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Business Context and Reporting Period

This Form 10-Q covers the quarterly and year-to-date periods ended June 30, 2003, for The Southern Company and its subsidiary operating companies (Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, and Southern Power). The company operates regulated retail electric utilities in the Southeast and a competitive wholesale generation business.

Key Financial Metrics (Consolidated)

Material Changes vs. Prior Period

• Earnings Growth: Consolidated net income increased 30.3% in Q2 2003 and 31.3% YTD 2003 compared to the prior year. This growth was driven primarily by a one-time after-tax gain of $88 million resulting from the termination of Power Purchase Agreements (PPAs) with Dynegy in May 2003.
• Revenue Drivers: "Other electric revenues" surged 169.9% in Q2 2003, largely due to the $144 million in revenues recorded from the Dynegy PPA termination. "Sales for resale" increased 15.2% in Q2 2003 due to higher wholesale capacity and energy sales from new generating units.
• Weather Impact: Mild weather in Q2 2003 reduced retail electricity demand, causing a slight decline in retail sales revenue. However, this was offset by strong wholesale market performance.
• Expense Increases: Fuel expenses rose 6.7% in Q2 2003 due to higher average fuel costs and new unit operations. Interest expense increased 8.9% due to net issuances of senior notes.

Guidance, Outlook, Risks, and Contingencies

• Dividend Increase: In July 2003, Southern Company increased its quarterly dividend to $0.35 per share (from $0.343).
• Mirant Bankruptcy: Mirant Corporation (spun off from Southern Company) filed for Chapter 11 bankruptcy on July 14, 2003. Southern Company faces contingent liabilities, including guarantees and joint tax liabilities, though management does not currently anticipate a material adverse effect.
• IRS Synthetic Fuel Review: The IRS suspended new private letter rulings for synthetic fuel tax credits and is reviewing existing ones. Southern Company has recognized approximately $219 million in tax credits from these investments; the outcome of the review is uncertain.
• Environmental Compliance: The Atlanta area faces potential re-classification as a "severe" ozone nonattainment area. While Georgia Power does not anticipate incurring estimated fees of up to $23 million annually, the final regulatory outcome remains pending.
• Construction Updates: Southern Power suspended construction of Plant Franklin Unit 3 following the Dynegy PPA termination. New units at Plant Franklin and Plant Harris began commercial operation in June 2003.
• Accounting Changes: The company adopted FASB Statement No. 143 (Asset Retirement Obligations) and No. 150 (Liabilities vs. Equity), reclassifying $2.2 billion of mandatorily redeemable preferred securities as liabilities effective July 1, 2003.

Investor Verification Checklist

• One-Time Gains: Verify the sustainability of earnings by excluding the $88 million Dynegy PPA termination gain.
• IRS Exposure: Assess the risk to future earnings from the IRS review of synthetic fuel tax credits ($219 million recognized).
• Mirant Contingencies: Monitor the resolution of Mirant's bankruptcy and its impact on Southern Company's indemnity obligations and tax liabilities.
• Regulatory Risks: Track the EPA's re-classification of the Atlanta ozone area and potential emissions fees for Georgia Power.
• Liquidity: Confirm the adequacy of the $3.2 billion in unused credit arrangements to support ongoing construction and debt maturities.