before being recognized in income in the same period as the hedged transaction. Gains and losses on derivative contracts that are not designated as hedges are recognized in the statements of income as incurred.

Total net unrealized pre-tax losses recognized in the statements of income for the three months ended March 31, 2009 for energy-related derivative contracts that are not hedges was $1 million and will continue to be marked to market until the settlement date. For the three months ended March 31, 2008, the total net unrealized losses recognized in the statements of income were $14 million. See Note (F) to the Condensed Financial Statements herein for further details of these losses.

The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at March 31, 2009 are as follows:


	March 31, 2009
	Fair Value Measurements
	Total		Maturity
	Fair Value		Year 1		Years 2&3		Years 4&5
	(in millions)
Level 1	$	—	$	—	$	—	$	—
Level 2		3.3		3.2		0.1		—
Level 3		—		—		—		—

Fair value of contracts outstanding at end of period	$	3.3	$	3.2	$	0.1	$	—

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

Southern Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, and thus fall into Level 2. See Note (C) to the Condensed Financial Statements herein for further discussion on fair value measurements.

For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Southern Power in Item 7 and Notes 1 and 6 to the financial statements of Southern Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.

Financing Activities

Southern Power did not issue or redeem any long-term securities during the three months ended March 31, 2009.

114

NOTES TO THE CONDENSED FINANCIAL STATEMENTS
FOR
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES

INDEX TO APPLICABLE NOTES TO
FINANCIAL STATEMENTS BY REGISTRANT


Registrant		Applicable Notes

Southern Company		A, B, C, D, E, F, G, H, I

Alabama Power		A, B, C, F, G, H

Georgia Power		A, B, C, D, F, G, H

Gulf Power		A, B, C, F, G, H

Mississippi Power		A, B, C, D, F, G, H

Southern Power		A, B, C, F, H

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED FINANCIAL STATEMENTS:

	(A)		INTRODUCTION

			The condensed quarterly financial statements of each registrant included herein have been prepared by such registrant, without audit, pursuant to the rules and regulations of the SEC. The Condensed Balance Sheets as of December 31, 2008 have been derived from the audited financial statements of each registrant. In the opinion of each registrant’s management, the information regarding such registrant furnished herein reflects all adjustments, which, except as otherwise disclosed, are of a normal recurring nature, necessary to present fairly the results of operations for the periods ended March 31, 2009 and 2008. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although each registrant believes that the disclosures regarding such registrant are adequate to make the information presented not misleading. Disclosures which would substantially duplicate the disclosures in the Form 10-K and details which have not changed significantly in amount or composition since the filing of the Form 10-K are generally omitted from this Quarterly Report on Form 10-Q. Therefore, these Condensed Financial Statements should be read in conjunction with the financial statements and the notes thereto included in the Form 10-K. Due to the seasonal variations in the demand for energy, operating results for the periods presented do not necessarily indicate operating results for the entire year.

			Reclassifications

			Certain prior period data presented in the financial statements have been reclassified to conform to the current year presentation.

			For comparative purposes, each registrant’s statement of income for the three months ended March 31, 2008 was modified within the operating expenses section to combine the line items “Other operations” and “Maintenance” into a single line item entitled “Other operations and maintenance.” The balance sheets at December 31, 2008 of Southern Company, Alabama Power, and Georgia Power were modified to present a separate line item for “Other regulatory assets” previously included in “Other.” In addition, Georgia Power’s balance sheet was modified to reflect a new line item “Liabilities from risk management activities” previously included in “Other.” Within the operating activities of Georgia Power’s statements of cash flows, “Deferred revenues” and “Deferred expenses” previously included in “Other, net” in the prior period are now shown as separate line items. Also, within the financing activities of the same statement, the line item “Capital leases” was collapsed into “Other.” Mississippi Power’s balance sheet was modified to combine the line item “Prepaid income taxes” with “Other current assets.” Southern Power’s consolidated statement of cash flows for the three months ended March 31, 2008 was modified within the investing activities to present separately the amount of “Payments pursuant to long-term service agreements” previously included in “Property additions.”

			These reclassifications had no effect on total assets, net income, cash flows, or earnings per share.

116

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

			Effective January 1, 2009, Southern Company and its subsidiaries adopted retrospectively FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” which is an amendment of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” (SFAS No. 160). In connection with the adoption of SFAS No. 160, Southern Company evaluated the requirements of Emerging Issues Task Force Topic No. 98, “Classification and Measurement of Redeemable Securities” (Topic D-98) with respect to the presentation of preferred and preference stock of subsidiaries. Based on the guidance in Topic D-98 and SFAS No. 160, the preferred and preference stock at Georgia Power and the preference stock at Alabama Power and Gulf Power are required to be shown as “noncontrolling interests,” separately presented as a component of “Stockholders’ Equity” on Southern Company’s consolidated balance sheets. The preferred stock of Alabama Power and Mississippi Power contains a feature that allows the holders to elect a majority of such subsidiary’s board of directors if dividends are not paid for four consecutive quarters. Because such a potential redemption-triggering event is not solely within the control of Alabama Power and Mississippi Power, this preferred stock is presented as “Redeemable Preferred Stock of Subsidiaries” in a manner consistent with temporary equity as defined in Topic D-98. The preferred and preference stock at Georgia Power and the preference stock at Alabama Power and Gulf Power do not contain such a provision that would allow the holders to elect a majority of such subsidiary’s board.

			In addition, SFAS No. 160 requires that preferred and preference dividends of subsidiaries previously presented within Southern Company’s consolidated statements of income as a component of “Other Income and (Expense)” be presented as a deduction from “Consolidated Net Income” to arrive at “Consolidated Net Income After Dividends on Preferred and Preference Stock.” In Southern Company’s consolidated statements of cash flows, the preferred and preference dividends previously classified in operating activities are now classified in financing activities.

			Southern Power Depreciation Policy

			See Note 1 to the financial statements of Southern Power under “Depreciation” in Item 8 of the Form 10-K for information regarding Southern Power’s depreciation policy. Southern Power revised its depreciation rates in 2009. The change in estimate is due to revised useful life assumptions for certain components of plant in service. The expected total impact on Southern Power’s income from continuing operations and net income for 2009 is a decrease of approximately $8.0 million and $5.0 million, respectively.

	(B)		CONTINGENCIES AND REGULATORY MATTERS

			See Note 3 to the financial statements of the registrants in Item 8 of the Form 10-K for information relating to various lawsuits, other contingencies, and regulatory matters.

			General Litigation Matters

			Each registrant is subject to certain claims and legal actions arising in the ordinary course of business. In addition, each registrant’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 the registrants and any of their subsidiaries cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of each registrant 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 such registrant’s financial statements.

117

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

			Mirant Matters

			Mirant was an energy company with businesses that included independent power projects and energy trading and risk management companies in the United States and selected other countries. It was a wholly-owned subsidiary of Southern Company until its initial public offering in October 2000. In April 2001, Southern Company completed a spin-off to its shareholders of its remaining ownership, and Mirant became an independent corporate entity.

			*Mirant Bankruptcy*

			In July 2003, Mirant and certain of its affiliates filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Texas. The Bankruptcy Court entered an order confirming Mirant’s plan of reorganization in December 2005, and Mirant announced that this plan became effective in January 2006. As part of the plan, Mirant transferred substantially all of its assets and its restructured debt to a new corporation that adopted the name Mirant Corporation (Reorganized Mirant).

			Southern Company has certain contingent liabilities associated with guarantees of contractual commitments made by Mirant’s subsidiaries discussed under “Guarantees” in Note 7 to the financial statements of Southern Company in Item 8 of the Form 10-K and with various lawsuits related to Mirant discussed below. Also, Southern Company has joint and several liability with Mirant regarding the joint consolidated federal income tax returns through 2001, as discussed in Note 5 to the financial statements of Southern Company in Item 8 of the Form 10-K. In December 2004, as a result of concluding an IRS audit for the tax years 2000 and 2001, Southern Company paid approximately $39 million in additional tax and interest related to Mirant tax items and filed a claim in Mirant’s bankruptcy case for that amount. To date, Southern Company has received from the IRS approximately $38 million in refunds related to Mirant. Southern Company believes it has a right to recoup the $39 million tax payment owed by Mirant from such tax refunds. As a result, Southern Company intends to retain the tax refunds and reduce its claim against Mirant for the payment of Mirant taxes by the amount of such refunds. MC Asset Recovery, LLC, a special purpose subsidiary of Reorganized Mirant (MC Asset Recovery), has objected to and sought to equitably subordinate the Southern Company tax claim in its fraudulent transfer litigation against Southern Company. Southern Company’s proofs of claim filed in the Mirant bankruptcy survive the settlement of the MC Asset Recovery litigation. Southern Company has reserved the remaining amount with respect to its Mirant tax claim.

			Under the terms of the separation agreements entered into in connection with the spin-off, Mirant agreed to indemnify Southern Company for costs associated with these guarantees, lawsuits, and additional IRS assessments. As a result of Mirant’s bankruptcy, Southern Company sought reimbursement as an unsecured creditor in Mirant’s Chapter 11 proceeding. As part of a complaint filed against Southern Company in June 2005 and amended thereafter, Mirant and The Official Committee of Unsecured Creditors of Mirant Corporation (Unsecured Creditors’ Committee) objected to and sought equitable subordination of Southern Company’s claims, and Mirant moved to reject the separation agreements entered into in connection with the spin-off as discussed in the preceding paragraph. MC Asset Recovery has been substituted as plaintiff in the complaint. If Southern Company’s claims for indemnification with respect to these, or any additional future payments, are allowed, then Mirant’s indemnity obligations to Southern Company would constitute unsecured claims against Mirant entitled to stock in Reorganized Mirant. The final outcome of this matter cannot now be determined.

118

NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)

			*MC Asset Recovery Litigation*

			In June 2005, Mirant, as a debtor in possession, and the Unsecured Creditors’ Committee filed a complaint against Southern Company in the U.S. Bankruptcy Court for the Northern District of Texas, which was amended in July 2005, February 2006, May 2006, and March 2007.

			In December 2005, the Bankruptcy Court entered an order authorizing the transfer of this proceeding, along with certain other actions, to MC Asset Recovery. Under that order, Reorganized Mirant was obligated to fund up to $20 million in professional fees in connection with the lawsuits, as well as certain additional amounts. Any net recoveries from these lawsuits would be distributed to, and shared equally by, certain unsecured creditors and the original equity holders. In January 2006, the U.S. District Court for the Northern District of Texas substituted MC Asset Recovery as plaintiff.

			The complaint, as amended in March 2007, alleged that Southern Company caused Mirant to engage in certain fraudulent transfers and to pay illegal dividends to Southern Company prior to the spin-off. The alleged fraudulent transfers and illegal dividends included without limitation: (1) certain dividends from Mirant to Southern Company in the aggregate amount of $668 million, (2) the repayment of certain intercompany loans and accrued interest in an aggregate amount of $1.035 billion, and (3) the dividend distribution of one share of Series B Preferred Stock and its subsequent redemption in exchange for Mirant’s 80% interest in a holding company that owned SE Finance Capital Corporation and Southern Company Ca