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<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>3. CONTINGENCIES AND REGULATORY MATTERS</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><b>General Litigation Matters</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Southern Company and its subsidiaries are subject to certain claims and legal actions arising in
the ordinary course of business. In addition, 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 opacity and air
and water quality standards, has increased generally throughout the United States. 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 herein, management does not
anticipate that the liabilities, if any, arising from such current proceedings would have a
material adverse effect on Southern Company’s financial statements.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Mirant Matters</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Mirant Corporation (Mirant) was an energy company with businesses that included independent power
projects and energy trading and risk management companies in the U.S. and selected other countries.
It was a wholly-owned subsidiary of Southern Company until its initial public offering in October
2000. In April 2001, Southern Company completed a spin-off to its shareholders of its remaining
ownership, and Mirant became an independent corporate entity.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In July 2003, Mirant and certain of its affiliates filed voluntary petitions for relief under
Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Texas.
The Bankruptcy Court entered an order confirming Mirant’s plan of reorganization in December 2005,
and Mirant announced that this plan became effective in January 2006. As part of the plan, Mirant
transferred substantially all of its assets and its restructured debt to a new corporation that
adopted the name Mirant Corporation (Reorganized Mirant).
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Under the terms of the separation agreements entered into in connection with the spin-off, Mirant
agreed to indemnify Southern Company for certain costs. As a result of Mirant’s bankruptcy,
Southern Company sought reimbursement as an unsecured creditor in Mirant’s Chapter 11 proceeding.
If Southern Company’s claims for indemnification with respect to these costs are allowed, then
Mirant’s indemnity obligations to Southern Company would constitute unsecured claims against Mirant
entitled to stock in Reorganized Mirant. As a result of the $202 million settlement on March 31,
2009 of another suit related to Mirant (MC Asset Recovery litigation), the maximum amount
Southern Company can assert by proof of claim in the Mirant bankruptcy is capped at $9.5 million.
See Note 5 under “Effective Tax Rate” for more information regarding the MC Asset Recovery
settlement. The final outcome of this matter cannot now be determined.
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<b>
</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Environmental Matters</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><b><i>New Source Review Actions</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In November 1999, the EPA brought a civil action in the U.S. District Court for the Northern
District of Georgia against certain Southern Company subsidiaries, including Alabama Power and
Georgia Power, alleging that these subsidiaries had violated the New Source Review (NSR) provisions
of the Clean Air Act and related state laws at certain coal-fired generating facilities. After
Alabama Power was dismissed from the original action, the EPA filed a separate action in January
2001 against Alabama Power in the U.S. District Court for the Northern District of Alabama. In
these lawsuits, the EPA alleges that NSR violations occurred at eight coal-fired generating
facilities operated by Alabama Power and Georgia Power, including facilities co-owned by
Mississippi Power and Gulf Power. The civil actions request penalties and injunctive relief,
including an order requiring installation of the best available control technology at the affected
units. The EPA concurrently issued notices of violation to Gulf Power and Mississippi Power
relating to Gulf Power’s Plant Crist and Mississippi Power’s Plant Watson. In early 2000, the EPA
filed a motion to amend its complaint to add Gulf Power and Mississippi Power as defendants based
on the allegations in the notices of violation. However, in March 2001, the court denied the
motion based on lack of jurisdiction, and the EPA has not re-filed. The original action, now
solely against Georgia Power, has been administratively closed since the spring of 2001, and the
case has not been reopened.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In June 2006, the U.S. District Court for the Northern District of Alabama entered a consent decree
between Alabama Power and the EPA, resolving a portion of the Alabama Power lawsuit relating to the
alleged NSR violations at Plant Miller. In July 2008, the U.S. District Court for the Northern
District of Alabama granted partial summary judgment in favor of Alabama Power with respect to its
other affected units regarding the proper legal test for determining whether projects are routine
maintenance, repair, and replacement and therefore are excluded from NSR permitting. The decision
did not resolve the case, which remains ongoing.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Southern Company believes that the traditional operating companies complied with applicable laws
and the EPA regulations and interpretations in effect at the time the work in question took place.
The Clean Air Act authorizes maximum civil penalties of $25,000 to $37,500 per day, per violation
at each generating unit, depending on the date of the alleged violation. An adverse outcome could
require substantial capital expenditures or affect the timing of currently budgeted capital
expenditures that cannot be determined at this time and could possibly require payment of
substantial penalties. Such expenditures could affect future results of operations, cash flows,
and financial condition if such costs are not recovered through regulated rates.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Carbon Dioxide Litigation</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><i>New York Case</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In July 2004, three environmental groups and attorneys general from eight states, each outside of
Southern Company’s service territory, and the corporation counsel for New York City filed
complaints in the U.S. District Court for the Southern District of New York against Southern
Company and four other electric power companies. The complaints allege that the companies’
emissions of carbon dioxide, a greenhouse gas, contribute to global warming, which the plaintiffs
assert is a public nuisance. Under common law public and private nuisance theories, the plaintiffs
seek a judicial order (1) holding each defendant jointly and severally liable for creating,
contributing to, and/or maintaining global warming and (2) requiring each of the defendants to cap
its emissions of carbon dioxide and then reduce those emissions by a specified percentage each year
for at least a decade. The plaintiffs have not, however, requested that damages be awarded in
connection with their claims. Southern Company believes these claims are without merit and notes
that the complaint cites no statutory or regulatory basis for the claims. In September 2005, the
U.S. District Court for the Southern District of New York granted Southern Company’s and the other
defendants’ motions to dismiss these cases. The plaintiffs filed an appeal to the U.S. Court of
Appeals for the Second Circuit in October 2005 and, on September 21, 2009, the U.S. Court of
Appeals for the Second Circuit reversed the district court’s ruling, vacating the dismissal of the
plaintiffs’ claim, and remanding the case to the district court. On November 5, 2009, the
defendants, including Southern Company, sought rehearing en banc, and the court’s ruling is subject
to potential appeal. Therefore, the ultimate outcome of these matters cannot be determined at this
time.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><i>Kivalina Case</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In February 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the U.S.
District Court for the Northern District of California against several electric utilities
(including Southern Company), several oil companies, and a coal company. The plaintiffs are the
governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being
destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions
of greenhouse gases by the defendants. The plaintiffs assert claims for public and private
nuisance and contend that some of the defendants have acted in concert and are therefore jointly
and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values
and for the cost of relocating the village, which is alleged to be $95 million to $400 million.
Southern Company believes that these claims are without merit and notes that the complaint cites no
statutory or regulatory basis for the claims. On September 30, 2009, the U.S. District Court for
the Northern District of California granted the defendants’ motions to dismiss the case based on
lack of jurisdiction and ruled the claims were barred by the political question doctrine and by the
plaintiffs’ failure to establish the standard for determining that the defendants’ conduct caused
the injury alleged. On November 5, 2009, the plaintiffs filed an appeal with the U.S. Court of
Appeals for the Ninth Circuit challenging the district court’s order dismissing the case. The
ultimate outcome of this matter cannot be determined at this time.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><i>Other Litigation</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Common law nuisance claims for injunctive relief and property damage allegedly caused by greenhouse
gas emissions have become more frequent, and courts have recently determined that private parties
and states have standing to bring such claims. For example, on October 16, 2009, the U.S. Court of
Appeals for the Fifth Circuit reversed the U.S. District Court for the Southern District of
Mississippi’s dismissal of private party claims against certain oil, coal, chemical, and utility
companies alleging damages as a result of Hurricane Katrina. In reversing the dismissal, the U.S.
Court of Appeals for the Fifth Circuit held that plaintiffs have standing to assert their nuisance,
trespass, and negligence claims and none of these claims are barred by the political question
doctrine. The Company is not currently a party to this litigation but the traditional operating
companies and Southern Power were named as defendants in an amended complaint which was rendered
moot in August 2007 by the U.S. District Court for the Southern District of Mississippi when such
court dismissed the original matter. The ultimate outcome of this matter cannot be determined at
this time.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Environmental Remediation</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Southern Company’s subsidiaries must comply with environmental laws and regulations that cover the
handling and disposal of waste and releases of hazardous substances. Under these various laws and
regulations, the subsidiaries may also incur substantial costs to clean up properties. The
traditional operating companies have each received authority from their respective state PSCs to
recover approved environmental compliance costs through regulatory mechanisms. Within limits
approved by the state PSCs, these rates are adjusted annually or as necessary.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Georgia Power’s environmental remediation liability as of December 31, 2009 was $12.5 million.
Georgia Power has been designated or identified as a potentially responsible party (PRP) at sites
governed by the Georgia Hazardous Site Response Act and/or by the federal Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA), including a large site in
Brunswick, Georgia on the CERCLA National Priorities List (NPL). The parties have completed the
removal of wastes from the Brunswick site as ordered by the EPA. Additional claims for recovery of
natural resource damages at this site or for the assessment and potential cleanup of other sites on
the Georgia Hazardous Sites Inventory and CERCLA NPL are anticipated.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">By letter dated September 30, 2008, the EPA advised Georgia Power that it has been designated as a
PRP at the Ward Transformer Superfund site located in Raleigh, North Carolina. Numerous other
entities have also received notices from the EPA. Georgia Power, along with other named PRPs, is
negotiating with the EPA to address cleanup of the site and reimbursement for past expenditures
related to work performed at the site. In addition, on April 30, 2009, two PRPs filed separate
actions in the U.S. District Court for the Eastern District of North Carolina against numerous
other PRPs, including Georgia Power, seeking contribution from the defendants for expenses incurred
by the plaintiffs related to work performed at a portion of the site. The ultimate outcome of
these matters will depend upon further environmental assessment and the ultimate number of PRPs and
cannot be determined at this time; however, it is not expected to have a material impact on
Southern Company’s financial statements.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Gulf Power’s environmental remediation liability includes estimated costs of environmental
remediation projects of approximately $65.2 million as of December 31, 2009. These estimated costs
relate to site closure criteria by the Florida Department of Environmental Protection (FDEP) for
potential impacts to soil and groundwater from herbicide applications at Gulf Power substations.
The schedule for completion of the remediation projects will be subject to FDEP approval. The
projects have been approved by the Florida PSC for recovery through Gulf Power’s environmental cost
recovery clause; therefore, there was no impact on net income as a result of these estimates.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The final outcome of these matters cannot now be determined. However, based on the currently known
conditions at these sites and the nature and extent of activities relating to these sites,
management does not believe that additional liabilities, if any, at these sites would be material
to the financial statements<i>.</i>
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<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>FERC Matters</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><b><i>Market-Based Rate Authority</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Each of the traditional operating companies and Southern Power has authorization from the FERC to
sell power to non-affiliates, including short-term opportunity sales, at market-based prices.
Specific FERC approval must be obtained with respect to a market-based contract with an affiliate.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In December 2004, the FERC initiated a proceeding to assess Southern Company’s generation market
power within its retail service territory. The ability to charge market-based rates in other
markets was not an issue in the proceeding. Any new market-based rate sales by any subsidiary of
Southern Company in Southern Company’s retail service territory entered into during a 15-month
refund period that ended in May 2006 could have been subject to refund to a cost-based rate level.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">On December 23, 2009, Southern Company and the FERC trial staff reached an agreement in principle
that would resolve the proceeding in its entirety. The agreement does not reflect any finding or
suggestion that any subsidiary of Southern Company possesses or has exercised any market power.
The agreement likewise does not require Southern Company to make any refunds related to sales
during the 15-month refund period. The agreement does provide for the traditional operating
companies and Southern Power to donate a total of $1.7 million to nonprofit organizations in the
states in which they operate for the purpose of offsetting the electricity bills of low-income
retail customers. The agreement is subject to review and approval by the FERC.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Intercompany Interchange Contract</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The Company’s generation fleet in its retail service territory is operated under the Intercompany
Interchange Contract (IIC), as approved by the FERC. In May 2005, the FERC initiated a new
proceeding to examine (1) the provisions of the IIC among the traditional operating companies,
Southern Power, and SCS, as agent, under the terms of which the power pool of Southern Company is
operated, (2) whether any parties to the IIC have violated the FERC’s standards of conduct
applicable to utility companies that are transmission providers, and (3) whether Southern Company’s
code of conduct defining Southern Power as a “system company” rather than a “marketing affiliate”
is just and reasonable. In connection with the formation of Southern Power, the FERC authorized
Southern Power’s inclusion in the IIC in 2000. The FERC also previously approved Southern
Company’s code of conduct.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In October 2006, the FERC issued an order accepting a settlement resolving the proceeding subject
to Southern Company’s agreement to accept certain modifications to the settlement’s terms.
Southern Company notified the FERC that it accepted the modifications. The modifications largely
involve functional separation and information restrictions related to marketing activities
conducted on behalf of Southern Power. In November 2006, Southern Company filed with the FERC a
compliance plan in connection with the order. In April 2007, the FERC approved, with certain
modifications, the plan submitted by Southern Company. Implementation of the plan did not have a
material impact on the Company’s financial statements. In November 2007, Southern Company notified
the FERC that the plan had been implemented. In December 2008, the FERC division of audits issued
for public comment its final audit report pertaining to compliance implementation and related
matters. No comments were submitted challenging the audit report’s findings of Southern Company’s
compliance. The proceeding remains open pending a decision from the FERC regarding the audit
report.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Right of Way Litigation</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Southern Company and certain of its subsidiaries, including Mississippi Power, have been named as
defendants in numerous lawsuits brought by landowners since 2001. The plaintiffs’ lawsuits claim
that defendants may not use, or sublease to third parties, some or all of the fiber optic
communications lines on the rights of way that cross the plaintiffs’ properties and that such
actions exceed the easements or other property rights held by defendants. The plaintiffs assert
claims for, among other things, trespass and unjust enrichment and seek compensatory and punitive
damages and injunctive relief. Management of Southern Company believes that its subsidiaries have
complied with applicable laws and that the plaintiffs’ claims are without merit.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">To date, Mississippi Power has entered into agreements with plaintiffs in approximately 95% of the
actions pending against Mississippi Power to clarify its easement rights in the State of
Mississippi. These agreements have been approved by the Circuit Courts of Harrison County and
Jasper County, Mississippi (First Judicial Circuit), and the related cases have been dismissed.
These agreements have not resulted in any material effects on Southern Company’s financial
statements.
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<div align="left" style="font-size: 10pt; margin-top: 6pt">In addition, in late 2001, certain subsidiaries of Southern Company, including Mississippi Power,
were named as defendants in a lawsuit brought in Troup County, Georgia, Superior Court by
Interstate Fibernet, Inc., a subsidiary of telecommunications company ITC DeltaCom, Inc. that uses
certain of the defendants’ rights of way. This lawsuit alleges, among other things, that the
defendants are contractually obligated to indemnify, defend, and hold harmless the
telecommunications company from any liability that may be assessed against it in pending and future
right of way litigation. The Company believes that the plaintiff’s claims are without merit. In
the fall of 2004, the trial court stayed the case until resolution of the underlying landowner
litigation discussed above. In January 2005, the Georgia Court of Appeals dismissed the
telecommunications company’s appeal of the trial court’s order for lack of jurisdiction. An
adverse outcome in this matter, combined with an adverse outcome against the telecommunications
company in one or more of the right of way lawsuits, could result in substantial judgments.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The final outcome of these matters cannot now be determined.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Nuclear Fuel Disposal Costs</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Alabama Power and Georgia Power have contracts with the United States, acting through the U.S.
Department of Energy (DOE), which provide for the permanent disposal of spent nuclear fuel. The
DOE failed to begin disposing of spent nuclear fuel in 1998 as required by the contracts, and
Alabama Power and Georgia Power are pursuing legal remedies against the government for breach of
contract.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In July 2007, the U.S. Court of Federal Claims awarded Georgia Power approximately $30 million,
based on its ownership interests, and awarded Alabama Power approximately $17 million, representing
substantially all of the direct costs of the expansion of spent nuclear fuel storage facilities at
Plants Farley, Hatch, and Vogtle from 1998 through 2004. In November 2007, the government’s motion
for reconsideration was denied. In January 2008, the government filed an appeal and, in February
2008, filed a motion to stay the appeal. In April 2008, the U.S. Court of Appeals for the Federal
Circuit granted the government’s motion to stay the appeal pending the court’s decisions in three
other similar cases already on appeal. Those cases were decided in August 2008. The U.S. Court of
Appeals for the Federal Circuit has left the stay of appeals in place pending the decision in an
appeal of another case involving spent nuclear fuel contracts.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In April 2008, a second claim against the government was filed for damages incurred after December
31, 2004 (the court-mandated cut-off in the original claim), due to the government’s alleged
continuing breach of contract. In October 2008, the U.S. Court of Appeals for the Federal Circuit
denied a similar request by the government to stay this proceeding. The complaint does not contain
any specific dollar amount for recovery of damages. Damages will continue to accumulate until the
issue is resolved or the storage is provided. No amounts have been recognized in the financial
statements as of December 31, 2009 for either claim. The final outcome of these matters cannot be
determined at this time, but no material impact on net income is expected as any damage amounts
collected from the government are expected to be returned to customers.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Sufficient pool storage capacity for spent fuel is available at Plant Vogtle to maintain full-core
discharge capability for both units into 2014. Construction of an on-site dry storage facility at
Plant Vogtle is expected to begin in sufficient time to maintain pool full-core discharge
capability. At Plants Hatch and Farley, on-site dry storage facilities are operational and can be
expanded to accommodate spent fuel through the expected life of each plant.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>Income Tax Matters</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Georgia Power’s 2005 through 2008 income tax filings for the State of Georgia include state income
tax credits for increased activity through Georgia ports. Georgia Power has also filed similar
claims for the years 2002 through 2004. The Georgia Department of Revenue has not responded to
these claims. In July 2007, Georgia Power filed a complaint in the Superior Court of Fulton County
to recover the credits claimed for the years 2002 through 2004. An unrecognized tax benefit has
been recorded related to these credits. See Note 5 under “Unrecognized Tax Benefits” for
additional information. If Georgia Power prevails, these claims could have a significant, and
possibly material, positive effect on Southern Company’s net income. If Georgia Power is not
successful, payment of the related state tax could have a significant, and possibly material,
negative effect on Southern Company’s cash flow. The ultimate outcome of this matter cannot now be
determined.
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<div align="left" style="font-size: 10pt; margin-top: 6pt"><b><i>Alabama Power</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><i>Retail Rate Plans</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Alabama Power operates under a Rate Stabilization and Equalization Plan (Rate RSE) approved by the
Alabama PSC. Rate RSE adjustments are based on forward-looking information for the applicable
upcoming calendar year. Rate adjustments for any two-year period, when averaged together, cannot
exceed 4% per year and any annual adjustment is limited to 5%. Retail rates remain unchanged when
the retail return on common equity (ROE) is projected to be between 13% and 14.5%. If Alabama
Power’s actual retail ROE is above the allowed equity return range, customer refunds will be
required; however, there is no provision for additional customer billings should the actual retail
ROE fall below the allowed equity return range. In October 2008, the Alabama PSC approved a
corrective rate package effective January 2009, that primarily provides for adjustments associated
with customer charges to certain existing rate structures. Alabama Power agreed to a moratorium on
any increase in rates in 2009 under Rate RSE. On December 1, 2009, Alabama Power made its Rate RSE
submission to the Alabama PSC of projected data for calendar year 2010. The Rate RSE increase for
2010 is 3.2%, or $152 million annually, and became effective in January 2010. The revenue
adjustment under the Rate RSE is largely attributable to the costs associated with fossil capacity
which is currently dedicated to certain long-term wholesale contracts that expire during 2010.
Retail cost of service for 2010 reflects the costs for that portion of the year in which this
capacity is no longer committed to wholesale. In an Alabama PSC order dated January 5, 2010, the
Alabama PSC acknowledged that a full calendar year of costs for such capacity would be reflected in
the Rate RSE calculation beginning in 2011 and thereafter. Under the terms of Rate RSE, the
maximum increase for 2011 cannot exceed 4.76%.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The Alabama PSC has also approved a rate mechanism that provides for adjustments to recognize the
cost of placing new generating facilities in retail service and for the recovery of retail costs
associated with certificated power purchase agreements (PPAs) under a Rate Certificated New Plant
(Rate CNP). There was no adjustment to Rate CNP in April 2007, 2008, or 2009. Effective April
2010, Rate CNP will be reduced approximately $70 million annually, primarily due to the expiration
on May 31, 2010 of the PPA with Southern Power covering the capacity of Plant Harris Unit 1. Rate
CNP also allows for the recovery of Alabama Power’s retail costs associated with environmental
laws, regulations, or other such mandates. The rate mechanism is based on forward-looking
information and provides for the recovery of these costs pursuant to a factor that is calculated
annually. Environmental costs to be recovered include operations and maintenance expenses,
depreciation, and a return on invested capital. Retail rates increased approximately 2.4% in
January 2008 and 0.6% in January 2007 due to environmental costs. In October 2008, Alabama Power
agreed to defer collection during 2009 of any increase in rates under this portion of Rate CNP
which permits recovery of costs associated with environmental laws and regulations until 2010. The
deferral of the retail rate adjustments had an immaterial impact on annual cash flows, and had no
significant effect on Southern Company’s revenues or net income in 2009. On December 1, 2009,
Alabama Power made its Rate CNP environmental submission to the Alabama PSC of projected data for
calendar year 2010. The Rate CNP environmental increase for 2010 is 4.3%, or $195 million
annually, based upon projected billings. Under the terms of the rate mechanism, the adjustment
became effective in January 2010. The Rate CNP environmental adjustment is primarily attributable
to scrubbers being placed in service during 2010 at four of Alabama Power’s generating plants.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><i>Fuel Cost Recovery</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Alabama Power has established fuel cost recovery rates under an energy cost recovery clause (Rate
ECR) approved by the Alabama PSC. Rates are based on an estimate of future energy costs and the
current over or under recovered balance. In June 2007, the Alabama PSC approved Alabama Power’s
request to increase the retail energy cost recovery rate to 3.100 cents per kilowatt hour (KWH),
effective with billings beginning July 2007. In October 2008, the Alabama PSC approved an increase
in Alabama Power’s Rate ECR factor to 3.983 cents per KWH effective with billings beginning October
2008. On June 2, 2009, the Alabama PSC approved a decrease in Alabama Power’s Rate ECR factor to
3.733 cents per KWH for billings beginning June 9, 2009. On December 1, 2009, the Alabama PSC
approved a decrease in Alabama Power’s Rate ECR factor to 2.731 cents per KWH for billings
beginning January 2010 through December 2011. The Alabama PSC further approved an additional
reduction in the Rate ECR factor of 0.328 cents per KWH for the billing months of January 2010
through December 2010 resulting in a Rate ECR factor of 2.403 cents per KWH for such 12-month
period. For billing months beginning January 2012, the Rate ECR factor shall be 5.910 cents per
KWH, absent a contrary order by the Alabama PSC. Rate ECR revenues, as recorded on the financial
statements, are adjusted for the difference in actual recoverable fuel costs and amounts billed in
current regulated rates. Accordingly, the approved decreases in the Rate ECR factor will have no
significant effect on Southern Company’s net income, but will decrease operating cash flows related
to fuel cost recovery in 2010 when compared to 2009. As of December 31, 2009, Alabama Power had an
over recovered fuel balance of approximately $200 million, of which approximately $22 million is
included in other regulatory liabilities, deferred in the balance sheets. Alabama Power, along
with the Alabama PSC, will continue to monitor the over recovered fuel cost balance to determine
whether an additional adjustment to billing rates is required.
</div>
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<b>
</b>
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<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Georgia Power</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><i>Retail Rate Plans</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In December 2004, the Georgia PSC approved the 2004 Retail Rate Plan. Under the terms of the 2004
Retail Rate Plan, Georgia Power’s earnings were evaluated against a retail ROE range of 10.25% to
12.25%. Two-thirds of any earnings above 12.25% were applied to rate refunds, with the remaining
one-third retained by Georgia Power. Retail rates and customer fees increased by approximately
$203 million effective January 1, 2005 to cover the higher costs of purchased power, operating and
maintenance expenses, environmental compliance, and continued investment in new generation,
transmission, and distribution facilities to support growth and ensure reliability. In 2007,
Georgia Power refunded 2005 earnings above 12.25% retail ROE. There were no refunds related to
earnings for 2007.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In December 2007, the Georgia PSC approved the 2007 Retail Rate Plan. Under the 2007 Retail Rate
Plan, Georgia Power’s earnings are evaluated against a retail ROE range of 10.25% to 12.25%.
Retail base rates increased by approximately $100 million effective January 1, 2008 to provide for
cost recovery of transmission, distribution, generation, and other investments, as well as
increased operating costs. In addition, the ECCR tariff was implemented to allow for the recovery
of costs related to environmental projects mandated by state and federal regulations. The ECCR
tariff increased rates by approximately $222 million effective January 1, 2008. In connection with
the 2007 Retail Rate Plan, Georgia Power agreed that it would not file for a general base rate
increase during this period unless its projected retail ROE falls below 10.25%. Georgia Power is
required to file a general rate case by July 1, 2010, in response to which the Georgia PSC would be
expected to determine whether the 2007 Retail Rate Plan should be continued, modified, or
discontinued.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><i>Cost of Removal</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The economic recession has significantly reduced Georgia Power’s revenues upon which retail rates
were set under the 2007 Retail Rate Plan. In June 2009, despite stringent efforts to reduce
expenses, Georgia Power’s projected retail ROE for both 2009 and 2010 was below 10.25%. However,
in lieu of filing to increase customer rates as allowed under the 2007 Retail Rate Plan, on June
29, 2009, Georgia Power filed a request with the Georgia PSC for an accounting order that would
allow Georgia Power to amortize up to $324 million of its regulatory liability related to other
cost of removal obligations.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">On August 27, 2009, the Georgia PSC approved the accounting order. Under the terms of the
accounting order, Georgia Power was entitled to amortize up to one-third of the regulatory
liability ($108 million) in 2009, limited to the amount needed to earn no more than a 9.75% retail
ROE. For the year ended December 31, 2009, Georgia Power amortized $41 million of the regulatory
liability. In addition, Georgia Power may amortize up to two-thirds of the regulatory liability
($216 million) in 2010, limited to the amount needed to earn no more than a 10.15% retail ROE.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><i>Fuel Cost Recovery</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Georgia Power has established fuel cost recovery rates approved by the Georgia PSC. The Georgia
PSC approved increases in Georgia Power’s total annual billings of approximately $383 million
effective March 1, 2007 and approximately $222 million effective June 1, 2008.
On December 15,
2009, Georgia Power filed for a fuel cost recovery increase with the
Georgia PSC. On February 22, 2010, Georgia Power, the Georgia PSC
Public Interest Advocacy Staff, and three customer groups entered into
a stipulation to resolve the case, subject to approval by the Georgia
PSC (the Stipulation). Under the terms of the Stipulation, Georgia
Power’s annual fuel cost recovery billings will increase by
approximately $425 million. In addition, Georgia Power will implement
an interim fuel rider, which would allow Georgia Power to adjust its
fuel cost recovery rates prior to the next fuel case if the under
recovered fuel balance exceeds budget by more than $75 million.
Georgia Power is required to file its next fuel case by March 1, 2011.
The Georgia PSC is scheduled to vote on the Stipulation on March 11,
2010 with the new fuel rates to become effective April 1, 2010. The
ultimate outcome of this matter cannot be determined at this time.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">As of
December 31, 2009, Georgia Power’s under recovered fuel
balance totaled approximately $665
million, which if the Stipulation is approved, Georgia Power will
recover over 32 months beginning April 1, 2010. Therefore,
approximately $373 million of the under recovered regulatory clause revenues for
Georgia Power is included in deferred charges and other assets at December
31, 2009.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Fuel cost recovery revenues as recorded in the financial statements are adjusted for differences in
actual recoverable costs and amounts billed in current regulated rates. Accordingly, a change in
the billing factor has no significant effect on Southern Company’s revenues or net income, but does
impact annual cash flow.
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<div align="left" style="font-size: 10pt; margin-top: 12pt"><i>Nuclear Construction</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">On August 26, 2009, the NRC issued an Early Site Permit and Limited Work Authorization to Southern
Nuclear, on behalf of Georgia Power, Oglethorpe Power Corporation (OPC), the Municipal Electric
Authority of Georgia (MEAG Power), and the City of Dalton, Georgia, an incorporated municipality in
the State of Georgia acting by and through its Board of Water, Light and Sinking Fund Commissioners
(collectively, Owners), related to two additional nuclear units on the site of Plant Vogtle (Plant
Vogtle Units 3 and 4). See Note 4 for additional information on these co-owners. In March 2008,
Southern Nuclear filed an application with the NRC for a combined construction and operating
license for the new units. If licensed by the NRC, Plant Vogtle Units 3 and 4 are scheduled to be
placed in service in 2016 and 2017, respectively.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">In April 2008, Georgia Power, acting for itself and as agent for the Owners, and a consortium
consisting of Westinghouse Electric Company LLC (Westinghouse) and Stone & Webster, Inc.
(collectively, Consortium) entered into an engineering, procurement, and construction agreement to
design, engineer, procure, construct, and test two AP1000 nuclear units with electric generating
capacity of approximately 1,100 MWs each and related facilities, structures, and improvements at
Plant Vogtle (Vogtle 3 and 4 Agreement).
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The Vogtle 3 and 4 Agreement is an arrangement whereby the Consortium supplies and constructs the
entire facility with the exception of certain items provided by the Owners. Under the terms of the
Vogtle 3 and 4 Agreement, the Owners agreed to pay a purchase price that will be subject to certain
price escalations and adjustments, including certain index-based adjustments, as well as
adjustments for change orders, and performance bonuses for early completion and unit performance.
Each Owner is severally (and not jointly) liable for its proportionate share, based on its
ownership interest, of all amounts owed to the Consortium under the Vogtle 3 and 4 Agreement.
Georgia Power’s proportionate share is 45.7%.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">On
February 23, 2010, Georgia Power, acting for itself and as agent for the Owners, and the
Consortium entered into an amendment to the Vogtle 3 and 4 Agreement. The amendment, which is
subject to the approval of the Georgia PSC, replaces certain of the index-based adjustments to the
purchase price with fixed escalation amounts.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">On March 17, 2009, the Georgia PSC voted to certify construction of Plant Vogtle Units 3 and 4 at
an in-service cost of $6.4 billion. In addition, the Georgia PSC voted to approve inclusion of the
related construction work in progress accounts in rate base.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">On April 21, 2009, the Governor of the State of Georgia signed into law the Georgia Nuclear Energy
Financing Act that will allow Georgia Power to recover financing costs for nuclear construction
projects by including the related construction work in progress accounts in rate base during the
construction period. The cost recovery provisions will become effective on January 1, 2011. With
respect to Plant Vogtle Units 3 and 4, this legislation allows Georgia Power to recover projected
financing costs of approximately $1.7 billion during the construction period beginning in 2011,
which reduces the projected in-service cost to approximately $4.4 billion.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">On June 15, 2009, an environmental group filed a petition in the Superior Court of Fulton County,
Georgia seeking review of the Georgia PSC’s certification order and challenging the
constitutionality of the Georgia Nuclear Energy Financing Act. Georgia Power believes there is no
meritorious basis for this petition and intends to vigorously defend against the requested actions.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">On August 27, 2009, the NRC issued letters to Westinghouse revising the review schedules needed to
certify the AP1000 standard design for new reactors and expressing concerns related to the
availability of adequate information and the shield building design. The shield building protects
the containment and provides structural support to the containment cooling water supply. Georgia
Power is continuing to work with Westinghouse and the NRC to resolve these concerns. Any possible
delays in the AP1000 design certification schedule, including those addressed by the NRC in their
letters, are not currently expected to affect the projected commercial operation dates for Plant
Vogtle Units 3 <font style="white-space: nowrap">and 4.</font>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">There are pending technical and procedural challenges to the construction and licensing of Plant
Vogtle Units 3 and 4. Similar additional challenges at the state and federal level are expected as
construction proceeds.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">On August 31, 2009, Georgia Power filed with the Georgia PSC its first semi-annual construction
monitoring report for Plant Vogtle Units 3 and 4 for the period ended June 30, 2009 which did not
include any proposed change to the estimated construction cost as certified by the Georgia PSC in
March 2009. On February 25, 2010, the Georgia PSC approved the expenditures made by Georgia Power
pursuant to the certification through June 30, 2009. The Georgia PSC also ordered that in its
future semi-annual construction monitoring reports, Georgia Power will report against a total
certified cost of approximately $6.1 billion, which is the effective certified amount after giving
effect to the Georgia Nuclear Energy Financing Act as described above. Georgia Power will continue
to file construction monitoring reports by February 28 and August 31 of each year during the
construction period.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The ultimate outcome of these matters cannot now be determined.
</div>
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<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Integrated Coal Gasification Combined Cycle (IGCC)</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">On January 16, 2009, Mississippi Power filed for a Certificate of Public Convenience and Necessity
with the Mississippi PSC to allow construction of a new electric generating plant located in Kemper
County, Mississippi. The plant would utilize an advanced integrated coal gasification combined
cycle technology with an output capacity of 582 MWs. The Kemper IGCC will use locally mined
lignite from a proposed mine adjacent to the plant as fuel. This certificate, if approved by the
Mississippi PSC, would authorize Mississippi Power to acquire, construct and operate the Kemper
IGCC and related facilities. The Kemper IGCC, subject to federal and state reviews and certain
regulatory approvals, is expected to begin commercial operation in May 2014. The Mississippi PSC
has issued orders allowing Mississippi Power to defer the costs associated with the generation
resource planning, evaluation, and screening activities as a regulatory asset. As of December 31,
2009, Mississippi Power had spent a total of $73.5 million of such costs including regulatory
filing costs.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">On November 9, 2009, the Mississippi PSC issued an order that found Mississippi Power has a
demonstrated need for additional capacity. Hearings to determine the appropriate resource to fill
the need were held in February 2010 with a decision due by May 2010.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The ultimate outcome of this matter cannot now be determined.
</div>
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