SO

Business Context and Reporting Period

This Form 10-Q covers The Southern Company and its subsidiary operating companies (Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power) for the quarterly period ended June 30, 2008. The Southern Company operates as a holding company for vertically integrated utilities in the Southeast and a competitive wholesale power generator. The filing includes unaudited consolidated financial statements and management discussion and analysis for the six months ended June 30, 2008, compared to the same period in 2007.

Key Financial Metrics (Six Months Ended June 30, 2008)

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 10.0% year-over-year. Retail revenues rose 10.4% and wholesale revenues increased 14.3%, driven by rate increases, market-response rates for large customers, and higher fuel cost recovery provisions.
• Net Income: Consolidated net income increased slightly by 1.0% ($7.8 million). This modest increase occurred despite significant revenue growth due to offsetting factors including a $67 million after-tax charge related to leveraged lease investments (SILO transactions), higher depreciation, and increased operations and maintenance expenses.
• Expense Increases: Fuel and purchased power expenses rose 15.7% due to higher coal and natural gas prices. Depreciation and amortization increased 13.9% due to new plant in service and updated depreciation studies.
• Cash Flow: Operating cash flow improved significantly by $403 million, primarily due to increased revenues and favorable changes in working capital (accrued taxes and accounts payable). Investing cash outflows increased by $342 million, largely due to higher property additions for utility plant construction.

Guidance, Outlook, and Risks

• Construction Program: The revised estimated total construction program for Southern Company is $4.4 billion in 2008, $5.2 billion in 2009, and $4.8 billion in 2010. This includes significant investment in the Plant Vogtle nuclear expansion (Units 3 and 4), with Georgia Power's share estimated at approximately $6.4 billion.
• Regulatory and Environmental Risks:
  • CAIR: The U.S. Court of Appeals vacated the Clean Air Interstate Rule (CAIR) in July 2008. The impact on future capital expenditures and emissions allowance values remains uncertain.
  • NSR Litigation: Partial summary judgment was granted in favor of Alabama Power regarding New Source Review (NSR) violations, but the case is not fully resolved.
  • Carbon Litigation: Southern Company is a defendant in the Kivalina case regarding global warming damages; defendants have filed motions to dismiss.
• Tax Matters: A $67 million after-tax charge was recorded in Q2 2008 related to leveraged lease (SILO) transactions due to recent court decisions and FASB interpretations. The ultimate impact on net income and cash flow depends on pending litigation and legislation.
• Fuel Cost Recovery: Under-recovered fuel costs totaled approximately $1.0 billion at June 30, 2008. Management is actively seeking rate adjustments from state Public Service Commissions to recover these costs.

Key Facts for Investor Verification

• Leveraged Lease Charge: Verify the status of the $67 million after-tax charge related to SILO transactions and the potential for further adjustments based on litigation outcomes.
• Plant Vogtle Progress: Monitor the regulatory certification process by the Georgia PSC and NRC licensing for the $6.4 billion nuclear expansion project.
• Fuel Cost Recovery: Track the recovery of the $1.0 billion under-recovered fuel balance through approved rate adjustments in Alabama, Georgia, and Florida.
• Environmental Compliance: Assess the financial impact of the vacated CAIR rule and ongoing NSR litigation on future capital spending and penalties.
• Debt Maturities: Approximately $948 million in long-term debt maturities are due through June 30, 2009.