Southern Company - 10-Q quarterly report FY

     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 X  No___

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes___  No X (Response applicable to all registrants.)

     This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, Savannah Electric and Power Company, and Southern Power Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies.

     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, storm damage cost recovery and repairs, environmental regulations and expenditures, the proposed merger of Savannah Electric and Georgia Power, financing activities, completion of construction projects, impacts of adoption of new accounting rules, access to sources of capital, 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:

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

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

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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)

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

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

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

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

FIRST QUARTER 2006 vs. FIRST QUARTER 2005

Discussion of the results of operations is focused on Southern Company’s primary business of electricity sales in the Southeast by the retail operating companies — Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric — and Southern Power. Southern Power is an electric wholesale generation subsidiary with market-based rate authority. Southern Company’s other business activities include investments in synthetic fuels and leveraged lease projects, telecommunications, and energy-related services. For additional information on these businesses, see BUSINESS — The SOUTHERN System — “Retail Operating Companies,” “Southern Power,” and “Other Business” in Item 1 of the Form 10-K.

     Hurricanes Dennis and Katrina hit Southern Company’s service territory in July and August 2005, respectively. As a result of these storms, as well as Hurricane Ivan in September 2004, Southern Company has incurred significant restoration costs. In addition, fuel costs at each of the retail operating companies rose significantly during 2005 and the first quarter of 2006. Southern Company continues to work with its regulators to develop methods to enable the timely recovery of these costs. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters — Storm Damage Cost Recovery” of Southern Company in Item 7 of the Form 10-K for additional information.

     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.

Southern Company’s first quarter earnings were $261.6 million ($0.35 per share) compared with $323.0 million ($0.43 per share) for the corresponding period in 2005. The decrease in earnings in the first quarter 2006 resulted primarily from higher other operations and maintenance expenses (excluding effects of a 2005 Alabama PSC accounting order), higher interest expense, reduction in tax credits related to synfuel investments, and milder weather compared to the first quarter of 2005. These decreases to earnings were partially offset by an increase in revenues resulting from sustained economic strength and customer growth in the Southern Company service area.

     Significant income statement items appropriate for discussion include the following:

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

     Retail revenues. The chart below reflects the primary drivers of the 8.9% increase in retail revenues in the first quarter of 2006 when compared to the same period in 2005. Changes in revenue related to certain cost recovery mechanisms such as fuel and storm damage have no effect on net income. In the first quarter 2006, retail KWH sales increased by 0.3% from the same period in 2005, primarily due to continued customer and demand growth from sustained economic strength in the Southeast. The number of retail customers increased by 1.3% and weather-adjusted average consumption by retail customers increased by 0.6% for the first quarter of 2006 when compared with the first quarter 2005.

     Details of retail revenues are as follows:

     Sales for resale. In the first quarter 2006, sales for resale increased $67.7 million, or 19.5%, over the same period in 2005. The increase reflects higher fuel revenues of $27 million due to a 20.6% increase in the cost of fuel per net KWH generated and a $65 million increase in revenues associated with sales under long-term contracts, offset by a $24 million decrease in excess capacity revenues.

     Other electric revenues. In the first quarter 2006, when compared to the same period in 2005, other electric revenues increased $9.9 million, or 9.8%. The increase was primarily due to higher transmission revenues of $4.1 million, increased cogeneration revenues of $4.3 million, and higher outdoor lighting revenues of $1.4 million.

     Fuel and purchased power expense. Fuel and purchased power expense increased $190.1 million in the first quarter 2006 when compared to the same period in 2005 due to a $201.6 million increase in the cost of fuel offset by a $11.5 million decrease related to fewer total KWHs generated and purchased. Increases in fuel expense at the retail operating companies are generally offset by fuel revenues and do not affect net income. See FUTURE EARNINGS POTENTIAL — “FERC and State PSC Matters — Retail Fuel Cost Recovery” herein for additional information. Fuel expenses incurred under Southern Power’s PPAs are generally the responsibility of the counterparties and do not significantly affect net income.

     Other operations expense. The $46.0 million increase in other operations expense in the first quarter 2006 as compared with the same period in the prior year is due to a $21.5 million increase in administrative and general expense, primarily additional compensation related to expensing of stock options, and a $8.3 million increase in customer accounts, service and sales expense, primarily technology costs, promotional expenses for energy efficiency programs, and an increase in uncollectible accounts. The increase was also attributable to a $9.4 million increase in production expense and a $6.8 million increase in transmission and distribution expense. Production, transmission, and distribution expenses fluctuate from year to year due to timing of plant outages and system maintenance projects as well as normal increases in costs.

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

     Maintenance expense. The $10.5 million decrease in maintenance expense in the first quarter 2006 compared with the same period in 2005 is mainly attributable to $45 million of expenses recorded in the first quarter of 2005 by Alabama Power in accordance with an accounting order approved by the Alabama PSC to offset the costs of Hurricane Ivan and restore the natural disaster reserve. In accordance with the accounting order, Alabama Power also returned certain regulatory liabilities related to deferred taxes to its retail customers; therefore, the combined effects of this accounting order had no impact on net income. See Note 3 to the financial statements of Southern Company under “Storm Damage Cost Recovery” in Item 8 of the Form 10-K and “Income taxes” below for additional information. Excluding the impact of the $45 million Alabama Power accounting order, maintenance expense increased $34.5 million in the first quarter of 2006 over 2005 due to an
$18.4 million increase in production maintenance expense and a $15.3 million increase in transmission and distribution maintenance expense. Production, transmission, and distribution expenses fluctuate from year to year due to timing of plant outages and system maintenance projects as well as normal increases in costs.

     Taxes other than income taxes. The $12.1 million increase in taxes other than income taxes in the first quarter 2006 compared with the same period in 2005 is primarily a result of increases in municipal franchise and gross receipts taxes associated with increases in revenues from energy sales and an increase in property taxes associated with changes in property tax rates, changes in the assessed value of properties, and increases in property value associated with the additions of Plants McIntosh and Oleander.

     Allowance for equity funds used during construction. The $5.3 million decrease in AFUDC equity for the first quarter 2006 compared to the same period in the prior year relates to the completion of the Plant McIntosh combined cycle units 10 and 11 by Georgia Power and Savannah Electric in June 2005. AFUDC equity is non-taxable.

     Equity in losses of unconsolidated subsidiaries. The $9.5 million increase in equity in losses of unconsolidated subsidiaries in the first quarter 2006 compared with the same period in the prior year reflects $12.1 million in increased production at synfuel production facilities that generate operating losses. These partnerships also claim federal income tax credits that offset these operating losses and make the projects profitable. The increase was offset by $2.6 million in expense recovery associated with the reserve recorded in the first quarter 2006 related to a projected phase-out of 2006 tax credits resulting from increases in current and projected future oil prices. See FUTURE EARNINGS POTENTIAL — “Income Tax Matters — Synthetic Fuel Tax Credits” herein for further information.

     Interest expense, net of amounts capitalized. Interest charges and other financing costs increased by $37.4 million in the first quarter of 2006 when compared to the same period in 2005 associated with a $901.4 million increase in notes payable and a $525.4 million increase in long-term debt outstanding at March 31, 2006 compared to March 31, 2005 as well as an increase in average interest rates on variable rate debt. Variable rates on pollution control bonds are highly correlated with the BMA Municipal Swap Index, which averaged 3.1% in the first quarter of 2006 compared to 1.9% in the first quarter of 2005. Variable rates on commercial paper and senior notes are highly correlated with the one-month LIBOR, which averaged 4.6% in the first quarter of 2006 and 2.6% in the first quarter of 2005. The increase in interest expense was also the result of $5.0 million related to early redemption of trust preferred securities. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Financing Activities” of Southern Company in Item 7 of the Form 10-K and herein for additional information.

     Other income (expense), net. The $5.7 million decrease in other income (expense), net, in the first quarter of 2006 compared to the same period in 2005 is primarily due to Alabama Power’s $5.0 million settlement with the EPA in the NSR litigation. See Note 3 to the financial statements of Southern Company under “Environmental Matters — New Source Review Actions” in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein under “NEW SOURCE REVIEW ACTIONS — New Source Review Litigation” for further information.

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

     Income taxes. The $31.1 million increase in income taxes in the first quarter 2006 when compared to the same period in the prior year is primarily due to the impact of the Alabama PSC accounting order recorded in the first quarter 2005, discussed under “Maintenance expense” above, and $19.5 million associated with the synthetic fuel reserve discussed under “Equity in losses of unconsolidated subsidiaries” above. The net after-tax effect of the synthetic fuel reserve is $16.9 million. See FUTURE EARNINGS POTENTIAL — “Income Tax Matters — Synthetic Fuel Tax Credits” herein for further information. These increases were partially offset by a decrease in income taxes associated with lower taxable income in the first quarter of 2006 as compared to the same period in 2005.

The results of operations discussed above are not necessarily indicative of Southern Company’s future earnings potential. The level of 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 retail operating companies’ ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs. Another major factor is the profitability of the competitive market-based wholesale generating business and federal regulatory policy, which may impact Southern Company’s level of participation in this market. Future earnings for the electricity business in the near term will depend, in part, upon the availability of tax credits on synfuel investments and growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in the service area. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form 10-K.

Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be fully recovered in rates on a timely basis. For additional information, including information on certain environmental litigation, 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.

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — New Source Review Actions” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters — New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding a civil action brought by the EPA alleging that Alabama Power had violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of its coal-fired generating facilities. On April 24, 2006, as a result of court-ordered mediation, the EPA filed, with the U.S. District Court for the Northern District of Alabama, statements designed to result in a judgment being entered in favor of Alabama Power on the claims related to Plants Barry, Gaston, Gorgas, and Greene County. In turn, Alabama Power agreed to the filing with the district court of a proposed consent decree that, upon such court’s approval, would require Alabama Power to pay $100,000 to resolve the EPA’s claim for a civil penalty related to alleged violations at Plant Miller. The proposed consent decree also formalizes specific emissions reductions to be accomplished by Alabama Power. These reductions are consistent with other Clean Air Act programs that require emissions reductions. Alabama Power further agreed to donate $4.9 million of sulfur dioxide emission allowances to a nonprofit charitable organization. As a result, Alabama Power recognized $5 million in other income (expense), net related to the proposed consent decree. The final

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

resolution of these claims is dependent on further court action and subject to possible appeals, and therefore, cannot be determined at this time.

On October 20, 2005, the EPA published a proposed rule clarifying the test for determining when an emissions increase is subject to the NSR requirements. On March 17, 2006, the U.S. Court of Appeals for the District of Columbia Circuit vacated the EPA’s proposed rule which sought to clarify the scope of the existing Routine Maintenance, Repair, and Replacement Exclusion. Because this rule was not yet in effect, the court’s ruling is not anticipated to have any impact on Southern Company. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — New Source Review Actions” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters — New Source Review Actions” in Item 8 of the Form 10-K for additional information.

On March 30, 2006, the U.S. Court of Appeals for the Eleventh Circuit ruled in favor of Georgia Power on its appeal and reversed the district court’s order regarding certain alleged opacity violations at Plant Wansley. The court of appeals remanded the case to the U.S. District Court for the Northern District of Georgia for further proceedings consistent with its decision. The ultimate outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS - - FUTURE EARNINGS POTENTIAL — “Environmental Matters — Plant Wansley Environmental Litigation” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters — Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K for additional information.

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 on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Each of the retail operating companies and Southern Power has authorization from the FERC to sell power to non-affiliates at market-based prices. The retail operating companies and Southern Power also have FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. On February 15, 2005, Southern Company submitted additional information related to generation dominance in Southern Company’s retail service territory. A hearing before an administrative law judge scheduled for March 2006 has been held in abeyance to allow the parties to explore settlement. Any new market-based rate transactions in its retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. The impact of all such sales through March 31, 2006 is not expected to exceed $19 million for the Southern Company system. The refund period covers 15 months. In the event that the FERC’s default mitigation measures for entities that are found to have market power are ultimately applied, the retail operating companies and Southern Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

     In addition, in May 2005, the FERC initiated an investigation to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to

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

entry, and affiliate abuse or reciprocal dealing. The FERC established a new 15-month refund period related to this expanded investigation. Any new market-based rate transactions involving any Southern Company subsidiary will be subject to refund to the extent the FERC orders lower rates as a result of this new investigation, with the refund period beginning July 19, 2005. The impact of all such sales through March 31, 2006 is not expected to exceed $37 million, of which $15 million relates to sales inside the retail service territory discussed above. The FERC also directed that this expanded proceeding be held in abeyance pending the outcome of the proceeding on the IIC discussed below.

     Southern Company and its subsidiaries believe that there is no meritorious basis for this proceeding and are vigorously defending themselves in this matter. However, the final outcome of this matter, including any remedies to be applied in the event of an adverse ruling in this proceeding, cannot now be determined.

Also in May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the power pool of Southern Company is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (2) whether any parties to the IIC have violated the FERC’s standards of conduct applicable to utility companies that are transmission providers, and (3) whether Southern Company’s code of conduct defining Southern Power as a “system company” rather than a “marketing affiliate” is just and reasonable. In connection with the formation of Southern Power, the FERC authorized Southern Power’s inclusion in the IIC in 2000. The FERC also previously approved Southern Company’s code of conduct. The FERC order directs that the administrative law judge who presided over a proceeding involving approval of PPAs between Southern Power and Georgia Power and Savannah Electric be assigned to preside over the hearing in this proceeding and that the testimony and exhibits presented in that proceeding be preserved to the extent appropriate. Effective July 19, 2005, revenues from transactions under the IIC involving any Southern Company subsidiaries will be subject to refund to the extent the FERC orders any changes to the IIC. On April 11, 2006, Southern Company, Calpine Corporation, Coral Energy, and Dalton Utilities filed a settlement offer that would resolve the proceeding. The offer is pending before the FERC and does not require any refunds. However, because the offer is pending, the final outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “FERC Matters — Intercompany Interchange Contract” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “FERC Matters — Intercompany Interchange Contract” in Item 8 of the Form 10-K for additional information.

The retail operating companies each have established fuel cost recovery rates approved by their respective state PSCs. In 2005 and the first quarter of 2006, the retail operating companies have experienced higher than expected fuel costs for coal and gas. These higher fuel costs have increased the under recovered fuel costs included in the balance sheets to approximately $1.2 billion at March 31, 2006. 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 retail operating companies will continue to monitor the under recovered fuel cost balance in light of these higher fuel costs. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters — Fuel Cost Recovery” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Alabama Power Retail Regulatory Matters” and “Georgia Power Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information.

     On March 17, 2006, Georgia Power and Savannah Electric filed a combined request for fuel cost recovery rate changes with the Georgia PSC to be effective July 1, 2006. The requested changes will allow for the

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

recovery of fuel costs based on an estimate of future fuel costs, as well as the collection of the existing under recovered fuel expenses. The filing also includes proposed fuel rate changes related to the previously announced proposed merger of the two companies, which is expected to be completed by July 2006.

     The request would result in an increase of about $7.22 per month, or about 8.1%, on the average Georgia Power residential customer bill and a decrease of about $8.14 a month, or about 6.4%, on the average residential bill for a customer in the former Savannah Electric territory. The impact for business customers would depend upon the customer’s specific rate class and usage.

     The request would increase Georgia Power’s revenues by $556 million a year, of which approximately $106 million relates to collection of the existing under recovered fuel costs. As of the end of March 2006, Savannah Electric had an under recovered fuel balance of $81 million, and Georgia Power had an under recovered fuel balance of about $784 million, including approximately $392 million related to fuel used since June 2005. The proposed fuel rates are based on an amortization period of 35 months for Georgia Power customers and 41 months for former Savannah Electric territory customers. Hearings are scheduled for May 2006 and the Georgia PSC is expected to rule on this matter in June 2006. The outcome of this matter cannot be determined at this time.

In July and August 2005, Hurricanes Dennis and Katrina, respectively, hit the Gulf Coast of the United States and caused significant damage within Southern Company’s service area, including portions of Gulf Power, Alabama Power, and Mississippi Power. Hurricane Ivan hit the Gulf coast of Florida and Alabama in September 2004, causing significant damage to the service areas of both Gulf Power and Alabama Power. Each retail operating company maintains a reserve to cover the cost of damages from major storms to its transmission and distribution lines and the cost of uninsured damages to its generation facilities and other property. In addition, each of the affected retail operating companies has been authorized by its state PSC to defer the portion of the hurricane restoration costs that exceeded the balance in its storm damage reserve account. As of March 31, 2006, the deficit balance in Southern Company’s storm damage reserve accounts totaled approximately $375 million, of which approximately $70 million and $305 million, respectively, are included in the Condensed Balance Sheets herein under “Other Current Assets” and “Other Regulatory Assets.” See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters — Storm Damage Cost Recovery” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Storm Damage Cost Recovery” in Item 8 of the Form 10-K for additional information.

     In October 2005, the Mississippi PSC issued an Interim Accounting Order requiring Mississippi Power to recognize a regulatory asset in an amount equal to the retail portion of the recorded Hurricane Katrina restoration costs, including both operation and maintenance expenditures and capital additions. In December 2005, Mississippi Power filed with the Mississippi PSC a detailed review of all Hurricane Katrina restoration costs as required in the Interim Accounting Order. Mississippi Power is currently working with the Mississippi PSC to establish a method to recover all such prudently incurred costs, while minimizing the impact on Mississippi Power’s customers. The Department of Defense emergency supplemental appropriations bill, enacted in December 2005 to address restoration efforts related to hurricanes in the Gulf of Mexico, provides $11 billion in disaster relief for the States of Mississippi, Louisiana, and Alabama. In the State of Mississippi, $300 million in grant assistance in the form of Community Development Block Grants (CDBGs) is expected to be designated for utilities within the state. Mississippi Power plans to apply for these CDBGs to offset the cost of storm recovery. Mississippi Power is also considering securitization of remaining unrecovered costs as provided for under legislation passed in the State of Mississippi in the first quarter of 2006. The final outcome of these matters cannot now be determined.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Also in December 2005, Mississippi Power submitted its annual PEP filing to the Mississippi PSC. Ordinarily, PEP limits annual rate increases to 4%; however, Mississippi Power requested that the Mississippi PSC approve a temporary change to allow it to exceed this cap as a result of the ongoing effects of Hurricane Katrina. Mississippi Power had requested a 5.05%, or $32 million, retail base rate increase to become effective in April 2006. Hearings were held in March 2006, and the full increase was approved by the Mississippi PSC on March 13, 2006.

Mirant was an energy company with businesses that included independent power projects and energy trading and risk management companies in the U.S. and selected other countries. It was a wholly-owned subsidiary of Southern Company until its initial public offering in October 2000. In April 2001, Southern Company completed a spin-off to its shareholders of its remaining ownership, and Mirant became an independent corporate entity. In July 2003, Mirant filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code. See Note 3 to the financial statements of Southern Company under “Mirant Matters — Mirant Bankruptcy” in Item 8 of the Form 10-K for information regarding Southern Company’s contingent liabilities associated with Mirant, including guarantees of contractual commitments, litigation, and joint and several liabilities in connection with the consolidated federal income tax return.

See Note 3 to the financial statements of Southern Company under “Mirant Matters — Mirant Securities Litigation” in Item 8 of theForm 10-K for information regarding a class action lawsuit that several Mirant shareholders (plaintiffs) originally filed against Mirant and certain Mirant officers in May 2002. In November 2002, Southern Company, certain former and current senior officers of Southern Company, and 12 underwriters of Mirant’s initial public offering were added as defendants. During Mirant’s Chapter 11 proceeding, the securities litigation was stayed, with the exception of limited discovery. Since Mirant’s plan of reorganization has become effective, the stay has been lifted, and activity has resumed. On March 24, 2006, the plaintiffs filed a Motion for Reconsideration requesting that the court vacate that portion of its July 14, 2003 order dismissing the plaintiffs’ claims based upon Mirant’s alleged improper energy trading and marketing activities involving the California energy market. Southern Company and the other defendants have opposed the plaintiffs’ motion. The plaintiffs have also stated that they intend to request that the court grant leave for them to amend the complaint to add allegations based upon claims asserted against Southern Company in the Mirant bankruptcy litigation. See Note 3 to the financial statements of Southern Company under “Mirant Matters — Mirant Bankruptcy Litigation” in Item 8 of the Form 10-K for additional information. The ultimate outcome of these matters cannot be determined at this time.

See Note 3 to the financial statements of Southern Company under “Mirant Matters — Southern Company Employee Savings Plan Litigation” in Item 8 of the Form 10-K for information related to the class action complaint filed under ERISA in June 2004, and amended in December 2004 and November 2005, on behalf of a purported class of participants in or beneficiaries of The Southern Company Employee Savings Plan at any time since April 2, 2001 and whose plan accounts included investments in Mirant common stock. In April 2006, the U.S. District Court for the Northern District of Georgia granted summary judgment in favor of Southern Company and all individually named defendants in the case. The plaintiff has filed an appeal of the ruling. The final outcome of this matter cannot be determined at this time.

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See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Income Tax Matters - Leveraged Lease Transactions” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Income Tax Matters — Leveraged Lease Transactions” in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein under “Income Tax Matters” for information regarding IRS challenges to Southern Company’s transactions related to international leveraged leases that could have material impacts on Southern Company’s financial statements. The FASB has recently proposed changes to the accounting for both leveraged leases and uncertain tax positions that may be effective beginning in 2007. If approved as proposed, these changes could require Southern Company to reflect the tax deductions that the IRS is challenging as currently payable on the balance sheet and to change the timing of income recognized under the leases, including a cumulative effect upon adoption of the change. For the lease settled with the IRS in February 2005, Southern Company estimates such cumulative effect would reduce Southern Company’s net income by approximately $16 million. The impact of these proposed changes related to the remaining three lease transactions would be dependent on the outcome of pending litigation, but could be significant, and potentially material, to Southern Company’s net income. The ultimate outcome of these matters cannot now be determined.

As discussed in MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Income Tax Matters — Synthetic Fuel Tax Credits” of Southern Company in Item 7 of the Form 10-K, Southern Company has investments in two entities that produce synthetic fuel and receive tax credits under Section 45K (formerly Section 29) of the IRC. In accordance with Section 45K of the IRC, these tax credits are subject to limitation as the annual average price of oil (as determined by the DOE) increases over a specified, inflation-adjusted dollar amount published in the spring of the subsequent year. Southern Company, along with its partners in these investments, will continue to monitor oil prices. Any indicated potential limitation on these credits could affect either the timing or the amount of the credit recognition and could also require an impairment analysis of these investments by Southern Company. Reserves against these tax credits of $17 million have been recorded in the first quarter 2006 due to projected phase-outs of the credits in 2006 as a result of current and projected future oil prices. See Note (J) to the Condensed Financial Statements herein for additional information regarding the impact of these reserves on the effective tax rate.

On March 16, 2006, a subsidiary of the Southern Company entered into a development agreement with Duke Energy Corporation (Duke) to evaluate the potential construction of a new two-unit nuclear plant at a jointly owned site in Cherokee County, South Carolina. If constructed, Southern Company would own an interest in Unit 1, representing approximately five hundred megawatts. Duke will be the developer and licensed operator of any plant built at the site.

     Southern Company is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Southern Company’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements such as opacity and other air quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such pending or potential litigation against Southern Company and its subsidiaries cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the

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

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.

     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.

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. Also 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.

On January 1, 2006, Southern Company adopted FASB Statement No. 123(R), “Share-Based Payment,” using the modified prospective method. This statement requires that compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. Although the compensation expense required under the revised statement differs slightly, the impacts on Southern Company’s financial statements are similar to the pro forma disclosures previously included in Note 1 to the financial statements of Southern Company under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein. Total pre-tax compensation cost related to non-vested awards not yet recognized is expected to be approximately $18 million over the remaining three-year service period.

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

Net cash flow from operating activities totaled $58 million for the first three months of 2006, compared to $171 million for the corresponding period in 2005. The $113 million decrease is primarily due to discontinued operations associated with the sale of Southern Company Gas assets, and increases in fuel and storm damage costs. For additional information regarding the sale of Southern Company Gas assets, see Note (B) to the Condensed Financial Statements herein under “SOUTHERN COMPANY GAS SALE.” Gross property additions to utility plant were $565 million in the first three months of 2006. The majority of funds needed for gross property additions since 2000 has been provided from operating activities.

     Significant balance sheet changes include a $383 million increase in long-term debt for the first three months of 2006 primarily for general corporate purposes. Property, plant, and equipment increased $162 million during the first quarter of 2006.

     The market price of Southern Company’s common stock at March 31, 2006 was $32.77 per share and the book value was $14.45 per share, representing a market-to-book ratio of 227%, compared to $34.53, $14.42, and 240%, respectively, at the end of 2005. The dividend for the first quarter 2006 was $0.3725 per share compared to $0.3575 per share in the first quarter 2005. In April 2006, the dividend was increased to $0.3875 per share for the dividend payable in June 2006.

     Southern Company, the retail operating companies, Southern Power, and SCS have each maintained investment grade ratings from the major rating agencies.

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY —“Capital Requirements and Contractual Obligations” of Southern Company in Item 7 of the Form 10-K for a description of Southern Company’s capital requirements for its construction program and other funding requirements associated with scheduled maturities of long-term debt, as well as the related interest, preferred and preference stock dividends, leases, trust funding requirements, and other purchase commitments. Approximately $894 million will be required by March 31, 2007 for redemptions and maturities of long-term debt.

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 amounts and timing of additional equity capital to be raised will be contingent on Southern Company’s investment opportunities. The retail operating companies and Southern Power plan to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from operating cash flows, security issuances, and term loan and short-term borrowings. Gulf Power and Mississippi Power are considering other financing options for storm recovery costs. 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, the Southern Company system had at March 31, 2006 approximately $301 million of cash and cash equivalents and approximately $3.3 billion of unused credit arrangements with banks, of which $810 million expire in 2006 and $2.5 billion expire in 2007 and beyond. Of

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

the facilities maturing in 2006, $311 million contain provisions allowing one-year term loans executable at the expiration date and $228 million contain provisions allowing two-year term loans executable at the expiration date. These unused credit arrangements also provide liquidity support to variable rate pollution control bonds and commercial paper programs. Southern Company expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the financial statements of Southern Company under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. The retail operating companies may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of each of the retail operating companies. At March 31, 2006, the Southern Company system had outstanding commercial paper of $1.4 billion, $225 million in bank notes, and extendible commercial notes of $44 million. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.

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.

Southern Company does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB and Baa2, or BBB- or Baa3 or below. These contracts are primarily for physical electricity purchases and sales. At March 31, 2006, the maximum potential collateral requirements at a BBB and Baa2 rating were approximately $9 million and at a BBB- or Baa3 rating were approximately $229 million. The maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $586 million. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Southern Company’s operating subsidiaries are also party to certain derivative agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas price risk management activities. At March 31, 2006, Southern Company’s total exposure to these types of agreements was approximately $11 million.

Southern Company’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2005 reporting period. In addition, Southern Company is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

     Due to cost-based rate regulations, the retail operating companies have limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. In addition, Southern Power’s exposure to market volatility in commodity fuel prices and prices of electricity is limited because its long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. To mitigate residual risks relative to movements in electricity prices, the retail operating companies and Southern Power enter into fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, into similar contracts for natural gas purchases. The retail operating companies have implemented fuel-hedging programs at the instruction of their respective state PSCs.

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

     The fair value of derivative energy contracts at March 31, 2006 was as follows:

     Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to the retail operating companies’ fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through the retail operating companies’ fuel cost recovery clauses. In addition, unrealized gains and losses on energy-related derivatives used by Southern Power to hedge anticipated purchases and sales are deferred in other comprehensive income. Gains and losses on derivative contracts that are not designated as hedges are recognized in the income statement as incurred. At March 31, 2006, the fair value gain/(loss) of derivative energy contracts was reflected in the financial statements as follows:

     Unrealized pre-tax gains and losses recognized in income were not material for any period presented.

     For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Market Price Risk” of 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.

In the first three months of 2006, Southern Company and its subsidiaries issued $800 million of senior notes, settled $600 million notional amount of related interest rate hedges at a gain of $18 million, and issued $14 million of common stock, including treasury stock, through employee and director stock plans. The proceeds

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

were primarily used to refund senior notes and to fund ongoing construction projects. The remainder was used to repay short-term indebtedness. The hedge gain will be deferred in other comprehensive income and amortized to income over a 10-year period. See Southern Company’s Condensed Consolidated Statements of Cash Flows herein for further details on financing activities during the first three months of 2006.

     In January 2006, Southern Company’s program to repurchase shares of stock to offset issuances under the Southern Company’s stock compensation plans was discontinued.

     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.

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Market Price Risk” herein for each registrant and Notes 1 and 6 to the financial statements of each registrant under “Financial Instruments” in Item 8 of the Form 10-K. Also, see Note (F) to the Condensed Financial Statements herein for information relating to derivative instruments.

     (a) Evaluation of disclosure controls and procedures.

     As of the end of the period covered by this quarterly report, Southern Company, the retail operating companies, and Southern Power conducted separate evaluations under the supervision and with the participation of each company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon these evaluations, the Chief Executive Officer and the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures are effective in alerting them in a timely manner to material information relating to their company (including its consolidated subsidiaries, if any) required to be included in periodic filings with the SEC.

     (b) Changes in internal controls.

     There have been no changes in Southern Company’s, Alabama Power’s, Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the first quarter of 2006 that have materially affected or are reasonably likely to materially affect Southern Company’s, Alabama Power’s, Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s internal control over financial reporting.

     During the first quarter 2006, Savannah Electric transferred responsibility for certain internal control procedures related to accounting for revenue and accounts payable transactions to Georgia Power and accounting for tax transactions to SCS. Savannah Electric continues to review such accounting transactions and maintains overall financial reporting responsibility; however, the transfer of these control procedures constitutes a change in Savannah Electric’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) that has materially affected or is reasonably likely to materially affect Savannah Electric’s internal control over financial reporting.

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

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

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

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

     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)

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

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

FIRST QUARTER 2006 vs. FIRST QUARTER 2005

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 business of selling electricity. These factors include the ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover rising costs related to growing demand and increasingly stringent environmental standards.

     Alabama Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS — OVERVIEW — “Key Performance Indicators” of Alabama Power in Item 7 of the Form 10-K.

Alabama Power’s net income after dividends on preferred stock for the first quarter 2006 was $82.1 million compared to $93.4 million for the corresponding period of 2005. Earnings in the first quarter 2006 decreased by $11.3 million, or 12.1%. Excluding the offsetting natural disaster reserve impacts recorded in the first quarter 2005 (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), the decrease in earnings was primarily due to increases in other operations expense, scheduled plant maintenance, interest expense, and the proposed consent decree agreement with the EPA (as described in “Other income (expense), net” below), partially offset by a 1.2% increase in retail rates that took effect January 1, 2006 under Alabama Power’s new environmental rate order approved by the Alabama PSC. See Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information on Alabama Power’s rates.

     Significant income statement items appropriate for discussion include the following:

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

     Retail revenues. The chart below reflects the primary drivers of the 13.1% increase in retail revenues in the first quarter 2006 compared to the same period in the prior year. Energy cost recovery revenues and other cost recovery revenues, which include the recovery of costs associated with PPAs certificated by the Alabama PSC (Rate CNP) and revenues associated with the replenishment of Alabama Power’s natural disaster reserve, generally do not affect net income. Excluding these revenues, retail revenues increased by $31.2 million, or 6.1%, for the first quarter 2006 when compared to the corresponding period in 2005. This increase was primarily due to 1.1% increase in KWH energy sales for the first quarter of 2006, as well as the retail rate increase implemented in January 2006 to recover environmental costs. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “PSC Matters — Retail Rate Adjustments” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters —Rate CNP” in Item 8 of the Form 10-K. KWH energy sales to residential and commercial customers increased 1.5% and 2.0%, respectively, for the first quarter 2006 when compared to the corresponding period in 2005, primarily due to increased sales growth. KWH energy sales to industrial customers increased 0.4% for the first quarter 2006 when compared to the first quarter of 2005 due to increased sales demand in the pulp and paper, automotive, and primary metals sectors.

     Details of retail revenues are as follows:

     Sales for resale — non-affiliates. Energy sales to 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 2006, revenues from sales for resale to non-affiliates increased $31.9 million when compared to the same period in 2005 primarily due to a 35.8% increase in price partially offset by 5.8% decrease in KWH sales to non-affiliates in the first quarter 2006. The 2006 price increases are generally the result of increased costs for both coal and natural gas. These transactions did not have a significant impact on earnings since energy is usually sold at variable cost.

     Sales for resale — affiliates. Energy sales to affiliated companies within the Southern Company system vary from period to period depending on demand and the availability and cost of generating resources at each company. These sales are made in accordance with the IIC, as approved by the FERC. In the first quarter 2006, revenues from sales for resale to affiliates decreased $28.0 million when compared to the same period in 2005 primarily due to a 28.5% decrease in KWH sales to affiliates as a result of a decrease in the availability of Alabama Power’s generating resources for such sales due to increased sales growth in Alabama Power’s service territory during the first quarter of 2006 and scheduled maintenance at Alabama Power’s generating facilities. These transactions did not have a significant impact on earnings since energy is generally sold at marginal cost.

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

     Other revenues. The $5.9 million increase in other revenues for the first quarter 2006 when compared to the corresponding period in 2005 is primarily attributed to a $4.3 million increase in revenues from cogeneration steam facilities due to increased fuel revenue resulting from higher natural gas prices (since cogeneration steam fuel revenues are generally offset by fuel expense, these revenues do not have a significant impact on earnings) and a $1.4 million increase in rent from electric property.

     Fuel expense, purchased power — non-affiliates, and purchased power — affiliates. Total fuel and purchased power expense increased $48.5 million in the first quarter 2006 when compared to the corresponding period in 2005 primarily due to a $75.6 million increase in the cost of fuel offset by a $27.1 million decrease related to fewer KWHs generated and purchased. Details of the individual components follow.

Fuel expense increased $41.9 million in the first quarter 2006 when compared to the corresponding period in 2005 primarily due to a 16.3% increase in the average cost of coal offset by a 6.6% decrease in generation from coal-fired generation facilities and a 28.8% increase in natural gas prices offset by a 1.1% decrease in generation from gas-fired facilities. Since energy expenses are generally offset by energy revenues, these expenses do not have a significant impact on earnings.

Purchased power from non-affiliates will vary depending on market cost of available energy being lower than Southern Company system generated energy, demand for energy within the service territory, and availability of Southern Company system generation. In the first quarter 2006, purchased power from non-affiliates decreased $1.8 million when compared to the same period in 2005 primarily due to a 4.1% decrease in the number of kilowatt-hours of energy purchased. These transactions did not have a significant impact on earnings since energy purchases are generally offset by energy revenues through Alabama Power’s energy cost recovery clause.

Purchased power 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. Purchased power from affiliates increased $8.4 million in the first quarter 2006 compared to the same period in 2005 due to a 17.3% increase in price primarily due to an increase in fuel costs offset by a 5.4% decrease in the amount of energy purchased. These transactions did not have a significant impact on earnings since energy purchases are generally offset by energy revenues through Alabama Power’s energy cost recovery clause.

     Other operations expense. Other operations expense increased $22.7 million in the first quarter 2006 when compared to the same period in 2005 primarily due to an $11.7 million increase in administrative and general expenses related to a $4.4 million increase in employee benefits and a $2.9 million increase in outside service expenses. In addition, other operations expense increased due to a $2.1 million increase in steam power expense related primarily to outage costs at various coal-fired facilities and other miscellaneous steam expense, a $1.6 million increase in transmission expense associated with external electric purchases, a $1.3 million increase in customer accounts expense mainly associated with information technology cost, and a $1.1 million increase in distribution expense.

     Maintenance expense. Maintenance expense decreased $14.1 million in the first quarter 2006 when compared to the same period in 2005 primarily due the recording of $45 million additional transmission and distribution expense in 2005. These costs were a result of the Alabama PSC accounting order to offset the costs of the damage from Hurricane Ivan in September 2004 and to restore a balance in the natural disaster reserve. 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 “Natural Disaster Cost Recovery” in Item 8 of Form 10-K. Excluding the natural

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

disaster reserve impacts of such accounting order, maintenance expense increased $30.9 million in the first quarter 2006 when compared to the same period in 2005. This increase was due to a $14.3 million increase in steam expense associated with outage maintenance cost at various coal-fired facilities, a $9.4 million increase in distribution expense primarily associated with the 2006 natural disaster reserve accrual and amortization of deferred storm expense and a $4.4 million increase in transmission expense primarily associated with the 2006 natural disaster reserve accrual, amortization of deferred storms expense, and maintenance of station equipment.

     Interest expense, net of amounts capitalized. The increase in interest expense, net of amounts capitalized during the first quarter 2006 when compared to the same period in 2005 primarily is the result of the issuance of additional senior notes in the first three months of 2006. For additional information, see FINANCIAL CONDITION AND LIQUIDITY — “Financing Activities” herein and in Item 7 of Alabama Power of the Form 10-K.

     Other income (expense), net. Other income, net decreased $6.2 million in the first quarter 2006 when compared to the first quarter 2005 due to a $5.0 million proposed settlement in April 2006 with the EPA in the NSR litigation. See FUTURE EARNINGS POTENTIAL — “Environmental Matters — New Source Review Litigation” and Note (B) to the Condensed Financial Statements herein for additional information.

     Income taxes. Income tax expense increased $39.9 million in the first quarter 2006 when compared to the first quarter 2005. In accordance with the Alabama PSC accounting order described above, Alabama Power returned $27.7 million of regulatory liabilities related to deferred income taxes to its retail customers in 2005. The remainder of the increase in income tax expense in the first quarter 2006 compared to the same period in 2005 primarily reflects the $17.3 million tax effect of the additional maintenance expenses recorded under the accounting order in 2005. 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 Form 10-K and Note (J) to the Condensed Financial Statements herein for additional information.

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 business of selling electricity. These factors include Alabama Power’s ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in Alabama Power’s service area. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL of Alabama Power in Item 7 of the Form 10-K.

Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be fully recovered in rates on a timely basis. For additional information, including information on certain environmental litigation, 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.

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

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — New Source Review Actions” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Environmental Matters — New Source Review Actions” in Item 8 of the Form 10-K for additional information regarding a civil action brought by the EPA alleging that Alabama Power had violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of its coal-fired generating facilities. On April 24, 2006, as a result of court-ordered mediation, the EPA filed, with the U.S. District Court for the Northern District of Alabama, statements designed to result in a judgment being entered in favor of Alabama Power on the claims related to Plants Barry, Gaston, Gorgas, and Greene County. In turn, Alabama Power agreed to the filing with the district court of a proposed consent decree that, upon such court’s approval, would require Alabama Power to pay $100,000 to resolve the EPA’s claim for a civil penalty related to alleged violations at Plant Miller. The proposed consent decree also formalizes specific emissions reductions to be accomplished by Alabama Power. These reductions are consistent with other Clean Air Act programs that require emissions reductions. Alabama Power further agreed to donate $4.9 million of sulfur dioxide emission allowances to a nonprofit charitable organization. As a result, Alabama Power recognized $5 million in other income (expense), net related to the proposed consent decree. The final resolution of these claims is dependent on further court action and subject to possible appeals, and therefore, cannot be determined at this time.

On October 20, 2005, the EPA published a proposed rule clarifying the test for determining when an emissions increase is subject to the NSR requirements. On March 17, 2006, the U.S. Court of Appeals for the District of Columbia Circuit vacated the EPA’s proposed rule which sought to clarify the scope of the existing Routine Maintenance, Repair, and Replacement Exclusion. Because this rule was not yet in effect, the court’s ruling is not anticipated to have any impact on Alabama Power. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — New Source Review Actions” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Environmental Matters — New Source Review Actions” in Item 8 of the Form 10-K for additional information.

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 on the FERC’s April 2004 order adopting a new interim analysis for measuring generation market power and a proceeding initiated by the FERC in December 2004 to assess Southern Company’s generation dominance within its retail service territory. Alabama Power has authorization from the FERC to sell power to non-affiliates at market-based prices. Alabama Power also has FERC authority to make short-term opportunity sales at market rates. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. On February 15, 2005, Southern Company submitted additional information related to generation dominance in its retail service territory. A hearing before an administrative law judge scheduled for March 2006 has been held in abeyance to allow the parties to explore settlement. Any new market-based rate transactions in its retail service territory entered into after February 27, 2005 will be subject to refund to the level of the default cost-based rates, pending the outcome of the proceeding. The impact of such sales through March 31, 2006 is not expected to exceed $3.7 million for Alabama Power. The refund

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

period covers 15 months. In the event that the FERC’s default mitigation measures are ultimately applied, Alabama Power may be required to charge cost-based rates for certain wholesale sales in the Southern Company retail service territory, which may be lower than negotiated market-based rates. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time.

     In addition, in May 2005, the FERC initiated an investigation to determine whether Southern Company satisfies the other three parts of the FERC’s market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal dealing. The FERC established a new 15-month refund period related to this expanded investigation. Any new market-based rate transactions involving any Southern Company subsidiary will be subject to refund to the extent the FERC orders lower rates as a result of this new investigation, with the refund period beginning July 19, 2005. The impact of such sales involving Alabama Power through March 31, 2006 is not expected to exceed $9.8 million, of which $2.9 million relates to sales inside the retail service territory discussed above. The FERC also directed that this expanded proceeding be held in abeyance pending the outcome of the proceeding on the IIC discussed below.

     Alabama Power believes that there is no meritorious basis for this proceeding and is vigorously defending itself in this matter. However, the final outcome of this matter, including any remedies to be applied in the event of an adverse ruling in this proceeding, cannot now be determined.

Also in May 2005, the FERC initiated a new proceeding to examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of which the power pool of Southern Company is operated, and, in particular, the propriety of the continued inclusion of Southern Power as a party to the IIC, (2) whether any parties to the IIC have violated the FERC’s standards of conduct applicable to utility companies that are transmission providers, and (3) whether Southern Company’s code of conduct defining Southern Power as a “system company” rather than a “marketing affiliate” is just and reasonable. In connection with the formation of Southern Power, the FERC authorized Southern Power’s inclusion in the IIC in 2000. The FERC also previously approved Southern Company’s code of conduct. The FERC order directs that the administrative law judge who presided over a proceeding involving approval of PPAs between Southern Power and Georgia Power and Savannah Electric be assigned to preside over the hearing in this proceeding and that the testimony and exhibits presented in that proceeding be preserved to the extent appropriate. Effective July 19, 2005, revenues from transactions under the IIC involving any Southern Company subsidiaries will be subject to refund to the extent the FERC orders any changes to the IIC. On April 11, 2006, Southern Company, Calpine Corporation, Coral Energy, and Dalton Utilities filed a settlement offer that would resolve the proceeding. The offer is pending before the FERC and does not require any refunds. However, because the offer is pending, the final outcome of this matter cannot now be determined. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “FERC Matters — Intercompany Interchange Contract” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “FERC Matters — Intercompany Interchange Contract” in Item 8 of the Form 10-K for additional information.

Alabama Power has established fuel cost recovery rates approved by the Alabama PSC. Alabama Power’s under recovered fuel costs as of March 31, 2006 totaled $219.5 million as compared to $285.1 million at December 31, 2005. Alabama Power increased its fuel billing factor in January 2006 in accordance with Rate ECR. Alabama Power will continue to monitor the under recovered fuel cost balance to determine if an additional adjustment to billing rates should be requested from the Alabama PSC. See MANAGEMENT’S

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

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 additional information.

Alabama Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Alabama Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements such as opacity and other air quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such pending or potential litigation against Alabama Power cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Alabama Power in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such proceedings would have a material adverse effect on Alabama 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.

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.

On January 1, 2006, Alabama Power adopted FASB Statement No. 123(R), “Share-Based Payment,” using the modified prospective method. This statement requires that compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. Although the compensation expense required under the revised statement differs slightly, the impacts on Alabama Power’s financial statements are similar to the pro forma disclosures previously included in Note 1 to the financial statements of Alabama Power under “Stock Options” in Item 8 of the Form 10-K and in Note (C) to the Condensed Financial Statements herein. Total pre-tax compensation cost related to non-vested awards not yet recognized is expected to be approximately $2.6 million over the remaining three-year service period.

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

Alabama Power’s financial condition continued to be stable at March 31, 2006. Net cash flows from operating activities totaled $164.4 million for the first three months of 2006, compared to $102.5 million for the first three months of 2005. The $61.9 million increase in the first three months of 2006 relates to a decrease in under recovered fuel cost receivable due to higher recovery rates under a new fuel rate effective January 1, 2006 and an increase in the accrued tax liability. These positive changes were partially offset by a decrease in accounts payable resulting from increased spending accrued in the fourth quarter 2005 that were paid in the first quarter 2006 and a decrease in deferred income tax expense. The changes in the accrued tax liability and deferred income tax expense are due to the reversal of prior favorable timing differences. Property additions to utility plant were $228.4 million in the first three months of 2006 and are included in the balance sheets herein.

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 related interest, preferred stock dividends, lease obligations, purchase commitments, and trust funding requirements. Approximately $377 million will be required through March 31, 2007 for redemptions and maturities of long-term debt.

Alabama Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past, which were primarily operating cash flows, with capital contributions from Southern Company, short-term debt, and external security issuances providing additional funds. However, the amount, type, and timing of any financings — if needed — will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions, and other factors. See 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.

     To meet short-term cash needs and contingencies, Alabama Power had at March 31, 2006 approximately $124 million of cash and cash equivalents, unused committed lines of credit of approximately $878 million (including $563 million of such lines which are dedicated to funding purchase obligations relating to variable rate pollution control bonds) and an extendible commercial note program. Of these credit facilities, $428 million will expire at various times during the remainder of 2006. $251 million of the credit facilities expiring in 2006 allow for the execution of 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 for additional information. Alabama Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Alabama Power and other Southern Company subsidiaries. Alabama Power has regulatory authority for up to $1.4 billion of short-term borrowings. At March 31, 2006, Alabama Power had no commercial paper or extendible commercial notes outstanding. Management believes that the need for working capital can be adequately met by issuing commercial paper or utilizing lines of credit without maintaining large cash balances.