SO

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009, for The Southern Company and its subsidiary operating companies: Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power. The registrants operate as vertically integrated utilities in the Southeast and a wholesale power generator. The reporting period was significantly impacted by recessionary economic conditions, which reduced industrial energy demand, and a major litigation settlement.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Net income after preferred dividends decreased by 65.0% ($233.5 million) compared to Q1 2008. The primary driver was a $202.0 million litigation settlement charge related to MC Asset Recovery (Mirant matters).
• Revenue Mix: Retail revenues increased 2.0% due to rate adjustments and cost recovery, while wholesale revenues decreased 12.1% due to lower energy prices and reduced sales volumes.
• Expense Increases: Depreciation and amortization increased 13.3% due to new plant in service (environmental and transmission projects). Other operations and maintenance expenses decreased 2.9% due to fewer outages and lower advertising costs, partially offset by a $27.1 million charge for a voluntary attrition program at Georgia Power.
• Industrial Sales: Weather-adjusted industrial KWH sales decreased 16.9% system-wide, reflecting the recessionary economy.

Guidance, Outlook, and Risks

• Economic Outlook: Management expects the recession to continue negatively impacting energy sales, particularly to industrial customers. Future earnings depend on the timing and extent of economic recovery.
• Regulatory Matters:
  • FERC: Southern Company commenced a "must offer" energy auction in April 2009 to mitigate market power presumptions. A generation dominance proceeding remains pending.
  • State PSCs: Georgia Power delayed its fuel case filing until September 2009 due to volatile fuel prices and economic uncertainty. New fuel rates are expected effective January 1, 2010.
• Construction Projects:
  • Plant Vogtle: Georgia PSC certified construction of Units 3 and 4 at an in-service cost of $6.4 billion. Financing cost recovery is approved starting in 2011.
  • Kemper IGCC: Mississippi Power continues planning for the Integrated Coal Gasification Combined Cycle project. Regulatory approval for the gasification portion is pending.
• Environmental Risks: Potential legislation regarding greenhouse gas emissions and EPA regulations on cooling water intake structures could result in significant compliance costs if not recovered through rates.
• Liquidity: The company maintains adequate access to capital with $4.2 billion in unused credit arrangements. Cash balances increased significantly in Q1 2009.

Investor Verification Checklist

• MC Asset Recovery Settlement: Verify the final tax treatment and potential for recovery of the $202 million charge through insurance or bankruptcy claims.
• Under-Recovered Fuel Costs: Monitor the balance of under-recovered fuel costs (approx. $1.0 billion system-wide) and the timing of rate adjustments to recover these costs.
• Industrial Demand Trends: Track weather-adjusted industrial sales volumes to gauge the severity of the economic downturn's impact on core utility revenues.
• Regulatory Approvals: Confirm the status of the Kemper IGCC gasification approval in Mississippi and the outcome of Georgia Power's delayed fuel case.
• Dividend Sustainability: Review the company's ability to maintain its dividend policy ($0.42/share in Q1 2009, increased to $0.4375 for Q2) given the significant drop in earnings.