Edgar Filing: ALABAMA POWER CO

Second Quarter 2012 vs. Second Quarter 2011

Year-to-Date 2012 vs. Year-to-Date 2011

(change in millions)

(% change)

(change in millions)

(% change)

!0-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to


Commission File Number	Registrant, State of Incorporation, Address and Telephone Number	I.R.S. Employer Identification No.
1-3526	The Southern Company (A Delaware Corporation) 30 Ivan Allen Jr. Boulevard, N.W. Atlanta, Georgia 30308 (404) 506-5000	58-0690070

1-3164	Alabama Power Company (An Alabama Corporation) 600 North 18^th Street Birmingham, Alabama 35203 (205) 257-1000	63-0004250

1-6468	Georgia Power Company (A Georgia Corporation) 241 Ralph McGill Boulevard, N.E. Atlanta, Georgia 30308 (404) 506-6526	58-0257110

001-31737	Gulf Power Company (A Florida Corporation) One Energy Place Pensacola, Florida 32520 (850) 444-6111	59-0276810

001-11229	Mississippi Power Company (A Mississippi Corporation) 2992 West Beach Gulfport, Mississippi 39501 (228) 864-1211	64-0205820

333-98553	Southern Power Company (A Delaware Corporation) 30 Ivan Allen Jr. Boulevard, N.W. Atlanta, Georgia 30308 (404) 506-5000	58-2598670

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). Yes þ No ¨

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


Registrant	Large Accelerated Filer	Accelerated Filer	Non- accelerated Filer	Smaller Reporting Company
The Southern Company	X
Alabama Power Company			X
Georgia Power Company			X
Gulf Power Company			X
Mississippi Power Company			X
Southern Power Company			X

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


Registrant	Description of Common Stock	Shares Outstanding at June 30, 2012
The Southern Company	Par Value $5 Per Share	874,796,883
Alabama Power Company	Par Value $40 Per Share	30,537,500
Georgia Power Company	Without Par Value	9,261,500
Gulf Power Company	Without Par Value	4,542,717
Mississippi Power Company	Without Par Value	1,121,000
Southern Power Company	Par Value $0.01 Per Share	1,000

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

INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2012


		Page Number
DEFINITIONS			5
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION			7

	PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	The Southern Company and Subsidiary Companies
	Condensed Consolidated Statements of Income		10
	Condensed Consolidated Statements of Comprehensive Income		11
	Condensed Consolidated Statements of Cash Flows		12
	Condensed Consolidated Balance Sheets		13
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
	Alabama Power Company
	Condensed Statements of Income		38
	Condensed Statements of Comprehensive Income		38
	Condensed Statements of Cash Flows		39
	Condensed Balance Sheets		40
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		42
	Georgia Power Company
	Condensed Statements of Income		59
	Condensed Statements of Comprehensive Income		59
	Condensed Statements of Cash Flows		60
	Condensed Balance Sheets		61
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		63
	Gulf Power Company
	Condensed Statements of Income		83
	Condensed Statements of Comprehensive Income		83
	Condensed Statements of Cash Flows		84
	Condensed Balance Sheets		85
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		87
	Mississippi Power Company
	Condensed Statements of Income		106
	Condensed Statements of Comprehensive Income		106
	Condensed Statements of Cash Flows		107
	Condensed Balance Sheets		108
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		110
	Southern Power Company and Subsidiary Companies
	Condensed Consolidated Statements of Income		133
	Condensed Consolidated Statements of Comprehensive Income		133
	Condensed Consolidated Statements of Cash Flows		134
	Condensed Consolidated Balance Sheets		135
	Management’s Discussion and Analysis of Financial Condition and Results of Operations		137
	Notes to the Condensed Financial Statements		150
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		36
Item 4.	Controls and Procedures		36

INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2012


		Page Number
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings		185
Item 1A.	Risk Factors		185
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		Inapplicable
Item 3.	Defaults Upon Senior Securities		Inapplicable
Item 4.	Mine Safety Disclosures		Inapplicable
Item 5.	Other Information		Inapplicable
Item 6.	Exhibits		186
	Signatures		190

DEFINITIONS


Term		Meaning

2010 ARP		Alternate Rate Plan approved by the Georgia PSC for Georgia Power, which became effective January 1, 2011 and will continue through December 31, 2013
2011 IRP Update		Georgia Power’s 2011 Integrated Resource Plan update filed with the Georgia PSC on August 4, 2011
AFUDC		Allowance for funds used during construction
Alabama Power		Alabama Power Company
ARO		Asset retirement obligation
Clean Air Act		Clean Air Act Amendments of 1990
CPCN		Certificate of public convenience and necessity
CWIP		Construction work in progress
DOE		U.S. Department of Energy
ECO Plan		Mississippi Power’s Environmental Compliance Overview Plan
EPA		U.S. Environmental Protection Agency
FERC		Federal Energy Regulatory Commission
Fitch		Fitch, Inc.
Form 10-K		Combined Annual Report on Form 10-K of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power for the year ended December 31, 2011
GAAP		Generally accepted accounting principles
Georgia Power		Georgia Power Company
Gulf Power		Gulf Power Company
IIC		Intercompany Interchange Contract
Internal Revenue Code		Internal Revenue Code of 1986, as amended
IRS		Internal Revenue Service
Kemper IGCC		Integrated coal gasification combined cycle facility under construction in Kemper County, Mississippi
KWH		Kilowatt-hour
LIBOR		London Interbank Offered Rate
Mississippi Power		Mississippi Power Company
mmBtu		Million British thermal unit
Moody’s		Moody’s Investors Service, Inc.
MW		Megawatt
MWH		Megawatt-hour
NCCR		Georgia Power’s Nuclear Construction Cost Recovery
NDR		Alabama Power’s natural disaster reserve
NRC		Nuclear Regulatory Commission
NSR		New Source Review
OCI		Other Comprehensive Income
PEP		Mississippi Power’s Performance Evaluation Plan
Plant Vogtle Units 3 and 4		Two new nuclear generating units under construction at Plant Vogtle
Power Pool		The operating arrangement whereby the integrated generating resources of the traditional operating companies and Southern Power are subject to joint commitment and dispatch in order to serve their combined load obligations
PPA		Power Purchase Agreement
PSC		Public Service Commission
registrants		Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power


ROE		Return on equity
SEC		Securities and Exchange Commission
SEGCO		Southern Electric Generating Company
SMEPA		South Mississippi Electric Power Association
Southern Company		The Southern Company
Southern Company system		Southern Company, the traditional operating companies, Southern Power, and other subsidiaries
Southern Nuclear		Southern Nuclear Operating Company, Inc.
Southern Power		Southern Power Company
S&P		Standard and Poor’s Ratings Services, a division of The McGraw Hill Companies, Inc.
traditional operating companies		Alabama Power, Georgia Power, Gulf Power, and Mississippi Power
Westinghouse		Westinghouse Electric Company LLC
wholesale revenues		revenues generated from sales for resale

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, statements concerning retail sales, retail rates, economic recovery, fuel and environmental cost recovery and other rate actions, current and proposed environmental regulations and related estimated expenditures, access to sources of capital, projections for the qualified pension plan and other postretirement benefit plan contributions, financing activities, start and completion of construction projects, plans and estimated costs for new generation resources, filings with state and federal regulatory authorities, impact of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, estimated sales and purchases under new power sale and purchase agreements, and estimated construction and other expenditures. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar terminology. There are various factors that could cause actual results to differ materially from those suggested by the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include:

•

the impact of recent and future federal and state regulatory changes, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry, implementation of the Energy Policy Act of 2005, environmental laws including regulation of water, coal combustion byproducts, and emissions of sulfur, nitrogen, carbon, soot, particulate matter, hazardous air pollutants, including mercury, and other substances, financial reform legislation, and also changes in tax and other laws and regulations to which Southern Company and its subsidiaries are subject, as well as changes in application of existing laws and regulations;

•

current and future litigation, regulatory investigations, proceedings, or inquiries, including the pending EPA civil actions against certain Southern Company subsidiaries, FERC matters, and IRS and state tax audits;

•

the effects, extent, and timing of the entry of additional competition in the markets in which Southern Company’s subsidiaries operate;

•

variations in demand for electricity, including those relating to weather, the general economy and recovery from the recent recession, population and business growth (and declines), and the effects of energy conservation measures;

•

available sources and costs of fuels;

•

effects of inflation;

•

ability to control costs and avoid cost overruns during the development and construction of facilities;

•

investment performance of Southern Company’s employee benefit plans and nuclear decommissioning trust funds;

•

advances in technology;

•

state and federal rate regulations and the impact of pending and future rate cases and negotiations, including rate actions relating to fuel and other cost recovery mechanisms;

•

regulatory approvals and actions related to Plant Vogtle Units 3 and 4, including Georgia PSC approvals, NRC actions, and potential DOE loan guarantees;

•

regulatory approvals and actions related to the Kemper IGCC, including Mississippi PSC approvals, potential DOE loan guarantees, the SMEPA purchase decision, utilization of investment tax credits, and the outcome of any further proceedings regarding the Mississippi PSC’s issuance of the CPCN;

•

the performance of projects undertaken by the non-utility businesses and the success of efforts to invest in and develop new opportunities;

•

internal restructuring or other restructuring options that may be pursued;

•

potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial to Southern Company or its subsidiaries;

•

the ability of counterparties of Southern Company and its subsidiaries to make payments as and when due and to perform as required;

•

the ability to obtain new short- and long-term contracts with wholesale customers;

•

the direct or indirect effect on Southern Company’s business resulting from terrorist incidents and the threat of terrorist incidents, including cyber intrusion;

•

interest rate fluctuations and financial market conditions and the results of financing efforts, including Southern Company’s and its subsidiaries’ credit ratings;

•

the impacts of any potential U.S. credit rating downgrade or other sovereign financial issues, including impacts on interest rates, access to capital markets, impacts on currency exchange rates, counterparty performance, and the economy in general, as well as potential impacts on the availability or benefits of proposed DOE loan guarantees;

•

the ability of Southern Company and its subsidiaries to obtain additional generating capacity at competitive prices;

•

catastrophic events such as fires, earthquakes, explosions, floods, hurricanes, droughts, pandemic health events such as influenzas, or other similar occurrences;

•

the direct or indirect effects on Southern Company’s business resulting from incidents affecting the U.S. electric grid or operation of generating resources;

•

the effect of accounting pronouncements issued periodically by standard setting bodies; and

•

other factors discussed elsewhere herein and in other reports filed by the registrants from time to time with the SEC.

The registrants expressly disclaim any obligation to update any forward-looking statements.

THE SOUTHERN COMPANY

AND SUBSIDIARY COMPANIES

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2012			2011			2012			2011
	(in millions)						(in millions)
Operating Revenues:
Retail revenues	$	3,597		$	3,842		$	6,689		$	7,238
Wholesale revenues		415			507			764			956
Other electric revenues		154			154			302			303
Other revenues		15			18			30			36

Total operating revenues		4,181			4,521			7,785			8,533

Operating Expenses:
Fuel		1,290			1,673			2,354			3,149
Purchased power		150			145			291			245
Other operations and maintenance		944			910			1,911			1,854
MC Asset Recovery insurance settlement		(19	)		—			(19	)		—
Depreciation and amortization		445			430			886			848
Taxes other than income taxes		228			227			453			447

Total operating expenses		3,038			3,385			5,876			6,543

Operating Income		1,143			1,136			1,909			1,990
Other Income and (Expense):
Allowance for equity funds used during construction		32			36			63			71
Interest expense, net of amounts capitalized		(220	)		(199	)		(431	)		(421	)
Other income (expense), net		13			(4	)		11			(2	)

Total other income and (expense)		(175	)		(167	)		(357	)		(352	)

Earnings Before Income Taxes		968			969			1,552			1,638
Income taxes		329			349			529			580

Consolidated Net Income		639			620			1,023			1,058
Dividends on Preferred and Preference Stock of Subsidiaries		16			16			32			32

Consolidated Net Income After Dividends on Preferred and Preference Stock of Subsidiaries	$	623		$	604		$	991		$	1,026

Common Stock Data:
Earnings per share (EPS) -
Basic EPS	$	0.71		$	0.71		$	1.14		$	1.20
Diluted EPS	$	0.71		$	0.70		$	1.13		$	1.20
Average number of shares of common stock outstanding (in millions)
Basic		872			855			870			851
Diluted		880			862			879			858
Cash dividends paid per share of common stock	$	0.4900		$	0.4725		$	0.9625		$	0.9275

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

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2012			2011			2012			2011
	(in millions)						(in millions)
Consolidated Net Income	$	639		$	620		$	1,023		$	1,058
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $(8), $-, $(5) and $2, respectively		(10	)		—			(7	)		3
Reclassification adjustment for amounts included in net income, net of tax of $2, $1, $3 and $3, respectively		2			—			4			3
Marketable securities:
Change in fair value, net of tax of $-, $2, $- and $1, respectively		—			3			—			2
Pension and other post retirement benefit plans:
Reclassification adjustment for amounts included in net income, net of tax of $1, $(1), $1 and $1, respectively		1			1			2			—

Total other comprehensive income (loss)		(7	)		4			(1	)		8

Dividends on preferred and preference stock of subsidiaries		(16	)		(16	)		(32	)		(32	)

Comprehensive Income	$	616		$	608		$	990		$	1,034

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

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Six Months Ended June 30,
	2012			2011
	(in millions)
Operating Activities:
Consolidated net income	$	1,023		$	1,058
Adjustments to reconcile consolidated net income to net cash provided from operating activities —
Depreciation and amortization, total		1,064			1,011
Deferred income taxes		327			427
Allowance for equity funds used during construction		(63	)		(71	)
Pension, postretirement, and other employee benefits		13			(38	)
Stock based compensation expense		35			27
Retail fuel cost over recovery—long-term		44			—
Other, net		(17	)		(6	)
Changes in certain current assets and liabilities —
-Receivables		(55	)		(156	)
-Fossil fuel stock		(305	)		81
-Other current assets		(53	)		(106	)
-Accounts payable		(167	)		58
-Accrued taxes		45			300
-Accrued compensation		(216	)		(193	)
-Retail fuel cost over recovery—short-term		101			(6	)
-Other current liabilities		(19	)		3

Net cash provided from operating activities		1,757			2,389

Investing Activities:
Property additions		(2,356	)		(2,126	)
Investment in restricted cash		(230	)		(3	)
Distribution of restricted cash		49			61
Nuclear decommissioning trust fund purchases		(576	)		(1,405	)
Nuclear decommissioning trust fund sales		574			1,401
Proceeds from property sales		2			17
Cost of removal, net of salvage		(58	)		(68	)
Change in construction payables		(134	)		37
Other investing activities		(62	)		22

Net cash used for investing activities		(2,791	)		(2,064	)

Financing Activities:
Decrease in notes payable, net		(406	)		(440	)
Proceeds —
Long-term debt issuances		2,487			1,950
Interest-bearing refundable deposit related to asset sale		150			—
Common stock issuances		316			482
Redemptions —
Long-term debt		(1,319	)		(1,504	)
Payment of common stock dividends		(837	)		(787	)
Payment of dividends on preferred and preference stock of subsidiaries		(32	)		(32	)
Other financing activities		19			(4	)

Net cash provided from (used for) financing activities		378			(335	)

Net Change in Cash and Cash Equivalents		(656	)		(10	)
Cash and Cash Equivalents at Beginning of Period		1,315			447

Cash and Cash Equivalents at End of Period	$	659		$	437

Supplemental Cash Flow Information:
Cash paid (received) during the period for —
Interest (net of $41 and $35 capitalized for 2012 and 2011, respectively)	$	391		$	419
Income taxes, net		(34	)		(355	)
Noncash transactions — accrued property additions at end of period		488			407

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)


Assets	At June 30, 2012			At December 31, 2011
	(in millions)
Current Assets:
Cash and cash equivalents	$	659		$	1,315
Restricted cash and cash equivalents		192			8
Receivables —
Customer accounts receivable		1,164			1,074
Unbilled revenues		497			376
Under recovered regulatory clause revenues		20			143
Other accounts and notes receivable		261			282
Accumulated provision for uncollectible accounts		(23	)		(26	)
Fossil fuel stock, at average cost		1,672			1,367
Materials and supplies, at average cost		919			903
Vacation pay		161			160
Prepaid expenses		577			385
Other regulatory assets, current		208			239
Other current assets		66			46

Total current assets		6,373			6,272

Property, Plant, and Equipment:
In service		61,577			59,744
Less accumulated depreciation		21,616			21,154

Plant in service, net of depreciation		39,961			38,590
Other utility plant, net		53			55
Nuclear fuel, at amortized cost		807			774
Construction work in progress		5,745			5,591

Total property, plant, and equipment		46,566			45,010

Other Property and Investments:
Nuclear decommissioning trusts, at fair value		1,235			1,207
Leveraged leases		660			649
Miscellaneous property and investments		260			262

Total other property and investments		2,155			2,118

Deferred Charges and Other Assets:
Deferred charges related to income taxes		1,390			1,365
Unamortized debt issuance expense		157			156
Unamortized loss on reacquired debt		288			285
Deferred under recovered regulatory clause revenues		29			48
Other regulatory assets, deferred		3,484			3,532
Other deferred charges and assets		455			481

Total deferred charges and other assets		5,803			5,867

Total Assets	$	60,897		$	59,267

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)


Liabilities and Stockholders’ Equity	At June 30, 2012			At December 31, 2011
	(in millions)
Current Liabilities:
Securities due within one year	$	2,075		$	1,717
Interest-bearing refundable deposit related to asset sale		150			—
Notes payable		453			859
Accounts payable		1,253			1,553
Customer deposits		363			347
Accrued taxes —
Accrued income taxes		17			13
Unrecognized tax benefits		6			22
Other accrued taxes		337			425
Accrued interest		237			226
Accrued vacation pay		204			205
Accrued compensation		246			450
Liabilities from risk management activities		160			209
Other regulatory liabilities, current		144			125
Other current liabilities		443			426

Total current liabilities		6,088			6,577

Long-term Debt		19,459			18,647

Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		9,352			8,809
Deferred credits related to income taxes		216			224
Accumulated deferred investment tax credits		704			611
Employee benefit obligations		2,409			2,442
Asset retirement obligations		1,385			1,321
Other cost of removal obligations		1,195			1,165
Other regulatory liabilities, deferred		295			297
Other deferred credits and liabilities		588			514

Total deferred credits and other liabilities		16,144			15,383

Total Liabilities		41,691			40,607

Redeemable Preferred Stock of Subsidiaries		375			375

Stockholders’ Equity:
Common Stockholders’ Equity:
Common stock, par value $5 per share —
Authorized — 1.5 billion shares
Issued — June 30, 2012: 875 million shares
— December 31, 2011: 866 million shares
Treasury — June 30, 2012: 0.6 million shares
— December 31, 2011: 0.5 million shares
Par value		4,377			4,328
Paid-in capital		4,755			4,410
Treasury, at cost		(18	)		(17	)
Retained earnings		9,122			8,968
Accumulated other comprehensive loss		(112	)		(111	)

Total Common Stockholders’ Equity		18,124			17,578
Preferred and Preference Stock of Subsidiaries		707			707

Total Stockholders’ Equity		18,831			18,285

Total Liabilities and Stockholders’ Equity	$	60,897		$	59,267

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

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SECOND QUARTER 2012 vs. SECOND QUARTER 2011

AND

YEAR-TO-DATE 2012 vs. YEAR-TO-DATE 2011

OVERVIEW

Southern Company is a holding company that owns all of the common stock of the traditional operating companies—Alabama Power, Georgia Power, Gulf Power, and Mississippi Power—and Southern Power and other direct and indirect subsidiaries. Discussion of the results of operations is focused on the Southern Company system’s primary business of electricity sales by the traditional operating companies and Southern Power. The four traditional operating companies are vertically integrated utilities providing electric service in four Southeastern states. Southern Power constructs, acquires, owns, and manages generation assets, including renewable energy projects, and sells electricity at market-based rates in the wholesale market. Southern Company’s other business activities include investments in leveraged lease projects and telecommunications. For additional information on these businesses, see BUSINESS—The Southern Company System—“Traditional Operating Companies,” “Southern Power,” and “Other Businesses” in Item 1 of the Form 10-K.

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

RESULTS OF OPERATIONS

Net Income


Second Quarter 2012 vs. Second Quarter 2011		Year-to-Date 2012 vs. Year-to-Date 2011
(change in millions)	(% change)	(change in millions)	(% change)
$19	3.1	$(35)	(3.4)

Southern Company’s second quarter 2012 net income after dividends on preferred and preference stock of subsidiaries was $623 million ($0.71 per share) compared to $604 million ($0.71 per share) for the second quarter 2011. The increase for the second quarter 2012 when compared to the corresponding period in 2011 was primarily the result of increases in revenues associated with the elimination of a tax-related adjustment under Alabama Power’s rate structure, an increase related to retail revenue rate effects at Georgia Power, an increase related to retail base revenues at Gulf Power, increases in usage and customer growth, an insurance recovery received related to the litigation settlement with MC Asset Recovery, LLC, and lower income taxes. The net income increase for the second quarter 2012 was partially offset by a decrease in revenues due to milder weather, an increase in operations and maintenance expenses, an increase in depreciation on additional plant in service related to new generation, transmission, distribution, and environmental projects, an increase in interest expense, and lower energy revenues at Southern Power.

Southern Company’s year-to-date 2012 net income after dividends on preferred and preference stock of subsidiaries was $991 million ($1.14 per share) compared to $1.03 billion ($1.20 per share) for year-to-date 2011. The net income decrease for year-to-date 2012 when compared to the corresponding period in 2011 was primarily the result of a decrease in revenues due to milder weather, an increase in operations and maintenance expenses, an increase in depreciation on additional plant in service related to new generation, transmission, distribution, and environmental projects, an increase in interest expense, and lower energy revenues at Southern Power. The net income decrease for year-to-date 2012 was partially offset by increases in revenues associated with the elimination of a tax-related adjustment under Alabama Power’s rate structure, an increase related to retail revenue rate effects at Georgia Power, an increase related to retail base and retail interim revenues at Gulf Power, increases in usage and customer growth, and an insurance recovery received related to the litigation settlement with MC Asset Recovery, LLC.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Retail Revenues


Second Quarter 2012 vs. Second Quarter 2011		Year-to-Date 2012 vs. Year-to-Date 2011
(change in millions)	(% change)	(change in millions)	(% change)
$(245)	(6.4)	$(549)	(7.6)

In the second quarter 2012, retail revenues were $3.60 billion compared to $3.84 billion for the corresponding period in 2011. For year-to-date 2012, retail revenues were $6.69 billion compared to $7.24 billion for the corresponding period in 2011.

Details of the change to retail revenues were as follows:


	Second Quarter 2012			Year-to-Date 2012
		(in millions)	(% change)		(in millions)	(% change)
Retail – prior year		$3,842			$7,238
Estimated change in –
Rates and pricing		75	2.0		134	1.9
Sales growth (decline)		23	0.6		40	0.5
Weather		(84)	(2.2)		(197)	(2.7)
Fuel and other cost recovery		(259)	(6.8)		(526)	(7.3)

Retail – current year		$3,597	(6.4)%		$ 6,689	(7.6)%

Revenues associated with changes in rates and pricing increased in the second quarter and year-to-date 2012 when compared to the corresponding periods in 2011 primarily due to the elimination of a tax-related adjustment under Alabama Power’s rate structure and an increase related to retail base and retail interim revenues at Gulf Power. Also contributing to the increase were increases in retail revenues at Georgia Power due to base tariff increases effective April 1, 2012 related to placing Plant McDonough-Atkinson Units 4 and 5 in service, the NCCR and demand-side management tariff increases effective January 1, 2012, as approved by the Georgia PSC, and the rate pricing effect of decreased customer usage, partially offset by lower contributions from market-driven rates from commercial and industrial customers.

Revenues attributable to changes in sales increased in the second quarter and year-to-date 2012 when compared to the corresponding periods in 2011. For second quarter 2012, the increase was due to a 2.1% increase in weather-adjusted residential KWH sales and a 1.2% increase in weather-adjusted commercial KWH sales, partially offset by a 0.1% decrease in industrial KWH sales. The increases in weather-adjusted residential and commercial KWH sales for the second quarter 2012 are due to increases in usage and customer growth. The decrease in industrial KWH sales for the second quarter 2012 is primarily due to decreases in the textiles and paper sectors, largely offset by increases in the pipeline and transportation sectors. For year-to-date 2012, the increase was due to a 1.3% increase in weather-adjusted residential KWH sales and a 0.9% increase in industrial KWH sales, while weather-adjusted commercial KWH sales remained flat. The increase in weather-adjusted residential KWH sales for year-to-date 2012 is due to increases in usage and customer growth. The increase in industrial KWH sales year-to-date 2012 is primarily due to increases in the pipeline, lumber, and transportation sectors, partially offset by decreases in the textiles sector.

Revenues resulting from changes in weather decreased $84 million in the second quarter 2012 and $197 million year-to-date 2012 when compared to the corresponding periods in 2011 as a result of milder weather.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Fuel and other cost recovery revenues decreased $259 million in the second quarter 2012 and decreased $526 million for year-to-date 2012 when compared to the corresponding periods in 2011. Electric rates for the traditional operating companies include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the energy component of purchased power costs, and do not affect net income.

Wholesale Revenues

Wholesale revenues consist of PPAs with investor-owned utilities and electric cooperatives, unit power sales contracts, and short-term opportunity sales. Wholesale revenues from PPAs and unit power sales contracts have both capacity and energy components. Capacity revenues reflect the recovery of fixed costs and a return on investment. Energy revenues will vary depending on fuel prices, the market prices of wholesale energy compared to the Southern Company system’s generation, demand for energy within the Southern Company system’s service territory, and the availability of the Southern Company system’s generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income. Short-term opportunity sales are made at market-based rates that generally provide a margin above the Southern Company system’s variable cost to produce the energy.

In the second quarter 2012, wholesale revenues were $415 million compared to $507 million for the corresponding period in 2011, reflecting a $106 million decrease in energy revenues, partially offset by a $14 million increase in capacity revenues. The decrease in energy revenues was primarily related to a reduction in the average price of energy and lower energy sales mainly due to lower customer demand.

For year-to-date 2012, wholesale revenues were $764 million compared to $956 million for the corresponding period in 2011, reflecting a $213 million decrease in energy revenues, partially offset by a $21 million increase in capacity revenues. The decrease in energy revenues was primarily related to a reduction in the average price of energy and lower energy sales mainly due to lower customer demand.

Fuel and Purchased Power Expenses


	Second Quarter 2012 vs. Second Quarter 2011			Year-to-Date 2012 vs. Year-to-Date 2011

	(change in millions)		(% change)	(change in millions)		(% change)
Fuel		$(383)	(22.9)		$(795)	(25.2)
Purchased power		5	3.4		46	18.8

Total fuel and purchased power expenses		$(378)			$(749)

In the second quarter 2012, total fuel and purchased power expenses were $1.44 billion compared to $1.82 billion for the corresponding period in 2011. The decrease was primarily the result of a $415 million decrease in the average cost of fuel and purchased power and a $133 million decrease in the volume of KWHs generated, partially offset by a $170 million increase in the volume of KWHs purchased.

For year-to-date 2012, total fuel and purchased power expenses were $2.64 billion compared to $3.39 billion for the corresponding period in 2011. The decrease was primarily the result of a $777 million decrease in the average cost of fuel and purchased power and a $430 million decrease in the volume of KWHs generated, partially offset by a $458 million increase in the volume of KWHs purchased.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Details of the Southern Company system’s generation and purchased power were as follows:


	Second Quarter 2012	Second Quarter 2011	Year-to-Date 2012	Year-to-Date 2011

Total generation (billions of KWHs)	44	48	83	94
Total purchased power (billions of KWHs)	5	2	9	4

Sources of generation (percent) —
Coal	41	56	38	54
Nuclear	17	15	18	16
Gas	41	26	41	27
Hydro	1	3	3	3

Cost of fuel, generated (cents per net KWH) —
Coal	4.18	4.06	4.14	4.01
Nuclear	0.83	0.72	0.81	0.70
Gas	2.56	4.23	2.66	4.08

Average cost of fuel, generated (cents per net KWH)	2.94	3.56	2.90	3.48
Average cost of purchased power (cents per net KWH)^(a)	4.09	7.51	3.98	8.07

(a)	Average cost of purchased power includes fuel purchased by the electric utilities for tolling agreements where power is generated by the provider.

Fuel

In the second quarter 2012, fuel expense was $1.29 billion compared to $1.67 billion for the corresponding period in 2011. The decrease was primarily due to a 39.5% decrease in the average cost of gas per KWH generated, a higher percentage of generation from lower cost natural gas-fired resources, and lower customer demand mainly due to milder weather.

For year-to-date 2012, fuel expense was $2.35 billion compared to $3.15 billion for the corresponding period in 2011. The decrease was primarily due to a 34.8% decrease in the average cost of gas per KWH generated, a higher percentage of generation from lower cost natural gas-fired resources, and lower customer demand mainly due to milder weather.

Purchased Power

In the second quarter 2012, purchased power expense was $150 million compared to $145 million for the corresponding period in 2011. The increase was primarily due to a 93.3% increase in the volume of KWHs purchased as the market cost of available energy was lower than the marginal cost of generation available, partially offset by a 45.5% decrease in the average cost per KWH purchased.

For year-to-date 2012, purchased power expense was $291 million compared to $245 million for the corresponding period in 2011. The increase was primarily due to a 158.9% increase in the volume of KWHs purchased as the market cost of available energy was lower than the marginal cost of generation available, partially offset by a 50.7% decrease in the average cost per KWH purchased.

Energy purchases will vary depending on demand for energy within the Southern Company system’s service territory, the market prices of wholesale energy as compared to the cost of the Southern Company system’s generation, and the availability of the Southern Company system’s generation.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Other Operations and Maintenance Expenses

In the second quarter 2012, other operations and maintenance expenses were $944 million compared to $910 million for the corresponding period in 2011. The increase was primarily the result of a $28 million increase in administrative and general costs primarily due to increases in pension costs and other employee benefits and a $16 million increase in transmission and distribution costs. The increase was partially offset by a $10 million decrease at Mississippi Power related to the expiration of an operating lease for Plant Daniel Units 3 and 4, as well as a $4 million decrease primarily related to scheduled outage and maintenance costs and commodity and labor costs.

For year-to-date 2012, other operations and maintenance expenses were $1.91 billion compared to $1.85 billion for the corresponding period in 2011. The increase was primarily the result of a $71 million increase in administrative and general costs primarily due to increases in pension costs, outside services, and other employee benefits. Also contributing to the increase was a $15 million increase in transmission and distribution costs and a $6 million net increase in customer accounts and customer service related costs. The increase was partially offset by a $21 million decrease at Mississippi Power related to the expiration of an operating lease for Plant Daniel Units 3 and 4, as well as an $18 million decrease primarily related to scheduled outage and maintenance costs and commodity and labor costs.

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FINANCIAL CONDITION AND LIQUIDITY—“Purchase of the Plant Daniel Combined Cycle Generating Units” of Southern Company in Item 7 of the Form 10-K for additional information.

MC Asset Recovery Insurance Settlement

N/M – Not meaningful

In the second quarter 2012, Southern Company received an insurance recovery related to the litigation settlement with MC Asset Recovery, LLC, which resulted in income of $19 million. See Note (B) to the Condensed Financial Statements under “Insurance Recovery” herein for additional information.

Depreciation and Amortization

In the second quarter 2012, depreciation and amortization was $445 million compared to $430 million for the corresponding period in 2011. For year-to-date 2012, depreciation and amortization was $886 million compared to $848 million for the corresponding period in 2011. The increases were primarily the result of an increase in depreciation due to additional plant in service related to new generation at Georgia Power’s Plant McDonough-Atkinson Units 4 and 5, as well as transmission, distribution, and environmental projects.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Allowance for Equity Funds Used During Construction


Second Quarter 2012 vs. Second Quarter 2011		Year-to-Date 2012 vs. Year-to-Date 2011
(change in millions)	(% change)	(change in millions)	(% change)
$(4)	(11.1)	$(8)	(11.3)

In the second quarter 2012, AFUDC equity was $32 million compared to $36 million for the corresponding period in 2011. For year-to-date 2012, AFUDC equity was $63 million compared to $71 million for the corresponding period in 2011. The decreases were primarily due to the completion of Georgia Power’s Plant McDonough-Atkinson Units 4 and 5 in December 2011 and April 2012, respectively, partially offset by increases in CWIP related to Mississippi Power’s Kemper IGCC.

Interest Expense, Net of Amounts Capitalized


Second Quarter 2012 vs. Second Quarter 2011		Year-to-Date 2012 vs. Year-to-Date 2011
(change in millions)	(% change)	(change in millions)	(% change)
$21	10.6	$10	2.4

In the second quarter 2012, interest expense, net of amounts capitalized was $220 million compared to $199 million for the corresponding period in 2011. For year-to-date 2012, interest expense, net of amounts capitalized was $431 million compared to $421 million for the corresponding period in 2011. The increases were primarily due to a $23 million reduction in interest expense in 2011 at Georgia Power resulting from the settlement of litigation with the Georgia Department of Revenue and a net increase in interest expense related to senior notes. The increases were partially offset by a decrease related to the conclusion of certain state and federal income tax audits, a decrease in interest expense on existing variable rate pollution control revenue bonds, and an increase in capitalized interest associated with construction projects at Mississippi Power and Southern Power.

Other Income (Expense), Net


Second Quarter 2012 vs. Second Quarter 2011		Year-to-Date 2012 vs. Year-to-Date 2011
(change in millions)	(% change)	(change in millions)	(% change)
$17	N/M	$13	N/M

N/M – Not meaningful

In the second quarter 2012, other income (expense), net was $13 million compared to $(4) million for the corresponding period in 2011. For year-to-date 2012, other income (expense), net was $11 million compared to $(2) million for the corresponding period in 2011. The increases were primarily due to the conclusion of certain federal income tax audits.

Income Taxes


Second Quarter 2012 vs. Second Quarter 2011		Year-to-Date 2012 vs. Year-to-Date 2011
(change in millions)	(% change)	(change in millions)	(% change)
$(20)	(5.7)	$(51)	(8.8)

In the second quarter 2012, income taxes were $329 million compared to $349 million for the corresponding period in 2011. For year-to-date 2012, income taxes were $529 million compared to $580 million for the corresponding period in 2011. The decreases were primarily due to lower pre-tax earnings and state income tax credits. See Note (G) to the Condensed Financial Statements herein under “Unrecognized Tax Benefits” for additional information.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Southern Company’s future earnings potential. The level of Southern Company’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Company’s primary business of selling electricity. These factors include the traditional operating companies’ ability to maintain a constructive regulatory environment that continues to allow for the timely recovery of prudently incurred costs during a time of increasing costs. Another major factor is the profitability of the competitive wholesale supply business. Future earnings for the electricity business in the near term will depend, in part, upon maintaining energy sales which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities and other wholesale customers, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in the service territory. In addition, the level of future earnings for the wholesale supply business also depends on numerous factors including creditworthiness of customers, total generating capacity available and related costs, future acquisitions and construction of generating facilities, and the successful remarketing of capacity as current contracts expire. Changes in economic conditions impact sales for the traditional operating companies and Southern Power, and the pace of the economic recovery remains uncertain. The timing and extent of the economic recovery will impact growth and may impact future earnings. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form 10-K.

Environmental Matters

Compliance costs related to federal and state environmental statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. Environmental compliance spending over the next several years may differ materially from the amounts estimated. The timing, specific requirements, and estimated costs could change as environmental statutes and regulations are adopted or modified. Further, higher costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and financial condition. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters” in Item 8 of the Form 10-K for additional information.

New Source Review Actions

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 February 23, 2012, the EPA filed a motion in the U.S. District Court for the Northern District of Alabama seeking vacatur of the judgment and recusal of the judge in the case involving Alabama Power (including claims related to a unit co-owned by Mississippi Power). The U.S. District Court for the Northern District of Alabama has not ruled on the EPA’s motion seeking vacatur of the judgment. The ultimate outcome of this matter cannot be determined at this time.

Climate Change Litigation

Hurricane Katrina Case

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Climate Change Litigation — Hurricane Katrina Case” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters — Climate Change Litigation – Hurricane Katrina Case” in Item 8 of the Form 10-K for additional information. On March 20, 2012, the U.S. District Court for the

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Southern District of Mississippi dismissed the amended class action complaint filed in May 2011 by the plaintiffs. On April 16, 2012, the plaintiffs appealed the case to the U.S. Court of Appeals for the Fifth Circuit. The ultimate outcome of this matter cannot be determined at this time.

Environmental Statutes and Regulations

General

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FUTURE EARNINGS POTENTIAL—“Environmental Matters— Environmental Statutes and Regulations – General” of Southern Company in Item 7 of the Form 10-K for information regarding the Southern Company system’s estimated base level capital expenditures to comply with existing statutes and regulations for 2012 through 2014, as well as the Southern Company system’s preliminary estimates for potential incremental environmental compliance investments associated with complying with the EPA’s final Mercury and Air Toxics Standards (MATS) rule (formerly referred to as the Utility Maximum Achievable Control Technology rule) and the EPA’s proposed water and coal combustion byproducts rules.

The Southern Company system is continuing to develop its compliance strategy and to assess the potential costs of complying with the MATS rule and the EPA’s proposed water and coal combustion byproducts rules. As part of the development of its compliance strategy for the MATS rule, the Southern Company system has entered into agreements for the construction of baghouses to control the emissions of mercury and particulates from certain generating units. While further analysis of the MATS rule is required and the ultimate costs remain uncertain, the compliance decisions made through the second quarter 2012 have allowed the Southern Company system to further develop its cost estimates for compliance with the MATS rule. As a result, estimated compliance costs for the MATS rule in the 2012 through 2014 period have been revised from up to $2.7 billion to approximately $1.8 billion as follows:


	2012		2013	2014

			(in millions)
MATS rule	$	150	$440	$	1,215

In addition, the Southern Company system has further developed its estimated capital expenditures and associated timing of these expenditures to comply with the proposed water and coal combustion byproducts rules, resulting in a reduction, due primarily to timing, in estimated compliance costs for 2012 through 2014. Potential incremental environmental compliance investments to comply with the proposed water and coal combustion byproducts rules have been revised from up to $1.5 billion to approximately $500 million over the 2012 through 2014 period based on the assumption that coal combustion byproducts will continue to be regulated as non-hazardous solid waste under the proposed rule. These potential incremental environmental compliance investments are estimated as follows:


	2012		2013	2014

			(in millions)
Proposed water and coal combustion byproducts rules	$	10	$85	$	405

While the Southern Company system’s ultimate costs of compliance with the MATS rule and the proposed water and coal combustion byproducts rules remain uncertain, the Southern Company system estimates that compliance costs through 2021 (assuming that coal combustion byproducts will continue to be regulated as non-hazardous solid waste under the proposed rule) will be at the low end of the $13 billion to $18 billion range provided in the Form 10-K. Included in this amount is approximately $750 million that is also included in the 2012 through 2014 base level capital investment of the traditional operating companies described in the Form 10-K in anticipation of these rules.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Southern Company system’s ultimate compliance strategy and actual future environmental capital expenditures are dependent on a final assessment of the MATS rule and will be affected by the final requirements of new or revised environmental regulations that are promulgated; the outcome of any legal challenges to the environmental rules; the cost, availability, and existing inventory of emissions allowances; and the fuel mix of the electric utilities. Compliance costs may arise from retirement and replacement of existing units, installation of additional environmental controls, upgrades to the transmission system, and changing fuel sources for certain existing units. The Southern Company system’s preliminary analysis further indicates that the short timeframe for compliance with the MATS rule could significantly affect electric system reliability and cause an increase in costs of materials and services. The ultimate outcome of these matters cannot be determined at this time.

As part of SEGCO’s environmental compliance strategy, the Board of Directors of SEGCO approved adding natural gas as the primary fuel source in 2015 for its 1,000 MWs of generating capacity and the construction of the necessary natural gas pipeline. SEGCO is jointly owned by Alabama Power and Georgia Power. The capacity of SEGCO’s units is sold to Alabama Power and Georgia Power through a PPA. The impact of SEGCO’s ultimate compliance strategy on the PPA costs cannot be determined at this time; however, if such costs cannot continue to be recovered through retail rates, they could have a material impact on Southern Company’s financial statements.

Air Quality

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters – Environmental Statutes and Regulations — Air Quality” of Southern Company in Item 7 of the Form 10-K for additional information on the eight-hour ozone and fine particulate matter air quality standards and the MATS rule.

On May 1, 2012, the EPA released its final determination of nonattainment areas based on the 2008 eight-hour ozone air quality standards. The only area within the traditional operating companies’ service territory designated as a nonattainment area was a 15-county area within metropolitan Atlanta. The potential impact of the revised standard and nonattainment designation will depend on further evaluation and implementation by the Georgia Environmental Protection Division and cannot be determined at this time.

On June 14, 2012, the EPA proposed a rule that would increase the stringency of the fine particulate matter national ambient air quality standards. If adopted, the proposed standards could result in the designation of new nonattainment areas within the Southern Company system’s service territory. As part of a related settlement, the EPA has agreed to finalize the proposed rule by December 14, 2012. The ultimate outcome of this rulemaking will depend on the final rule and the outcome of any legal challenges and cannot be determined at this time.

Numerous petitions for administrative reconsideration of the MATS rule, including a petition by Southern Company and its subsidiaries, have been filed with the EPA. Challenges to the final rule have also been filed in the U.S. District Court for the District of Columbia by numerous states, environmental organizations, industry groups, and others. The impact of the MATS rule will depend on the outcome of these and any other legal challenges and, therefore, cannot be determined at this time.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Water Quality

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FUTURE EARNINGS POTENTIAL—“Environmental Matters—Environmental Statutes and Regulations – Water Quality” of Southern Company in Item 7 of the Form 10-K for additional information on the proposed rules regarding certain cooling water intake structures. The EPA has entered into an amended settlement agreement to extend the deadline for issuing a final rule until June 27, 2013. The ultimate outcome of this rulemaking will depend on the final rule and the outcome of any legal challenges and cannot be determined at this time.

Coal Combustion Byproducts

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FUTURE EARNINGS POTENTIAL—“Environmental Matters—Environmental Statutes and Regulations—Coal Combustion Byproducts” of Southern Company in Item 7 of the Form 10-K for additional information. Environmental groups and other parties have filed lawsuits in the U.S. District Court for the District of Columbia seeking to require the EPA to complete its rulemaking process and issue final regulations pertaining to the regulation of coal combustion byproducts. The ultimate outcome of these matters cannot be determined at this time.

Global Climate Issues

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FUTURE EARNINGS POTENTIAL—“Environmental Matters—Global Climate Issues” of Southern Company in Item 7 of the Form 10-K for additional information.

On April 13, 2012, the EPA published proposed regulations to establish standards of performance for greenhouse gas emissions from new fossil fuel steam electric generating units. As proposed, the standards would not apply to existing units. The EPA has delayed its plans to propose greenhouse gas emissions performance standards for modified sources and emissions guidelines for existing sources. The impact of this rulemaking will depend on the scope and specific requirements of the final rule and the outcome of any legal challenges and, therefore, cannot be determined at this time.

On June 26, 2012, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit unanimously rejected all challenges to four of the EPA’s actions relating to the greenhouse gas permitting programs under the Clean Air Act. These rules may impact the amount of time it takes to obtain prevention of significant deterioration permits for new generation and major modifications to existing generating units and the requirements ultimately imposed by those permits. The ultimate impact of these rules cannot be determined at this time and will depend on the outcome of any other legal challenges.

PSC Matters

Retail Fuel Cost Recovery

The traditional operating companies each have established fuel cost recovery rates approved by their respective state PSCs. The traditional operating companies have experienced lower pricing for natural gas resulting in an increase in natural gas generation and a decrease in coal generation, which is currently more costly. The lower cost of natural gas has resulted in total over recovered fuel costs at Georgia Power, Gulf Power, and Mississippi Power included in Southern Company’s Condensed Balance Sheet herein of approximately $196 million at June 30, 2012. At June 30, 2012, Alabama Power had under recovered fuel costs included in Southern Company’s Condensed Balance Sheet herein of approximately $16 million. At December 31, 2011, total under recovered fuel costs at Alabama Power and Georgia Power included in Southern Company’s Condensed Balance Sheet herein were approximately $169 million, and Gulf Power and Mississippi Power had a total over recovered fuel balance included in Southern Company’s Condensed Balance Sheet herein of approximately $52 million. Fuel cost recovery revenues are adjusted for differences in actual

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Southern Company’s revenues or net income, but will affect annual cash flow. The traditional operating companies continuously monitor their under or over recovered fuel cost balances.

On June 21, 2012, the Georgia PSC approved a decrease in Georgia Power’s fuel cost recovery rates of 19%, which reduced annual billings by $567 million effective June 1, 2012. The decrease in fuel costs resulted from lower natural gas prices as a result of increased natural gas supplies.

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 “Retail Regulatory Matters – Alabama Power – Fuel Cost Recovery” and “Retail Regulatory Matters – Georgia Power – Fuel Cost Recovery” in Item 8 of the Form 10-K for additional information.

Alabama Power

Rate CNP

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL—“PSC Matters—Alabama Power —Rate CNP” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Retail Regulatory Matters—Alabama Power—Rate CNP” in Item 8 of the Form 10-K for additional information regarding Alabama Power’s recovery of retail costs through Rate Certificated New Plant Power Purchase Agreement (Rate CNP) and Rate Certificated New Plant Environmental (Rate CNP Environmental). Alabama Power’s under recovered Rate CNP balance as of June 30, 2012 was $2 million as compared to $6 million at December 31, 2011. Alabama Power’s under recovered Rate CNP Environmental balance as of June 30, 2012 was $26 million as compared to $11 million at December 31, 2011. These under recovered balances at June 30, 2012 are included in deferred under recovered regulatory clause revenues on Southern Company’s Condensed Balance Sheet herein. For Rate CNP, this classification is based on an estimate, which includes such factors as purchased power capacity and energy demand. For Rate CNP Environmental, this classification is based on an estimate, which includes such factors as costs to comply with environmental mandates and energy demand. A change in any of these factors could have a material impact on the timing of any recovery of the under recovered retail costs.

Natural Disaster Cost Recovery

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FUTURE EARNINGS POTENTIAL—“PSC Matters—Alabama Power —Natural Disaster Reserve” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Retail Regulatory Matters—Alabama Power—Natural Disaster Reserve” in Item 8 of the Form 10-K for additional information regarding natural disaster cost recovery. At June 30, 2012, the NDR had an accumulated balance of $105 million, which is included in Southern Company’s Condensed Balance Sheet herein under other regulatory liabilities, deferred. The accruals are reflected as operations and maintenance expenses in Southern Company’s Condensed Statement of Income herein.

Georgia Power

2011 Integrated Resource Plan Update

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FUTURE EARNINGS POTENTIAL—“Environmental Matters— Environmental Statutes and Regulations—Air Quality,” “—Water Quality,” and “—Coal Combustion Byproducts” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Retail Regulatory Matters—Georgia Power— Rate Plans” and “– 2011 Integrated Resource Plan Update” in Item 8 of the Form 10-K for additional information regarding proposed and final EPA rules and regulations, including the MATS rule for coal- and oil-fired electric utility steam generating units, revisions to effluent guidelines for steam electric power plants,

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

and additional regulation of coal combustion byproducts; the State of Georgia’s Multi-Pollutant Rule; Georgia Power’s analysis of the potential costs and benefits of installing the required controls on its fossil generating units in light of these regulations; the 2010 ARP; and the 2011 IRP Update.

On March 20, 2012, the Georgia PSC approved Georgia Power’s request to decertify and retire two coal-fired generation units at Plant Branch as of October 31, 2013 and December 31, 2013 and an oil-fired unit at Plant Mitchell as of March 26, 2012, which was included in Georgia Power’s 2011 IRP Update. The Georgia PSC also approved three PPAs totaling 998 MWs with Southern Power for capacity and energy that will commence in 2015 and end in 2030. The PPAs remain subject to FERC approval. The ultimate outcome of this matter cannot be determined at this time.

Income Tax Matters

Bonus Depreciation

In December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act include 100% bonus depreciation for property placed in service after September 8, 2010 and through 2011 (and for certain long-term construction projects to be placed in service in 2012) and 50% bonus depreciation for property placed in service in 2012 (and for certain long-term construction projects to be placed in service in 2013), which will have a positive impact on the future cash flows of Southern Company through 2013. Due to the significant amount of estimated bonus depreciation for 2012, a portion of Southern Company’s tax credit utilization will be deferred. Consequently, Southern Company’s positive cash flow benefit is estimated to be between $535 million and $725 million in 2012.

Construction Program

The subsidiary companies of Southern Company are engaged in continuous construction programs to accommodate existing and estimated future loads on their respective systems. The Southern Company system intends to continue its strategy of developing and constructing new generating facilities, including natural gas, biomass, and solar units at Southern Power, natural gas units and Plant Vogtle Units 3 and 4 at Georgia Power, and the Kemper IGCC at Mississippi Power, as well as adding or changing fuel sources for certain existing units, adding environmental control equipment, and expanding the transmission and distribution systems. For the traditional operating companies, major generation construction projects are subject to state PSC approvals in order to be included in retail rates. While Southern Power generally constructs and acquires generation assets covered by long-term PPAs, any uncontracted capacity could negatively affect future earnings. See Note 7 to the financial statements of Southern Company under “Construction Program” in Item 8 of the Form 10-K for estimated construction expenditures for the next three years. In addition, see Note 3 to the financial statements of Southern Company under “Retail Regulatory Matters—Georgia Power—Nuclear Construction,” “Retail Regulatory Matters – Georgia Power—Other Construction,” and “Integrated Coal Gasification Combined Cycle” in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under “Retail Regulatory Matters—Georgia Power—Nuclear Construction” and “Integrated Coal Gasification Combined Cycle” herein for additional information.

Investments in Leveraged Leases

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FUTURE EARNINGS POTENTIAL—“Investments in Leveraged Leases” of Southern Company in Item 7 and Note 1 to the financial statements of Southern Company under “Leveraged Leases” in Item 8 of the Form 10-K for additional information.

The recent financial and operational performance of one of Southern Company’s lessees and the associated generation assets has raised potential concerns on the part of Southern Company as to the credit quality of the lessee and the residual value of the assets. Current projections indicate significant uncertainty as to whether the lessee will be able to pay the

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

December 2012 semi-annual rent payment in full. Southern Company is currently engaged in discussions with the lessee and the holders of the project’s nonrecourse debt to restructure the debt payments and the related rental payments to allow additional capital investment in the project to be made to improve the operation of the generation assets and the financial viability of the lease transaction. Southern Company believes there is a reasonable possibility that it will be able to reach an agreement with the lessee and the debtholders to restructure the project. However, due to continued poor performance of the generation assets and the uncertainties surrounding the receipt of the December 2012 semi-annual rent payment and its ability to successfully restructure the project, Southern Company has placed the lease on nonaccrual status whereby income associated with this investment will not be recognized in the financial statements beginning in July 2012. If the attempts at restructuring the project are unsuccessful and the project is ultimately abandoned, the potential impairment loss that would be incurred is approximately $90 million on an after-tax basis. The ultimate outcome of this matter cannot be determined at this time.

Other Matters

Southern Company and its subsidiaries are involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Southern Company and its subsidiaries are subject to certain claims and legal actions arising in the ordinary course of business. The business activities of Southern Company’s subsidiaries are subject to extensive governmental regulation related to public health and the environment, such as regulation of air emissions and water discharges. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as air quality and water standards, has increased generally throughout the U.S. In particular, personal injury and other claims for damages caused by alleged exposure to hazardous materials, and common law nuisance claims for injunctive relief and property damage allegedly caused by greenhouse gas and other emissions, 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 in Note (B) herein or in Note 3 to the financial statements of Southern Company in Item 8 of the Form 10-K, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Southern Company’s financial statements.

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

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FUTURE EARNINGS POTENTIAL—“Other Matters” of Southern Company in Item 7 of the Form 10-K for additional information regarding the earthquake and tsunami that struck Japan in March 2011. On March 12, 2012, the NRC issued three orders and a request for information based on the NRC task force report recommendations that included, among other items, additional mitigation strategies for beyond-design-basis events, enhanced spent fuel pool instrumentation capabilities, hardened vents for certain classes of containment structures, including the one in use at Plant Hatch, site specific evaluations for seismic and flooding hazards, and various plant evaluations to ensure adequate coping capabilities during station blackout and other conditions. The staff of the NRC expects to issue additional implementation guidance by the end of August 2012. The final form and the resulting impact of any changes to safety requirements for nuclear reactors will be dependent on further review and action by the NRC and cannot be determined at this time. See RISK FACTORS of Southern Company in Item 1A of the Form 10-K for a discussion of certain risks associated with the licensing, construction, and operation of nuclear generating units, including potential impacts that could result from a major incident at a nuclear facility anywhere in the world. The ultimate outcome of these events cannot be determined at this time.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

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

FINANCIAL CONDITION AND LIQUIDITY

Overview

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY—“Overview” of Southern Company in Item 7 of the Form 10-K for additional information. Southern Company’s financial condition remained stable at June 30, 2012. Southern Company intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital and liquidity needs. See “Sources of Capital,” “Financing Activities,” and “Capital Requirements and Contractual Obligations” herein for additional information.

Net cash provided from operating activities totaled $1.8 billion for the first six months of 2012, a decrease of $632 million from the corresponding period in 2011. Significant changes in operating cash flow for the first six months of 2012 compared to the corresponding period in 2011 include an increase in fossil fuel stock as a result of milder weather in the first six months of 2012 and lower natural gas prices and a decrease in accrued taxes due to the timing of tax payments. Net cash used for investing activities totaled $2.8 billion for the first six months of 2012, an increase of $727 million from the corresponding period in 2011. The increase was primarily due to property additions to utility plant. Net cash provided from financing activities totaled $378 million for the first six months of 2012 compared to $335 million net cash used for financing activities in the corresponding period in 2011. The change was primarily due to an increase in long-term debt issuances and the receipt of an interest bearing refundable deposit related to a pending asset sale at Mississippi Power.

Significant balance sheet changes for the first six months of 2012 include an increase of $1.6 billion in total property, plant, and equipment for the construction of generation, transmission, and distribution facilities. Other significant changes include an increase in long-term debt of $812 million due to senior note issuances.

The market price of Southern Company’s common stock at the end of the second quarter 2012 was $46.30 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $20.72 per share, representing a market-to-book ratio of 223%, compared to $40.38, $19.80, and 204%, respectively, at the end of 2011. The dividend for the second quarter 2012 was $0.49 per share compared to $0.4725 per share in the second quarter 2011.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FINANCIAL CONDITION AND LIQUIDITY—“Capital Requirements and Contractual Obligations” of Southern Company in Item 7 of the Form 10-K for a description of Southern Company’s capital requirements for the construction programs of the Southern Company system, including estimated capital expenditures to comply with existing environmental regulations, and other funding requirements associated with scheduled maturities of long-term debt, as well as the related interest, preferred and preference stock dividends, leases, trust funding requirements, other purchase commitments, unrecognized tax benefits and interest, and derivative obligations. Approximately $2.1 billion will be required through June 30, 2013 to fund maturities of long-term debt.

See FUTURE EARNINGS POTENTIAL—“Environmental Statutes and Regulations—General” herein for a description of the Southern Company system’s estimated capital expenditures to comply with the MATS rule and proposed water and coal combustion byproducts rules.

The construction programs are subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; changes in environmental statutes and regulations; the outcome of any legal challenges to the environmental rules; changes in generating plants, including unit retirements and replacements and adding or changing fuel sources at existing units, to meet new regulatory requirements; changes in FERC rules and regulations; PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; storm impacts; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.

Sources of Capital

Southern Company intends to meet its future capital needs through internal cash flow and external security issuances. Equity capital can be provided from any combination of Southern Company’s stock plans, private placements, or public offerings. The amount and timing of additional equity capital to be raised will be contingent on Southern Company’s investment opportunities.

Except as described below with respect to potential DOE loan guarantees, the traditional operating companies and Southern Power plan to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from operating cash flows, security issuances, term loans, short-term borrowings, and equity contributions from Southern Company. However, the amount, type, and timing of any future 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.

In June 2010, Georgia Power reached an agreement with the DOE to accept terms for a conditional commitment for federal loan guarantees that would apply to future Georgia Power borrowings related to the construction of Plant Vogtle Units 3 and 4. Any borrowings guaranteed by the DOE would be full recourse to Georgia Power and secured by a first priority lien on Georgia Power’s 45.7% undivided ownership interest in Plant Vogtle Units 3 and 4. Total guaranteed borrowings would not exceed the lesser of 70% of eligible project costs, or approximately $3.46 billion, and are expected to be funded by the Federal Financing Bank. Final approval and issuance of loan guarantees by the DOE are subject to negotiation of definitive agreements, completion of due diligence by the DOE, receipt of any necessary regulatory approvals, and satisfaction of other conditions. In the event that the DOE does not issue a loan guarantee or Georgia Power determines that the final terms and conditions of the loan guarantee by the DOE are not in the best interest of its customers, Georgia Power expects to finance the construction of Plant Vogtle Units 3 and 4 through traditional capital markets financings. There can be no assurance that the DOE will issue loan guarantees for Georgia Power.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition, Mississippi Power has applied to the DOE for federal loan guarantees to finance a portion of the eligible construction costs of the Kemper IGCC. Mississippi Power is in advanced due diligence with the DOE. There can be no assurance that the DOE will issue federal loan guarantees for Mississippi Power. In the event that the DOE does not issue a conditional commitment or a final definitive loan guarantee, Mississippi Power intends to finance the construction of the Kemper IGCC through traditional capital markets financings. Mississippi Power also received DOE grant funds of $245 million that were used for the construction of the Kemper IGCC. An additional $25 million is expected to be received for the initial operation of the Kemper IGCC.

Southern Company’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt, as well as cash needs, which can fluctuate significantly due to the seasonality of the business of the Southern Company system. To meet short-term cash needs and contingencies, Southern Company has substantial cash flow from operating activities and access to capital markets, including commercial paper programs which are backed by bank credit facilities.

At June 30, 2012, Southern Company and its subsidiaries had approximately $659 million of cash and cash equivalents. Committed credit arrangements with banks at June 30, 2012, including expiration dates, were as follows:


	Expires										Executable Term Loans				Due Within One Year^(a)
Company	2012		2013		2014 and Beyond^(b)		Total		Unused		One Year		Two Years		Term Out		No Term Out
	(in millions)						(in millions)				(in millions)				(in millions)
Southern Company		$—		$—		$1,000		$1,000		$1,000		$—		$—		$—		$—
Alabama Power		37		101		1,150		1,288		1,288		51		—		51		52
Georgia Power		—		—		1,750		1,750		1,745		—		—		—		—
Gulf Power		20		60		195		275		275		45		—		45		35
Mississippi Power		41		95		165		301		301		25		41		66		70
Southern Power		—		—		500		500		500		—		—		—		—
Other		—		50		—		50		50		25		—		25		—

Total		$98		$306		$4,760		$5,164		$5,159		$146		$41		$187		$157

(a)	Reflects facilities expiring on or before June 30, 2013.

(b)	All remaining Gulf Power and Mississippi Power credit agreements in this column expire in 2014.

See Note 6 to the financial statements of Southern Company under “Bank Credit Arrangements” in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under “Bank Credit Arrangements” herein for additional information.

Most of these arrangements contain covenants that limit debt levels and typically contain cross default provisions that are restricted only to the indebtedness of the individual company. Southern Company and its subsidiaries are currently in compliance with all such covenants.

A portion of the unused credit with banks is allocated to provide liquidity support to the traditional operating companies’ variable rate pollution control revenue bonds and commercial paper programs. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of June 30, 2012 was approximately $1.8 billion.

The traditional operating companies may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of each of the traditional operating companies.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Details of short-term borrowings, excluding $2 million of notes payable related to other energy service contracts, were as follows:


	Short-term Debt at the End of the Period		Short-term Debt During the Period ^(a)
	Amount Outstanding	Weighted Average Interest Rate	Average Outstanding	Weighted Average Interest Rate	Maximum Amount Outstanding

	(in millions)		(in millions)		(in millions)
June 30, 2012:
Commercial paper	$445	0.4%	$477	0.4%	$735
Short-term bank debt	—	—%	175	1.1%	300

Total	$445	0.4%	$652	0.5%

(a)	Average and maximum amounts are based upon daily balances during the period.

Management believes that the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and cash.

Credit Rating Risk

Southern Company does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change of certain subsidiaries to BBB and Baa2, or BBB- and/or Baa3 or below. These contracts are for physical electricity purchases and sales, fuel purchases, fuel transportation and storage, emissions allowances, energy price risk management, and construction of new generation. The maximum potential collateral requirements under these contracts at June 30, 2012 were as follows:


Credit Ratings		Maximum Potential Collateral Requirements

		(in millions)
At BBB and Baa2		$ 9
At BBB- and/or Baa3		613
Below BBB- and/or Baa3		2,668

On March 6, 2012, Mississippi Power received a $150 million interest-bearing refundable deposit from SMEPA to be applied to the sale price for the pending sale of an undivided interest in the Kemper IGCC. Until the acquisition is closed, the deposit bears interest at Mississippi Power’s AFUDC rate, which was 9.967% per annum as of June 30, 2012, and is refundable to SMEPA upon termination of the asset purchase agreement related to such purchase, within 60 days of a request by SMEPA for a full or partial refund, or within 15 days at SMEPA’s discretion in the event that Mississippi Power is assigned a senior unsecured credit rating of BBB+ or lower by S&P or Baa1 or lower by Moody’s or ceases to be rated by either of these rating agencies.

Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, any credit rating downgrade could impact Southern Company’s ability to access capital markets, particularly the short-term debt market.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Market Price Risk

Southern Company is exposed to market risks, primarily commodity price risk and interest rate risk. Southern Company may also occasionally have limited exposure to foreign currency exchange rates. To manage the volatility attributable to these exposures, Southern Company nets the exposures, where possible, to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to Southern Company’s policies in areas such as counterparty exposure and risk management practices. Southern Company’s policy is that derivatives are to be used primarily for hedging purposes and mandates strict adherence to all applicable risk management policies. Derivative positions are monitored using techniques including, but not limited to, market valuation, value at risk, stress testing, and sensitivity analysis.

Due to cost-based rate regulation and other various cost recovery mechanisms, the traditional operating companies continue to have limited exposure to market volatility in interest rates, foreign currency, commodity fuel prices, and prices of electricity. In addition, Southern Power’s exposure to market volatility in commodity fuel prices and prices of electricity is limited because its long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. However, Southern Power has been and may continue to be exposed to market volatility in energy-related commodity prices as a result of sales of uncontracted generating capacity. To mitigate residual risks relative to movements in electricity prices, the traditional operating companies enter into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, financial hedge contracts for natural gas purchases. The traditional operating companies continue to manage fuel-hedging programs implemented per the guidelines of their respective state PSCs. Southern Company had no material change in market risk exposure for the second quarter 2012 when compared with the December 31, 2011 reporting period.

The changes in fair value of energy-related derivative contracts, the majority of which are composed of regulatory hedges, for the three and six months ended June 30, 2012 were as follows:


	Second Quarter 2012 Changes		Year-to-Date 2012 Changes

		Fair Value

		(in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net		$(265)		$(231)
Contracts realized or settled		77		126
Current period changes^(a)		18		(65)

Contracts outstanding at the end of the period, assets (liabilities), net		$(170)		$(170)

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

The changes in the fair value positions of the energy-related derivative contracts, which are substantially all attributable to both the volume and the price of natural gas, for the three and six months ended June 30, 2012 were as follows:


	Second Quarter 2012 Changes		Year-to-Date 2012 Changes

		Fair Value

		(in millions)
Natural gas swaps		$ 78		$ 59
Natural gas options		17		3
Other energy-related derivatives		—		(1)

Total changes		$ 95		$61

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The net hedge volumes of energy-related derivative contracts were as follows:


	June 30, 2012	March 31, 2012	December 31, 2011

	mmBtu Volume
	(in millions)
Commodity—Natural gas swaps	141	123	123
Commodity—Natural gas options	101	98	66

Total hedge volume	242	221	189

The weighted average swap contract cost above market prices was approximately $0.95 per mmBtu as of June 30, 2012, $1.71 per mmBtu as of March 31, 2012, and $1.51 per mmBtu as of December 31, 2011. The change in option premiums is primarily attributable to the volatility of the market and the underlying change in the natural gas price. The majority of the natural gas hedge gains and losses are recovered through the traditional operating companies’ fuel cost recovery clauses.

The net fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:


Asset (Liability) Derivatives	June 30, 2012	December 31, 2011

	(in millions)
Regulatory hedges	$(164)	$(221)
Cash flow hedges	(1)	(1)
Not designated	(5)	(9)

Total fair value	$(170)	$(231)

Energy-related derivative contracts which are designated as regulatory hedges relate to the traditional operating companies’ fuel-hedging programs, where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the fuel cost recovery clauses. Gains and losses on energy-related derivatives that are designated as cash flow hedges are mainly used by Southern Power to hedge anticipated purchases and sales and are initially deferred in OCI before being recognized in income in the same period as the hedged transaction. Gains and losses on energy-related derivative contracts that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.

Total net unrealized pre-tax gains (losses) recognized in income for the three and six months ended June 30, 2012 were $10 million and $4 million, respectively, and were not material for the corresponding periods in 2011.

Southern Company uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are market observable, and thus fall into Level 2. See Note (C) to the Condensed Financial Statements herein for further discussion on fair value measurements. The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at June 30, 2012 were as follows:


	June 30, 2012 Fair Value Measurements

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

	(in millions)
Level 1	$ —	$ —	$ —	$—
Level 2	(170)	(116)	(52)	(2)
Level 3	—	—	—	—

Fair value of contracts outstanding at end of period	$(170)	$(116)	$(52)	$ (2)

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) enacted in July 2010 could impact the use of over-the-counter derivatives by Southern Company. Regulations to implement the Dodd-Frank Act will impose additional requirements on the use of over-the-counter derivatives for both Southern Company and its subsidiaries and their derivative counterparties, which could affect both the use and cost of over-the-counter derivatives. Although all relevant regulations have not been finalized, Southern Company does not expect the impact of these rules to be material.

For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS—FINANCIAL CONDITION AND LIQUIDITY—“Market Price Risk” of Southern Company in Item 7 and Note 1 under “Financial Instruments” and Note 11 to the financial statements of Southern Company in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements herein.

Financing Activities

During the first six months of 2012, Southern Company issued approximately 9.7 million shares of common stock for $317 million through employee and director stock plans. Since mid-2011, Southern Company has issued additional equity only through its employee and director stock plans. Southern Company plans to use the proceeds received from stock option exercises during 2012 (including the $317 million received through June 30, 2012) and 2013 to repurchase shares to partially offset the incremental shares issued under its employee and director stock plans. Pursuant to board approval, Southern Company may repurchase shares through open market purchases or privately negotiated transactions, in accordance with applicable securities laws.

In addition, Southern Company is not currently issuing shares of common stock through the Southern Investment Plan or its employee savings plan. All sales under the Southern Investment Plan and the employee savings plan are currently being funded with shares acquired on the open market by the independent plan administrators.

The following table outlines the debt financing activities during the first six months of 2012:


Company	Senior Note Issuances	Senior Note Redemptions and Maturities	Pollution Control Bond Issuances	Pollution Control Bond Redemptions	Other Long-Term Debt Issuances	Other Long- Term Debt Redemptions and Maturities

			(in millions)
Southern Company	$ —	$500	$ —	$ —	$ —	$ —
Alabama Power	250	250	—	1	—	—
Georgia Power	1,500	—	234	49	—	250
Gulf Power	100	91	—	—	—	—
Mississippi Power	400	90	—	—	—	75
Southern Power	—	—	—	—	4	—

Total	$2,250	$931	$234	$ 50	$ 4	$325

Southern Company’s subsidiaries used the proceeds of the debt issuances shown in the table above for the redemptions and maturities shown in the table above, to repay short-term indebtedness, and for general corporate purposes, including their respective continuous construction programs.

On January 17, 2012, Southern Company’s $500 million aggregate principal amount of Series 2007A 5.30% Senior Notes matured.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On March 6, 2012, Mississippi Power received a $150 million interest-bearing refundable deposit from SMEPA to be applied to the sale price for the pending sale of an undivided interest in the Kemper IGCC. Until the acquisition is closed, the deposit bears interest at Mississippi Power’s AFUDC rate, which was 9.967% per annum at June 30, 2012 and is refundable to SMEPA upon termination of the asset purchase agreement related to such purchase, within 60 days of a request by SMEPA for a full or partial refund, or within 15 days at SMEPA’s discretion in the event that Mississippi Power is assigned a senior unsecured credit rating of BBB+ or lower by S&P or Baa1 or lower by Moody’s or ceases to be rated by either of these rating agencies.

Subsequent to June 30, 2012, Georgia Power redeemed $300 million aggregate principal amount of its Series 2007D 6.375% Senior Notes due July 15, 2047.

Subsequent to June 30, 2012, $85 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series 2005 and $100 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Second Series 2005 were redeemed.

In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Company and its subsidiaries plan to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

PART I

Item 3. Quantitative And Qualitative Disclosures About Market Risk.

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FINANCIAL CONDITION AND LIQUIDITY—“Market Price Risk” herein for each registrant and Note 1 to the financial statements of each registrant under “Financial Instruments,” Note 11 to the financial statements of Southern Company, Alabama Power, and Georgia Power, Note 10 to the financial statements of Gulf Power and Mississippi Power, and Note 9 to the financial statements of Southern Power in Item 8 of the Form 10-K. Also, see Note (H) to the Condensed Financial Statements herein for information relating to derivative instruments.

Item 4. Controls and Procedures.

(a)

Evaluation of disclosure controls and procedures.

As of the end of the period covered by this quarterly report, Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power conducted separate evaluations under the supervision and with the participation of each company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon these evaluations, the Chief Executive Officer and the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures are effective.

(b)

Changes in internal controls.

There have been no changes in 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 second quarter 2012 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.

ALABAMA POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2012			2011			2012			2011
	(in millions)						(in millions)
Operating Revenues:
Retail revenues	$	1,254		$	1,244		$	2,346		$	2,370
Wholesale revenues, non-affiliates		70			70			131			138
Wholesale revenues, affiliates		6			75			20			150
Other revenues		47			51			96			102

Total operating revenues		1,377			1,440			2,593			2,760

Operating Expenses:
Fuel		343			428			649			823
Purchased power, non-affiliates		17			17			32			28
Purchased power, affiliates		66			57			106			103
Other operations and maintenance		316			290			637			587
Depreciation and amortization		160			159			317			316
Taxes other than income taxes		85			85			171			170

Total operating expenses		987			1,036			1,912			2,027

Operating Income		390			404			681			733
Other Income and (Expense):
Allowance for equity funds used during construction		4			6			9			11
Interest income		4			5			8			9
Interest expense, net of amounts capitalized		(73	)		(77	)		(146	)		(151	)
Other income (expense), net		(4	)		(7	)		(11	)		(13	)

Total other income and (expense)		(69	)		(73	)		(140	)		(144	)

Earnings Before Income Taxes		321			331			541			589
Income taxes		126			131			210			227

Net Income		195			200			331			362
Dividends on Preferred and Preference Stock		10			10			20			20

Net Income After Dividends on Preferred and Preference Stock	$	185		$	190		$	311		$	342

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2012			2011			2012			2011
	(in millions)						(in millions)
Net Income After Dividends on Preferred and Preference Stock	$	185		$	190		$	311		$	342
Other comprehensive income (loss):
Qualifying hedges:
Changes in fair value, net of tax of $(7), $(1), $(4) and $1, respectively		(11	)		1			(7	)		3
Reclassification adjustment for amounts included in net income, net of tax of $-, $(1), $- and $(1), respectively		—			(2	)		—			(2	)

Total other comprehensive income (loss)		(11	)		(1	)		(7	)		1

Comprehensive Income	$	174		$	189		$	304		$	343

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

ALABAMA POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Six Months Ended June 30,
	2012			2011
	(in millions)
Operating Activities:
Net income	$	331		$	362
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization, total		380			373
Deferred income taxes		85			174
Allowance for equity funds used during construction		(9	)		(11	)
Pension, postretirement, and other employee benefits		(8	)		(24	)
Stock based compensation expense		6			4
Other, net		(24	)		(3	)
Changes in certain current assets and liabilities —
-Receivables		(46	)		(57	)
-Fossil fuel stock		(125	)		13
-Materials and supplies		(6	)		(5	)
-Other current assets		(31	)		(66	)
-Accounts payable		(145	)		(77	)
-Accrued taxes		128			193
-Accrued compensation		(45	)		(52	)
-Other current liabilities		(10	)		(5	)

Net cash provided from operating activities		481			819

Investing Activities:
Property additions		(436	)		(485	)
Distribution of restricted cash from pollution control revenue bonds		—			11
Nuclear decommissioning trust fund purchases		(88	)		(252	)
Nuclear decommissioning trust fund sales		88			252
Cost of removal, net of salvage		(7	)		(47	)
Change in construction payables		(12	)		(14	)
Other investing activities		(9	)		(22	)

Net cash used for investing activities		(464	)		(557	)

Financing Activities:
Proceeds —
Capital contributions from parent company		11			5
Senior notes issuances		250			700
Redemptions —
Pollution control revenue bonds		(1	)		—
Senior notes		(250	)		(650	)
Payment of preferred and preference stock dividends		(20	)		(20	)
Payment of common stock dividends		(270	)		(277	)
Other financing activities		(3	)		(12	)

Net cash used for financing activities		(283	)		(254	)

Net Change in Cash and Cash Equivalents		(266	)		8
Cash and Cash Equivalents at Beginning of Period		344			154

Cash and Cash Equivalents at End of Period	$	78		$	162

Supplemental Cash Flow Information:
Cash paid (received) during the period for —
Interest (net of $3 and $5 capitalized for 2012 and 2011, respectively)	$	136		$	141
Income taxes, net		31			(100	)
Noncash transactions—accrued property additions at end of period		7			14

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)


Assets	At June 30, 2012			At December 31, 2011
		(in millions)
Current Assets:
Cash and cash equivalents	$	78		$	344
Restricted cash and cash equivalents		—			1
Receivables —
Customer accounts receivable		368			332
Unbilled revenues		160			126
Under recovered regulatory clause revenues		16			—
Other accounts and notes receivable		34			35
Affiliated companies		57			79
Accumulated provision for uncollectible accounts		(9	)		(10	)
Fossil fuel stock, at average cost		469			344
Materials and supplies, at average cost		380			375
Vacation pay		59			59
Prepaid expenses		135			74
Other regulatory assets, current		32			44
Other current assets		8			11

Total current assets		1,787			1,814

Property, Plant, and Equipment:
In service		21,110			20,809
Less accumulated provision for depreciation		7,562			7,344

Plant in service, net of depreciation		13,548			13,465
Nuclear fuel, at amortized cost		347			330
Construction work in progress		390			374

Total property, plant, and equipment		14,285			14,169

Other Property and Investments:
Equity investments in unconsolidated subsidiaries		61			62
Nuclear decommissioning trusts, at fair value		571			540
Miscellaneous property and investments		73			73

Total other property and investments		705			675

Deferred Charges and Other Assets:
Deferred charges related to income taxes		529			532
Prepaid pension costs		74			59
Deferred under recovered regulatory clause revenues		29			48
Other regulatory assets, deferred		1,001			994
Other deferred charges and assets		144			186

Total deferred charges and other assets		1,777			1,819

Total Assets	$	18,554		$	18,477

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)


Liabilities and Stockholder’s Equity	At June 30, 2012			At December 31, 2011
	(in millions)
Current Liabilities:
Securities due within one year	$	500		$	500
Accounts payable —
Affiliated		176			203
Other		196			322
Customer deposits		86			85
Accrued taxes —
Accrued income taxes		99			32
Other accrued taxes		80			34
Accrued interest		65			63
Accrued vacation pay		48			48
Accrued compensation		51			95
Liabilities from risk management activities		54			54
Other regulatory liabilities, current		3			18
Other current liabilities		40			38

Total current liabilities		1,398			1,492

Long-term Debt		5,630			5,632

Deferred Credits and Other Liabilities:
Accumulated deferred income taxes		3,319			3,257
Deferred credits related to income taxes		81			83
Accumulated deferred investment tax credits		145			149
Employee benefit obligations		339			343
Asset retirement obligations		571			553
Other cost of removal obligations		736			703
Other regulatory liabilities, deferred		165			156
Other deferred credits and liabilities		84			82

Total deferred credits and other liabilities		5,440			5,326

Total Liabilities		12,468			12,450

Redeemable Preferred Stock		342			342

Preference Stock		343			343

Common Stockholder’s Equity:
Common stock, par value $40 per share —
Authorized - 40,000,000 shares
Outstanding - 30,537,500 shares		1,222			1,222
Paid-in capital		2,207			2,182
Retained earnings		1,997			1,956
Accumulated other comprehensive loss		(25	)		(18	)

Total common stockholder’s equity		5,401			5,342

Total Liabilities and Stockholder’s Equity	$	18,554		$	18,477

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

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SECOND QUARTER 2012 vs. SECOND QUARTER 2011

AND

YEAR-TO-DATE 2012 vs. YEAR-TO-DATE 2011

OVERVIEW

Alabama Power operates as a vertically integrated utility providing electricity to retail and wholesale customers within its traditional service territory located within the State of Alabama in addition 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 constructive regulatory environment, to maintain and grow energy sales given economic conditions, and to effectively manage and secure timely recovery of costs. These costs include those related to projected long-term demand growth, increasingly stringent environmental standards, fuel, capital expenditures, and restoration following major storms. Appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Alabama Power for the foreseeable future.

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

RESULTS OF OPERATIONS

Net Income

Alabama Power’s net income after dividends on preferred and preference stock for the second quarter 2012 was $185 million compared to $190 million for the corresponding period in 2011. Alabama Power’s net income after dividends on preferred and preference stock for year-to-date 2012 was $311 million compared to $342 million for the corresponding period in 2011. The decreases for the second quarter and year-to-date 2012 when compared to the corresponding periods in 2011 were related to decreases in weather-related revenues due to milder weather and increases in operations and maintenance expenses in 2012. These decreases were partially offset by increases in revenues associated with the elimination of a tax-related adjustment under Alabama Power’s rate structure and increases in energy sales due to increases in usage and customer growth. See BUSINESS – “Rate Matters – Rate Structure and Cost Recovery Plans” of Alabama Power in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Rate Adjustments” of Alabama Power in Item 7 of the Form 10-K for information regarding the rate structure of Alabama Power.

Retail Revenues

In the second quarter 2012, retail revenues were $1.25 billion compared to $1.24 billion for the corresponding period in 2011. For year-to-date 2012, retail revenues were $2.35 billion compared to $2.37 billion for the corresponding period in 2011.

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Details of the change to retail revenues were as follows:


	Second Quarter 2012		Year-to-Date 2012

	(in millions)	(% change)	(in millions)	(% change)
Retail – prior year	$1,244		$2,370
Estimated change in –
Rates and pricing	31	2.5	56	2.4
Sales growth (decline)	25	2.0	45	1.9
Weather	(38)	(3.0)	(88)	(3.7)
Fuel and other cost recovery	(8)	(0.7)	(37)	(1.6)

Retail – current year	$1,254	0.8%	$2,346	(1.0)%

Revenues attributable to changes in sales increased in the second quarter and year-to-date 2012 when compared to the corresponding periods in 2011. Weather-adjusted residential KWH energy sales increased 5.6% in the second quarter and 3.5% for year-to-date 2012 as a result of increases in usage and customer growth. Weather-adjusted commercial KWH energy sales increased 3.6% in the second quarter 2012 and 1.7% for year-to-date 2012 as a result of increases in usage. Industrial KWH energy sales increased 2.3% in the second quarter 2012 and 2.8% for year-to-date 2012 due to an increase in usage resulting from changes in production levels primarily in the primary metals, chemicals, automotive and plastics, and forest products sectors, partially offset by decreases in the stone, clay, and glass and textiles sectors.

Revenues resulting from changes in weather decreased in the second quarter and year-to-date 2012 when compared to the corresponding periods in 2011. Alabama Power’s service territory experienced milder weather conditions in the second quarter and year-to-date 2012 when compared to the corresponding periods in the prior year. The resulting decreases for the second quarter 2012 were 5.4% and 2.5% for residential and commercial sales revenue, respectively. The resulting decreases for year-to-date 2012 were 7.1% and 2.1% for residential and commercial sales revenue, respectively.

Fuel and other cost recovery revenues decreased in the second quarter and year-to-date 2012 when compared to the corresponding periods in 2011 primarily due to lower fuel costs associated with decreased KWH generation and lower average cost per KWH generated due to lower natural gas prices. Electric rates include provisions to recognize the full recovery of fuel costs, purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with the NDR. Under these provisions, fuel and other cost recovery revenues generally equal fuel and other cost recovery expenses and do not affect net income.

See BUSINESS – “Rate Matters – Rate Structure and Cost Recovery Plans” of Alabama Power in Item 1, MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Rate Adjustments” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information.

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Wholesale Revenues – Non-Affiliates

Wholesale revenues from sales to non-affiliates will vary depending on the market prices of available wholesale energy compared to the cost of Alabama Power’s and the Southern Company system’s generation, demand for energy within the Southern Company system’s service territory, and availability of the Southern Company system’s generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income.

In the second quarter 2012 and the second quarter 2011, wholesale revenues from non-affiliates were $70 million. For year-to-date 2012, wholesale revenues from non-affiliates were $131 million compared to $138 million for the corresponding period in 2011. The decrease was primarily due to a 4.1% decrease in KWH sales and a 1.2% decrease in the price of energy.

Wholesale Revenues – Affiliates

Wholesale revenues from sales to affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost and energy purchases are generally offset by energy revenues through Alabama Power’s energy cost recovery clauses.

In the second quarter 2012, wholesale revenues from affiliates were $6 million compared to $75 million for the corresponding period in 2011. The decrease was primarily due to a 90.2% decrease in KWH sales.

For year-to-date 2012, wholesale revenues from affiliates were $20 million compared to $150 million for the corresponding period in 2011. The decrease was due to an 82.6% decrease in KWH sales and a 23.5% decrease in the price of energy.

Fuel and Purchased Power Expenses


	Second Quarter 2012 vs. Second Quarter 2011		Year-to-Date 2012 vs. Year-to-Date 2011

	(change in millions)	(% change)	(change in millions)	(% change)
Fuel	$(85)	(19.9)	$(174)	(21.1)
Purchased power – non-affiliates	—	—	4	14.3
Purchased power – affiliates	9	15.8	3	2.9

Total fuel and purchased power expenses	$(76)		$(167)

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In the second quarter 2012, total fuel and purchased power expenses were $426 million compared to $502 million for the corresponding period in 2011. The decrease was primarily due to a $64 million decrease related to a reduction in total KWHs generated as a result of milder weather in the second quarter 2012, a $22 million decrease in the cost of fuel, and a $46 million decrease in the average cost of purchased power, partially offset by a $55 million increase in KWHs purchased.

For year-to-date 2012, total fuel and purchased power expenses were $787 million compared to $954 million for the corresponding period in 2011. The decrease was primarily due to a $149 million decrease related to a reduction in total KWHs generated as a result of milder weather for year-to-date 2012, a $25 million decrease in the cost of fuel, and a $51 million decrease in the average cost of purchased power, partially offset by a $58 million increase in KWHs purchased.

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

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


	Second Quarter 2012	Second Quarter 2011	Year-to-Date 2012	Year-to-Date 2011

Total generation (billions of KWHs)	13	17	27	33
Total purchased power (billions of KWHs)	2	1	3	2

Sources of generation (percent) –
Coal	53	56	48	56
Nuclear	24	23	26	23
Gas	21	16	20	15
Hydro	2	5	6	6

Cost of fuel, generated (cents per net KWH) –
Coal	3.29	3.13	3.35	3.06
Nuclear	0.82	0.64	0.78	0.65
Gas	2.76	4.19	2.88	4.18

Average cost of fuel, generated (cents per net KWH)^(a)	2.57	2.71	2.54	2.67
Average cost of purchased power (cents per net KWH)^(b)	3.89	6.02	4.14	5.66

(a)	KWHs generated by hydro are excluded from the average cost of fuel, generated.

(b)	Average cost of purchased power includes fuel purchased by Alabama Power for tolling agreements where power is generated by the provider.

Fuel

In the second quarter 2012, fuel expense was $343 million compared to $428 million for the corresponding period in 2011. The $85 million decrease was due to a 34.1% decrease in the average cost of KWHs generated by natural gas, which excludes fuel associated with tolling agreements, and a 23.5% decrease in KWHs generated by coal, slightly offset by a 6.9% increase in KWHs generated by natural gas.

For year-to-date 2012, fuel expense was $649 million compared to $823 million for the corresponding period in 2011. The $174 million decrease was due to a 31.0% decrease in the average cost of KWHs generated by natural gas, which excludes fuel associated with tolling agreements, and a 29.4% decrease in KWHs generated by coal, slightly offset by an 8.4% increase in KWHs generated by natural gas.

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Purchased Power – Non-Affiliates

In the second quarter 2012 and the second quarter 2011, purchased power expense from non-affiliates was $17 million. For year-to-date 2012, purchased power expense from non-affiliates was $32 million compared to $28 million for the corresponding period in 2011. The increase was related to a 388.0% increase in the amount of energy purchased, partially offset by a 76.6% decrease in the average cost per KWH.

Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system’s generation, demand for energy within the Southern Company system’s service territory, and the availability of the Southern Company system’s generation.

Purchased Power – Affiliates

In the second quarter 2012, purchased power expense from affiliates was $66 million compared to $57 million for the corresponding period in 2011. The increase was related to a 54.4% increase in the amount of energy purchased, partially offset by a 26.2% decrease in the average cost per KWH.

For year-to-date 2012, purchased power expense from affiliates was $106 million compared to $103 million for the corresponding period in 2011. The increase was related to a 23.2% increase in the amount of energy purchased, partially offset by a 17.0% decrease in the average cost per KWH.

Energy purchases from affiliates will vary depending on demand for energy 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 or other contractual agreements, as approved by the FERC.

Other Operations and Maintenance Expenses

In the second quarter 2012, other operations and maintenance expenses were $316 million compared to $290 million for the corresponding period in 2011. Administrative and general expenses increased $15 million primarily due to pension and other benefit-related expenses. Distribution expenses increased $7 million primarily due to increases in vegetation management and overhead line maintenance costs. Steam production expenses increased $3 million due to environmental mandates which were partially offset by revenues associated with Rate CNP Environmental.

For year-to-date 2012, other operations and maintenance expenses were $637 million compared to $587 million for the corresponding period in 2011. Administrative and general expenses increased $33 million primarily due to pension and other benefit-related expenses, affiliated service company expenses, labor expenses, and property insurance expenses. Nuclear production expenses increased $5 million primarily due to the amortization of nuclear outage expenses of $13 million, partially offset by a decrease in operation costs related to decreases in labor. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Nuclear Outage Accounting Order” of Alabama Power in Item 7 of the Form 10-K for additional information. Additionally, distribution and transmission expenses increased $4 million due to increases in labor expenses and vegetation management.

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Income Taxes

In the second quarter 2012, income taxes were $126 million compared to $131 million for the corresponding period in 2011. For year-to-date 2012, income taxes were $210 million compared to $227 million for the corresponding period in 2011. The decreases for the second quarter and year-to-date 2012 were primarily due to lower pre-tax earnings as a result of lower revenues due to milder weather and an increase in operations and maintenance expense.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Alabama Power’s future earnings potential. The level of Alabama Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Alabama Power’s primary business of selling electricity. These factors include Alabama Power’s ability to maintain a constructive regulatory environment that continues to allow for the timely recovery of prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon maintaining energy sales which are subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in Alabama Power’s service territory. Changes in economic conditions impact sales for Alabama Power and the pace of the economic recovery remains uncertain. The timing and extent of the economic recovery will impact growth and may impact future earnings. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Alabama Power in Item 7 of the Form 10-K.

Environmental Matters

Compliance costs related to federal and state environmental statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. Environmental compliance spending over the next several years may differ materially from the amounts estimated. The timing, specific requirements, and estimated costs could change as environmental statutes and regulations are adopted or modified. Further, higher costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and financial condition. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.

New Source Review Actions

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. On February 23, 2012, the EPA filed a motion in the U.S. District Court for the Northern District of Alabama seeking vacatur of the judgment and recusal of the judge in the case involving Alabama Power. The U.S. District Court for the Northern District of Alabama has not ruled on the EPA’s motion seeking vacatur of the judgment. The ultimate outcome of this matter cannot be determined at this time.

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Climate Change Litigation

Hurricane Katrina Case

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Climate Change Litigation – Hurricane Katrina Case” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Environmental Matters – Climate Change Litigation – Hurricane Katrina Case” in Item 8 of the Form 10-K for additional information. On March 20, 2012, the U.S. District Court for the Southern District of Mississippi dismissed the amended class action complaint filed in May 2011 by the plaintiffs. On April 16, 2012, the plaintiffs appealed the case to the U.S. Court of Appeals for the Fifth Circuit. The ultimate outcome of this matter cannot be determined at this time.

Environmental Statutes and Regulations

General

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – General” of Alabama Power in Item 7 of the Form 10-K for information regarding Alabama Power’s estimated base level capital expenditures to comply with existing statutes and regulations for 2012 through 2014, as well as Alabama Power’s preliminary estimates for potential incremental environmental compliance investments associated with complying with the EPA’s final Mercury and Air Toxics Standards (MATS) rule (formerly referred to as the Utility Maximum Achievable Control Technology rule) and the EPA’s proposed water and coal combustion byproducts rules.

Alabama Power is continuing to develop its compliance strategy and to assess the potential costs of complying with the MATS rule and the EPA’s proposed water and coal combustion byproducts rules. As part of the development of its compliance strategy for the MATS rule, Alabama Power has entered into agreements for the construction of baghouses to control the emissions of mercury and particulates from generating units with an aggregate capacity of 1,901 MWs. While further analysis of the MATS rule is required and the ultimate costs remain uncertain, the compliance decisions made through the second quarter 2012 have allowed Alabama Power to further develop its cost estimates for compliance with the MATS rule. As a result, estimated compliance costs for the MATS rule in the 2012 through 2014 period have been revised from up to $1.2 billion to approximately $660 million as follows:


	2012		2013		2014

	(in millions)
MATS rule	$	65	$	155	$	440

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition, Alabama Power has further developed its estimated capital expenditures and associated timing of these expenditures to comply with the proposed water and coal combustion byproducts rules, resulting in a reduction, due primarily to timing, in estimated compliance costs for 2012 through 2014. Potential incremental environmental compliance investments to comply with the proposed water and coal combustion byproducts rules have been revised from up to $630 million to approximately $175 million over the 2012 through 2014 period, based on the assumption that coal combustion byproducts will continue to be regulated as non-hazardous solid waste under the proposed rule. These potential incremental environmental compliance investments are estimated as follows:

2012

2013

2014

(in millions)

Proposed water and coal combustion byproducts rules

$10

$160

While Alabama Power’s ultimate costs of compliance with the MATS rule and the proposed water and coal combustion byproducts rules remain uncertain, Alabama Power estimates that compliance costs through 2021 (assuming that coal combustion byproducts will continue to be regulated as non-hazardous solid waste under the proposed rule) will be at the low end of the $5 billion to $7 billion range provided in the Form 10-K.

Alabama Power’s ultimate compliance strategy and actual future environmental capital expenditures are dependent on a final assessment of the MATS rule and will be affected by the final requirements of new or revised environmental regulations that are promulgated; the outcome of any legal challenges to the environmental rules; the cost, availability, and existing inventory of emissions allowances; and Alabama Power’s fuel mix. Compliance costs may arise from retirement and replacement of existing units, installation of additional environmental controls, upgrades to the transmission system, and changing fuel sources for certain existing units. Alabama Power’s preliminary analysis further indicates that the short timeframe for compliance with the MATS rule could significantly affect electric system reliability and cause an increase in costs of materials and services. The ultimate outcome of these matters cannot be determined at this time.

As part of SEGCO’s environmental compliance strategy, the Board of Directors of SEGCO approved adding natural gas as the primary fuel source in 2015 for its 1,000 MWs of generating capacity and the construction of the necessary natural gas pipeline. SEGCO is jointly owned by Alabama Power and Georgia Power. The capacity of SEGCO’s units is sold to Alabama Power and Georgia Power through a PPA. See Note 4 to the financial statements of Alabama Power in Item 8 of the Form 10-K for additional information. The impact of SEGCO’s ultimate compliance strategy on the PPA costs cannot be determined at this time; however, if such costs cannot continue to be recovered through retail rates, they could have a material impact on Alabama Power’s financial statements.

Air Quality

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Alabama Power in Item 7 of the Form 10-K for additional information on the eight-hour ozone and fine particulate matter air quality standards and the MATS rule.

On May 1, 2012, the EPA released its final determination of nonattainment areas based on the 2008 eight-hour ozone air quality standards. None of the areas within Alabama Power’s service territory were designated as nonattainment areas.

On June 14, 2012, the EPA proposed a rule that would increase the stringency of the fine particulate matter national ambient air quality standards. If adopted, the proposed standards could result in the designation of new nonattainment areas within Alabama Power’s service territory. As part of a related settlement, the EPA has agreed to finalize the proposed rule by December 14, 2012. The ultimate outcome of this rulemaking will depend on the final rule and the outcome of any legal challenges and cannot be determined at this time.

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Numerous petitions for administrative reconsideration of the MATS rule, including a petition by Southern Company and its subsidiaries, including Alabama Power, have been filed with the EPA. Challenges to the final rule have also been filed in the U.S. District Court for the District of Columbia by numerous states, environmental organizations, industry groups, and others. The impact of the MATS rule will depend on the outcome of these and any other legal challenges and, therefore, cannot be determined at this time.

Water Quality

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Water Quality” of Alabama Power in Item 7 of the Form 10-K for additional information on the proposed rules regarding certain cooling water intake structures. The EPA has entered into an amended settlement agreement to extend the deadline for issuing a final rule until June 27, 2013. The ultimate outcome of this rulemaking will depend on the final rule and the outcome of any legal challenges and cannot be determined at this time.

Coal Combustion Byproducts

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Coal Combustion Byproducts” of Alabama Power in Item 7 of the Form 10-K for additional information. Environmental groups and other parties have filed lawsuits in the U.S. District Court for the District of Columbia seeking to require the EPA to complete its rulemaking process and issue final regulations pertaining to the regulation of coal combustion byproducts. The ultimate outcome of these matters cannot be determined at this time.

Global Climate Issues

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Global Climate Issues” of Alabama Power in Item 7 of the Form 10-K for additional information.

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PSC Matters

Rate CNP

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Rate Adjustments – Rate CNP” 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 for additional information regarding Alabama Power’s recovery of retail costs through Rate Certificated New Plant Power Purchase Agreement (Rate CNP) and Rate CNP Environmental. Alabama Power’s under recovered Rate CNP balance as of June 30, 2012 was $2 million as compared to $6 million at December 31, 2011. Alabama Power’s under recovered Rate CNP Environmental balance as of June 30, 2012 was $26 million as compared to $11 million at December 31, 2011. These under recovered balances at June 30, 2012 are included in deferred under recovered regulatory clause revenues on Alabama Power’s Condensed Balance Sheet herein. For Rate CNP, this classification is based on an estimate, which includes such factors as purchased power capacity and energy demand. For Rate CNP Environmental, this classification is based on an estimate, which includes such factors as costs to comply with environmental mandates and energy demand. A change in any of these factors could have a material impact on the timing of any recovery of the under recovered retail costs.

Retail Fuel Cost Recovery

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters – Fuel Cost Recovery” in Item 8 of the Form 10-K for information regarding Alabama Power’s fuel cost recovery. Alabama Power’s under recovered fuel costs as of June 30, 2012 totaled $16 million as compared to $31 million at December 31, 2011. These under recovered fuel costs at June 30, 2012 are included in under recovered regulatory clause revenues on Alabama Power’s Condensed Balance Sheet herein. This classification is based on an estimate which includes such factors as weather, generation availability, energy demand, and the price of energy. A change in any of these factors could have a material impact on the timing of any recovery of the under recovered fuel costs.

Natural Disaster Cost Recovery

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Natural Disaster Reserve” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters – Natural Disaster Reserve” in Item 8 of the Form 10-K for additional information regarding natural disaster cost recovery. At June 30, 2012, the NDR had an accumulated balance of $105 million, which is included in Alabama Power’s Condensed Balance Sheet herein under other regulatory liabilities, deferred. The accruals are reflected as operations and maintenance expenses in Alabama Power’s Condensed Statement of Income herein.

Income Tax Matters

Bonus Depreciation

In December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act include 100% bonus depreciation for property placed in service after September 8, 2010 and through 2011 (and for certain long-term construction projects to be placed in service in 2012) and 50% bonus depreciation for property placed in service in 2012 (and for certain long-term construction projects to be placed in service in 2013), which will have a positive impact on the future cash flows of Alabama Power through 2013. Consequently, Alabama Power’s positive cash flow benefit is estimated to be between $85 million and $110 million in 2012.

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Other Matters

Alabama Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Alabama Power is subject to certain claims and legal actions arising in the ordinary course of business. Alabama Power’s business activities are subject to extensive governmental regulation related to public health and the environment, such as regulation of air emissions and water discharges. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as air quality and water standards, has increased generally throughout the U.S. In particular, personal injury and other claims for damages caused by alleged exposure to hazardous materials, and common law nuisance claims for injunctive relief and property damage allegedly caused by greenhouse gas and other emissions, 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 in Note (B) 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 ultimate liabilities, if any, arising from such current proceedings would have a material effect on Alabama Power’s financial statements.

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Other Matters” of Alabama Power in Item 7 of the Form 10-K for additional information regarding the earthquake and tsunami that struck Japan in March 2011. On March 12, 2012, the NRC issued three orders and a request for information based on the NRC task force report recommendations that included, among other items, additional mitigation strategies for beyond-design-basis events, enhanced spent fuel pool instrumentation capabilities, hardened vents for certain classes of containment structures, site specific evaluations for seismic and flooding hazards, and various plant evaluations to ensure adequate coping capabilities during station blackout and other conditions. The staff of the NRC expects to issue additional implementation guidance by the end of August 2012. The final form and the resulting impact of any changes to safety requirements for nuclear reactors will be dependent on further review and action by the NRC and cannot be determined at this time. See RISK FACTORS of Alabama Power in Item 1A of the Form 10-K for a discussion of certain risks associated with the operation of nuclear generating units, including potential impacts that could result from a major incident at a nuclear facility anywhere in the world. The ultimate outcome of these events cannot be determined at this time.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Alabama Power prepares its financial statements in accordance with GAAP. 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 Pension and Other Postretirement Benefits.

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION AND LIQUIDITY

Overview

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Overview” of Alabama Power in Item 7 of the Form 10-K for additional information. Alabama Power’s financial condition remained stable at June 30, 2012. Alabama Power intends to continue to monitor its access to short-term and long-term capital markets as well as its bank credit arrangements to meet future capital and liquidity needs. See “Sources of Capital,” “Financing Activities,” and “Capital Requirements and Contractual Obligations” herein for additional information.

Net cash provided from operating activities totaled $481 million for the first six months of 2012, a decrease of $338 million as compared to the first six months of 2011. The decrease in cash provided from operating activities was primarily due to an increase in fossil fuel stock, a decrease in deferred income taxes, and the timing of income tax payments and refunds associated with bonus depreciation. Net cash used for investing activities totaled $464 million for the first six months of 2012 primarily due to gross property additions related to nuclear fuel and transmission, distribution, and steam generating equipment. Net cash used for financing activities totaled $283 million for the first six months of 2012. This was primarily due to the payment of common stock dividends. Fluctuations in cash flow from financing activities vary year to year based on capital needs and the maturity or redemption of securities.

Significant balance sheet changes for the first six months of 2012 include increases of $125 million in fossil fuel stock, at average cost, $116 million in property, plant, and equipment associated with routine property additions and nuclear fuel, $67 million in accrued income taxes, and $61 million in prepaid expenses and decreases of $266 million in cash and cash equivalents and $126 million in other accounts payable.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Alabama Power in Item 7 of the Form 10-K for a description of Alabama Power’s capital requirements for its construction program, including estimated capital expenditures to comply with existing environmental regulations, scheduled maturities of long-term debt, as well as the related interest, derivative obligations, preferred and preference stock dividends, leases, purchase commitments, and trust funding requirements. Approximately $500 million will be required through June 30, 2013 to fund maturities of long-term debt.

See FUTURE EARNINGS POTENTIAL – “Environmental Statutes and Regulations – General” herein for a description of the Alabama Power’s estimated capital expenditures to comply with the MATS rule and proposed water and coal combustion byproducts rules.

The construction program is subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; changes in environmental statutes and regulations; the outcome of any legal challenges to the environmental rules; changes in generating plants, including unit retirements and replacements and adding or changing fuel sources at existing units, to meet new regulatory requirements; changes in FERC rules and regulations; Alabama PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; storm impacts; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Sources of Capital

Alabama Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Alabama Power has primarily utilized funds from operating cash flows, short-term debt, security issuances, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Alabama Power in Item 7 of the Form 10-K for additional information.

Alabama Power’s current liabilities sometimes exceed current assets because of Alabama Power’s debt due within one year and the periodic use of short-term debt as a funding source primarily to meet scheduled maturities of long-term debt, as well as cash needs, which can fluctuate significantly due to the seasonality of the business.

At June 30, 2012, Alabama Power had approximately $78 million of cash and cash equivalents. Committed credit arrangements with banks at June 30, 2012, including expiration dates, were as follows:

Expires

Executable Term
Loans

Due Within One

Year^(a)

2012

2013

2014

and
Beyond

Total

Unused

One
Year

Two
Years

Term
Out

No Term
Out

(in millions)

$37

$101

$1,150

$1,288

$51

$—

$51

$52

(a)	Reflects facilities expiring on or before June 30, 2013.

See Note 6 to the financial statements of Alabama Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under “Bank Credit Arrangements” herein for additional information.

Most of these arrangements contain covenants that limit debt levels and typically contain cross default provisions that are restricted only to the indebtedness of Alabama Power. Alabama Power is currently in compliance with all such covenants. Alabama Power expects to renew its credit arrangements, as needed, prior to expiration. These credit arrangements provide liquidity support to Alabama Power’s commercial paper borrowings and variable rate pollution control revenue bonds. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of June 30, 2012 was approximately $793 million.

Alabama Power may meet short-term cash needs through its commercial paper program. Alabama Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Alabama Power and the other traditional operating companies. Proceeds from such issuances for the benefit of Alabama Power are loaned directly to Alabama Power. The obligations of each traditional operating company under these arrangements are several and there is no cross affiliate credit support.

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Details of short-term borrowings were as follows:

Short-term Debt at the
End of the Period

Short-term Debt During the Period ^(a)

Amount
Outstanding

Weighted
Average
Interest
Rate

Average
Outstanding

Weighted
Average
Interest
Rate

Maximum
Amount
Outstanding

(in millions)

June 30, 2012:

Commercial paper

$—

— %

$22

0.2%

$57

(a)	Average and maximum amounts are based upon daily balances during the period.

Management believes that the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, and cash.

Credit Rating Risk

Alabama Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to below BBB- and/or Baa3. These contracts are primarily for physical electricity purchases, fuel purchases, fuel transportation and storage, and energy price risk management. At June 30, 2012, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $311 million. Included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participant has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, any credit rating downgrade could impact Alabama Power’s ability to access capital markets, particularly the short-term debt market.

Market Price Risk

Alabama Power’s market risk exposure relative to interest rate changes for the second quarter 2012 has not changed materially compared to the December 31, 2011 reporting period. Since a significant portion of outstanding indebtedness remains at fixed rates, Alabama Power is not aware of any facts or circumstances that would significantly affect exposures on existing indebtedness in the near term. However, the impact on future financing costs cannot now be determined.

Due to cost-based rate regulation and other various cost recovery mechanisms, Alabama Power continues to have limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, Alabama Power enters into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, financial hedge contracts for natural gas purchases. Alabama Power continues to manage a retail fuel-hedging program implemented per the guidelines of the Alabama PSC. As such, Alabama Power had no material change in market risk exposure for the second quarter 2012 when compared with the December 31, 2011 reporting period.

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The changes in fair value of energy-related derivative contracts, substantially all of which are composed of regulatory hedges, for the three and six months ended June 30, 2012 were as follows:


	Second Quarter 2012 Changes		Year-to-Date 2012 Changes

	Fair Value
	(in millions)
Contracts outstanding at the beginning of the period, assets (liabilities), net		$(53)		$(48)
Contracts realized or settled		16		30
Current period changes^(a)		5		(14)

Contracts outstanding at the end of the period, assets (liabilities), net		$(32)		$(32)

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


	Second Quarter 2012 Changes		Year-to-Date 2012 Changes

	Fair Value
	(in millions)
Natural gas swaps		$16		$14
Natural gas options		5		2
Other energy-related derivatives		—		—

Total changes		$21		$16

The net hedge volumes of energy-related derivative contracts were as follows:


	June 30, 2012		March 31, 2012		December 31, 2011

	mmBtu Volume
	(in millions)
Commodity – Natural gas swaps		32		27		30
Commodity – Natural gas options		11		10		9

Total hedge volume		43		37		39

The weighted average swap contract cost above market prices was approximately $0.93 per mmBtu as of June 30, 2012, $1.72 per mmBtu as of March 31, 2012, and $1.45 per mmBtu as of December 31, 2011. The change in option premiums is primarily attributable to the volatility of the market and the underlying change in the natural gas price. A majority of the natural gas hedge gains and losses is recovered through Alabama Power’s retail fuel cost recovery clause.

Regulatory hedges relate to Alabama Power’s fuel-hedging program where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through Alabama Power’s fuel cost recovery clause.

Unrealized pre-tax gains and losses recognized in income for the three and six months ended June 30, 2012 and 2011 for energy-related derivative contracts that are not hedges were not material.

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Alabama Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are market observable, and thus fall into Level 2. See Note (C) to the Condensed Financial Statements herein for further discussion on fair value measurements. The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at June 30, 2012 were as follows:


	June 30, 2012 Fair Value Measurements

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

		(in millions)
Level 1		$—		$—		$—		$—
Level 2		(32)		(25)		(7)		—
Level 3		—		—		—		—

Fair value of contracts outstanding at end of period		$(32)		$(25)		$(7)		$—

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) enacted in July 2010 could impact the use of over-the-counter derivatives by Alabama Power. Regulations to implement the Dodd-Frank Act will impose additional requirements on the use of over-the-counter derivatives for both Alabama Power and its derivative counterparties, which could affect both the use and cost of over-the-counter derivatives. Although all relevant regulations have not been finalized, Alabama Power does not expect the impact of these rules to be material.

For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Alabama Power in Item 7 and Note 1 under “Financial Instruments” and Note 11 to the financial statements of Alabama Power in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements herein.

Financing Activities

In January 2012, Alabama Power issued $250 million aggregate principal amount of Series 2012A 4.10% Senior Notes due January 15, 2042. The proceeds were used for general corporate purposes, including Alabama Power’s continuous construction program. Alabama Power settled $100 million of interest rate swaps related to this issuance at a loss of $1 million. The loss is being amortized to interest expense, in earnings, over 10 years.

In March 2012, Alabama Power redeemed approximately $1 million aggregate principal amount of The Industrial Development Board of the Town of West Jefferson Solid Waste Disposal Revenue Bonds (Alabama Power Company Miller Plant Project), Series 2008.

In April 2012, Alabama Power redeemed $250 million aggregate principal amount of its Series 2007B 5.875% Senior Notes due April 1, 2047.

In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Alabama Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

GEORGIA POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2012			2011			2012			2011
	(in millions)						(in millions)
Operating Revenues:
Retail revenues	$	1,857		$	2,070		$	3,451		$	3,885
Wholesale revenues, non-affiliates		75			97			141			180
Wholesale revenues, affiliates		6			16			9			27
Other revenues		82			82			164			162

Total operating revenues		2,020			2,265			3,765			4,254

Operating Expenses:
Fuel		572			784			1,012			1,461
Purchased power, non-affiliates		94			96			187			170
Purchased power, affiliates		129			157			288			320
Other operations and maintenance		411			419			845			841
Depreciation and amortization		185			178			373			351
Taxes other than income taxes		94			94			181			181

Total operating expenses		1,485			1,728			2,886			3,324

Operating Income		535			537			879			930
Other Income and (Expense):
Allowance for equity funds used during construction		13			22			26			47
Interest expense, net of amounts capitalized		(90	)		(71	)		(181	)		(167	)
Other income (expense), net		(6	)		(5	)		(9	)		(6	)

Total other income and (expense)		(83	)		(54	)		(164	)		(126	)

Earnings Before Income Taxes		452			483			715			804
Income taxes		152			169			244			280

Net Income		300			314			471			524
Dividends on Preferred and Preference Stock		5			5			9			9

Net Income After Dividends on Preferred and Preference Stock	$	295		$	309		$	462		$	515

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2012		2011		2012		2011
	(in millions)				(in millions)
Net Income After Dividends on Preferred and Preference Stock	$	295	$	309	$	462	$	515
Other comprehensive income (loss):
Qualifying hedges:
Reclassification adjustment for amounts included in net income, net of tax of $1, $1, $1 and $1, respectively		—		—		1		1

Total other comprehensive income (loss)		—		—		1		1

Comprehensive Income	$	295	$	309	$	463	$	516

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

GEORGIA POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Six Months Ended June 30,
	2012			2011
	(in millions)
Operating Activities:
Net income	$	471		$	524
Adjustments to reconcile net income to net cash provided from operating activities —
Depreciation and amortization, total		458			426
Deferred income taxes		128			189
Allowance for equity funds used during construction		(26	)		(47	)
Retail fuel cost over recovery—long-term		44			—
Deferred expenses		26			33
Other, net		(3	)		(73	)
Changes in certain current assets and liabilities —
-Receivables		19			(100	)
-Fossil fuel stock		(147	)		55
-Prepaid income taxes		13			77
-Other current assets		8			(14	)
-Accounts payable		(37	)		60
-Accrued taxes		(77	)		(123	)
-Accrued compensation		(60	)		(42	)
-Retail fuel cost over recovery—short-term		55			—
-Other current liabilities		43			46

Net cash provided from operating activities		915			1,011

Investing Activities:
Property additions		(812	)		(931	)
Investment of restricted cash		(234	)		—
Distribution of restricted cash		49			—
Nuclear decommissioning trust fund purchases		(488	)		(1,152	)
Nuclear decommissioning trust fund sales		486			1,149
Cost of removal, net of salvage		(34	)		(9	)
Change in construction payables, net of joint owner portion		(161	)		34
Other investing activities		(14	)		(12	)

Net cash used for investing activities		(1,208	)		(921	)

Financing Activities:
Decrease in notes payable, net		(513	)		(253	)
Proceeds —
Capital contributions from parent company		18			183
Pollution control revenue bonds issuances		234			250
Senior notes issuances		1,500			550
Other long-term debt issuances		—			250
Redemptions —
Pollution control revenue bonds		(49	)		(197	)
Senior notes		—			(101	)
Other long-term debt		(250	)		(300	)
Payment of preferred and preference stock dividends		(9	)		(9	)
Payment of common stock dividends