ML20042E907

Alabama Power Co Annual Rept 1989

ML20042E907
Person / Time
Site:	Farley
Issue date:	12/31/1989
From:	Harris E ALABAMA POWER CO.
To:
Shared Package
ML20042E908	List: ML20042E907 ML20042G308
References
NUDOCS 9005040075
Download: ML20042E907 (39)

Text

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Corporate Profile Alabama Power Company is one of five operating companies of The Southern Company Others are Georgia Power Company. Gutf Power Company (serving northwest Flonda). Mississippi Power Company (serving southeast Mississippi). and Savannah Electnc and Power Company (serving Savannah. Georgia and surrouncing areas) System affikates also include Southern Company i Services. Inc., which performs specialized services at cost for sysicm companies upon request. Southern Electric international Inc. a consulting firm. The Southerr, Investment Group, Inc., which i develops new business opportunities; and Southern Electric Generating Company. which is owned in equal shares by Alabama Power and Georgia Power companies s. A copy of Form 10-K as filed with the Secunties and Exchange Commission will be available to stockholders upon wntten request to Art P. Beattie. Secretary A copy of the company's Financial and Statistical Review is also available upon request Customers (at year end) Residential. 974.622 Commercial. .141.265 Industnal. .5.200 l Other .684 /- TOTAL .1.121.771 KWH Sales (Thousands) l Residential .11.346.736 Commercial. .7.915.685 Industrial. .17.360,791 Other. .9.221,819 TUTAL. 45.845.031 l

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Generating Plants (Alabama Power's ownership

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interests in KW of nameplate capacity) Fossil Gadsden .120.000 Gorgas. .1.221,250 Barry .1,525.000 Chickasaw. .4'),000 Greene County. 300.000 Gaston. .1.389,840 Employees Miller .1.980,000 Corporate Headquarters 1.889 Hydro Western Division. .600 Weiss. . 87,750 Henry. .72,900 Eastem Division. 597 Logan Martin. 128.250 Lay .177,000 Birmingham Division. 943 Mitchell. .170.000 Jord^^ 100.000 Southeast Division. 324 Bouldin. 225,000 Harns. .135.000 Mobile Division. .630 Martin. .154.200 Yates. .32,000 Southem Division .616 Thurlow. .58.000 Lewis Smith.157.500 Generating Plants. 3.508 Bankhead. .45.125 Holt .40.000 y Othr. - 591 Nuclaar 10TAL. 9.698 Farley 1.720.000 o 1

c Hfghlights 1989 1988t Operating Fhwn(millions) 2,485 ' 2,384 Operating Eg, millions) 1,934 1,893 Net income after Dividends on Preferred Stock (millions) 311 283 Return on Average Common Equity (percent) 14.5. 14.0 Allowance for Funds Used During Construction, Net, as a Percent of Net income after Dividends on Preferred Stock 15.1' 20.9 Coverage Ratios:. Mortgage Indenture (2.00x minimum requirement for issuance) 4.47x 3.72x ~ Charter (1.50x minimum requirement for ivt ance) 2.20x ' 2.00x Energy Sales (thousands of kilowatt-hours): Within System Service Area-Retail 36,789,697 36,089,84 I ~ Sales for Resale 2,629,005 2,854,703 0 Ott. system 6,425,529 ~ 4,579,415 Territorial Pbak-Hour Demand (thousands of kilowatts)tt 8,156-7,991 TotalCustomers (year-end) 1,121,771 1,108,334 Gross Property Additions During War (millions) 459 644 tincludes the effect of arnortmng, beginning in February 1987, certain retail serv 6ce rendered but not yet billed to cu*tomers 1tincludes southeasiem Power Administration allotment l$"E0*E""'" gl,alnWo""S' $hmto i n rencnu io w

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.= rue.9/ Nomen GAEA l ,, - l "'IEEEEEl l m-E I .=e = i i i.o m. m -m. .i==u..n. htmlWrritorial Distribution of Distribution of Revenue i Energy Supplied 1989 Revenue Dollar Dollar (19791989) Bbitrons of KWH (Includes allowance for tunas used during E Earnings avaltable for common dividends ~ (Includes Southeastem Ibwer construction andotherhcome, not of taxes) . A enmings retained in business Administration A#ormeno $9earcompoun6AnnualGrowthRate = 34% a Interest clarges and preferred stock dividends B Federal, state and local taxes B Depreciation and amortization " W Other operation and maintenance j B Fuel and purchased power (Ireludes allowance for funds used during constructoon and otherincome, net of taxes)_ 2

k the Stockholdm ( Alabama Power co,1pleted a decade of progress and growth in 1989 with continued stable rates, tight tost controls and a renewed emphasis on customer satisfaction. It is encouraging that the company's position during the past decade provides an excellent foundatic, which will enable Ahlbama Power to continue its growth as we enter a new decade. A significant indication of the campany's future financial stability was the creation by the Alabama Public Service Commission of a rate stabilization procedure in 1982 which has remained in effect sir.co that time. That concept establishes a range for the company's rate of return on er401-period retail common equity and allows for small, periodic rate adjustments to kbT the company within that range. As expected, the concept has had a stabilizing effect an retail electric rates. Cost controls have also stabilized the company's wholesale 6%ctric rates. As we began the 1980s, great uncertainty over tpe energy future of the United Sta10s hung like a threatening cloud. Alabama Power sougat to make meaningful choices about providing energy for the future. We learned the p.; ; 3 . d (Y, -e: g.< ,oe e PQ. (' l G .7,, . 3%.pyg ~ ' M ..-,-.t 4...- A k (g .- -a4 y, I e (!.,, ' i g.; g+ e ~ . ys - . 3 .$My t. A , jg 1 +. 4 .,,e e 3

lesson that energy is not inexpensive and must be used with thought for the future. Alabama has grown over the past 10 years and continues to grow. That means we've had to grow, too, as well as operate in the most efficient manner possible. The system's generating plant performance continues to be an outstanding indication of attention to efficiency and productivity. The 453 days of uninterrupted operation of unit 2 of the Joseph M. Farley Nuclear Electric Generating Plant set a world record for plants of similar size and design. The amount of time the system's fossil-fueled units were available to operate was 90.5 percent, well above the national average. Improved efficiency of the fossil plants has saved customers $74.1 million since 1985. In addition, hydroelectric generation totaled 6.1_ million megawatt hours, exceeding the average annual generation by 30 percent. During 1989, Alabama experienced rainfall which was above average.' Alabama Power has been committed to a construction program that ensures future sources of energy that are practical, safe and economical. When the final unit of the James H. Miller Steam Electric Generating Plant becomes commercial in 1991, it will complete a 25-year era of continuous major power plant construction to meet the energy needs of a growing state. Emphasis for the 1990s will be competitive rates and quality service to our customers. Consistent with our vision to be the competitive choice of electric customers in the future, we have developed a strategic plan to ensure our success in providing quality electric service at a reasonable cost, As the emphasis on customer satisfaction continues, we are reminded again and again that Alabama Power's basic strength is its employees, 3 who are the foundation of our vision for the future. As we enjoy a time of stability we realize that our greatest challenge is to sustain these achievements as we face the future with confidence. Elmer B. Harris President and Chief Executive Officer i March 1,1990 1 4 J

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.j, &ys@cgx1f $.r M K$ %. + E.G w? $g ?s . nl i i l and reliability of service to the customer and help control costs to generate and i i distribute electricity. Lower operating and maintenance costs help offset the effects of L Inflation and lead to continued stable rates. All of the company's nuclear, hydroelectric and fossil-j fueled plants continued their excellent operation during 1989. A' combination of record I rainfall, plant availability and management of water resources resulted in a record f production year for the company's hydroelectric plants. In March of 1989, the Farley nuclear plant unit 2 completed 453 days of uninterrupted operation, a record among Moithe companp nuclew, the 143 Westinghouse pressurized water reactors in operation worldwide, i L t,:.:::::n andloosil. A program to consistently lower heat rate, a measure of j fueled plants continued efficiency in steam electric generating plants, has resulted in a major improvement in ( during es lect ity R d cti in p n h ate ro 1 5 h ug 1 9 has es din $74.1 million savings in fuel costs. Renegotiation of certain of the company's long-term coal contracts in 1989 will result in saving millions of dollars in fuel costs. The Miller steam plant unit 3 began providing I commercial service in 1989 and unit 4 is scheduled to go commercial in 1991. Completion of the Miller units will end a 25-year program of continuous generating plant construction. No major generating plant construction is planned through the end of the century. l r Decline in heat rate, a measure of fossil-19' fueled generating plant efficiency, has saved I J' the company $74.1 million since 1985. st 3L im im ; im E im im '- ~ Fossil Heat Rate Thousands of BTU /KWH F 8 @Nd@s&e$($5%@ - Y ? si W R"4Md mn. 4 m,f. -.m,s. fu eNn'*# ^ m ~ n .p. N dihOMIC[mn.[ky%f o w M*%>4f[N,M.,s-hh:%m$M},hMgp;. b y" W'

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- (:W&;iNhhy;';pgw.g,g.tw x ; M y@d h % c n + m u pa y h. % yh Y ~ J le h3 =~-.., m In addition to retail sales of electricity to industrial, commercial and residential customers, Alabama Power sells electricity at wholesale rates to municipalities and rural electric cooperatives which operate in the state. A long term agreement for 100 megawatts of firm power was negotiated with the Alabama Municipal Electric Authority in 1986. Discussions were initiated in 1989 for additional power sales in response to a request from AMEA. Alabama Power continues to perform under existing contracts with certain Florida utilities for sales of electricity. New contracts were Ttw existing end new ott. approved by the Rderal Energy Regulatory Commission in 1989 for off-system sales system sales are financidy to Jacksonville Electric Authority, Florida Power Corporation and Florida Power and benet6cialbothto ttw Light Company. These sales will range from approximately 300 MW beginning in company andits customers. 1993 to 1200 megawatts in 1995 and will remain at that leve! until 2010 when the agreements expire. The existing and new off-system sales are financially beneficial both to the company and its customers. In yet another cost-cutting and productivity improvement effort, Alabama Power has combined a numDer of offices in its six geographic divisions, combined the construction and power generation services departments, and reorganized its marketing and economic development departments. Through a detailed company-wide work assessment program, a number of work activities have been eliminated or modified. During the year, a number of jobs were eliminated After the 1989 holidays, more than .. - ; 4 e. .c, 11,000 Christmas trees in the Mont-g, ' w. [ gomery, Birmingham and Aubum areas found a second purpose-as mulch Li y '. for city parks and for soil erosion 's : ' : + r control. The tree recycling program was sponsored by Alabama Power,

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and the Alabama Conservancy Alabama o 3 y. Power crews chipped the trees. l z 4 4 '.. ' .Iw' . t 10 Wj;;G;py 3if 'k^ exd%gLq.mE- ' + <ao &c '$g$ tI 4' ' tr%'gbu%# a:m s : 4 (t'2Dg$idd%[.dbftdj .C i: ..O bIjfidSf$.gg;f.ze't' .,,[ g zw.e;xg ??,7gi, !W c m(p$$f$$;A$a w y.he*N)$$,Q6d,, b[,U ~. a: e ,d )m ?$*X4r$ 'A 1,k..wy%.A t O.~ ~ ,4 R ~ ?' '? p$$;. n,4;f.,.'p".myldpcQ ~ ~' + n OflK #% yff g NWm{;q.x&q&bd, $""*lhp ' h. ^ ~ Q. \\: E* e g)[Q A B *E ekk guesun a n %pityw f ~ q-4:dl..N..efh..y' * ' W+ [ .,s t ^ TJ. s ./ ',~ 4 ~ @ I IiPd.r $1 y ~

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plfff;yE~ K'4kW m jiy; y pl c L . q' ' ';.. '... f(l $ &, i ,k' ~ J, Y NW 5 t._h .l Yk t f ~ 3 k 6fiAM. %gi 1 ~ d yp;

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4 iki %& 4, w 3 s nm. kgi:;x i_i 9 0 primarily through attrition and early-retirement programs. A new pay plan was also implemented which ties compensation to individual and departmental goals, which in tum are tied to overall company goals. A portion of the company's employees were olaced on the new pay plan in 1989 and the remainder who are not covered by the Intemational Brotherhood of Electrical Workers contract will be included in the plan in 1990. A new three-year contract with the IBEW was negotiated during 1989 and went into effect in September. That contract also contains productivity and work improvement incentives. Alabama Power closely Also in 1989 plans were developed to deal with a number monitors state and federal of issues which are of concem to our customers and which could impact the cost of legislationin orderto protect the company's operation. Alabama Power closely monitors state and federallegislation theinterests ofits customers in order to protect the interests of its customers and stockholders. and stockholders. New programs were developed during the year to improve contact with commercial and industrial customers, and seminars were held to offer assistance to enaurage industrial expansion. Customer relations meetings were held I across the system. Customers have demonstrated a high level of satisfaction with our on-line computerized cash reporting system, which gives instant credit when bills are paid. Computer-based power outage evaluation systems have improved response time in restoring service after power outages. Alabama Priver employees for years have been recognized 100 N'- gg-soo E ~ g{ m m_ _m u 1984 1985 1986 1987 1988 1989 1979 80 01 82 83 84 05 06 87 98 09. Percent of Total Gross Property Additions KWH Generation

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r i s (.. d.%,j --.c ?..h. ( sl hi s ~g- -~ t' 9$ 4 for taking active roles in their communities. During the year the company started a program to formally recognize those employees whose volunteerism has been exemplary. Employees and customers of Alabama Power continued their support for Project SHARE, an energy assistance program to help pay energy bills for qualified low-income elderly and nandicapped citizens. Started in 1982 with $50,000 seed money from Alabama Power, Project SHARE has become nationally recognized as one of the most outstanding pnvams of its type. For fiscal 1939 the p,ogram had distributed more than $1.4 million, assisting 15,360 families. Alabama Power emplopes In 1989, the company established the Alabama Power forpars haw been Foundation, inc., and has contributed $25 million to the foundation it is the intent of recognizedfortaking actin the foundation to assist qualified charitable organizations with the earnings these rolesintheircommunities. funds produce. 1 The exciting changes of 1989 are designed to focus Alabama Power and its employees on the importance of serving our customers and achieving our goal of driving down the real cost of electricity. We are grateful to our employees for their hard work and their enthusiasm in serving our customers. We are equally grateful to our customers, without whom we would not be in business. l l 1 1 Alabama Power crews went to North Qgl r 1 ? y t-and South Carolina to help restore . p-h ~ j,., ~,. 'O Jh$2 - f.,,,. power following the destruction "'J:' .Y ? ~,"/~ 'E-brought by Hurricane Hugolast ~ E+ ' ~ l L ' y ~ September. More than 492 crew [i .. g.[ ~ [..,. members assisted k power restora-tion in both Carolinas and the Virgin '.pg ';~~ Islands during 1989 and early 1990. (; =, ?['% e'

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n ,y '; $.L..9 ...y g [y... a.N [, y ;..e.,p.; 47 f .H-jp; '= z; 7 ft L'j. ~ ., p _.m.: .n, .. Y _+s yk,*. 9 x , $ lf.'(h [ 5h;$% )\\ jf-0&yy,. a .' ^ _ g'b f, [-. Q. &&. _fy,., t'l.l.h.L j ..,g Q, ' ' L % 4.,; ?O O,_y N:.& kN L..;% f' A%. T_ M W % y y "M= Lf &j ( W y" M. p+f +l. % Rg$;g?=; M ' 3 . PMg D k ME.3%%@gp#$y@ m %g g@ . Qd% et MU$Wg n m x a n$ %a$$[cTO S CID7EYeM 4 ~ t_ 3 1989 FinancialReport REPORTOF MANAGEMENT The management of Alabama Power Company has prepared and is responsible for the financial f statements and related financialinformation included in this report. The financial statements were l prepared in accordance with generally accepted accounting principles appropriate in the circum-stances, and necessarily include amounts that are based on best estimates and judgments with appropriate conside,tation to materiality. Financial information included elsewhere in this annual reDort is consistent with the financial statements. The company maintains a system of intemal accounting controls to provide reasonable assurance that assets are safeguarded and that the books and records reflect only authorized transactions of the com.0any. Limitations exist in any system of intemal controls based upon recognition that cost of the system should not exceed benefrts derived. The company believes its system of intemal account- ) ing controls, augmented by its dntemal auditing function, appropriately balances the cost / benefit relationship. The company's system oi intemal contral is cvaluated on an ongoing basis by the company's qualified internal audit staff. The company's indepenaent public accountants also consider certain i elements of the intemal control system in order to determine their auditing procedures for the l purpose of expressing an opinion on the financial statements. The Board of Directors pursues its responsibility for reported falanciai information th ough its Audit Committee, composed of directors who are not employees. The Audit Conmittee meets period cally with management, internal auditors and independent public accountants to assure that they are carrying out their responsibihties and to dixuss auditing, intemal control and financial reporting matters. Both intemal auditors and independent public accountants periodically meet alone with the Audit Committee and han free access to the Committee at av time. We believe that these policies and procedures provide reasonable assurance that our operations are cond .;th a high standard of business conduct and that the financial statements reflect fairly J the financial position, results of operations anti cash flows of the company. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of A(abama Power Company: We have audited the accompanying balance sheets and statements of capitalization of ALABAMA l POWER COMPANY (an Alabama corporation and a wholly owned subsidiary of The Southern Com-pany) as of December 31,1989 and 1988, and the related statements of income, eamings retained in the business, other paid-in capital and cash flows for each of the tnree years in the period ended becember 31,1989. These financial statements are the itsponsibility of the Company's manage-ment. Our responsibility is to express an opinion on these financial matements based on our audits. W3 conducted our audits in accordance witn genarally acc@ted auditing sandards. Those stan-dards require that we plan and perform the audit to 00tain reasonable assuiance about whether the j financia! s:atements are free of mateaal misstatement. An audit includes enmining, on a test basis, { evidence support!ng tne amounts and disck sures in the financia'sutements. An audit also includes 1 assessing the accounting principles used and significant estim8tes made by management, as well as evaluating the overall financial stmement presentation. We believe that our audits provide a reasonable basis fnr our opinion. { in our opinion, the financial statements (pages 2? 33) referred to above present fairy in all l material respects, the financial position of Alabamn t wer Company as of Decemoer 31,1989 and 1988, and the results of its operatiurs and its cash wvs for the periods stated in conformity with generally accepted accounting principles. ARTHUR ANDERSEN & CO. Birmingham, Alabama. February 16,1990 16 l k 5 l i ~ c ~ ?- L ,mf x m. ~ W c,, Selected Financial Data.

(Ddlars InThousands) -

1989' -

• 1988* ~

- 1987 * -- 1986' Condensed Statements of income:. .. Operating Reenues, $2.485,387 - $2.384,314 - $2,450,532 $2.425.751 [ Operating Expennes: - Operation and maintenance,,,,.. 1,343,194 !,376,012: 1,446.608 1,349,167- , -; Depreciation and amortization. 247,973 225,123 212,072. 201,803-r Taxes other than income taxes... .154,398 148,601 141,422 : 135,248: Fedoral and state income taxes,.,, =188,507 - 143.614 190,575 255,400 1,934,072 1,893,430 - 1,990,677 1,941,618 : oTotal operating expenses.., ,,g,

Operating income,.

551,315 490.884 / 459,8b5 4B4,133 : i 28,452 46.603 38,180 : 38,291 ' Other Irrane, Net,,,,. incomo Before Interect Charges.. 579,767 537,487,. 498,035

522,4241 Net Interest Charges......

229,098 217,532 - 207,877 214,943 Dividends on Preferred Stock ;.. 39,523 - 36.480 1 32.919 34,025' Not inc3no after Dividends on Preferre' Stock - - $ 311,1'46- $ 283,475 $ - 257,2391 $ 273.456 - d Cash Dividends on Common Stock.,, $,217,300 $ 212,700 - $ 201.100 $ - 191,300 - Retum on Average Common Equity (Percent) =,..... 14.53 - -14.03 13.56 15,12-Total Assets..,,..., 6,279,431( 6,180,945s ~ 5.912,000 - 15,570,6531 i 'i = Gross Property Additions., 459,199 - 643.892-600,589 553,767 Capitalization: Common stock equity: $2,188,811 $2,094.815 : $1,946,747 ' $1,847,608 .A '484,400? 484,400 384,400 t '384,400- - Preferred stock Preferred stock wbject to mandatory redemption 117,500-22,500? 27,5G3 : 30,000 long-term debt. 2.435,129 2.496,492 >~ 2.386,258

2,210,108-

' j Residentd. 11,346,736 ]'] TotalCapitalization,,. $5,125,840 $5,098,207

$4,744,905

$4,472.116 : Kilowatt-hour Sales (in Thousands): 111,332,285 -11,149,2251 10,606,698 ~ Commercial,., 7,915,685 ~ 7,711,092 - 7,476,924i 7,015,589 _ i !ndustnal, 17,360,791. 16,881,342 15,969,075 '15,025,806. Eales for resaie.. 2,629,805' 2,854,703 3,007.267 3,007,753 j Other -166,485 165,122 '159,422 153,282 ' 1, Total territorial sales, 39,419,502 ' 38,944,544 z -37,761,913 - -35,839,128 - -i Norsterntorial sales, 6,425,529 ' 4.579,415 7.348,457 l - 5,967,275 + j Total Kilo,vatt hout Sales. 45,845.031 43,523.959 45,110.370 - 41,776,403 I Operating Revenues: - $ -'738,864 Residential l $ 781,982 - $ 761,8051 . $ 759,957 - Commercial,.

533,487 J 510,910

.501.088 - - 481,676 - Industrial, 762,274 - 738,755 .721,298 705,395 ~ j ' Sales for resale. 98,552 108,119 5118,907-124,412-. 1 Other 11,743 11,255. 10,968-10,811 j j] - Total terntorial revenues. 2,188,038 2,130,844 2,112,218 2,061,158. Nontemtorial revenues. 271,171 231,622 ' ~319,617 345,614 Total revenues from sales of electricity,, 2,459,209 2,362,466-2,431,835' 2,406,772 ' 4 Other revenues. 26,178 21,848 18,697 18,979 - j ,f Total Operating Revenues. - $2,485,387 $2.384,314 $2.450,532 ' $2,425,751 Customers (End of ibar) 1,121,771 1,108,334 1,090,302 ; 1,070,760 "10,457 10,367 ~ Employees (End of Year).. - 9,698 10,302 + l Awrage Revenue Per Kilowatt hour .5.76-Total Sales Ments).. 5.36 5.43 5.39 Average Cc.st of Fuel Per Net Kilowatt-hotr

j

Generraed (Including 6EGCO)(Cents) 1.73

,1.71 '1.80 > 1,83 y J h

• includes tne enect er recoonung, begnning in Fetwuary 1987 retail serwce rendered but not yet txiled to custorners t

1 .t 1 ~ '17 ? .'5 A w w y ~p. u t ,~ ~,, s a: + Y T ,m g^ + 1 h ; i '.# 9 : s,, S, 1 + j , f f f, i t W 19851

• 19841

'1983; J1982i '1961

1980 19*9 ~

^ 1$2,105,40G L j,875l608 $1',h64,145 $1,594.022 $1 A21,997 - $1,163.623' ~ }, $2.414219; -1,370,594-

1,157,405'

. 941,966 . 940262, .978,075 1 816243 - 700,647. 183,779. l 174,514.

• ;169231.'

169,753. ^ 147,581 e 127,840-123,075 ^ 128.6481 ,122,928; 107,445 = 96,936 80,878 1 74,488 74,592 4 = 248,774 ' 224,726 - 220245' 176.238 < - 92.773 - = 114,427 ' > 58,759 ~ ' 1,931,795-1,679.573 = 1,438.887 -1 383.189:- 1,305,307 s 1,132,998; i957,073 i ~ ' 482A24 i 425,833: 1436,721 1380,956.' . 288,715

288,999, "

206,550 .t 47,888 57,563 ~ 44,339' - W 71 - - 46,927 '42.715. 40.7751 ' 530,312 .- 483,396; 481,0001 430,527

335,642:

331.714 1 247,325 = . 224.404 J ' J208,103l 214,113 210,612 -

199,762 -

-170.997

158,666" 41,346.

' 42.041 - 37,936

• J36.658 36,071f -

31.013 - 1 31,219? ~' 229.011 - $ -162257 ' $

• 99,809

- $ 129,704 [ $ o 57.440 $ 264.562, $ 233252 $ ' 186,700: $ l 161,900 .$-145200' - $ 130,700 - -15.41 14,74 ' 16.12; < $1120,800 - ~ '$ ; 115,300 $~ 54,000; " 12.62 c - 8.17 ' _.11.612 ~ 5.82 l ."4 5,722263, 5A96,197 '5,120,007 J ' 4,683,358-4,449.126 ,.4 244,932 . 3,995.816 4 p 568,073. 575,173. 522.140-459,437 "437,587.- 411,813 f ' 459.533 ' ~. - $1,770,156 - $1,664295 = $1,499,909' - $1,340,890 a $1,231,061 ^ $1211,417 -. . $1,022,533 : i 384,4001 424,400_ J24 400 - 374,400-374,400., i3^d M. 334,400 35,000-37224 43,789-2.349.373 2,402.713 . 138,034 42,234' .2,394,674 ( 2.159,793 ; 1,883.684 - - 4 r,wo . 50,000 ' s 2,404.565 . _ 2,370.050 - $4.538.929 $4.528.632 $4,366.908 $4.127,574 ' $4,043.924 : $3.753,110 ' ' $3.290.617 : c 9 s m s - 9,814,814' 9,634,285-9.176,413 9,153.173 9,229,255 i9.510,609 ' .P G - '7 y 6,593,645. 6 270,899 5.816,678 5,715,330 - 5,586,990 -5,514,844 C : "i W 'l '15215276 c 15,134,188 .13,688,096-13,460,193 ' 14,651,012 f - 14,499,37S 14,0 V. {l s 2,726,083 2,600.692 2,496,899 2,408,904' . 2,402,331 ~ J 2,518,347-' 2,461,078; H = 146.119 143.785-138,901 .134.811 __ 131,117 127,582, 126,729 - d 34,495.937' . 33,763,049 31,316,987 30.872,711-- 32,000,705 -132,170,757 L

31,104,318-j

9.167,033

5266,477 2.905,585- '3.066.423-1,768,650- '1,346,912 " '6.286 - . 43.662.970 ~ 39,050.326-34 222,572 ' ' 33.939,134 '~ 33.769,355-. - 33,517,669 J 31,110.604 -1 9 684,970' $ 664,286 $ 629.478 $ 578291. _'$ 518,730J $ 489,031 ' ' $ 385,224 < N 453,651- ' 430,400 .398,827-37'.,581-325,388 1293,576-242.626: 3 717,078 692,177 ~ 631,440 600,219 = 584,030' 507,784 1442221 119,025 103,030 . 97,731' 99,014 - 89,727 - 77,627 76,056 10,129 9,615 8.914 8.036, 7.644:

6.706'

6,335-J 1,984,853 1,905,508.

1,766.590 1,657,141' 1,525.519 : 01,374,724 ' > 1,152A62 / 411,571 186.518-92;373-90,331 56,013: ~~ a 37,304 x ' 1222: 2,396,424 2,092,026-1,858,763- - 1,747A72 _1,581,532: .1,412,028

1,153,684 17,795 13,380 -

16,845 -16.673- ~ 12.490 - - 9.%9 c ' 9.939 . [ $2.414219 $2,105.406 $1.875.608 ' - $1.764.145 _ -$1,594,022 - $1,421,997 ' $1,163.623 ~. j 4 q 1,050,795 1,034,026 -1,015 203. 1,001,832 ' 996,200, 0 986,082 i

976,200.

Q

10,212

'10,144 9.917 - 9,663 : 9,661 9,573

9,038; i

.d 5.49 '5.36 5.43. 5.15 4.68 '421 3.71l N 1,90 ' 1.86. 1.74 > 1.80 -1.84 1.61 ~ 1.56 - 0 '5 i 1 + 5

.[ - ~

A ~ w [ { (18: r TM 4 M:nagement's Discussion and tong-term power saies contracts uth the company and other Analysis of Results of operating affiliates of The Southem Company (Southem). Because of disclosures in reports filed with the Secunties and Operations and Financ. l Condit. ion Exchange Commission by Gulf States conceming its ia a financial condition, a signihcant portion of these revenues has l been excluded from the company's net incorne. See Note 13 q RESULTS OF OPERATIONS to the financial statements for additional information, j The company's net income after dividends on preferred The decrease in rewnues in 1988 from 1987 was { stock was $311 milhon in 1989, $283 milhon in 1988, and attributable to a decrease in nontemtorial sales and lower a $257 milkon in 1987. The increase in net income in 1989 over retail rates throughout most of the year, offset somewhat b/ ~ ) 1988 is pnmanly attributable to continued growth in territorial an increase in temtorial kilowatt-hour sales. Territorial l sales. increases in retail rates, and effective intemal cost revenues were also affected by an approximate 1 percent controls. reduction in retail rates, beginning in January 1988, to reflect The return on average common equity for 1989 was 14.5 the, eduction in federal income taxes as a resu!t of the Tax percent compared to 14.0 percent in 1988, and 13.6 percent Reform Act of 1986. in 1987. The increase in 1989 over 1988 is the result of an The awrage revenue per kilowatt-hour of total sales was { increase in not income offset to some extent by an increase 5.36c in 1989, 5.43c in 1988, and 5.39c in 1987. The in common stock equity investment attributable to earnings decrease in 1989 was the result of an increase in nontemtorial - I retained in the business-energy sales, which are sold at a rate generally lower than that for territorial sales. The increase in 1988 was the result of. I Revenues nonterritorial energy sales decreasing at a rate greater than Total revenues in 1989 increased from 1988 primarily as a the decrease in nontemtorial capacity sales. { result of an increase in sales to nontemtorial customers and ~ higher retail rates throughout the year. Temtorial revenues Operating Expenses increased $57 million or 2.7 percent in 1989 primarily as a Total operating expenses for 1989 increased 2,1 percent g result of an increase in kilowatt-hour sales of 1.2 percent and from 1988 primarily as a result of increased operation increases in retail rates effective in late 1988 and early 1989 expenses associated with an increase in fossil generation, under Rate RSE, which provides for penodic retail rate higher demand for energy by nontemtorial customers, and - adjustments based upon the company's camed return on increased income tax expense. Fuel costs are by far the end-of-period retail common equity. Under Rate RSE, retail single largest expense for the company. The mix of fuel rates were increased by approximately 1.5 percent and 2 sources for generation of electricity is determined primarily percent effective in July and October 1988, respectively, and by system load, the unit cost of fuel consumed, and the l^ by an additional 18 percent in January 1989. See Note 2 to availability of hydro and nuclear generating units. Fuel the financial statements for additional information on Rate RSE. expense increasec (36 million in 1989 as a result of an - Nontemtorial revenes increased $40 milhon or 17.1 increase in fossil generation, offset somewhat by a decrease percent in 1989 over 1988 as a result of increases in energy in the unit cost of fossil fuel, improved plant efficiency, and a and capac:ty sales of $26 milhon and $14 milhon, respectively. decrease in nuclear fuel expense resulting from a decrease Revenues from sales to off system utihties consist of capacity in nuclear generation. Fuel cost per kilowatt hour generated, and energy components. Capacity revenues reflect the including the company's portion of Southern Electric recovery of fixed costs and a return on investment under the Generating Company, was 1.73c in 1989,1.71c in 1988, and [, contracts. Energy is sold at its variable cost. Nonterritorial 1.80c in 1987. Purchased and interchanged power expenses energy sates increased by 40.3 percent from 1988 reflecting decreased $54 millbn in 1989 primarily due to a 155 percent an increase in energy sales to non-affihated utikties under increase in hydro generation which was caused by increased I,ong-term contractual agreements This increase is primarily . rainfall in 1989 in contrast to the drought conditions due to variations in prices for oil and natural gas, the primary expenenced in 1988. The reduced provision for possible i fuel source of these non-affikated utihties. Capacity revenues uncollectible amounts relating to the Gulf States dispute also increased pnmarily as a result of Plant Miller unit 3 beginning decreased operating expenses as a result of the company i commercial operation on May 1,1989. This unit is primanly suspending performance under the contracts in July 1988. l dedicated to non-affiliated utikties under long term contracts. No provision was recorded in 1989, but such provisions H There were no energy and capacity sales to Gulf States amounted to $20 milhon in 1988, and $44 million in 1987. Utihties Company (Gu!! States) in 1989, although such sales Depreciation expense increased each year principally due. amounted to $25 million in 1988 and $59 million in 1987. Legal to continued grcwth in depreciable plant in service. The p'oceedings are continuing in which Gulf States is seeking to composite straight line depreciation rate was 3.5 percent in be excused from obhgations under unit power and other 1989,1988, and 1987. l 2 9 19 - +6 y, fThe increase in income tax ekpense in 1989 was primarily - contributed $25 million to the Foundation:This amount was ' = due to the increase in taxable incoma The decrease in , expensed in 1989, and is reflected on the 'lChantable

income tax expense in 1988 was primarily due to the.

foundation" line of the Statements of Income!. decrease in the lederal tax rate as a tout of the Tax Reforrn + Act of 1986 and a decrease in taxable incoma Effects of inflation - The company is subject to rate regulation and income tax .i ' Allowance for Funds Used During Construction laws that are based on the recovery of historical costs. - 1 (AFUDC) Therefore, inflation. creates an economic loss because the ' . AFUDC is the estimated debt and equity costs during the. company is recowring its costs of investments in doi lars that period of construction, of funds Irwsted in the construction ham less purchasing power. While the inflation rate has been - ' of plant which are not recovered from customers through relatively low in recent years, it continues to have an adverse current rates'While cash is not realiied currently from suEh ' effect on the company because of the large investment ini allowance, it is realized over the service life of the plant under long lived utility plant. Conventional accounting for historical the rate-making process through increased revenues cost does not recognize this economic loss nor the partially resutting from higher rate base and higher depreciatio'n.

offsetting gain that arises through financing facilities with

[ cxp:nsa The composite rate used to determine the amount fixed-money obligations, such as long term debt and. . of allows.nce, net of deferred income tax, wa' 9.6 percent in preferred stock. Any recognition of inflation by regulatory, s ' 1989,95 percent in 1988, and &9 percent in 1987. The authorities is reflected in the rate of retum allowed. Company accounts for the deferred income tax effect of the debt cost as a charge to income tax expense associated with ' Future Earnings Potential. '!j operations and a corresponding credit to allowande for debt ~ The results of operations diwussed above are not. -, l funds used during construction.' AFUDC, net of deferred necessarily indicative of future earnings potential. The level of . income taxes, as a percent of net income after dividends on future eamings depends on numerous fcctors ranging from. A pref;rred stock was 151 percent in 1989,20.9 percent in. regulatory matters to growth in energy sales. ' 1988, and 1&2 percent in 1987. The Financial Accounting Standards Board (FASB) has. 'J issued new rules for accounting for income taxes scheduled int: rest Charges and Dividends on Preferred Stock to be effectiw in 1992. The accounting for and the impact on Interest on long-term debt increased in 1989 over 1988 by. net income related to these new rules, which are expected to $5 million and dividends on preferred stock increased by $3 be adopted in 1992.on a prospective basis, will depend; ] million. These increases were primarily the result of securities greatly'on future rate-making treatment. For additional issued in 1988 less the redemption and retirement of senior ir4ormation on FASB Statement Na 96, see Note'1 to the : O; securities in 1989 and 198a A first mortgage bond issuance ; financial statements under " Income Taxes".- . of $150 million (10 percent series) was sold in June 198& The Future camings will also depend upon growth in electric j company also issued $50 million of Adjustable Rate Class A. sales which will be subject to a number of factors, including "4 Preferred Stock in February 1988, and $50 million of Auction the volume of sales to non-affiliated utilities, the extent of Class A Preferred Stock in No ember 198& During 1989, the energy conservation practiced by customers, the elasticity of company refinanced its obligations under two issues of d,emand, weather, deregulation, competit!on, an'd the rate of

pollution control bonds that carried interest rates of 9 percent economic growth in the company's service area. See Note to 9.125 percent ($19 million) and 9.5 percent ($35 million) at

'13 to the financial statements for information concerning the f new interest rates of 7.2 percent in each casa The reduction dispute with Gulf States relating to unit power and other long-t in secunties outstanding included the maturity in May 1989 d term power sales contracts.1 $20 million of first mortgage bonds (4-7/8 percent series) and - the redemption of $21 million of first mortgage bonds (12 5/8 1 percent series)in January 1989 in satisfaction of the annual FINANCIAL CONDITION 1 first mortgage bond improwment fund requirement. In Liquidity and Capital Resources U L addition, the company reacquired first mortgage bonds of The company has regulatory approval for short term f $30 million (10-5/8 percent series) and $5 million (12 5/8 borrowings up to $325 million and borrowing resources of d percent series)during 1989. $341 million. At the end of 1989, the company had .I outstanding short term borrowings of $30 million. In January Alabarr Power Foundation, Inc. 1989121 million of first mortgage bonds were redeemed. l . Late in 1989, the company established the naMma Pow ' ' ? : ' ' CO million~of first mortgage bonds were retired Foundation;lnc. (Foundation), to provide financial r e tance '50t 'latter half of 1989, a total of $35 million of 1 s . to qualified charitable organizations. The company has 3pp ds were reacquired.' l J 5 A dommon equity as a percent of total capitalization was legislation, including passage of acid rain provisions, or the 42.7 percent at year +nd 1989. Security ratings by all major tightening of existing regulations goveming power plant rating agencies remain in the "A" category. emissions is expected to occur in 1990. The company The capital expenditure program required the outlay of estimates that the cost of complying with the acid rain portion, of the Bush administration bill would increase capital $1.7 billion during the three years 1987 through 1989. The expenditures by some $800 million through the year 2013 primary sources of funds for capital expenditures are internal sources, long term debt, sales of preferred stock, and capital and increase revenue requirements by some eight percent in contnbutions from Southem. 2001, when compliance costs would be expected to peak. Capital expenditures are estimated to total $1.4 billion for These costs would include building scrubbers at some plants the three years 1990 through 1992, including $80 million of to reduce sulfur dioxide emissions, as well as the increased AFUDC, not of deferred income taxes. A major component of use of more expensive, low sulfur coal. Another bill pending these expenditures is Plant Miller unit 4 which will have in Congress could cost up to three times as much to - generating capacity of 660 megawatts and is scheduled for implement. operation in 1991. This coal fired unit will initially be dedicated ' Future legislation amending the Resource Conservation to off system power sales under long term contracts. Another and Recomry Act, as well ao prev;ous amendments to this major component of future capital expenditures is trans-act; the Comprehensive Environmenta! Response, mission and distribution related facilities. Compensation and Liability Act; and the Emergency Planning The capital budget is subject to periodic review and ~ and Community Right to-Know Acticould affect many areas revision, and capital costs incurred and commercial of company operationscincluding the generation, operation dates may vary from estimates because of several transmission and distribution of electricity. The full impact of factors, including new cost estimates, revised loao estimates, these requirements cannot be determined at this time, changes in environmental requirements, and the cost of pending the development and implementation of applicable capital. In addition to the funds required for the capital regulations. budget, approximately $66 million will be required through in 1988, the Environmental Protection Agency (EPA) the end of 1992 in connection with present sinking fund solicited public comment on the need for a new short term requirements and matunties of senior securities and pollution ambient air quality standard for sulfur dioxide. During 1990, control bonds. the EPA is expected to make a final decision on whether to 11 is anticipated that the funds required will be derived from promulgate this standard. The impact of any new standard sources in form and quantity similar to those used in the will depend upon the level chosen for the standard and past. In order to issue additional first mortgage bonds and cannot be determined at this time. preferred stock, the company must comply with certain in 1985, the EPA promulgated air quality control - earnings coverage requirements contained in its mortgage regulations related to stack height requirements of the Clean indenture and corporate charter. The bond comrage was Air Act. The U.S. Court of Appea!s for the District of Columbia 4.47 and the prebird stock coverage was 2.20 for the year Circuit issued a decision in litigation conceming ti e EPA's ended Decemt#31,1989. The minimum coverage ratios stack height rules in January 1988. The decision, which the under the mortgage indenture and the corporate charter for U S. Supreme Court has declined to review, remands the the issuance of additional first mortgage bonds and maaer to the EPA for reconsideration of certain of the stack preferred stock are 2.0 and 1.5, respectively. height rules. At this time the impact of the court's decision on Changes in environmental regulations could substantially final rules and the ultimate imp 0ct on the company cannot increase capital requirements and operating costs. Clean air be determined. 21 ~' v a-s i ,1@.,- t ' Statements Of income.. x for the Years Ended December 31,1939,1988 and 1987 - 1989 '1988' 1987- - n (in Thousands) OPERATING. REVENUES (Notes 1,21. and 17);, $2,485,387 $2.384.314, $2.450.532 > _j OPERATING EXPENSES: ' Operation - Fuel.,,... -712,453. 676,423 - 696,763 ~ - Purchased and interchar.ged power, net . 47,572 / 101,485 139,653 Other.. ,J.. 380,536 400,879 L 410,575 - ' Maintenance. Ji,. 202,633 197,225 1199,617 i Depreciation and amortistion. 247,973 225.123 - 212,072' . Taxes other thanincome taxes..,... 154,398 - 148,681 -141,422 Federal and state income taxes (Note 5).. 188,507' '143.614 = 190,575 ~ . Total operabng expenses.- '1,934,072 1,893.430 ! 1,990.677 L OPERATING INCOME,., 551,315 490.884 459,855 l- ' OTHER INCOME (EXPENSE)J. 29,515-. 39.047-L All:mance for equity funds used during construction (Note 1). +.,.,, 3,750-3,302. 3,440 27,663 Income from subsidary(Note 11),, l. Charitabic foundation,,, (25,000)' ' Other, net '. 20,187 '4,254-7,077 q [ INCOME BEFOREINTERESTCHARGES..... 579,767 537,487 498.035 ' INTEREST CHARGES: e interest on long-term debt......, 230,046 _ 225,522 205,824 Allowance for debt funds Jsed during construction (Note 1) - . (27,627). ~ (31,830) -(24,235) Amorii2ation of debt discount, premium and expense, net. 4,46Tr 4,411. 4,405 ' Otherinterestcharges. 22.2 % 19,429 - 21,883 Net interest charges. 229,098 217.532 207.877: NET INCOME........ _....... > 350,669 319,955 290.158 .i., DMDENDS ON PREFERRED STOCK,, 39,523 36.480 -32,919 NET INCOME AFTER DMDENDS ON PREFERRED STOCK : $ 311,146 - $ 283.475. $ 257.239 - l . Statements Of Eamings Retained in The Business. for the Wars Ended December 31,1989,1988 and 1987 1989 1988 1987 (In lnousands) Balance, beg,.ning of period. S 565,351 $ 496,783 $ 440,644 ' Add (deduct):- -311,146-281475 257,239 Net income after dividenas on preferred stock, Cash dividends paid on common stock (217,300)- -(212,700) (201,100) Preferred stock issuance expense (Notes 9 and 10). (24) -(2,033) Auction preferred stock dividend adjustment (Note 10). 174 - (174). Balance, end of period (Note 14) S 659,347 $ 565,351 - $ 496.783 { J' Statements Of Other Pald-In Capital for the Years Ended December 31,.1989,1988 and 1987 1939-1988 1987 - ~ (in Thousands). Balance, beginning of penod. $1,304,645 $1,225,145 .$1,182,145 Cash contribution to capital by parent company - 79,500. -43.000 f Balance, end of period $1,304,645 $1,304.645 $1,225,145 - 1 The accor.1panying notes are an integral part of these statements. -j ~ ! I I 5.' ~ y a f =5 c. c Statsments Of Cash Flows ' for the Years Ended December 31,1989,1988 and 1987 1989 1988 '1987-(in Thousands) 2 OPERATING ACTIVITIES: $319,955 $290,158 ~ Netincome, , $350,669 Adystments to reconcile not income to not ' ' cash prodded by operat ng acbvit es:. Depreciation and amortiration, 322,042 ' 296,234-270,492 ' Deferred income taxM not 31,715 37,952- - 107,824 Doferred irwstment tax credts, net 6,917' . 15,019 23,477' Allowance for equity funds used dunng construction, (29,515). -(39,047) (27,663). (5,297) 16.106.- 67,445 Otner, net Change in certain current assets and haukes-(10,538)' (11,405) (177,359)' Receivabies Provision for uncollecbble accounts 102 20,227: 43,891' . Prepaymeros - 2,793. . (16.079)' ' 1,725 loventories = 20,408 (23,182). - (26,255): Payaties i 36,259. (12,957) 39,645 3 Interest accrued, (248) ~. 685^ 1,841 . 1,547 (7.754). 516l ' Taxes accrued. Energy cost recony, retail. .39,164 OtNr 26,156 - (3,264) 898 Net cash prcudad Imm operating activities. 772.174 -592,490 1 616.635 INVESTING ACilVlilES ..(643,892) ' (600,589). (459,199).. Gross property addlions +.. Allouance for equit/ unds used donng construction 29,515' 1 39 047.. 27,663 f s incorne tax effect of debt portion of allowance for funds used danno construction, (10,005) (11,527) - (10,128). Other, (15,742). (4.359) - (525) ' Net cash used for irwsting achvities. (455,431)- (620,73_1) (583,579) FINANCING ACTIVlTIES AND CAPITAL CONTRIBUTIONS: Proceeds: First mortgage bonds 1 150,000' 200,000 Preferred stock, 100,000 ' ' Pollution control bonds 53,700 : 432 Otherlong-term debti 55,176 62,515. 69,78o Captal contnbutions from parent company 79,500 43,000 Notes payable, net 30,000' 15,000 Add Bond dscount and debt expenses, net 350 (3,340) ~' (2,344) Preferred stock issuance expenses (24) (2,033) Redemptions: First mortgage bonds -(75,650) .(42,445) (108,082) Preferred stock. (5,000) ' (2,500) (5,000) Pollution control bonds (53,950) Other long-term debt, (57,316)~ (56,748) (32,500) (15,000) Notes payable, net Add. Gains (losses) on reacquired debt, net, -(4,902) (208) (237) Cash used for payment of preferred stock dvidends (40,105)- (35,362). -(201,100) (32,837) Cash used for payment of common stock dvidends. (217,300) (212,700) Net cash provided from (used for) financing activities and captal contnbutions. (315,021) 21.679 (53,882) NET INCREASE (DECREASE)lN CASH AND - TEMPORARY CASH INVESTMENTS 1,722 ' ' (6,562) -(20,826) CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 1,517 8,079 28,905 CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD S ' 3.239 $ 1,517 $ 8.079-Supplemental cash flow information. Cash paid dunng the year for-Interest (net of amountcapitalized). $ 222,815 $ 212,803 $ 198,795 - Income taxes 122,812 64,660 75,202 The accompanying notes are an integral part of these statements. 23 J y <g? p.! y ' Balance Shssts at December 31;i989 And 1958 1989-1988- - Assets ~ - (InThousands) s UTILITY PLANT (Notes 1,3,12 and 16)J Plant in service, at original cost... , ; $8,260,889 " $7,444.943 ' Less-Accumulated provisio' 'depieciabon.-,,.' ,,a, 2,465,901- ' 2264,152: 4

5,794,988'

.5.180,791' Ll . Nuclear fuel, at amortzed cost. .147,997 '174' 30 1 RS c Construction work in progrese.. ~' . - D. 557,221-6,500,206 1,023.077. 6,377,998 - Less-Property.related accumulated deferred income less (Note 1) - -1,051,877 1.001,173 j 5.448,329 5,3'6.825 >l OTHER PROPERTY ANDINVESTMENTS:', a . Southern Electric Generating Company. at equity (Note 11), ~ 25,576 21,827 ' Nonutlity properN, net,. - 3,914 . 3,916 - d

• ,cellangous ; '

L 5,220 ' 3.934

i; 34,710

- 29,SE y CvRRENT ASSETS: ,3,239 1,517 N Cash (Note 4). ' Receivables-- , Customer accounts receivable :.... .262,058 -

- 261,7b9 Other accounts and notes receivable (Note' 13) -

98,225 '96.628, Atfliated companies.......,,,,,. r,;.. - 69,766 53,609 J Accumulated provision for uncollectible accounts (Noto 13),, (74,942)- 1(79,691)- Refundable income taxes.. . 12,366 f Fossil fuel stock, at awrage cost. 131,942 ? - 173,858 L Materials and supplies, at average cost. 139,326 .117,818-Prepayments o....,. ' 54,613 28,412 ? Ybcation pay deferred (Note 1). 22,021; 21.871 l DEFERRED CHARGES: 706,248 688,147 Debt expense, being amortzed 6,491- , 6,831 4 Debt redemption expunse, being amortzed.... 28,778 - 27,329' Miscellaneous 54,875 ' 52.136 : = [ 90,144 86,296 Total Assets $6,279,431 : $6.180.945 Capitalization and Liabilities CAPITALIZATION (See accompanying statements): s f Common stock equity (Note 14) ', ' $2,188,811 < $2,094,815 a - Preferred stock - 484,400, 484,400. t - Preferred stock suulect to mandatory redemption (Note 8). < 17,500 - -2.496.492 i 22,500 Long-term debt. 2,435,1291 5.125,840-5.098.207 - - CURRENT LIABILITIES. G Preferred stock due or to be redeemed within one year (Note 8), 5,000 5.000. Long-term debt due or to be redeemed within one year (Note 7) ' 81,031 -

96,242.

Notes payable to banks (Note 4). .- 30,000 < Accounts payable-1 Affiliated companies. 52,019. 41,769 Other 215,626 '217,674' Customer deposits 28,450 ' Taxes accrued-25,964-1 1 Federal and stateincome (Note 5). 1'4,905 ' .13,836 - Other 11,927 11,449-Interest accrued....... 49,926 50,174-l Vacaton pay accrued (Note 1), 22,021 21,871- -l Energy cost recovery, retail, 39,164 Miscellaneous., 51,858 - 28.944 601,927 - 512.923' DEFERRED CREDITS AND OTHER LIABILITIES: ' ;cuipulated deferred investmer,t tax credits (Note 5) 399,097- . 412,771 - Prepaid capacity rewnues, net (Note 17) 102,346 J104,211 Miscellaneous., 50,221 '52,833 i ' 551,664 - 569.815- -{ COMMITMENTS AND CONTINGENT MATTERS (Notes 2,3,5.11,13,15 and 17) . $6,279,431 $6,180.945 Total Capitalization and Liabilities,, .s. i The accompanying notes are an integral part of these statements. j 24 -. ,s -l .x m m 7c =e s ~~ + + J. :, ;;, ,n i m Stataments Of Capitalizati:n at Decensee 31,1989 hnd1988- . Perceniof ' ~ Amount s Total ,1989 -1988 1989-19885' (In Thousands)-- ', COMMON STOCK EOUlTYi. Common stock, par value $40 por share, authorized ^ . 6.000.000 shares, outstandng 5.608,955 sharoc i. $ ~ 224,358, $ 224,358' ' Other paid-in capital ~.? 1,304,645 - .1,304,645: Premium on proferred stock..

461,

~ 46l' Earnings retained in the business (Note 14),,.. - 659,347 '565,351', Is ? Total,. '2.188,811 2.094,815 42,7 % ,41.1% s CUMULATIVE PREFERRED STOCK (Note 3): $1 par value, authorized 27,500,000 shares,. outstandng 4,500000 shares % ~ $25 stated capitaia -4d -Adjustable rate-7.68% at December 31,1989 (Note 3). 50,000 50,000, Mjustable rato-6.72% at December 31,~ 1989,(Note 9). 50,000-50,000 ' $100 stated capital- . Auction-7.43% at December 31,1989 (Note 10) 50,000 -

50,000

~ $100 par value, authorized 3.850.000 shares, ~ ' outstandng 3,569,000 shares-- 4 Senes 4.20% to 4.52%., 41,400 41,400 1 4,60% to 4.92%,. 29,000'- 29,000. ~ ( l 'l 32,000 ; 32,000 L 5.96% to 8.04%, 232,000 132.000 8.16% to 9.44%.. Total (annual dvidend requirement-$36394.000). 484,400 484,400 9.5 -9.5. Subject to mandatory redemption (Note 8), 11D0% (annual dvidend requirement- - 22,500 27,500 $2,475.000) '. ] 4 t.ess amount due or to be redeemed within. 5,000-5,000.- one year.. . Total en:fuding amount due or to be redeemed -22,500 0.3 0.4, Lj .p within one year. 17,500' LONGTERM DEBT (Notc 3). 4 First mortgage bonds-Matunty ' Interest Rates .j May 1J1989 ' 4%%.

20,000

J Apnl 1,'1990 ' 5%. 6,957 , 6.957 1 . March 1,1991 4%9t. '13,000 13,000 ] June 1,1992 4%% 14,360: .14,360. q May 1,1993 4%% 13,818 13,818: May 1,'1994 : 4%%.-, D 24,105 - ~ 24.105 ( 1995 through 1999 4%% to 8%% 150,658

150.658,

] 2000 through 2004 74%to 9%% -593,424 - 593.424 4 2005 through 2008 8%% to 10%% -610,000 '610,000 2010 12%%.. '36,073 61,973-i -2016 9%%.. 125,000 125,000. j 2017 10%%. '170,250 - 200,000' .2018 10%, 150,000 '150,000-d Total first mortgage bonds.., -1,907,645 :

1,983.295

,j .Other long term debt (Note 6). 627,496 629,886 i _18,981) ~. (20.447) ( . Unamortized debt premium (dscount), not. ?! ' Total long-term debt (annualins,: rest 2,592,734. J! requirement-$22tG39.000). 2,516,160 Less amount due or to be redeemed within one year (Note 7), 81,031 96,242 d iLong-teon debt, excludng amount due or to be i redeemed within one year. 2,435,129 2,496.492. 47.5 ' 49.0 i . TOTAL CAPITAllZATION, $5,125,840 $5,098,207 100.0 % 100.0 % 1 The accompanying rote, are an integral part.of th w statementsc 4'Ij g j>

25. :

l6 ) .1- ~...... ... -.. -.............. ~... n. i :o 3 -.y 1 Notes To Financial Statements nuclear fuci, which is scheduled to begin in 193a: howowr, the actual year this service will begin is uncertain. Sufficient

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING storage capacity currently is rmble to permit normal POLICIES: operation into 2010 and 2013 at Plant Far!ey units 1 and 2, Generaf-respectively. The company is a wholly ownect subsidiary of The t 4 Southern Com' any (Southern) wMh is the parent company Utility Plant-p of five operating companies, Southem Company Services, Utility plant is stated at original cost. Such cost inciudes - Inc. (SCS), Southem Electric intemational, Inc. (SEI) and The appropriate administrative and general costs; payroll 4eiated Southem investment Group, Inc. (SIG). The operating com-costs s'ach as pensions, taxes and other oenefits; and toe i panies provide electnc utAty service in four Soutneastern

allowance for funds used during cmstruction. The cost of states. Contracts among the companies. covering inter ~

maintenance, repairs, and replacement of minor items of connection arrangements, interchan(,e ci electric pNet and property is charged to maintenance expense. The cost of s joint ownership of generating facilities, are regulatod by the replacementsof property (exclusive of minoritems of property) ' Federa! Energy Regulatory Commission (FERC) or the ' is charged to utihty planti Securities and Exchan0e Commission (SEC). SCS provides, at cost, specialized services upon request to Southem and to 'each of the subsidiary companies. SEI designs, constructs, Allowance for Funds Used During Construction i 7 owns, and carates independent power facihties in the (AFUDC) 1 United State SEl also provides a broad range of technical This allowance is the estimated debt and equity costs, dur-services to industrial companies and utilities outside the ing the period of construction, of funds invested in the con-Southem electnc system:SIG tcoaiches and develops new . struction of plant which are not recowred from customers business and investment opponunities, through current revenues. While cash is not reahzed currently - . Southern is regrstered as a holding company under the from such allowance, it is reahzcd over the service life of the Pubhc Utihty Holding Company Act of 1935 (Holding Com-plant under the rate-making process through increased pany Act), and it and its subsidianes are subject to the revenues resulting from higher rate case and higher . regulatory provisions of the Holding Company Act. The com-depreciation expense. The compoate rate used to determine pany is a!so regulated by the FERC and the Alabama Public the amount or allowance, net of defeired income tax, wr 9.6 Service Commission (APSC) and follows generally accepted percent in 1989,9.5 percent in 1988 and 8.9 percent in 1987. acccunting principles and comphes with the accounting The company accounts for the deferred income tax effect of pokcies and practices presenbed by the respective the capitalized debt cost as a cha*ge to income tax expense commissions. associated with operations and a caresponding credit to allowance 'or debt funds used during construction. The Revenues-deferred income tax effect of capitahzed debt cost was Prior to February 1987, rewnue from the sale of electncity $10,005,000, $11,527,000 and $10.128,000 in 1989,1988, and in the company's retail junsdiction was included in revenues 1987, respectively. AFUDC, twt of deferred income taxes, as - as billed to customers on a cycle bilhng basis. Beginning in a percent of not income atter dividends on preferred stock February 1987, the estimated rewnue for service rendered amounted to 15.1 percent in 1989,20.9 percent in 1988 and but not yet billed to retail customers is being accrued and 16.2 percent in 1987c included in rewnues. Under current retail rate procedures. such cumulative accrued amount of $49,446,000 as of Depreciation and Nuclear Decommissioning-February 1,1987, was amortized over the ensuing eighteen-Depreciation of the etiginal cost of depreciable utihty plant month penod. Such amortization amounted to $19.229,000 in 1988 and $30,217,000 in 1987' in service is provided by using composite straight-line rates which approximated 3.5 percant in 1989,1988 and 1987 and includes a factor to provide for the_ e> cected cost of decom-Fuel Costs-missioning nuclear facil: ties. lhis cost. b& sed on decommis-Fuel costs are expensed as the fuel is consumed. The sioning promptly after the unit is taken out of servicemas company recovers fuel costs and net purchased energy: estimated as of December 1985, to be $250 million for Plant costs through fuel cost recovery mechanisms which provide t Fadey, Future estimates will be developed penodically con-for adjustments as necessary to reflect increa::os or sidering changing price le/els and technology and the factor decreasesin such costs. included in the depreciation rates will also be adjusted to Fuel expense includes the amort zation of the cost of reflect revised decommissioning com In 1988, the Nuclear nuclear fuel and a charge, based on nuclear generahon, for Regulatory Corrm ssion (NRC) adopted regulations requiring the permanent disposal of spent nuclear fuel. Total charges alliicensees operating comrnercial powe reactors to submit for nuclear fuel included in fuel expense amounted to a report by July,1990, setting forth a plan ter providing, with $75,024,000 its 1989, $90.671,000 in 1988 and $83,964.000 in reasonable assurance, funds for decommissioning. 1987. The company has a contract with the U.S. Department Reasonable assurance may be an external annual sinking of Energy which p'ovides for permanent disposFJ,on of ss, t fund, a surety method or prepayment, 26 j

OQ 7 <9 y ^,Lg ' :p m ,y 'n ~ ', y q. g gg-

• ,y,

' (When property subject to deprecist on is retirdid or othbr.' LTne homponents of net pension cost are shown below:. ,p. ~ 'b Dwise disposed of in the normal course of business, its cost, - 1989 1988- ~ 1987 ~--

hgether.with its ccst 'of removal less salvage, is charged to.

' ttG accumulated provision for depreciation. l - (in Thousands) > . Benefits eamed dun.ng -g ~ Retirement Plar+,. the year.. .f . $ (19,605 '$ 23,952 - $ 22,422 S iThe company l'es a defined beneht, trustood; 4 Interest cost on projected ', -, beneht obhgation.

41,195 39,194- '36,747--

q contribuery pension plan which covets substetially all ' Actual retum on plan ' .-(78,023) L,(23,525)4

regular. employees. Benehts are based on the greater of._

assets. s (154,473): f amounts resulting from two different formuteta years of : m, Net amortizatior,andi _j soevice and knai average pavlor Wars of seryice and a flat ' deferral 94 S_96 - 25,3 9 -(23,816).

dollar benefit. The policy of the company is to use the " dry '3 t

923\\f $ 1 4Pg. $ 11,828 0 ' ~ a0e normal rmthod with frozen laitial habihty'? actuarial 1 Net pension cost,, . method for funding purposes, subject to hnitations under j 7 federal income tax regulations. The company uses the - ' Of the pensier, xasts ruorded, $228.000 in1989, $',606.000 4 j' projected unit cred,t" actuarial method for hnancial report. in 1988 and $7,15B000 iri19R were charh9d to operating. 't r i ing purposes as is requires under Financial kcour. ting t s expensee, and the balance us charged to const Standards Board (FASB) Statement No. 87 yEmployers' - - other accountss Also, the company has offered early retiremeet m

Accounting for Pensions". The funded status of_ the plan at,

l plans in 1989,1908 and 1987, The expense re plans is amortized in accordance with rate makin0 t'eatmeni December 31 is as followsL '1909-1988i - ' and amounted to $11,202,000 in 1989 and $5,529,000 in. a (InThousands) - _1988. No expense u.as recorded in 1987, in additiori, in 1989c ~ Actuarial present value of beneht ' $2,033,000 was charged to construction and..other accounts? ] obligations: a 6 The company also provides certain hea:th cer9 an J Pe L 3 Vested benefN

$(374,736) $(218,662) insurance benefits for ret ied employees. Substantially all q

- Nonveste%nehts, ' (7,U,1,1.) (25,018)' - employets may become edgible for these benefits when they ) retire. The~ company ha since 1987, recognized the cost of - Accumulated benefit - . (381,767) ~ (343,680)' these benefits on an N;ctual basis Lsing the ' aggregate _. obligatior) _.,... . cost" actuarial method whk b spreans tha expected cost of ;

• Additional amounts related m such benehts over the remainirig periods of emplores'.

projectad safaryincreases _

J1h188.) J139,472)' -serviceasalevelpercentage of payrollcosts Accruedcosts q= . Proj.ected beneht obhgation., (575,955) (483,152) ' for medical benehts are funded to the exten: deductible : Lr Fair value of plan assets, primarily under federalincome tax regulations. Accrued costa oflife. f equity and hedincome - insurance benof ts, other than curr'ent cah pagnentMor "

• secunties 827,561 - 697,874 retirees, are not curiently being fundedsTho cost of such,

Unrecognized net gain

-(158,035) 1(114,431)! < benehts amounted to $14396,000 in 1989, $17,008,000 in "e h ~ Unrecognized net .1988 and $15,591,000 in 1987,- o Y l ~ 4 ,( Unrecognized prior 6 4,754). . tansition asset. (80,517) s

Vacation Pa'g

_ployeesaarn"their vacationin oneyeari i service cost., 1 &22-209 . The company s em _ m. V Prepaid pension cost recognized , in the Balance Sheets, $ '14,878 $ 15j46 and uke it ih the subsequent year. Homer, for mte making. purposes, vacation papis rpcognized es an aiowable expense ? t ' only when paid. Consistent y.ith this ra.e making treatroent. (a Weighted average rates assumed 19 the ac'uarial caicuia' _, - the coanpany accrues a current liabili \\ 4 pay and recorda a current asset representing future 4 tionswere: 1989 1988. 199]; g recoverability of the costs. Such amounts were $22,021,000 . l V s Discount. ,,e .8.0% 8.5% 7.5% ard $21.871,000 at December 31,1989_and 1988, respec- - Annualsalaryincrease ' 6.0 '61 6.0 tivdy, in 1990lapproximately 67 percent of the 1989 vacation ( i

l.ong-term retum on plan assets '

8.5 l - 8.5 8.5 'liabihty will be expensed and the balance win be' charged to f 4( construction and other o., counts,( n,

p

. Income Taxesa The company provides defened inone taxes for all incon'e tax timing differti.nces, inestment tax credits' utilized are; d-:Jerred and amortized to income over the average fves - i 3 me related property. Provisions for' property reiated j deferred income taxes reflect consumption of part of the i Talue of the plant and equipment to which the pavisions. <j

i 1

i 43 r

• l r

\\, g-s v, .3- .m g[ y is p '? .l Mah >y S. ^+

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f0 j y c C. relatS Accordingly,ihe rEated accumulat;d deferred income from 13W 15 perce'nt; a moratorium on upward adjustments J taxes are a valuation reserve that is deducted from plant f through June 30,1991; and provisions which effectiwly limit; ~ t nvestment in the Balance Sheets t ASB Statement Na 96, increases or decreases to 4 percent in any calendar year. i " Accounting for income Taxes", which is currently scheduled The order also requires that the APSC review the range of. to be implemented by 1992, requires, among other things, return by June 30,1932 to dc " mine if such range is 1 Econversion to the liabikty method of accounting for deferred. approprit( an light of the then-urrent economic conditions. - income taxes,The most significant impact will be to require The company's rate schedules provide for adjustments in. - q~ the use of before income tax AFUDC rates Current % the retail electric rates to reflect changes in both state and federal ~ ' equity component of AFUDC is capitalized without a provi-income tax rems. As a result of the decrease iri the federal sion for deferred taxes, and the debt component is capitalized -. income tax rate by the Tax Reform Act of 1986, retail electric ; E net of deferred income tax. This change will not affect not. rates were reduced approximately 1 percent in January 1988 rate base, but could create additional property taxes The ; and 2 percentin January 1987 j ' change, which is expected to be adopted in,1992 on a1

In July 1989, two customers of the company filed a civil f

prospective basic. will necessitate restating defarred income complaint in Federal District Court in Montgomery against taxes at the.afes at which they are expected to be settled. the company, Southern, SCS and Arthur Andersen & Co ; s Certain duferred income taxes have been recordcd at rates seeking to represent all ratepayers of the company and ~ 1 ihigher than the' rates specified in the Tax Reform Act of 1986. claiming $10 million actual damages ' relating to the financial; I i jThe amounts resulting from this diange in tax rates will be accounting treatment cf sparebrts at the company's . used to reduce future tax expense for accounting and rate-generating plants, plus treble and punitive damages for ( j making purposes. Tax law requires that such amounts alleged violauons of the federal Racketeer influenced and L I related to accelerated depreciation be used to reduce tax Corrupt Organizations Act (RICO), federal and state antitrust - 1 - expense over the lives of the related assets. Amounts not. laws, other federal and state statutes and common law fraud.

{

related to accelerated depreciation are not covered by The defendants' motiuns to dismiss this complaint were granted. 1 normalization requirements and will be reversed in accor. . in January 1990 and the plaintiffs have appealed that order. - 1

]y

- dance with rate-making treatment. The statement also- ' The company dso has been named as a defendant, precludes the netting of deferred tax habilities against assets . together with Southem, SCS, Arthur Andersen &'Ca,. ' See Note 5 for further information regarding income taxes Georgia Power Company (Georgia), and Mississippi Power i The company is included in the consolidated federal ' Company (Mississippi),in civil actions filed in September - j income tax retum of Southerrt. 1989. in the U.S. District Court for the Southem District of l Mississippi and with these companies and Gulf Pour 1 Prior Year Reclassifications-Company (Gull)in July:1989, in the U.S. District Court for tne I The firiencial statements for prior periods reflect certain . Northem District of Florida. These actions allege that y e reclassifications to conform with current presentation. Mississippi and Gulf obtained excessive rate increases tyi j . means of improper accounting for spare parts and, in the Q Staternents of Cash Flows-case of the Florida action, unlawful payments to govemment. 3 For purposes of the tatemenM of Cash Flows, temporary Qals. h plaMs sed actua! damages estimated to be - cash investments, which are secunties with maturities of 90

in excess of $10 million in each case, plus treble and punite -

days or less, are considered cash equivalents, damages, on behalf of at ratepayers of Mississippi arid Gulf ; j for alleged violations of RICO, federal and state antitrust laws, A other federal and state statutes and common law fradd/ 1 .- 2 RATE MATTERS: o Motions to dismiss these actions ' ave been filed by the ] h -In November 1982, the APSC adopted rates that provido - defendants. for periodic adjustments based upon the company % earned ' This litigat on involves matters currently under investigation ' 2 ' retum on end of period retail common equity. The rates also . by the U.S Attomey and the Intemal Revenue Service (IRS) provide for adjustments to recognize the placing of new s as discussed in Note 5. In management's opinion, the com-gerw. : ting fadities in retail service. Both increases and , pany's accounting practices are appropriate and the out/ decreases have been placed into effect since the adoptian of come of this ktigation will not have a materialimpact on the - ? these rates < During 1989, an increase of 1.8 percent went into company's financial s'atementsc d effect in January An examination of the rate plan conducted t'y an independent management audit firm under a contract - " with the APSC was completed in March 1989. The report

3. CAPITAL BUDGET, FINANCING AND.

Q . as generally famrable, and the audit firm recommended ' FUEL-COMMITMENTS: 1 w continuation of the rate plan. In early 1990cthe APSC voted Capital Budget- ] , tu continue these rates in effect untl November 1,1994, by - The company's capital expenditures are currently' which time the APSC mostroview the procedure: however, . est rr ud to total $522 million in 1990, $423 mt!!bnin i991 i 7 r a sates will remain in effect thereafter unless the APSC and $434 million in 1992. The estiniates incluoe AFUDC of votes to modify or discontinue them. The order provides for $48 million, net of delened income taxes, in 1990, $21 m!Ilior, M 1 several modifications to the rates, including a reduction in the - in 1991 and $11 millioriin 1992. The capital budget 's subject d 1 .[

3. allowed range o! return on common equity to 1314W percent to periodic review and revision, and actual capital costs -

i L O' [ 4 1 .a 'l i 28 mortgage bonds at least twice; and for the issuance of addi- . tional preferred stock, that gross income available for interest (In Thousands). cover pro forma ar,nual interest charges and preferred stock Totaf prMion for dividends at least one and one-half times.These coserages, incomo taxesn for first mortgage bonds and or preferred stock for the year Federal- $ 53,980. 1 ended December 31,1989 nere 4 47 and 2.20, respectively. Currently payable $124,438 $ 73,644 Deferred-FuelCommitments Current year, 38,298 74,142 142,093-1 Reversalof prior To supply a portion of the fuel requirements of its 0 2,207)_ (42,627) (44,951) years.s!md - generating plants, the company has entered into various r long-term commitments for the procurement of fossiland 6'917 15.019' 23 477 nuclear fuel. In most cases, these contracts contain provF 157,446 120,178 ~ 174,599 sions for price escalations, minimum production levels and other financial cammitmenta in addition, contracts with a - State-certain coal contractor require reimbursement or purchase, Currently payable - 11,808. '8,965 4,445 f at not book value, of the investments in mines or equipment Deferred-

l upon termination of the contract. At December 31,1989 such Current year.,

5,041 4,927. 4,498: net book value was approximately $44 million. Additional-Peversal of prior commitments for coal and for nuclear fuel will be required in years - 583 1,510 ' 6,184 the future to supply the company's fuel needs- _ 17,432' ~ 15,402 - '15.127 Total ' 9 4,873 -135,580 189,726

4. BANK LINES OF CREDIT:

Lessincome taxes At December 31,1989, the company had committed lines charged (credited)to of of edit with banks totaling approximately $341 millicn, of otherincome ; (13,629) _ (8.034) (849) - which $200 million represented commitments obtair,ed Federaland state under revolving credit agreements with ten banks outside its income taxes charged service area, terminating April 30,1993-to operations., $188,507 $143,614 $190,575 The company, along with Southem and GeorgM. expects to enter into agreements, effective as of January 1,1990, with several banks outside the service area to provido $500 - - Deferred income taxes result primarily from the use of / million of revolving credit to the companies individually or in accelerated methods of depreciation and other wnto-offs of - coy combination up to the total credit amoun' " $500 million property costs, as provided for by the income tax laws l being through May 1,1993. It is aleo expected that sssissippi will greater than the book depreciation of such property Otner - be a party to one of the agreements; which will provide deferred income taxes are provided for certain costs ci = Mississippi with $3 million of available credit. Each company revenues that are recognized for income tax purposes iti : periods differeof from those used for book purposes.'locome ~

has the option of converting its short-term borrowings into term loans, payable in 12 equal quarterly installments with the,

taxes deferred in prict years are reversed and charged Or. first installment due at the end of the first quarter after the ' credited to income when the book depreciation o' prop 3rty / , agreement terminates or at an earlier date at such company;s costs exceeds the related tax deductions or when ot'wr timing c 9. S k\\ j l { - j' k y a1, 4 y[F n u i:J l n w ,;;p;4 ?

} ~; 1 1 differences reverse. 'As explained in Note 1, certain amounts

6. OTHER LONG-TERM DEBT:

l resulting from the change in tax rates will be rewrsed in i . Details of other long-term debt are as follows: 1 accordance with regulatory rate-making treatment. See Note ' 1 for further information on the new rules on accounting for December 31' . income taxes. 1989_,;1988-Doferredinwstmenttax credits ais morttzed owr thelife of (in Thousands) '1 the related property with such amt "tation apphed asa credit Obligationsincurred in connection to reduce depreciation in the Sta'. 7ts of Incume. Such with the sale of tax-exempt poAution credits amortized in this mannoi a c Jnted to $20,592.000 in - control rewnue bonds by public s 1989, $20.618,000 in 1988. and $22,798,000 in 1987. At authonties-Der a mber 31,1989, all investment tax credits available to December 1,1305 and 2004, r60uce federal income taxes payable had been utilized. 9% and 9%%(redeemed The provision for income taxes currently payable includes . July 1989) - $ 18,700 - tho tax eliects of the reversal of prior yeart! timing differences April 1. 2005,9%% (redeemed for which deferred income taxes vse not provided. At August 1989)' 35,000: j December 31,1989, the remaining balance of such timing 2003-2013. 6% to 9%% 163,200 163,450 d ' differences was approximately $85 million, for which deferred 2014 2016,7.2% to 10%% 306,200 252,500 p income taxes of approximately $31 million have not been Less funds on depos? 1 prcnided. . with trustees. 1,546 '1,546 , The total provision for federalincome taxes as a percentage 467,854 468,104 ~j of income before federal income tax amounted to 31.0 percent, Capitalized lease oblig3tions 1 273 percent, and 37.6 percent for 1939,1988, and 1987 - respectively. The difference between these rates and the and other long term debt-Nuclear fuel. = 144,042 145,752 l federal statutory rate (34 percent in 1989 and 1988 and 40 Ofuce buildings 8,971 9,219 percent in 1987) was due pomarily to the exclusion f rom tax-Street light and other 6,629 6.8 n I able income of the allowance for equity funds used dunng

construction (2.0 percent in 1989,3.0 percent in 198f3 and 2.4 159,642 161,782-pe' cent in 5987), the reducton in federal income tax expense

$627,496 $629,,g related primarily to depletion for tax years audited and settled - (25 percent in 1988) and differences in depreciation basis and rates (a negative 1.2 percent.1.9 percent and 1.6 per-PoHution control obligations represent installment purchases cent in 1989,1988 and 1987, respectively). of pollut on control facilities financed by funds derived from The U S. Atiorney for the No% hem District of Georgia and sales by pu'cde authorities or revenue bonds. The company is ) the IRS are conducting an inwstigation of certain tax required to make payments sufficieni lor the authorities to - accounting practices of Southem's operating subsidiariesJ meet princbal and interest reqdirements of such bonds. With - exduding Savannah Electric and Power Cortpany(Savannah) respect to $32,250,000 of such pollution control obligations, Management has beor' informed that the inwstigation was the company has authenticated and delivered to the trustees initiated regarding tax acoobntiru for emergency spare parts, a like principal amount of first mortgage bonds as security for but has been expanded to include other matters, including its obligations under the installment purchase agreements. pol.tical contnt'ations. The full extent of the inestigation and - Ne orincipal or interest on these f;rst mortgage bonds is its ultimate outcome cannot non be deferrniiiod; bote.er, in payable unless and until a default occurs on the installment management's opinion, tne outcome will not have a material purchase agreements. During 1989, the company refinanced impact on tfu company's financN staternents< its obligations under two issues of pollution control bonds in March 198!), the SEC ordered a private inwstigation to that carried itwest rates of 9.0 percent to 9.125 percent determine whether Southem, its operating sutsdianes ($1&7 millior0 and 9.5 percent ($35 million) at new interest (induding the campany), and Scuthern Electric Genuating . rates of 72 percentin each case Company (SEGCO) may nave violated federal securhe 3 thvs The company has capitalized leased nudear material and and the Holding Co npany Act in connection with cortain recorded the related lease obligations. The company exercised - disdosures in or ornissions from Fecurities ofta-irn materials. its option to terminate two arrangernenta effechvo in April rnmy ttatemetts, rworts and dauuments filed with the SEC. 1988 and Ncvem'oer 1989. One other o"rangement provides. and which wre a!so r>rovided to investars and othe's,' relating for the payment of interest at varying eates and times depen- ' to certain tax and fnarcial accounting practices, some pa:ts cent on r?ptions selected by the company from types of loans accounting; tax deductions and habilities, cortingen* habihtes aWilat/,e under the arrangement. Pri'icipal amounts ot $tandE ard other mattera afft cting the net income and financial con- . ing at the end of 1989 were $144042,000 with an eficdve - dition of Sothern arthts sutndiaries, maintenance of boch rate. including applicarle fees, averaging 8.8 pe cent. i and recc rds. internal accounang controls ard pottical con-Principal pay"ents are required under the arrangement ' / ' tr:butions. ManagenmL bef eves that thrs imestigation is based on the cost cifuel burned. related to the lAS Attomey ard the IRS irrsstigations referred The company has a'to capitalized certain office buidng . to ricove The tinatoutcorns of this trt tter cannot new b9 ~ leases atxt a stmet light 13ase. Monthly prrripa! paymerrs e determacd; hotocr. in rranaganv3nt s opeiion, the outf plus inte:rst are required, and at Cocember 31,1989, the ecme wil ilot have a raateria' adverse.offec;oo the com! interest rate was 95 percent for office buildings and 13.0 per: pars /n fina ncial staten'onts. cent for #,estEghts. j e u f i, 6

y 'I 1 The not book value of capitalized leases includedin utility 10.' AUCTION PREFERRED STOCK: _ f plan ( in service was $142,255,000 and $140382,000 at ' The company issued 500,000 shares of Auction Class A - Decernber 31i 1989 and 1988, respectively. The estimated Preferred Stock in November,1988, with a stated capital of . aggregate annual maturities of other long term tbt through - $100 per share: The dividend rates are determined on the 1994 are as follows: $53,559.000 in 1990, $41.603,000 in basis of orders placed in an auction conducted generally 1991, $33,705.000 in 1992, $16381,000in 1993 and every 49 days. During 1989, the per annum dividend rate - ! $7322,000 li' 1994. ranged from 6.70 percent to 8.00 percent per annun.. The rate for the dividend period beginning Februar/13,1990 is .7, LONGTERM DEBT DUE OR TO BE REDEEMEDWITHIN ONE YEAR: 11, INVESTMENT IN JOINTLY OWNED FACILITIESf The annual first mertgage bond improvoment fund require. The company and one of its affiliates, Georgia, own equally ment is one percent oMhe aggregate principal amount o, all of the outstr nding capital stock of SEGCO, which owns ;

bonds of each series au6enticated, so long as a portion of '

electnc generating units wlth a total rated capacity of" that tas is outstanding, end may be satisfied by the. 1,019,680 kilowatts, together with associated transmission. deposit of cash and/or reacquired bonds, the certification of WesfThe capacity of these units is sold equally to the unfunded property additions is a combination thereof. The cc.mpany and Georgia under a contract expiring in 19941 1990 requirement amounting to 320,515,000 was satisfied in wriich, it substance, requires payments sufficient to provide January 1990 by We deposit of coh, all of which was used for the operating expenses, taxes, interest expense and a for the redemption of outstanding bcods at par value . retum on equity, whethe' or not EEGCO has any capacity - r First mortgage bonds maturing in 1900 amount to $6,957,000 and energy avai'able The company s share of such amounts e and other long-term debt of $53,559,00Vmaturing in 1990 totaled $81M&Wn 198% $7&174gn 1988 at consists primarily of capitahzed nuclear fut ' lease obligations. $76.812,000 in,1937 and is included in Purchased and interchanged power, net" in the Statements of Income - In addition, the company has guaranteed unconditionally 1 8, PREFERRED STOCK SUBJECT TO - the obliga!!on of SEGCO under aninstafiment safe agree < ; MANDATORY REDEMPTION: ment for the purchase of certain pollution control facihties at - The 11 percent series of preferred stock is subpct to a SEGCO s generating units, pursuant to which $26 million cumulative sinkinriGnd requiring the redemption of 25,000 principal amount of pollution.contiol revenue bonds have shares ($2,500,0JN such Stock on January 1 each year, been issued. Georgia has agreed to reimburse the company -. ~ The company has ti?e ner'amulative option to double tne number of shares esdeemed in ag one year. The stock is f r the pro rata portion of such obhgation corresponding to its then proportionate ownership of stock of SEGCO if the comt redeemable for sinking fund purposent $100 per share pany is cMed upon to make such payment under its guaranty. pluc accrued olvidends to the date of reoamption. The. At December 31,1989, the capitalization of SEGCO consisted - - redemption requirement may be offset each year in whole or of $51,153,000 of equity and $81,400,000 oflong-term debt in part by shares purchased and cancelled. The January 1, on which the annualinterest requirement is $7,411,000. In : 1900 sinking fund requirement was satisfied through the 1989, SEGCO did not pay any dividends. In 1988 and 1987, redemption of 25,000 shares The company exercise an SEGCO paid dividends totaling $5,422.000 and $500,000 - option to redeem 25,000 additional shares. respectively. SEGCO's net income was $7,500,000, $6,604.000 and $6,880,000 for 1989,1988 and 1987, respectively.

9. ADJUSTABLE RATE PREFERRED STOCK:

The company and one of its affiliates, Mississippi, own as The company issued 2,000.000 shares of Adjustable Rate tenants in common in the proportions of 60 percent and 40 Class A Prefened Stock in' September 1983, with a stated percent, respectively, a 500,000 kilowatt steam-efectric ~ capital of $25 per sharecln February 1988, the company generbting plant ip Greene County, Alabama. The plant was issued an additionai 2,000,000 shares of Ad ustable Rate placed in service in 1965 and the company's gross invest-i Class A Preferred Stock with a stated captal of $25 per ment at December 31,;1989; amounted to $78.537,000. The shara The dividend rate on each of these series is adjusted companyt share of expenses is included in the correspond. quarterly using a formula based upon certain U. S. Treasury ing operating expense accounts in the Statements of locoma . secunty rates. However, the applicable dividend rate for any dividend period shallin no event be, for the 1983 senes, less 12, PROPOSED SALE OF INTEREST IN PLANT:: than 7.20 percent per annum or greater than 13.28 percent The company proposes to sell an 8.13 percent undivide'd par annum and, for the 1988 series,less than 5.92 percent per ownership interest in units 1 and 2 of Plant Miller and related.' I i annum or greater than 11.04 percent per annum; The per faciWes to Alabama Electnc Cooperative, Inc. (AEC). AEC's annum dividend rates are shown below: ownership interest would represent about 108 megawatts of the two unitst capa^ity of 1,320 megawatts! 1983 Serjes 1988 Series This purchase by AEC will be in heu of a purchase of an First quarter 1989 8.48 % 7.52 %

1. nterest in Plant Farley in accordance with conditions imposed Second quarter 1989 8.64 7.68 by the NRC on the operating licenses for Plant Farley in an Third quarter 1989 7.84 6.72 antitrust review. The agreement for sale of the ownership i Fourth quarter 1989 '

7.68 6.72 interest in Plant Miller units 1 and 2, has received the requisite Frst quarter 1990 7.52 6.40 regulatory approvals. The proposed sale will be closed on or 31

i c

• a'ter January 1/1991, and no later ttw i Jun A.The-Service Commission which disallowed the recovery of the-

,^ purchase pnce will be established t7/ a fm:a under which capacity charges under these contracts. As a result of these ' a calculation will be made at the time of sale. If computed actions, Gulf States advised Southern that the capacity currently, the formula would yield approximately $50 rnillion. charges applicable to the Texas and Louisiana jurisdictions would not be depos'ted with the Court or paid to the 13 NONTERRITORIAL REVENUES: operating affiliates. Because of Gulf States' refusal to pay. the The operating subsidiarios of the Southom o'ectoc system, operahng aWiates were allowed by the FERC to suspend including the company, havo entered into long term and pcrformance under the contracts effective July 1988. In short term contractual agreements for the sale of capacity December 1988, Southem filed a counterclaim against Gulf and energy to certain nonaffiliated utilities located outside the States seeking recovery of all past due payments and system's service territory Certain of these agreements are damages for breach of the contracts < The case is pending

• nonfirm and are based on capacity of the system in general, before the U. S. District Court in Texas.

i Other agreements are firm and pertain to capacity related to in consolidated proceedings initiated by Gulf States and j specific generating units. Because the energy is generally Southern's operating subsidiaries, the FERC in.1988 found sold at cost under these agreements, revenues from capacity the contracts not to be unjust or unreasonable, granted the j sales primarily affect profitability The company's portion of declaratory relief sought by Southern's operating subsidiaries, q . off system capacity revenues has been as follows: ano dismissed the complaint filed by Gulf States. This dec,F sion has been affirmed by the U. S. _ Court of Appeals for the District of Columbia Circuit. In February 1990, Gulf States Other Other - filed a petition requesting the U.S. Supreme Court to review 'I Unit Long-Term ShortTerm the FERC decision. The FERC had previously ruled that it ,, Year Power Nonfirm Nonfirm Total does not have jurisdiction over the question of whether .(In Thousands) Southern negotiated in good faith to reduce the amount of. 1989 $137,024 $ 1,290. $758 5139,072 capacity purchases and engaged in fraudulent conduct in 1988 121,008 4,695 125,703 ente 6ng into the contracts. 1987 142,195 ' ~ 10,476 152,671 Revenues recorded after June 1988, do not include any o, L amounts for sales te Gulf States under unit power and other Long-term nonfirm power is currently being sold to the City . long term power contracts. Prior to that date, revenues of Tallahassee, Florida, under a contract that expires in the . incluoed the full amount due under these contracts. Some of i year 2000. Also beginning in 1990, nonfirm power is being these revenues have been withheld by Gulf States since. w a 3 sold to Florida Po,ver Corporation (FPC), and these sales will 1986. Because of disclosure in reports filed with the SEC by continue through 1992. An agreement with Virginia Electric Gulf States concerning its financial condition, most of these and Power Company for short-term nonfirm. power was revenues, after taxes, have been excluded from net income entered into and expired dunng 1989. through charges to the provision for uncollectible accounts . Urtt power from Plant Miller is being sold to Flonda Power shown below: & Light Company and Jacksonville Electric Authority and, Cumulative beginning in 1994, will be sold to FPC. Under these 1986-1988 -1988 1987 agreements, approximately 1,000 megawatts of capacity is (in Thousands) scheduled to be sold dunng the period 1990 through 1993-Disposition of Gulf States Thereafter, these sales will increase to approximately 1,200 Revenue: megawatts by mid 1995 and remain at that level, unless Total revenues $148,924 $25,442 $58,565 reduced by the customers after 1999, until the expiration of Revenues withheld or the contracts in 2010. These megawatts of capacity sales do deposited 91,796 20,113 43,822 not include any amounts under contracts to Gulf States Charged to provision for Utilities Company (Gulf States), which were suspended in uncollectible accounts 73,389 '20.113 43,692 1988 as discussed below Excluded from after tax In July 1986, Gulf States filed suit in the U. S. District Court income 43,291 12,829 25,432 for the Eastern Distnct of Texas (Court) against Southem, its operating subsidiaries (excluding Savannah), and SCS The Certain immaterial adjustments were recorded in 1989 ? complaint seeks a judgment declanng that Gulf States is reflecting true-up provisions of the contract and are included excused from further obligation under its unit power and in the cumulative amounts, other long-term power saies contracts with the company and in management's opinion, the outcome of de lawsuit will the other operating affiliates of Southern and an award to not materially affect the company's financial statements; ' i Gulf States for unspecified damages. Gulf States alleges, however, the ultimate outcome of this matter cannot now be among other things, that Southern failed to negotiate and determined.' renegotide in good faith to reduce the amount of capacity purchases under the contracts and engaged in fraudulent

14. DIVIDEND RESTRICTIONS:

conduct in entering into the contracts. The Court permitted The company's first mortgage bonde and preferred stock = Gulf States to make payments due under the contracts tf/ outstanding are entitled to the benefits or indenture covenants depositing funds with the Court pending the outcome of the or charter provisions restricting the payment of cash dtvidends lawsuit. Subsequently, Gulf States received orders from the on common stock (except those paid concurrent!y with the Public Ut,hty Commissico of Texas and the Louisiana Public receipt of a cash capital contnbution in like amount). Under j l 32

p. 'C c the med restoctive of those, a first mortgage bond indenture appkcable tru1 indentures. The NRC has proposed an covenant, $273,455,000 of retained earnings were restricted amendment to this rule to postpone the rule's implementation against the payment of common dividends at December 31, date from April 4,1990, until one year from the effective date

1989, of the amendment. The company expects to comply with this rula'

15. NUCLEAR INSURANCE:

Under the Pnce-Anderson Amendments Act of 1988 (Act), 16, ASSETS SUBJECT TO LIEN: the company maintains agreements of indemnity with the The company's mortgage, as amended and supplemented, NRC which, together with private insurance, cover third-party securing the first mortgage bonds issued by the company, hibility arising from any nuclear incident occurring at Plant constitutes a direct first ken on substantially all of the com-Farley The Act kmits to $7.8 bilkon pubhc liabihty claims that any's fixed property and franchises ~ could anse from a single nuclear incident. Plant Farley is insured against this habikty to a maximum of $200 milhon by private insurance, with the remaining coverage provided by a

17. ALABAMA MUNICIPAL ELECTRIC AUTHORITY mandatory program of deferred premiums which would be (AMEA) CAPACITY CONTRACT:

assessed, after a nuclear incident, against all owners of in August 19M. :Po comparu entered into a firm pomr nuclear reactors A company could be assessed up to $66 purchase contia.a with AMEA entitling AMEA to scheduled milhon per incident for each licensed reactor it operates but amounts of capacity (to a maximum of 100 megawatts) for a not more than an aggregate of $10 million per incident to be period of 15 years commencing September 1,1986. This paid in a calendar year for each reactor Such maximum power will be sold to AMEA for Cs member municipahties that assessment for the company is $132 milhon per incident but previously were served directly by the company as wholesale not more than an aggregate of $20 milhon to be paid for customers. Under the terms of the contract, the company eachincident in any one yeat received a payment from AMEA representing the not present The company is a member of Nuclear Muu,' Umited value of the revenue associated with this capacity entitle-(NML), a mutual insurer established to provide propertv ment. This payment is being ame tized to operating rewnue damage insurance in an amount up to $500 milhe, ;or with a corresponding charge to other interest expense at an members' nuclear generating facikties. The members are effective discount rate of 9.96 percent. subject to a retrospective premium adjustment in the event In order to secure AMEA's advance payment and the t that losses exceed accumulated reserve funds. The com' company's performance obligation under the contract, the. pany's maximum assessment per incident is hmited to $32 company issued and delivered to an escrow agent $113.3 milhon under the current policy million of first mortgage bonds representing the maximum Additionally, the company has pohcies which currently amount of liquidated damages payable by the company in provide coverage up to $1.5 billion for losses in excess of the the event of a default under the contract. No principal or $500 million NML cowrage. This excess insurance is provided interest is payabie on such bonds unless and until a default - by Nuclear Electnc insurance Limited (NEIL), a mutual by the company occurs As the liquidated damages decline insurance company, and American Nuclear Insurers / Mutual under the contract, a portion of the bonds equal to such Atomic Energy Liabihty Underwnters decrease will be returned to the company. At December 31,. - NEIL also covers the additional costs which would be 1989, $1.6 million of such bonds have been dehvered to the incurred in obtaining replacement power dunng a prolonged company by the escrow agent. accidental outage at a member's nuclear plant. Members can be insured against increased costs of replacement

18. QUARTERLY FIN ANCIAL DATA (UNAUDITED):

power in an amount up to $3.5 million per week (starting 21 Summarized quarterly financial data for 1989 and 1988 are weeks after the outage) for one year and up to $2.3 milhon as follows: and $1.2 milhon per week for the second and third years, Net locome [ respectively. after Dividends Under each of the NEIL pohcies, members are subject to Operating Operating on Preferred assessments if losses each year exceed the accumulated Revenues income Stock funds available to the insurer under that policy. The present maximum assessments oer incident for the company for (in Thousands) )ggg excess property damage would be $6.8 million and for replacement power would be $7.8 million under each current First $559,393 $133,277 $ 83,222 Second 621,403 128,420 70,677 all propertv policies, the NRC has issued a proposed Third 717,850 179,704 112,735 rule providing tblr, no later than Apnl 4,1990, on site property Fourth 586,741 109,914 44,512 damage insurance policies for commercial nuclear power 1988 plants be amended to provide that all proceeds from such First $557,432 $108,084 $ 56,768 insurance shall be apphed hrst for the sole purpose of plac-Secono 586,515 98,392 45,885 ing the reactor in a safe and stable condition after an acci-Third 696,272 172,556 119,458 dent. Any remaining proceeds are first apphed toward the inurth 544,095 i1,852 61,364 costs of decontamination and debns removal operations ordered by the NRC. and second, paid to either the com-The company's business is influenced by seasonal weather pany or its bond trustees as may be appropriate under conditions and the timing of rate adjustments. 33

=g-O .p-ceneral officer, . Jerry L Harris, Assistant Comptroller . Continental Stohk Transfer & Trust Company ~ E. Wayne Boston, Assistant Secretary - - 72 Reade Street l rB ns, sident and: and Assistant Treasurer New York, New York 10007 (Allseries except the 8.72% series, Travis J. Bowden, Executive Vice jstantTr'a u cr ' Adj" stable Rate Class A 1988 series, President > . ane ',u: tion Class A 1988 series) j m Essig, AssMant Secretary 2 - . Bill M. Guthrie, Executive Vice Southem Company Services,Inc : President Shirley A. Thomas, Assistant Secretary 3 64 Perimeter Center East ,j -. Atla,ita, Georgia 30346 - Wiliam L McDonough, Executive Vice John H. Snyder, Assistant Secretary (For the Adjustable Rate Class A 1988 i President series) William L Smith, Assistant Treasurerd R. P. Mcdonald, Executive Vice Bankers Trust Company y President David L Whitson, Assistant Treasurer Four Albany Street. ~ l . W. George HairstonIll, Senior Vice New York, New York 10015 President, Nuclear Operations - (Forthe Auction Class A 1988 series) .j e Baks"ke Fa e President, - Division Office /s uman Registrars Stephen E. Bradley, Vice President, John B. Byars Jr., Vice President,- j Public Affairs Eufaula AmSouth Bank, N.A.- j Robert A. Buettner, Vice President and Jerry J. Thomley, Vice President, StockTransfer Department j Counsel Annistons P.O. Box 11426 - 4 Rayford F. Davis, Vice President' Robert H. Haubein Jr., Vice President,. . Birmingham,' Alabama 35202 -l 1 Power Delivery Tuscaloosa Harris Trust Company of New York-77 Water Street - John E. Dorsett, Vice Presidot, Power J. Bruce Jones Vice President, Mobile . NewYork, New York 10005 ji Generation Services (For the 8.72% series) J Homer H. Turner Jr., Vice President, R. S. Hardigree, Vice President.-- Birmingham ContinentalStock Transfer ' Corporate Services & Trust Company i Clyde H. Wood, Vice President, 72 Reade Street R. E. Huffman, Vice President, Montgomery. New York, New York 10007 : Operating Services

(All series except the 8.72% series,.

William B. Hutchins lil, Vice President Adjustable Rate Class A 1988 series, and Auction Class A1988 series) and Treasurer 1 Effective April 10,1989 ( T. H. Jones, Vice President, Fossil. 2 Retired effective January 1,1990 Southem Company Services,Inc. Generation 3 Effective July 28l1989 64 Perimeter Center East i 4 Retired effective February 1,1990 Atlanta, Georgia 30346 C. Alan Martin, Vice President, 5 Effective April 28,1989 - (For the Adjustable Rate Class A1988 Marketing senes) Charlton B. McArthur, Vice President,- Bankers Trust Company - Economic Development Four Albany Street j New York, New York 10015 Jack D. Woodard, Vice President, g~OUS gIj86U S - (For the Auction Class A 1988 series). Nuclear Gcneration Alabama Power Company Jackson W. Minor, Vice President and 600 North 18th Street. ~

Comptroller Birmingham, Alabama 35291 0

Art P. Beatti 3ecretary Harris Trust Company of NewYork 77 Water Street - Balch & Bingham Charles M. Deascn, Assistant - New York, New York 10005 E0. Box 306 - Comptroller (For the 8.72% series) Birmingham, Alabama 35201 -

o oi D/plcc/ ops ' John C. WebbIV, Demopolis (1977) ~ Gerald H. Powell,' Jacksonville (1986)*- President President. Webb Lumber Company,Inc. Dixie Clay Company of Alabama,IncJ - Elmer B. Harris, Birmingham (1989)t - ' Wholesale Lumber-President and Chief Executive Officer 'Winton M. Blount til, Montgomery. i h m( )0 ^ J mes C. Inzer Jr., Gadsden (1965) {i a 0 Ch r and Chief Executive Off.cer : Winton M. Blount lil and Associates Inzer, Suttle, Swann & Stivender, P.A. Edison Illuminating Companies,- inc. .Attomeys Retired Executive Vice President DrwrsifiedInvestments Crawford T. JohnsonIll, Birmingham Whit Armstrong, Enterprise (1982) Aiaba a en (1969)t President, Chairman and Chief. Chairman and Chie! Executive Officer ' Executive Officer-Trav. J. Bowden, Birmingham (1988)t is ' Coca-Cola Bottling Company United, The Citizens Bank. - Inc.. Executive Vice President-Bottlers of Soft Drinks'_ Edward L. Addison,Mlanta(1983) Carl E. Jones Jr., Mobile'(1988)*' S. Eason Balch, Birmingham (1970) President President,Chairmanand ' . The Southem Compan/ Chief Executive Officer-Partner ' Bingham Balch & Electric Utility Holding Company First Alabama Bank of Mobile .Attomeys y William J. Rushton Ill, Birmingham President - ~. Dr. Johri W. Rouse, Birmingham" James H. Sanford, Prattville (1983)** . (1988)t.- ' (19/0)t HOME Place Farms l lac. . President and Chief Executive Officer

• 1 Chairman and Chief Executive Officer Diversified Farmers and Ginners Southem Research Institute -

Protective Life Corporation Sales and Service of Life and Health Insumnce Louis J, Willie, Birmingham (1984)t Bill M. Guthrie, Birmingham (1988)t - Executive Vice President - President, Chairman and Chief Boo er. h ngton Insurance

• Audit Committee member ?

arman nd h ef e uti fe AmScuth Bancorporaion Company - ,, Audit Committee attemate member t Executive Committee member ,Multibank Hntding Company ~ Wso@edor. William L McDonough, Birmingham, j Fred Morgan Clark, Eufaula (1977) (1985)t Years in parentheses indicate date of Retired Executive Vice President election." 4 l l l' s ) 35 s .. i

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.) Corpomte Profile t' h s y... :.mv4.. 24%. g w" b; * ' ) 3 .as %. M v 'b::M,. Alabama Power Company is one of hve operating companies of The Southern Companj Others y e,-e? y S Pd,{ j, i y 4 gJ. are Georgia Power Company Gulf Power Company (serving northwest Flonda) Mississippi Power yj#^ Ddh h y ) Company (serving southeast Mississippi). and Savannah Electnc and Power Company (serving l f e>. m; 77.; Savannah Georgia and surrounding areast System affikates a!so include Southem Company s v

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%gs ~ c;;. nyy n Services Inc. which performs speciahzea services at cost for system companies upon request I Southern Electnc Intemational. Inc. a consulting firm. The Southern Investment Group. Inc unich y $e.5.NN.h.m.,k k,,f. p s gjh.y g +p%mg..: develops new business opportunities and Southern Electnc Generating Company which is owned ,,ga e s.g, y ~, q In equal shares by Alabama Power and Georgia Power companies e 3 y).. ,.y. s 1,'M9" '?'e l A copy of Form 10-K as filed with the Secunties and Exchange Commission will be available to a n a 4 .. g.r, q stockholders upon wntten request to Art P Beattle. Secretary A copy of the company's Financial 2-f.p 'O { e -M G,..s j 1 and Statistical Review is also available upon request . w... s Customers (at year end) v.. t,..,,,.. ~ +

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Residential. 974 622 J. A. Commercial 141.265 g r.7, 7. Industnal 5.200 Other 684 / T.4,

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~ TOTAL. 1.121 771 79,. *..;;s L&: l.' ~ j%,{[.... ~ ^ ' dff .y - i .n. Q., s.. P KWH Sales (Thousands) Mf. ' ' "U. Residential. 11.346 736 AL% Commercial. 7915.685 Q9p x.' Industrial. .17.360.791 . yr. ,a 2#. l Other 9.221.819 - ~.' TOTAL. 45.845.031 . C.

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.;~ I Yg'.f j f ~ : }," I g--- Generating Plants (Alabama Power's ownership h y P \\.g,... interests in KW of nameplate capacity) i l Fj$5'h..b: ^ fnssil N +.5A .V Ist@?.M 1:,' < Gadsden .120,000 Gorgas. .1.221.250 s.". l., Barry. .1.525.000 Chickasaw. 40.000 (2 h k ' ;n, ui.s Greene County 300.000 Gaston. 1.389.840 l %[7 ^{" i ;i. ; Employees Miller .1.980.000 kg.;j ,O, ' ' f 7.,. Corporate Headquarters 1.889 H)dro ? W.e;wt ..f ; Western Division. .600 Weiss. 87.750 Henry. .72.900 Y$hQ ' i Eastern Division 597 Logan Martin.128.250 Lay. 177.000 Birmingham Division 943 Mitchell. .170.000 Jordan .100.000 9 DRM.4 m \\ ' Southeast Division 324 Bouldin. 225.000 Harns. 135.000

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';, [ J c A...w - 4 > Mobile Division 630 Martin 154.200 Yates 32.000 % py(' 3jy;f. Southern Division 616 Thurlow. 58.000 Lewis Smith 157.500 , 9:: " i Mf.[; ~ Generating Plants 3.508 Bankhead-45.125 Holt 40.000 t? %g Other 591 Nuclear 1M.g ; TOTAL .9.698 Farley 1.720.000 iK hp.y y.,. y y

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L Highlights 1989 ~ 988t 1 Operating Revenues (millions) 2,485 2,384 Operating Expenses (millions) 1,934 S' 1,893 Net income after Dividends on Preferred Stock (millions) ' S 311 S 283 Return on Average Common Equity (percent). 14.5 - 14.0 y Allowance for Funds Used During Construction, Net, as a Percent of Net income after Dividends on Preferred Stock .15.1 20.9. Coverage Ratios: - Mortgage Indenture (2.00x minimum requirement for issuance) 4.47x, 3.72x Charter (1.50x minimum requirement for issuance) 2.20x - 2.00x t Energy Sales (thousands of kilowatt hours): Within System Service Area-- Retail 36,789,697 36,089,841 Sales for Resale 2,629,805 2,854,703 Off-system-6,425,529 4,579,415 = Territorial Peak-Hour Demand (thousands of kilowatts)tt 8,256 7,991 .i TotalCustomers (year end) 1,121,771 1,108,334 i Gross Property Additions During Year (millions) 459 644-flncludes the effect of amortmng beginning in February 1987, certain retail service rendered but not yet odled to customers tilncludes southeastem Power Administration allotment EARN.HOS AVAILABLE INTEREST CHARGES S Div0E D S ENo1 EA g S ETAINED / 4s N McE % 10m \\ - Elli <= m - , _ l- '[80SE"oA lll-l m . f.$_^'. _E E E g; e'. m mt.t!E ac a 111111111 8 ~ 198s 1986 1987 1988 1989 1979 80 81 82 83 84 8s 86 07 88 89 Total Territorial Distribution of Distribution of Revenue Energy Supplied 1989 Revenue Dollar Dollar (19791989) Billions ofI(WH (Includes allowance for funds used dunng a Eamsngs available for common dividends '~ (Includes Southeastem Fbwer construction and other oncome, net of taxes) & earnengs retained in business Admontstration Allotment) SparCompound AnnualGrowth Rate = 34% n interest charges and preferred stock dividends a Federal, state and local taxes W De?reciation and amortization u Other operation and maintenance - 5 Fuel and purchased power (Includes allowance for funds used dunng construction and otherincome, net of taxes) 2

~. A. p~Ap n : m a % v m *: l l ll> the Stockhoklers 4 N .x. e, fp. Alabama Power completed a decade of progress and -r., growth in 1989 with continued stable rates. tight cost controls and a renewed ) s ?. emphasis on customer satisfaction. It is encouraging that the company's position j .c Y l [ during the past decade provides an excellent foundation which will enable Alabama i I i Power to continue its growth as we enter a new decade. h it i .l A significant indication of the company's future financial I g., stability was the creation by the Alabama Public Service Commission of a rate k g.[.C.f. MM. stabilization procedure in 1982 which has remained in effect since that time. That /%. Alt 9

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"'a l] c .p 4 : iM;'h 3.w {.T common equity and allows for small, periodic rate adjustments to keep the company ) . fb ( fg within that range. As expected, the concept has had a stabilizing effect on retail jf7W?m +Wpj' electric rates. Cost controls have also stabilized the company's wholesale electric rates. n -.-. r1 leM34TR.8%%mt = r t. 4r/ As we began the 1980s, great uncertainty over the energy L g j.. # A..m.;.3: j'h.h.ex2 future of the United States hung like a threatening cloud. Alabama Power sought to L\\ s gs.l .f. , %. ~ c.. -[ ~% W f. make meaningful choices about providing energy for the future. We learned the N. +s l . p W. ' &,((Ofy*$'l&q;"!'of a,_ h f g_ UL':sf;6. d n i es, pn ~hf {p g3lte . L::. - l" I _....p p+x.ed1$ps.t;. 4 ygf,c. &f ~'

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v. + + lesson that energy is not inexpensive and must be used with thought for the future. Alabama has grown over the past 10 years and continues to grow. That means we've had to grow, too, as well as operate in the most efficient manner possible.- The system's generating' plant performance continues 10 be an outstanding indication of attention to efficiency and producC !. The 453 days i of uninterrupted operation of unit 2 of the Joseph M. Farley Nuclev aectric Generating Plant set a world record for plants of similar size and design. The amount of time the-system's fossil-fueled units were available to operate was 90.5 percent, well above the national average. Improved efficiency of the fossil plants has saved customers 574.1 million since 1985. In addition, hydroelectric generation totaled 6,1 million megawatt hours, exceeding the average annual generation by 30 percent. During 1989, Alabama experienced rainfall which was above average. Alabama Power has been committed to a construction program that ensures future sources of energy that are practical, safe and economical. When the final unit of th'e James H. Miller Steam Electric Generating Plant becomes commercial in 1991, it will complete a 25-year era of continuous major power plant construction to meet the energy needs of a growing state. Emphasis for the 1990s will be competitive rates and . quality service to our customers. Consistent with our vision to be the competitive choice'of electric customers in the future, we have developed a strategic plan to ensure our success in providing quality electric service at a reasonable cost. As the emphasis on customer satisfaction continues, we. are reminded again and again that Alabama Power's basic strength is its employees, ) ^ who are the foundation of our vision for the future. As we enjoy a time of stability we realize that our greatest challenge is'to sustain these achievements as we face the future with confidence. Elmer B. Harris President and Chief Executive Officer March 1,1990 4

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1 The H>arin Review. The year 1989 was exciting for Alabama Power. 7 Financially healthy, the company is changing to deal with present and future competition, while continuing its dedication to customer service. The response of- + Alabama Pover in this era of change has been an examination of our markets, services, costs, work practices, productivity and the size of our work force. l Stable rates are vital when competing in the energy i . marketplace. Customers and the company have benefited from the Rate Stabilization and Equalization (Rate RSE) and Certificated New Plant (Rate CNP) procedure used stable rates are vitalwhen by the Alabama Public Service Commission which has jurisdiction over the competingin the energy company's retail electric rates. An independent audit performed by Theodore Barry J marketpiece. and Associates for the commission, completed in March 1989, said that, " Rate RSE has benefited the Alabama ratepayers, the Alabama Commission and Alabama Power. since its inception in 1982 and should be continued." The commission held hearings in November and December 1989, addressing the continuation of Rate RSE and Rate i CNP and, in early 1990, voted to continue the rates until at least November 1994. 1 - Alabama Power's wholesale rates are under the - jurisdiction of the Federal Energy Regulatory Commission. Cost controls have also allowed these rates to remain stable for the past six years. l Gains in efficiency and productivity improve the quality. 1 1 8.0 E_ 12.0 e ag i 1985 1986 1987 1988 1989 1979 80 81 82 83 04 85 86 87 68 89 Territorial Peak Demand Average Residential 1 i $$c*e?s"o$trueestem mer fr,'*,$n*a, l w Administration Allotment) l 6

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t u and reliability of service to the customer and help control costs to generate and distribute electricity. Lower operating and maintenance costs help offset the effects of - inflation and lead to continued stable rates. All of the company's nuclear, hydroelectric and fossil-fueled plants continued their excellent operation during 1989. A combination 'of record rainfall, plant availability and management of water resources resulted in a record production year for the company's hydroelectric plants. In March of 1989, the Farley nuclear plant unit 2 completed 453 days of uninterrupted operation, a record among AHof thecompany'snuclear, the 143 Westinghouse pressurized water reactors in operation _ worldwide. l hydroelectric and fouil-A program to consistently lower heat rate, a measure of fueled plants continued efficiency in steam electric generating plants, has resulted in a major improvement in i their excellent operation - efficiency. The lower the heat rate, the less coal is required to produce a kilowatt-hour. during 1989. of electricity. Reduction in plant heat rate from 1985 through 1989 has resulted in a - $74.1 million savings in fuel costs. Renegotiation of certain of the company's long-term coal contracts in 1989 will result in saving millions of dollars in fuel costs. The Miller steam plant unit 3 began providing f commercial service in 1989 and unit 4 is scheduled to go commercial in 1991. l Completion of the Miller units will end a 25-year program of continuous generating j plant construction. No major generating plant construction is planned through the end of the century. j i 1-Decline in heat rate, a measure of fossil-fueled generating plant efficiency, has saved the company $74.1 million since 1985. 91 9.7 ' 9.6 1985 1986 1987 1988 1989 Fossil Heat Rate 1 Thousands of BTU /KWH.. 8 i i

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1 l In addition to retail sales of electricity to industrial,- ') l commercial and residential customers, Alabama Power sells electricity at wholesale ) rates to municipalities and rural electric cooperatives which operate in the state. A long term agreement for 100 megawatts of firm power was negotiated with the-Alabama Municipal Electric Authority in 1986. Discussions were initiated in 1989 for : additional power sales in response to a request from AMEA. Alabama Power continues to perform under existing contracts with certain Florida utilities for sales of electricity. New contracts were ~ The existing and new off-approved by the Federal Energy Regulatory Commission in 1989 for off system sales - system sales are financially to Jacksonville Electric Authority, Florida Power Corporation and Florida Power and beneficialboth to the 1.ight Company. These sales will range from approximately 300 MW beginning in company andits customers. 1993 to 1200 megawatts in 1995 and will remain at that level until 2010 when the l agreements expire. The existing and new off-system sales are financially beneficial both to the company and its customers. [ In yet another cost cutting and productivity improvement < effort, Alabama Power has combined a number of offices in its six geographic divisions, combined the construction and power generation services departments, and reorganized its marketing and economic development departments. Through a 1 detailed company wide work assessment program, a number of work activities have been eliminated or modified. During the year, a number of jobs were eliminated l After the 1989 holidays, more than - 11,000 Christmas treesin the Mont-gomery, Birmingham and Aubum areas ncycow g*" found a second purpose-as mulch for city parks and for soilerosion l control. The tree recycling program L was sponsored by Alabama Power, Bruno's and FoodMax grocery stores j-and the Alabama Conservancy. Alabama .sd Power crews chipped the trees. 'j & $W 10

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.\\ l I primarily through attrition and early-retirement programs. A new pay plan was also : implemented which ties compensation to individual and departmental goals, which in - turn are tied to overall company goals. A portion of the company's employees were placed on the new pay plan in 1989 and the remainder who are not covered by the - Intemational Brotherhood of Electrical Workers contract will be included in the plan in 1990. A new three-year contract with the IBEW was negotiated during 1989 and went into effect in September. That contract also contains productivity and work improvement incentives. J Alabama Power closely _ Also in 1989 plans were developed to deal with a number-monitors state and federal of issues which are of concern to our customers and which could impact the cost of legislationin orderto protect the company's operation _. Alabama Power closely monitors state and federal legislation theinterests ofits customers in Order 10 protect the interests of its customers and stockholders. and stockholders. New programs were developed during the year to' improve contact with commercial and industrial customers, and seminars were held to offer assistance to encourage industrial expansion Customer relations. meetings were held across the system. Customers have demonstrated a high level of satisfaction with our on-line computerized cash reporting system, which gives instant credit when bills are 4 paid. Computer-based power outage evaluation systems have improved response time in restoring service after power outages. 4 Alabama Power employees for years have been recognized ^ 1 700 'DB}} E...i.iid.i _a......._...u

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I L for taking active roles in their communities. During the year the company started a l ~ program to formally recognize those employees whose volunteerism has been. exemplary. Employees and customers of Alabama Power continued their support for { Project SHARE, an energy assistance program to help pay energy bills for qualified - low-income elderly and handicapped citizens. _ Started in.1982 with $50,000 seed money from Alabama Power, Project SHARE has become nationally recognized as one of the most outstanding programs of its type. For fiscal 1989 the program had - 71 - distributed more than $1 A million, assisting 15,360 families. Alabama Power employees In 1989, the company established the' Alabama Power for years have been F0undation, Inc., and has contributed $25 million to the foundation. It is the intent of recognized for taking active the foundation to assist qualified charitable organizations with the earnings these . rolesin their communities. funds produce. The exciting changes of 1989 are designed to focus Alabama Power and its employees on the importance of serving our customers and achieving our goal of driving down the real cost of electricity. We are grateful to our a' employees for their hard work and their enthusiasm in serving our customers. We are _ 1 equally grateful to our customers, without whom we would not be in business. I j L i l P l. Alabama Powercrews went to North . j .l and South Carolina to help restore power following the destruction-w brought by Hurricane Hugo last } September. More than 492 crew - _s i members assisted in power restora-g." ~ i tion in both Carolinas and the Virgin ~ Islands during 1989 and early 1990. 'l.n. I i I '=. ~.. -r.,-- -.---=---- ---m. - - - - - +

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1989 FinancialReport REPORTOF MANAGEMENT The management of Alabama Power Company has prepared and is responsible for the financial H statements and related financial information included in this report. The financial statements were prepared in accordance with generally accepted accounting principles appropriate in the circum-stances, and necessarily include amounts that are based on best estimates and judgments with _ appropriate consideration to materiality. Financial information included elsewhere in this annual f report is consistent with the financial statements. The company maintains a system of intemal accounting controls to provide reasonable assurance - that assets are safeguarded and that the books and records reflect only authorized transactions of the company. Limitations exist in any system of intemal controls based upon recognition that cost of. the system should not exceed benefits derived. The company believes its system of intemal account-ing controls, augmented by its intemal auditing function, appropriately balances the cost / benefit relationship. The company's system of intemal control is evaluated on an ongoing basis by the company's qualified internal audit staff. The company's independent public accountards also consider certain ' elements of the internal control system in order to determine their auditing procedures for the purpose of expressing an opinion on the financial statements, t The Board of Directors pursues its responsibility for reported financial information through its Audit Committee, composed of directors who are not employees. The Audit Committee meets periodically with management, intemal auditors and mdependent public accountants to assure that they are carrying out their responsibilities and to discuss auditing, intemal control and financial i reporting matters. Both intemal auditors and independent public accountants periodically meet alone with the Audit Committee and have free access to the Committee at any time. We believe that these policies and procedures provide reasonable assurance that our operations are conducted with a high standard of business conduct and that the financial statements refleu fairly the financial position, results of operations and cash flows of the company. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Alabama Power Company: We have audited the accompanying balance sheets and statements of capitalization of ALABAMA POWER COMPANY (an Alabama corporation and a wholly owned subsidiary of The Southem Com-l' pany) as of December 31,1989 and 1988, and the related statements of income, eamings retained in - the business, other paid-in capital and cash flows for each of the three years in the period ended i December 31,1989. These financial statements are the responsibility of the Company's manage-ment. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those stan-dards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opini6n. In our opinion, the financial statements (pages 22-33) referred to above present fairly, in all material respects, the financial position of Alabama Power Company as of December 31,1989 w t 1988, and the results of its operations and its cash flows for the periods stated in conformity e generally accepted accounting principles. ARTHUR ANDERSEN & CO. Birmingham, Alabama, 1 February 16,1990 l 16

Selected Financial Dato. (Donars in Thousands) 1989* 1988' 1987* 1986 Condensed Statements of income: Operating Revenues $2,485.387 $2.384.314 $2.450.532 $2.425.751 OTArating Expenses: Coeration and maintenance 1,343,194-1,376.012-1.446,608 1,349.167 Depreciation and amortization. 247,973. 225.123 212.072 201.803 Taxes other than income taxes. 154,398 148.681 141,422 135.248 Federal and state income taxes. 188,507 143.614 190.575 255.400-Tota! operating expenses. 1,934.072 1.893.430 1,990,677 1.941.618 Operating income. 551,315 490.884 459.855 484.133 Other income. Not. 28,452 46.603 38.180 38.291 income Before Interest Charges -579,767 537.487 498.035 522,424 Netinterest Charges.,. 229,098 217,532 207.877 214,943 Dividends on Preferred Stock. 39,523 36.480 32.919 34.025 Net income aner Dividends on Preferred Stock $ 311,146 $ 283.475 $ 257.239 $ 273.456 Cash Dividends on Common Stock. S 217,300 $ 212,700- $ 201,100 $ 191,300 i Retum on Average Common Equity (Percent). 14.53 14.03 13.56 15.12 6,279,431 6.180.945 5,912.000 5.570.653 Total Assets Gross Property Additions 459,199 643,892 600,589 553,767. Capitalization: l Common stock equity $2,188,811 $2,094.815 - $1.946.747 $1.847.608 Preferred stock 484,400 484.400 384,400 384,400 Preferred stock subject to mandatory redemption 17,500 22,500 '27,500 30,000 Long-term debt 2,435,129 2.496.492 2.386.258 2.210.108 Total Capitalization. $5,125,840 $5.098.207 $4 744.905 $4.472.116 Kilowatt hour Sales (in Thousands): Residential 11,346,736 11,332.285-11,149.225 10,606.698 Commercial. 7,915,685_. 7,711,092 - 7,476,924 7,015.589 17,360,791' 16,881,342 15.969.075 15.025.806 Industnal -. Sales for resale 2,629,805 2,854,703 3,007.,267 3.007,753 Otner 166,485 165.122 - 159.422 ' 153.282 Total terntonal sales. 39,419,502 38.944.544-37,761.913 35,809.128 Nonterntonal sales. 6,425,529 4,579.415. 7.348.457 5 967.275 Total Kilowatt-hour Sales 45.845,031 43.523.959 45.110.370 41.776.403 ~ Operating Revenues: Residential 5 781,982 $ 761,805 $ 759.957 $ 738.864 Commercal. '533,487 '510,910 501,088 481,676 Industnal, 762,274 738,755 721,298 705.395 Sales for resale 98,552 108.119 - 118.907 124.412 Other 11,743 11,255 10.968 10.811 Total terntonal revenues. 2,188,038 2,130.844 2,112.218 2,061,158 Nonterntonal revenues. - 271.171 -231.622 319.617 345.614 Total revenues from sales of electrioty, 2,459,209 2,362,466 2,431,835 2,406.772 Other rewnues 26,178 21.848 ' 18.697 18.979 Total Operating Resenues $2,485,387 $2.384.314 $2.453.532 $2.425.751 Customers (End of War) 1,121,771 1,108.334 1.090,302 1,070,760 Employees (End of Year). 9,698 10,302 10,457 -10.367 Average Revenue Per Kilowatt hour Total Sales (Cents). 5.36 5.43 5.39 5.76 Average Cost of Fuel Per Net Kilowatt-hout Generated (including SEGCO)(Cents) 1,73 1.71 1.80 1.83 Wtuces the eNet d recogneng teginning in February 987. retail serwce rendered but not yet tMod to custerners l 17

m i 1985 1984 1983 1982-1981-1980 1979-j] - $2.414.219 - $2.105.406 - $1.875.608 - $1,764,145 $1.594.022 $1.421.997 $1,163 623 l 1,370,594 1,157,405 941.966 940.262 978.075 816.243 700.647-' 183.779 174.514 169.231 169.753 147,581' 127,840 123.075 128.648 - 122.928 107.445-96.936-86.878 74.488 74,592 248.774 - 224.726-220,245 176.238-92.773 114.427-58.759 1.931.795 - 1.679.573 1,438.887 j.383.189 1,305.307 1.132.998 957.073 482.424 425.833 436.721 1380.956 288,715: 288.999 .206,550 47.888 57.563 -44.339 j 28.571 - 46.927 -42.715 40.775 i 530.312 483,396 481,060 1 409,527 335.642 331,714 ' - 247,325 224.404 208,103 214,113 210,F12 199,762 170.997i 158.666 - 41:346 42.041 37.936 36.658 - 36.071 31.013 31,219 ^ $ 264.562 $ 233.252 5 229.011' $ 162.257 - 99.809 : $ 129.704 ' $: 57.440 - l $.185.700 '. $ 161,900 $ 145.200 .$ 130,700 . $ 120.800 $ 115.300 ' $ - - 54,000 ' 15.41 14.74 16.12 . 12.62 . 8.17 11.61-5.82' 5,722.263 5.496.197. 5,120.607 4.683,358 - 4.449.126 4.244.932 3.995.816 568.073 575,173 - 522,140 459,437. ' 437,587. 411,813 459.533 - d $1,770,156 $1,664.295 $1,499.909 $1,340.890 $1.231,001 $1.211,417 - $1,022,533 384.400-424.400 424,400 374,400 374.400 334,400 = 334,400 35.000 37,224 38.034 42.234 43,789' 47,500-50,000' '2,349.373 2.402,713 2.404.565 -2,370.050 . 2,394.674 2,159.793 1.883.684 L $4.538.929 $4.528.632 $4.366.908 ^ $4.127.574 $4.043.924 - $3,753.110 - $3.290.617 .9.814,814 9,634,285 9.176,413 9,153.173 9.229,255 9,510,609 ' 8.679 417' 6,593,645 6,270,899 5.816.678 5,715.630- ' 5.586,990 J 5,514,844 5,207,513 15.215,276 15,134.188 13.688,096 13.460,193-14.651,012. 14.499,375 14,629,581 2,726.083 2,600.692 2,496 899-2,408,904 2,402,331.- 2.518.347 2A61,078 - 146.119 1 0.785 138.901 134.811-131.117. 127.582 126.729- -j 34,495.937 33,783.849 31,316.987 30.872,711 32.000,705 32,170,757 31,104.318 9.167.033 5,266.477 2.905.585 = 3.066.423' 1;768.650' 1.346,912' 6.286 - 43.662.970. 39.050.326 34.222.572 - 33.939,134 33.769.355 ~ 33.517,669 ' 31.110.604 ] $ 684.970 $ 664.286. $ 629.478, $ 578,291 '$ 518.7301 $' 489.031 - $ 385.224 453.651 430.400 398.827 371,581 325,388 293.576 242.626 1 717.078 692,177 631,440 600,219-584,030 507,784; ' 442,221 l 119 025 109.030 97.731 99,014 89.727 .77,627-76,056 l 10.129 9.615 - 8.914 8.036 7.644 6.706 6,335 1 I 1,984.853 1,905.508 1,766,390 ~ 1,657,141-- 1,525.519.

1,374.724

1,152,462 f 411.571 186.518' 92,373 -

90.331 56.013 37,304 L 1.222 2.3 % 424 2,092,026 1.858.763 1,747.472 1,581,532 ~

1,412,028. 1,153,684 17,795 : '13.380 16.845 16.673 12.490 9.969 0.939. -$2.414.219 ' $2,105.406 $1.875.608 $1.764.145 $1.594.022 $1.421.997. . $1.163.623 1,050.795 1.034.026 . 1,015.203 1,001,832 996,200.- 986,082 97&200 I 10.212 10.144 9.917 9,663 9.661 9,573 9,038 .] 5.49 5.36 5 43 5.15 4.68 - ' 4 21 .3.71 l i 1.90- _1.86 1,74 1.80 1.84 1.61 1.56 j 1, i 18 +

Management's Discussion and long term power sales contracts witn tn3 company and otner Analysis of Results of operating affiliates of The Soutnem Company (Southem). 8 ""S* ' d'Sd S**S '" '*P "$ *d *'tn tne Secunties and Operations and Financial Condition Exchange Commission by Gulf States concerning its financial condition, a significant portion of these revenues has been excluded from the company's net income. See Note 13 RESULTS OF OPERATIONS to the financial statements for additional information. The company's net income a'ter dividends on preferred Ine decrease in revenues in 1988 from 1987 was stock was $311 milhon in 1989, $283 mdlion in 1988, and attnbutable to a decrease in nonterntonal sales and lower $257 mdhon in 1987. The increase in net income in 1989 over retail rates throughout most of the year, offset somewhat by 1988 is pnmanly attnbutable to continued growth in temtorial an increase in terntonal kilowatt-hour sales. Terntonal sales, increases in retail rates, and effective internal cost revenues were also affected by an approximate 1 percent connols. reduction in retail rates, beginning in January 1988, to reflect The return on average common equity for 1989 was 14.5 the reduction in federalincome taxes as a result of the Tax percent compared to 140 percent in 1988, and 13.6 percent Reform Act of 1986. in 1987. The increase in 1989 over 1988 is the result of an The average revenue per kilowatt hour of total sales was. increase in net income offset to some extent by an increase 5.36e in 1989/5.43c in 1988, and 5.39c in 1987. The in common stock equity investment attributable to earnings decrease in 1989 was the result of an increase in nonterntonal' retained in the business-energy sales, which are sold at a rate generally lower than that for terntonal sales. The increase in 1988 was the result of Revenues nonte ntonal energy sales decreasing at a rate greater than Total revenues in 1989 increased from 1988 pnmanly as a the decrease in nontemtonal capacity sales. result of an increase in sales to nontemtonal customers and higher retail rates throughout the year. Terntorial-revenues Operating Expenses increased $57 million or 2.7 percent in 1989 primanly as a Total operating expenses for 1989 increased 2.1 percent result of an increase in kilowatt hour sales of 1.2 percent and from 1988 pnmanly as a result of increased operation increases in retail rates effective in late 1988 and early 1989 expenses associated with an increase in fossil generation, under Rate RSE, which provides for penodic retail rate higher demand for energy by nontemtorial customers, and adjustments based upon the company's earned return on increased income tax expense. Fuel costs are by far the end.of-penod retail common equity. Under Rate RSE, retail single largest expense for the company. The mix of fuel rates were increased by approximately 1.5 percent and 2 sources for generation of electncity is determined pnmanly percent effective in July and October 1988, respectively, and by system load, the unit cost of fuel consumed, and the by an additional 1.8 percent in January 1989. See Note 2 to availability of hydro and nuclear generating units, Fuel the financial statements for additional information on Rate RSE. expense increased $36 million in 1989 as a result of an ' ncrease in fossil generation, offset somewhat by a decrease Nonterntonal revenues increased $40 million or 17,1 i percent in 1989 over 1988 as a result of increases in energy in the unit cost of fossil fuel; improved plant efficiency, and a and capacity sales of $26 milhon and $14 million, respectively. decrease in nuclear fuel expense resulting from a decrease Revenues from sales to off system utihties consist of capacity in nuclear generation Fuel cost per kilowatt hour generated, and energy components. Capacity revenues reflect the including the company's portion cf Southern Electric recovery of fixed costs and a retum on investment under the Generating Company, was 1,73c in 1989,1.71e in 1988, and contracts. Energy is sold at its variable cost. Nonterntorial 1.80c in 1987. Purchased and interchanged power expenses energy sales increased by 40.3 percent from 1988 reflecting decreased $54 million in 1989 primarily due to a 155 percent an increase in energy sales to non-affiliated utilities under increase in hydro generation which was caused by increased long term contractual agreemerts. This increase is pnmarily rainfall in 1989 in contrast to the drought conditions due to variations in pnces for oil and natural gas, the pnmary experienced in 1988. The reduced provision for possible fuel source of these non-affikated utikties. Capacity revenues uncollectible amounts relating to the Gulf States dispute also increased pnmarily as a result of Plant Miller unit 3 beginning decreased operating expenses as a result of the company commercial operation on May 1,1989. This unit is pnmanly suspending performance under the contracts in July 1988. dedicated to non-affiliated utilities under long term contracts. No provision was recorded in 1989, but such provisions There were no energy and capacity sales to Gulf States amounted to $20 million in 1988, and $44 million in 1987. Utihties Company (Gulf States) in 1989, although such sales Depreciation expense increased each year principally due amounted to $25 milkon in 1988 and $59 million in 1987. Legal to continued growth in depreciable plant in service. The proceedings are continuing in which Gulf States is seeking to composite straight kne depreciation rate was 3.5 percent in be excused from obligations under unit power and other 1989,1988, and 1987. 19

+3 The increase in income tax Gxpense in 1989 was primanly contnbuted $25 million to the Foundation. This amount was due to the increase in taxable income. The decrease in ' expensed in 1989, and is reflected on tne "Chantab;e income tax expense in 1988 was primanly due to the - foundation" line of the Statements of income. decrease in the federal tax rate as a result of the Tax Reform .Act of 1986 and a decrease in taxable income. Effects of inflation The company is subject to rate regulation and income tax Allowance for Funds Used During Construction _ laws tnat are based on the recovery of histoncal costs. (AFUDC) Therefore, inflation creates an economic loss because the AFUDC is the estimated debt and equity costs dunng the company is recovenng its costs of investments in dollars that period of construction, of funds invested in the construction have less purchasing power. While the inflation rate has been - of plant which are not recovered from customers through relatively low in recent years, it continues to have an adverse current rates lWhile cash is not reahzed currently from such effect on the company because of the large investment in allowance, it is realized over the service hfe of the plant under long hved utikty plant. Conventional accounting for histoncal the rate making process through increased revenues cost does not recognize this economic loss nor the partially resulting from higher rate base and higher depreciation offsetting gain that anses through financing facihties with expense. The composite rcte used to determine the amount fixed money obligations, such as long term debt and of allowance, net of deferred income tax, was 9.6 percent in _ preferred stock. Any recognition of inflation by regulatory. 1989, 9.5 percent in 1988, and 89 percent in 1987. The . authonties is reflected in the rate of retum allowedL company accounts for the deferred income tax effect of the debt cost as a charge to income tax expense associated with Future Earnings Potential operations and a corresponding credit to allowance for debt The results of operations discussed above are not funds used during construction, AFUDC, net of deferred _ necessarily indicative _ of _ future earnings potential The level of income taxes, as a percent of net income after dividends on future eamings depends on numerous factors ranging from preferred stock was 15.1 percent in 1989,20.9 percent in regulatory matters to growth in energy sales. 1988, and 16.2 percent in 1987. The Financial Accounting Standards Board (FASB) has issued new rules for accounting for income taxes scheduled Interest Charges and Dividends on Preferred Stock to be effective in 1992. The accounting for and the impact on Interest on long term debt increased in 1989 over 1988 by net income related to these new rules, which are expected to $5 million and dividends on preferred stock increased by $3 be adopted in 1992 on a prospective basis, will depend milhon. These increases were pnmanly the result of secunties greatly on future rate-making treatment. For additional - issued in 1988 less the redemption and retirement of senior information on FASB Statement Na 96, see Note 1 to the financial statements under " Income Taxes", secunties in 1989 and 198a A first mortgage bond issuance of $150 milkon (10 percent senes) was sold in June 198a The Future earnings will also depend upon growth in electric. company also issued $50 milhon of Adjustable Rate Class A. sales which will be subject to a number of factors, including . Preferred Stock in February 1988, and s50 million of Auction the wlume of sales to non-affiliated utilities, the extent of Class A Preferred Stock in November 198a Dunng 1989, the energy conservation practiced by customers, the etasticity of company refinanced its obligations under two issues of demand, weather, deregulation, competition, and the rate of pollution control bonds that carried interest rates of 9 percent economic growth in the company's service area. See Note to 9125 percent ($19 milhon) and 9.5 percent ($35 million) at 13 to the financial statements for information conceming the new interest rates nf 7.2 percent in each case. The reduction dispute with Gulf States relating to unit power and other long-term power sales contracts, in secunties outstanding included the matunty in May 1989 of $20 million of first mortgage bonds (4 7/8 percent series) and the redemption of $21 million of first mortgage bonds (12 5/8 FINANCIAL CONDITION _ percent series)in January 1989 in satisfaction of the annual first mortgage bond improvement fund requirement. In-Liquidity and Capital Resources addition, the company reacquired first mortgage bonds of The company has regulatory approval for short-term $30 milhon (10 5/8 percent series) and $5 million (12 5/8 borrowings up to $325 million and borrowing resources of percent series) dunng 1989- $341 million. At the end of 1989, the company had ~ outstanding short term borrowings of $30 milkon. In January Alabama Power Foundation, Inc. 1989, $21 million of first mortgage bonds were redeemed. Late in 1989, the company established the Alabama Power An additional $20 million of first mortgage bonds were retired ~ Foundation, Inc. (Foundation), to provide financial assistance in May 1989. In the latter half of 1989, a total of $35 million of to quakfied chantable organizations. The company has first mortgage bonds were reacquired. 20

r

Common equity as a percent of total capitalgation WCs '

legislation, including passage of acid rain provisions lor the - 42.7 percent at year end 1989. Secunty ratings by all major tightening of existing regulations goveming power plant rating agencies remain in the "A" category. emissions is expected to occur in 1990. The company The capital expenditure program required the outlay of. estimctes that the cost of complying with the acid rain portion ' $1.7 billion during the three years 1987 through 1989. The of the Bush administration bill would increase capital pnmary sources of funds for capital expenditures are internal ' expenditures by some $800 million through the year 2013 sources, long-term debt, sales of preferred stock, and capital and increase revenue requirements by some eight percent in - contobutions from Southem. 2001, when compliance costs would be expected to peak. Capital expenditures are estimated to total $1.4 billion for These costs would include building scrubbers at some plants the three years 1990 through 1992, including $80 million of to reduce sulfur dioxide emissions, as well as the increased - AFUDC, net of deferred income taxes A major component of use of more expensive, low Sulfur coal.' Another bill pending - these expenditures is Plant Miller unit 4 which will have

in Congress could cost up to three times as much to '

generating capacity of 660 megawatts and is scheduled for ' implement. operation in 1991. This coal fired unit will initially be dedicated Future legislation amending the Resource Conservation _- - to off system power sales under long term contracts. Another and Recovery Act, as well as previous amendments to this major component of future capital expenditures is trans-act; the Comprehensive Environmental Response, mission and distribution related facilities. Compensation and Liability Act; and the Emergency Planning ; j The capital budget is subject to periodic review and ~ and Community Hight to Know Act, could affect many areas - revision, and capital costs incurred and commercial ' of company operations, inc!uding the generation, I operation dates may vary from estimates because of several transmission and distribution of electricity. The full impact of j factors, including new cost estimates, revised load estimates, these requirements cannot be determined at this time, ] changes in environmental requirements, and the cost of pending the development and implementation of applicable ~ capital. In_ addition to the funds required for the capital regulations. l budget, approximately $66 million will be required through in 1988, the Environmental Protection Agency (EPA) - If ~' the end of 1992 in connection with present sinking fund solicited public comment on the need for a new short term requirements and matunties of senior secunties and pollution ambient air quality standard for sulfur dioxide. During 1990,. control bonds the EPA is expected to make a fina! decision on whether to - 11 is anticipated that the funds required will be derived from' promulgate this standard. The impact of any new standard - sources in form and quantity similar to those used in the. will depend upon the level chosen for the standard and 3 past, in order to issue additional first mortgage bonds and cannot be determined at this time.. j preferred stock, the company must comply with certain - In 1985, the EPA promulgated air quality control - ] earnings coverage requirements contained in its mortgage regulations related to stack height requirements of the Clean 1 indenture and corporate charter. The bond coverage was - Air Act. The U.S. Court of Appeals for the District of Columbia ] 447 and the preferred stock covere.ge was 2.20 for the year Circuit issued a decision in litigation conceming the EPA's g ended December 31,1989. The minimum coverage ratios . stack height rules in January 1988. The decision, which the - under the mortgage indenture and the corporate charter for - U.S. Supreme Court has declined to review, remands the ' ~ thn issuance of odditional first mortgage bonds and matter to the EPA for reconsideration of certain of the stack preferred stock are 2.0 and 1.5, respectively. height rules. At this time the impact of the court's decision on.. Changes in environmental regulations could substantially - final rules and the ultimate impact on the. company cannot increase capital requirements and operating costs. Clean air be determined. "1 a i q ] 21 1

Statements Of income for the Years Ended December 31,1989.1988 and 1987 3989-1988 1987 (in Thousands) OPERATING PEVENUES (Notes 1,2.13 and 17). . $2.485.387 $2.384.314 $2,450,532 OPERATING EXPENSES: Operation-Fuel. 712,453 676,423 696.763 Purchased and interchanged pour, not 47,572 101.485 139 653 Other. 380,536 400.879 410.575 202,633 197,225 199.617 Maintenance., Depreciation and amortization 247,973 225,123 212,072 Taxes other thanincome taxes 154,398 148.681 141.422 Federal and state income taxes (Note 5) 188,507 143.614 190.575 Total operating expenses 1,934,072 1.893.430 1.990.677 OPERATING INCOME 551,315 490.884 459.855 OTHER INCOME (EXPENSE). Allowance for equity funds used dunng construction (Note 1). 29,515 39.047 27,663 Income from subsidiary (Note 11) 3,750 3.302 3.440 Chantable foundation, (25,000) Other, net 20,187 4.254 7.077 INCOME BEFORE INTEREST CHARGES 579.767 537.487 - 498.0J5 INTEREST CHARGES. Interest on long-term debt. 230,046 225.522 205.824 Allowance for debc funds used dunng construction (Note 1). (27,627) (31.830) (24.235) Amortization of debt discount, premium and expensa net 4,469' 4.411 4,405 Other interest charges 22,210 19.429 21,883 Net interest charges. 229.098 - 217,532 207.877 NET INCOME...... 350,o69 319.955 290,158 DIVIDENDS ON PREFERRED STOCK. 39,523 36.480 32.919 NET INCOME AFTER DMDENDS ON PREFERRED STOCK. $ 311,146 $ 283.475 $ 257.239 Statements Of Earnings Retained in The Business for the ears Ended December 31,1989.1988 and 1987 1989 1988 1987 (In Thousands) Balance beginning of penod. S 565,351 $ ' 496,783 $ 440.644 Add (deduct): Net inccme after dwidends on preferred stock. 311,146 283.475 257,239 Cash dwidends paid on common stock (217,300) (212,700) (201,100) Preferred stock issuance expense (Notes 9 and 10). (24) (2,033) Auction preferred stock dividend adjustment (Note 10). 174 (174) Balanca end of pened (Note 14) $ 659,347 $ 565.351 5 496.783 Statements Of Other Pald In Capital for the Years Ended December 31,1989,1988 and 1987 1989 1988 1987 (in Thousands) Balance, beginning of penod. $1,304,645 $1.225.145 $1,182,145 Cash contnbution to capital by parent company 79.500 43.000 Balanca end of penod $1.304,645 $1.304.645 $1.225,145 The accompanying notes are an integral part of these statements. 22

a i s Sta^Cments Of Cash Flows for the Years Ended December 31,1989.1988 and 1987 a 1989 1988 19B7 (In Thousands). OPERATING ACTIVITIES $350,669 $319.955 $290.158 ' . Net income ; . A:hustments to reconcile net income to tiet cash proAded by operatng acteties: Depreciation and amort zation - 322,042 296,234 270.492-- Deferred income taxes. net 31,715 37,952

107.824 6,9174 15.019 23.477 Deferred investment tax cred

ts, net

Allowance for equity funds used dunng construct on.

(29,515) (39 047) (27.663) Other, net - (5,297) .16,106 67,445-Change irl Certain current assets and liabilities: (10.538)- (11,405) (177,359)- Receivables Prcmsion for uncollectible accounts 102 20.227 ~ 43.891 Prepayments 2,793 '(16.079) 1,725 ' inventones - 20,408 (23.182). (26,255)' Payables., 16,259 (12,957)- 39.645 Interest accrued, ..(248) 685 1,841 Taxes accrued. 1,547-(7.754) 516 Energy cost recovery. retail 39,164' - Other. 26,156 - (3.264) 898 Net cash provided from operating activities, 772.174 '592,490 s 616,635 INVESTING ACTIVITIES: .(459,199) (643.892). _(600,589)- Gross property additions - ~ Allowance for equity funds used dunno construction 29,515 39,047

27,663 4 -

- Income tax effect of debt portion of allowance 'Otner. -(15,742) (4.359).- ' (10.128) for funds used dunng constructon. (10,005)- (11,527): - (525) s Net cash used for investing activities,,, (455,431). (620.731), (583.579)- FINANCING ACTIVITIES AND CAPITAL CONTRIBUTIONS. Proceeds: First mortgage bonds. ~~. 150.000-200.000 Preferred stock. 100,000 : Polluton control bonds - 53,700 ' -432 Other tong-term debt,, 55,176 .62,515 69,786 Capital contnbutions from parent company 79,500: . 43.000

Notes payable, net -

^ 30,000 15,000 ~ <j ' Add. Bond discount and debt expenses, net .350. (3.340) (2.344) Preferred stock issuance expenses '

(24)e (2,033)

Redemptions: First mortgage bonds. (75,650)t (42,445)% -(108.082) Preferred stock. <4, (5,000) ' (2,500): = (5.000) Pollution control bonds

(53,950) -

Other long-term debt. - (57,316) - - (56,748) -(32.500) Notes payatso, net .(15,000) k ,c Add. Gains (losses) on reacquired debt, net. (4,902) -(208) (237) Cash used for payment of preferred stock dividends '(40,105) .(35,362). ,(32,837) H Cash used for payment of common stock dividends, -(217,300) (212,700) -(201.100). j Net cash provided from (used for) financing activities (53.882) j and captal contnbutions, -(315.021)' 21,679 ~ . NET INCREASE (DECREASE)IN CASH AND TEMPORARY CASH INVESTMENTS..... 1,722, (6,562) ~ (20,826) ' CASH AND TEMPORARY CASH INVESTMENTS-. ~ n] AT BEGINNING OF PERIOD 1,517 8.079 28.905 -I -l CASH AND TEMPORARY CASH INVESTMENTS y AT END OF PERIOD S 3,239- $ 1,517 ' $ ' 8.079 i l Supplemental cash flow information: Cash paid during the year for-i Interest (net of amount captalized). . $ 222,815 $ 212,803 $ 198.795 income taxes 122,812 64.660 78.202 The accompanying notes are an integral part of these statements? 23

{ h ~ ! B: lance She'etS at Decemtnf 31,1989 and 1988 1989-1988 Assets (In Thousands) - I UTlUTY PLANT (Notes 1. 3.12 and 16)- Plant in service. at onginal cost - ) . Less-Accumulated provison for cepreciation. ' 58,260,889 $7,444.943 2.465.901-2.264.152 5.794,988 5,180,791 - 1 Nuclear fuel, at amortized cost.

147,997l 174.130 Construction work in progress 557.221 1.023 077' i

Less-Property related accumulated de' erred income taxes (Note 1). ' 6,500,206 6.377,998 ~" 1.051,877 1.001.173 5.448.329 5.376.825. OTHER PROPERTY AND INVESTMENTS: Southern Electne Generating Company. at equity (Note 11) 25.576 21.827 -~ NonutAty property. net. 3,914 3.916. M:scel:aneous. 5.220 ' 3.934 ( 34,710. 29 677 't - CURRENT ASSETS: I ' 3,239 1,517. Cash (Note 4) Receivades. 261,759 i Customer accounts receivade 262,058 1 Other accounts and notes receivable (Note 13). 98,225 ' 96.628 i 69,766-53.609 Affaated companies.... Accumulated provison for uncdlectide accounts (Note 13) . (74,942) ' (79.691) -- Refundableincome taxes. . 12.366 FossI fuel stock, at awrage cost,. 131,942. .173.858 Materials and supplies, at aerage cost. 139,326- -117.818 Prepayments....... 54,613 28,412-Vacation pay deferred (Note 1). '22.021 21 871 706,248 - 688.147 DEFERRED CHARGES' Debtexpense beingamortzed 6,491 '6.831-Debt redemption expense, being amortzed 28,778 ' 27,329 Miscellaneous, 54.875 52.136' 90,144 - 86.296 l Total Assets, 56,279.431- $6.180 945 ' 7 - Capitalization and Uabilities

CAPITAUZATION (See accompanying statements).

Common stock equity (Note 14). $2,188,811 $2,094,815 Preferred stock ~. 484,400 484.400 Preferred stock subject to mandatory redemption (Note 8). 17,500 22,500 Long term debt.. ' 2.435,129-2.496.492 5.125.840 - 5.098.207 - . CURRENT LIABILITIES. 5.000 :' i r Preferred stock due or to be redeemed witnin one year (Note 8). 5,000 Long term debt due or to be redeemed within one year (Note 7) 81,031 96.242 4., Notes payade to banks (Note 4). 30,000 Accounts payable-Affiliated companies. 52,019 ~ 41,769 Other 215,626 217,674 Customer deposits 28,450 25,964 Taxes accrued-- Federal and stateincome(Note 5), 14,905 13.836 - t 'Other 11,927 11,449 Interest accrued,.. 49,926 50,174-Vacation pay accrued (Note 1) 22,021 21,871 Energy cost recomfy retail. 39,164 Miscellaneous, 51,858 28.944

j 601.927 512.923

' OEFERRED CREDITS AND OTHER LIABluTIES: Accumulated deferred investment tax credits (Note 5) 399,097 412,771 Prepaid capac:ty revenues, net (Note 17) 102,346 -104.211 Miscellaneous. 50.221 52.833 551,664 569.815 COMMITMENTS AND CONTINGENT MATTERS (Notes 2. 3, 5,11. 93.15 and 17) Total Capitalization and Uabilities. $6.279.431 $6.180 945 The accompanying notes are an integral part of these statements. 24 V '.u

Statements Of Capitalization' at December 3th989 and 1988 Percent of Amount Total-1989 1988 1589' 1988 (in Thousands) - COMMON STOCK EOUlTY Common stock. par value $40 per share. authoreed 6000.000 shares, outstanding 5608.955 shares. $ 224.358 $ 224.358 - Other paid in captal 1,304,645 1,304.645 Prernum on preferred stock. 461 461 Earrings retained in the business (Note 14). 659,347 565.351 Total.. 2,188.811 2.094 815 42.7 % 41.1% - - CUMULATIVE PREFERRED STOCK (Note 3). $1 par value authonzed 27.500.000 shares, outstanding 4.500.000 shares- $25 stated capital-Adjustable rate-7.68% at December 31,1989 (Note 9), 50,000 - 50.000 Adjustable rate-6.72% at December 31,1989 (Note 9), 50,000

50.000

$100 stated captal-Auction-7.43% at December 31,1989 (Note 10) 50,000 50.000 $100 par value, authonzed 3.850.000 shares. - outstanding 3.569.000 shares-Senes 4.20% to 4 52%.... 41,400 41.400 4.60% to 4 92%,, 29,000 l 29,000 5 96% to 8.04%,, 32,000 32.000 -l .8.16% :o 9 44%.. 232.000 ' 232.000 ,,s Total (annual dividend requirement-$36.394.000) ; 484.400 = 484.400 9.5 9.5 Subject to mandatory redemption (Note 8): 11.00% (annual dividend requirement-22,500 27,500 $2.475.000), Less amount due or to be redeemed within - -5,000 5.000 one year. Tobl excluding amount due or to be redeemed wthin one year. 17,500 22.500 0.3 . 0.4 LONGTERM DEBT (Note 3). First mortgage bonds-Matunty ~ Interest Rates May 1.1989 4%%. 20,000 j Apnl 1,1990 5%. . 6,957- ' 6.957 1 March 1,1991 44%. 13,000-13.000 June 1,1992 4%%. 14,360 i .14,360. May 1,1993 - 4%%..,,, 13.818' 13.818 May 1,1994 4%%... 24,105 '24.105-1995 through 1999 4%% to 8%%. 150,658' 150,658-2000 through 2004 7%% to 9%% 593,424' 593,424-2005 through 2008 8%% to 10%% 610,000 .610,000-2010 12%%. 36,073' 61.973 2016 9%%.. 125.000 ' 125.000 2017 10%%. 170,250' 200,000-2018 10%. ,150,000 150.000 ~l Total first mortgage bonds,,. 1,907,645 - 1,983,295 Otherlong term debt (Note 6). 627,496 629.886-j. Unamortized debt premium (discount), net. -- (18,981) (20.447) . Total long-term debt (annual interest ' j requirement-$226.239.000). -2,516,180 2.592.734 Less amount due or to be redeemed wthin one year (Note 7). 81,031 96.242 Long-term debt, excluding amount due or to be 'f L -redeemed witnin one year. 2,435.129 2.496.492 47.5 49.0 i! l! TOTAL CAPITAll2ATION. 55,125.840 $5,098.207 100.0 % 100.0 % ' 1 The accompany:ng notes are an integral part of these statements. -[ n q l 2s a

v ibOtes To Financial Statements nuclear fun which is schedul:d to begin in 1998; however. the actual year this service will begin is uncertain. Sufficient

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING

storage capacity currently is available to permit riormat POUCIES:

operation into 2010 and 2013 at Plant Farley units 1 and 2, General-respectiey The company is a wholly owned subsid:ary of The Southern Company (Southern) which is the parent Company Utility Plant-of five operating companies. Southern Company Services. Utikty plant is stated at onginal cost Such cost includes Inc (SCS), Southern Electne Intemational. Inc (SEI) and The appropnate administrative and general costs; payroll.related Southem investment Group. Inc (SIG) The operating com-costs such as pensions, taxes and other benefits; and the panies provide electnc utihty servicc in four Southeastern allowance for funds used dunng construction. The cost of states Contracts among the companies. covenng inter' maintenance, repairs, and replacement of minor items of u connection arrangements, irsterchange of electnc power and property is charged to maintenance expense. The cost of - joint ownership of generating facihties, are regulated by the replacements of property (exclusive of minor items of property). Federal Energy Regulatory Commission (FERC) or the is charged to utility plant, s Secunties and Exchange Commission (SEC) SCS provides, at cost, speciahzad services upon request to Southern and to cach of the subsidiary companies. SEI designs, constructs. - Allowance for Funds Used During Construction owns, and operates independent power facilities in the (AFUDC)- United States. SEl also provides a broad range of technical ' This allowance is the estimated debt and equity costs, dur-services to industrial companies and utikties outside the ang the period of construction, of funds imested in the con-Southern electric system. SIG researches and develops new - struction of plant which are not recovered from customers business and investment opportunities. through current revenues While cash is not realized currently Southern is registered as a holding company under the from such allowanCO, it is reahzed over the service hfe of the Pubhc Utility Holding Company Act of 1935 (Holding Com-plant under the rate making process through increased j pany Act), and it and its subsidianes are subject to the revenues resulting from higher rate base and higher i regulatory provisions of the Holding Company Act. The com-depre:iation expense. The composite rate used to determine. pany is also regulated by the FERC and the Alabama Pubhc the amount of allowance, net of deferred income tax, was 96 Service Commission (APSC) and follows genodly accepted percent in 1989,9.5 percent in 1988 and 89 percent in 1987, accounting principles and comphes with the accounting The company accounts for the deferred income tax effect of pokcies and practices presenbed by the respective the capitalized debt cost as a charge to income tax expense commissions associated with operations and a corresponding credit to. allowance for debt funds used dunng construction. The Revenues-deferred income tax effect of capitahzed debt cost was Pnor to February 1987, revenue from the sale of electncity $10.005,000, $11,527,000 and $10,12a000 in 1989.1988, and in the company's retail jurisdiction was included in revenues 1987, respectively. AFUDC, net of deferred income taxes, as as billed to customers on a cycle bilkng basis. Beginning in a percent of net income after dividends on preferred stock _ q February 1987, the estimated revenue for service rendered amour,ted to 15.1 percent in 1989,20.9 percent in 1988 and but not yet billed to retail customers is being accrued and 16.2 percent in 1987. j included in revenues. Under current retad rate procedures, such cumulative accrued amount of $49.446.000 as of Depreciation and Nuclear Decommissioning-February 1,1987, was amortized over the ensuing eighteen-Depreciation of the onginal cost of depreciable utikty plant month penod. Such amortization amounted to $19,229.000 in in service is provided by using composite straight kne rates 1988 and $30.217,000 in 1987. which approximated 3.5 percent in 1989,1988 and 1987 and includes a factor to provide for the expected cost of decom-Fuel Costs-missioning nuclear facilities. This cost, based on decommis-Fuel costs are expensed as the fuel is consumed. The sioning promptly after the unit is taken out of service, was '. } company recovers fuel costs and net purchased energy estimated as of December 1985, to be $250 million for Plant costs through fuel cost recovery mechanisms which provide Farley. Future estimates will be developed penodically con-for adjustments as necessary to reflect increases or - sidering changing price levels and technology and the factor decreasesin such costs. included in the depreciation rates will also be adjusted to - Fuel expense includes the amortization of the cost of reflect revised decommissioning costs. In 1988, the Nuclear nuclear fuel and a charge, based on nuclear generation, for Regulatory Commission (NRC) adopted regulations requinng the permanent disposal of spent nuclear fuel. Total charges all hcensees operahng commercial power reactors to submit for nuclear fuelincluded in fuel expense amounted to a report by July,1990, setting forth a plan for providing, with $75.024.000 in 1989 $90.671,000 in 1988 and $83.964,000 in reasonable assurance, funds for decommissionin0-1987. The company has a contract with the U.S. Department Reasonable assurance may be an external annual sinking of Energy which provides for permanent disposition of spent fund, a surety method or prepayment. J 4 i

When property subject to depreciatir., retired or othgr. The comporonts of rGt pension cost are shown tdor 7 wise disposed of in the normal Course of bu$ ness. Its Cost, 39gg -- $ggg 39g7 together with its Cost of removal. less salvage, is charged to (in Thousands) the accumulated proviSon for depreciation. Benefits earned dunng Retirement Plans-the year $ 19,605 $ 23.952 $ 22,422 - Intrest cost on propcted The company has a defined benefit, trusteed, non. benefit obligation 41,195 39,194-36.747 contnbutory pension plan which covers substantially all r Actual retum on plan regular employees Benefits are based on the greater of assets (154,473) (78.023) (23.525) amounts resulting from two different formulas: years of Net amortization and service and final amrage pay, or years of service and a flat deferral 94.596 25 300 (23 816) dollar benefit. The policy of the Company is to use the " entry age normal method with frozen initial liability" actuanal Net pension cost 923 $ 10_423 $ 11.828 - method for funding purposes, subject to limitations under federal income tax regulations. The company uses the Of the pension costs recorded, $228.000 in 1989. $4606.000 i " projected unit credit" actuanal method for financial report-in 1988 and $7,158.000 in 1987 v ere charged to operating i ing purposes as is required under Financial Accounting expenses, and the balance was charged to construction and Stanoards Board (FASB) Statement No. 87 " Employers' other accounts Also, the company has offered early retirement [ Accounting for Pensons". The funded status of the plan at plans in 1989,1988 and 1987. The expense related to these r i December 31 is as follows: plans is amortized in accordance with rate making treatment 1989 1988 and amounted to $11.202,000 in 1989 and $5.529,000 in (in Thousands) 1988. No expense was recorded in 1987. In addition, in 1989, Actuanal present value of benefit $2.033.000 was charged to consttuction and other accounts. 7 The company also provides certain health care and life obligations: Vested benefits $(374,736) $(318.662) insurance benefits for retired employees. Substantially all Nonvested benefits (7,031) (25 018) employees may become eligible for these benefits when they [ retire. The company has, since 1987, recognized the cost of l Accumulated benefit these beneftts on an accrual basis usng the " aggregate obligation (381,767) (343.680) cost" actuarial method, which spreads the expected cost of 3 Additionalamounts related to such benefits over the remaining penods of employees projected salaryincreases (194,188) (139 472) service as a level percentage of payroll costs. Accrued costs Projected benefit obligation. (575,955) (483,152) for medical benefits are funded to the extent deductible. Fait value of plan assets, pnmanly under federalincome tax regulations. Accrued costs of life equity and fixed income insurance benefits, other than current Cash payments for secunties 827,561 697,874 retirees, are not currently being funded. The cost of such Unrecognized net gain (158,035) (114,431 benefits amounted to $14.396.000 in 1989 W.008.000 in Unrecognized nel 1988 and $15.591,000 in 1987. transtion asse. (80,517) (84.754) Unrecognized pnor Vacation pay-service cost 1,622 209 The company's employees eam their vacation in one year and take it in the subsequent year. Howewr, for rate-making nt aaceh t- $ 14,676 $ 15,746 purposes, vacation pay is recognized as an allowable expense only when paid. Consstent with this rate making treatment, Weighted average rates assumed in the actuarial Calcula-the Company accrues a current liability for earned vacation tions were: pay and records a current asset representing future 1989 1988 1987 recoverability of the costs Such amounts were $22,021.000 Discount 8.0% 8.5% 7.5% and $21,871,000 at December 31,1989 and 1988, respec-Annual salary increase. 6.0 6;0 6.0 tively. In 1990, approximately G7 percent of the 1989 vacation ' Long-term return on plan assets 8.5 8.5 85 liabihty will be expensed and the balance will be charged to construction and other accounts. Income Taxes-The company provides deferred income taxes for all income tax timing differences. Indstment tax credits utilized are ' deferred and amortized to income over the average lives. of the related property. Provisions for property related deferred income taxes reflect consumption of part of the value of the plant and equipment to whlCh the provisions . 2T

relate Accordingly, th? relaZd accumulat:d deferred income. from 13415 perc;nt, a moratonum on upwed cdjustments - taxes are a valuation reserve that is deducted from plant through June 30.1991; ar d provisions which o'fectively hmit investment in the Ba!ance Sheets. FASB Statement No 96 increases or decreases to 4 percent in any calendar year " Accounting for income Taxes", which is currently scheduled The order also requires that the APSC rowew the range of to be implemented by 1992, requires. among other things, return by June 30,1992 to determine if such range is conversion to the liability method of accounting for deferred approonate in light of the then Current OConomic Conditions. income taxes The most significant impact will be to require The comoany's rate schedules provide for adjustments in i the use of before income tax AFUDC rates Currently, the. retail electric rates to reflect changes in both state and federal equity component of AFUDC is capitahred without a provi. income tax rates. As a result of the decrease in the federa! sion for deferred taxes. and the debt Component is capitalized income tax rate by the Tax Reform Act of 1986, retail electnc not of deferred income tax. This change will not affect not rates were reduced approximately 1 percent in January 1988 l rate base. but could create additional property taxes The and 2 percent in January 1987. change, which is expected to be adopted in 1992 on a in July 1989, two customers of the company filed a civil prospective basis, will necessitate restating deferred income complaint in Federal D:stnct Court in Montgomery against taxes at the rates at which they are expected to be settled the company, Southem, SCS and Arthur Andersen & Co. Certain deferred income taxes have been recorded at rates seeking to represent all ratepayers of the company and higher than the rates specified in the Tax Reform Act of 1986. claiming $10 million actual damages relating to the financial The amounts resulting from this Change in tax rates will be accounting treatment of spare parts at the company's used to reduce future tax expense for accounting and rate. generating plants, plus treble and punitive damages for making purposes. Tax law requires that such amounts alleged violations of the federal Racketeer influenced and related to accelerated depreciation be used to reduce tax Corrupt Organizations Act (RICO), federal and state antitrust expense over the lives of the related assets. Amounts not laws other federal and state statutes and Common law fraud. related to accelerated depreciation are not covered by The defendants' motions to dismiss this complaint were granted - normalization requirements and will be reversed in accor. in January 1990 and the plaintiffs have appealed that order. dance with rate making treatment. The statement also The company also has been named as a defendant, precludes the netting of deferred tax liabilities against assets. together with Southern. SCS, Arthur Andersen & Co., See Note 5 for further information regarding income taxes Georgia Power Company (Georgia), and Mississippi Power The company is included in the consolidated federal Company (Mississippi), in civil actions filed in September income tax return of Southerrt 1989, in the U.S. Distnct Court for the Southern Distnet of Missis 9ppi and with these companies and Gulf Pour Prior Year Reclassifications-Company (Gulf)in July 1989. in the U.S Distnet Court for the Tne financial statements for pnor penods reflect certain Northem Distnct of Flonda. These actions allege that reclassifications to conform with current presentation. Mississippi and Gulf obtained excessive rate increases by means of improper accounting for spare parts and, in the Statements of Cash Flows-case of the Flonda action, unlawful payments to government For purposes of the Statements of Cash Flows temporary off cia's. The plaintiffs seek actual damages estimated to be cash investments, which are secunties with matunties of 90 in excess of $10 million in each case, plus treble and punitive days or less, are considered cash equivalents. damages, on behalf of all ratepayers of Mississippi and Gulf for alleged violations of RICO. federal and state antitrust laws. 2, RATE MATTERS: Other federal and State statutes and Common law fraud, Motions to dismiss these actions have been filed by the in November 1982, the APSC adopted rates that provide defendants. for penodic adjustments based upon the company's earned . This litigation involves matters currently under investigation return on end-of-penod retail common equity. The rates also by the U.S. Attomey and the Internal Remnue Service (IRS) provide for adjustments to recognize the placing of new as discussed in Note S. In management's opinion, the com-r generating facilities in retail servica Both increases and pany's accounting practices are appropnate and the out-decreases have been placed into effect since the adoption of come of this litigation will not have a matenal impact on the these rates Dunng 1989, an increase of 1.8 percent wont into - company's financial statements.- effect in January An examination of the rate plan conducted by an independent management avoit firm under a contract with the APSC was completed in March 1989. The repon 3, CAPITAL BUDGET, FINANCING AND was generally favorable, and the audit firm recommended FUEL COMMITMENTS: continuation of the rate plan. In early 1990, the APSC voted Capital Budget-to continue these rates in effect until November 1,1994, by The company's capaal expenditures are currently which time the APSC must rev ew the procedure, however, estimated to total $522 million in 1990, $423 million in 1991 the rates will remain in effect thereafter unless the APSC and $434 million in 1992. The estimates inclede AFUDC of votes to modify or discontinue them. The order provides for $48 million, net of deferred income taxes, in 1990, $21 malion 'seeral modifications to the rates, including a reduction in the in 1991 and $11 million in 1992 The capital budget is subject allowed range of retum on common equity to 13-14W percent to penodic review and revision, and actual capital costs ' I r 28

1 incurred and Comm:rcial operation oates may y;ry from option in addition, these agreements provide for pryment of estimates because of several factors including new cost commitment fees based on the unused portions of the estimates, re Ased load estimates, the Cost of Capital and Commitments or, in lieu of such tees. for compensating changing enveonmental requirements. balances to be maintained at the banks < These agreements will replace the $200 milhon in commitments referred to above Financing-The company continues to maintain committed knes of credit within its service area in the amount of $141 milkon The ability of the company to finance its capital budget depends on the amount of funds generated intemally and whtCh expire at various times dunng 1990 and in certain the funds 11 Can raise by external financing The company's cases provide for awrage annual Compensating balances. pnmary sources of external financing are sales of fast mort. Because the arrangements are based on an average e balance, the company does not Consider any of its Cash gage bonds and preferred stock to the pubhc, receipt of additional paid in capita from Southern, and leasing of balances to be restncted as of any specific date. nuclear matenal At December 31,1989, the company had regulatory In order to issue additional first mortgage bonds and - approvat to have outstanding up to $325 milkon of short-term preferred stock, the company must comply with certain. borrowings eamings coverage requirements contained in its mortgage indenture and corporate charter. The most resthetive of these

5. INCOME TAXES:

provisions requires, for the issuance of additional first mort-A detail of the federal and state income tax provisions is gage bonds, that before income tax carnings. as defined. shown below: cover pto forma annual interest charges on outstanding first 1000 1000 I007 mortgage bonos at least Iwice; and for the issuance of addi-tional preferred stock, that gross income available for interest . (In Thousands) cover pro forma annualinterest charges and preferred stock Total provision for dividends at least one and one half times. These coverages, incometaxes: for first mortgage bonds and for preferred stock for the year Federal-ended December 31,1989, were 447 and 2.20, respectively. Currently payable $124,438 $ 73.644 ' $ 53.980 Deferred-Fuel Commitments-Current year. 38,298 74,142 142.093 Reversalof prior To supply a portion of the fuel requirements of its years (12,207) (42,627) (44.951) generating plants, the company has entered into vanous Deferredinestment _i long-term commitments for the procurement of fossil,and tax credits. 6,917 15.019 23 477 nuclear fuel in most cases. these contracts contain provi-sions for pnce escalations, minimum production levels and 157,446 120,178 174.599 other financial commitments. In addition, contracts with a State-certain coal contractor require reimbursement or purchase, Currently payable 11,808 8.965 4,445 at net book value. of the inwstments in mines or equipment Deferred-upon termination of the contract. At December 31,1989 such Cunent year: 5,041-4.927 4.498 not book value was approximately $44 milkon. Additional Reversalof prior i commitments for coat and for nuclear fuel will be required in years 583 1,510-6.184 the future to supply the company's fuel needs-17,432 15 402 15,127 Total.. .174,878 135,580 189,726 4, BANK LINES OF CREDIT: Lessincome taxes At December 31,1989, the company had committed knes charged (credited)to of credit with banks totahng approximately $341 milhon, of - . other income, (13,629) (8.034) (849) which $200 milhon represented commitments obtained Federal and state. under revolving credit agreements with ten banks outside its income taxes charged service area, terminating Apnl 30,1993-to operations. , $188,507 $143 614 $190.575 The company, along with Southern and Georgia, expects - to enter into agreements, effective as of January 1,1990, with sewral banks outside the service area to provide $500 - Deferred income taxes result pnmarily from the use of milhon of revolving credit to the companies individually or in accelerated methods of depreciation and other wnte-offs of i' any combination up to the total credit amount of $500 milhon. property costs, as provided for by the income tax laws, being through May 1,1993. It is also expected that Mississippi will greater than the book depreciation of such property. Other be a party to one of the agreements, which will provide deferred income taxes are provided for certain costs or Mississippi with $3 milhon of available credit. Each company revenues that are recognized for income tax purposes in has the option of converting its short term borrowings into penods different from those used for book purposes. Income term loans, payable in 12 equal quarterly installments with the taxes deferred in prior years are reversed and charged or first installment due at the end of the first quarter after the credited to income when the book depreciation of property agreement terminates or at an earlier date at such company's costs exceeds the related tax deductions or when other timing t

alfferences r: verse As :xp!ained in Noti 1, certain amounts

6. OTHER LON3 TERM DEBT:

resulting from the Cn89ge in tax rates will be reWrsed in Details of other long term debt are as follows; accordance with regulatory rate making treatment. See Note 1 for further information on the new rules on accounting for Neember R income taxes. 1989 1988 Deterred investment tax credits are amortized over the hfe of (in Thousands) the related property with such amortization applied as a Credit Obligations incurredin connection to reduce depreciation in the Statements of income Such with the sale of tax cxempt pollution credits amortized in this manner amounted to $20,592.000 in control revenue bonds by public 1989. $20.618.000 in 1988. and $22.798.000 in 1987. At authonties- - l December 31,1989, all investment tax credits available to December 1,1995 and 2004, t reduce federal income taxes payable had been utilized. 9% and 9%%(redeemed The provision for income taxes currently payable includes July 1989).., - $ 18,700 the tax effects of the reversal of pnot years' timing differences Apnl 1,2005. 94%(redeemed for which deferred income taxes were not provided. At. August 1989) 35.000 December 31,1989, the remaining balance of such timing 2003 2013. 6% to 9%% 163,200 163.450. differences was approximately $85 million, for which deferred 2014 2016. 7.2% to 10%% 306,200 252.500 income taxes of approximately $31 million have not been less funds on deposit provided with trustees, 1,546 1.546 The total provision for federal income taxes as a percentage 467,854 468.104 of income before federal income tax amounted to 31.0 percent, Capitalizedlease obligations 273 percent, and 37.6 percent for 1989,1988, and 1987, and other tong term debt-i respectively The difference between these rates and the Nuclear fuel. 144,042 - 145,752 L federal statutory rate (34 percent in 1989 and 1988 and 40 Office buildings, 8,971 9.219 t percent in 1987) was due pnmanly to the exclusion from tax Street light and other 6,629 6 811 able income of the allowance for equity funds used dunng 159'642 161'782 construction (2.0 percent in 1989,30 percent in 1988 and 2 4 percent in 1987), the raduction in federal income tax expense $627,496 $629.886 ' related pnmanly to depletion for tax years audited and settled (2.5 percent in 1988) and differences in depreciation basis and rates (a negatie 1.2 percent,1.9 percent and 16 per-Pollution control obligations represent installment purchases cent in 1989,1988 and 1987, respectively). of pollution control facilities financed by funds denved from t The U. S. Attomey for the Northern Distnct of Georgia and - sales by public authonties of revenue bonds. The company is .the IRS are conducting an investigation of certain tax required to make payments sufficient for the authonties to I accounting practices of Southern's operating subsidianes, meet principal and interest requirements of such bonds. With excluding Savannah Electric and Power Company (Savannah), respect to $32,250.000 of such pollution control obligations, Management has been informed that the investigation was the company has authenticated and delivered to the trustees initiated regarding tax accounting for emergency spare parts, a like principal amount of first mortgage bonds as secunty for but has been expanded to include other matters, including its obilgations under the installment purchase agreements. political contnbutions The full extent of the investigation and No pnncipal or interest on these first mortgage bo~nds is its ultimate outcome cannot now be determined; howewr, in payable unless and until a default occurs on the installment management's opinion, the outcome will not have a matenal purchase agreements Dunno 1989, the company refinanced impact on the comDany's financial statements. Its obligations under two issues of pollution control bonds in March 1989, the SEC ordered a pnvate investigation to that carned interest rates of 9.0 percent to 9125 percent determine whether Southem, its operating subsidianes ($18.7 million) and 9.5 percent ($35 million) at new interest (including the company), and Southern Electne Generating rates of 7.2 percent in each case. Company (SEGCO) may have violated federa! secunties lam The company has capitalized leased nuclear matenal and L and the Holding Company Act in connection with certain recorded the related lease obligations. The company exercised disclosures in or omissions from secuntie's offering matenals. its option to terminate two arrangements, effective in Apnl proxy statements, reports and documents filed with the SEC, 1988 and November 1989. One other arrangement provides and which were also provided to investors and others, relating for the payment of interest at varying rates and times depen-to certain tax and financial accounting practices. spare parts - dent on options selected by the company from types of loans accounting, tax deductions and liabilities, contingent liabilities available under the arrangement. Pnneipal amounts outstand- .i and other matters affecting the net income and financial con-ing at the end of 1983 were $144.042.000 with an effective. dition of Southern and its subsidianes, maintenance of books rate, including applicable fees, averaging 8.8 percent. and records, internal accounting controls and political con-Pnncipal payments are reovired under the arrangement tributions Management believes that this investigation is based on the cost of fuel bumed. related to the U.S. Attorney and the IRS investigations referred The company has also capitalized certain office building to above. The final outcome of this matter cannot now be leases and a street light lease. Monthly pnncipal payments determined; however, in management's opinion, the out-plus interest are required, and at December 31,1989, the come will not have a material adverse effect on the com-interest rate was 9.5 percent for office buildings and 130 per. pany's financial statements. cent for streetlights. 30

t The net book value of cepitaleed leases included in utility

10. AUCTION PREFERRED STOCK:

plant in service was $142.255.000 and $140382.000 at The company issued 500,000 shares of Auction Class A December 31,1989 and 1938 respectively. The estimated Preferred Stock in November 1988. with a stated capital of aggregate annual rnatunties of other long term debt through $100 per share. The dividend rates are determined on the 1994 are as follows: $53.559.000 in 1990, $41603.000 in basis of orders placed in an auction conducted generaily 1991. $33.705.000 in 1992. $16381.000 in 1993 and every 49 days Dunng 1989, the per annum dividend rate $7322.000 in 1994 ranged from 670 percent to 800 percent per annum The rate for the dividend penod beginning Februar/13,1990 is 6mrmnmr anna

7. LONGTERM DEBT DUE OR TO BE REDEEMED WITHIN ONE YEAR:

11. INVESTMENT IN JOINTLY OWNED FACILITIES:

The annual first mortgage bond improvement fund require. The company and one of its a' filiates. Georgia, own equally mont is one percent of the aggregate principal amount of all of the outstanding capital stock of SEGCO. which owns bonds of each series authenticated. so long as a portion of electne generating units with a total rated capacity of that series is outstanding, and may be satisfied by the 1.019.680 kilowatts, together with associated transmission deposit of cash and'or reacoutred bonds, tne certification of facilities. The capacity of these units is sold equally to the unfunded property additions or a combination thereof. The companV and Geor9sa under a contract expinn9 in 1994 1990 tequirement amounting to $20.515.000 was satisfied in which, in substance. requires payments sufficient to provide January 1990 by the deposit of cash, all of which was used. for the operating expenses, taxes. interest expense and a + for the redemption of outstanding bonds at par value. retum on equity, whether or not SEGCO has any capacity First mortgage bonds matunng in 1990 amount to $6.957.000 and energy available. Tb* company's share of such amounts and other long term debt of $53,559.000 matunng in 1990 totaled $81,166.000 n 1989, $76.174.000 n 1988 and a consists pnmanly of capitalized nuclear fuel lease obligations. $76,812.000 in 1987 and is included in Purchased and interchanged power, net" in the Statements of income

8. PREFERRED STOCK SUBJECT TO in addition, the company has guaranteed unconditionally MANDATORY REDEMPTION:

the obligation of SEGCO under an installment sate agree-ment for the purchase of certain pollution control facilities at The 11 percent senes of preferred stock is subject to a cumulative sinking fund requinng the redemption of 25.000 SEGCO's generating units. pursuant to which $26 million principal amount of pollution control revenue bonds have shares ($2.500.000) of such stock on January 1 each year been issued Georgia has agreed to reimburse the company The company has the non cumulative option to double the for the pro f ata portion of such obligation corresponding to its number of shares redeemed in any one year. The stock is then proportionate ownership of stock of SEGCO if the com-redeemable for sinking fund purposes at $100 per share plus accrued dividends to the date of redemption. The pany is called upon to make such payment under its guarantv. At December 31,1989, the capitalization of SEGCO consisted redemption requirement may be offset each year in whole or of $51.153.000 of equity and $81,400.000 of long-term debt in part by shares purchased and cancelled. The January 1 on which the annualinterest requirement is $7,411,000 In 1990 sinking fund reauirement was satisfied through the redemption of 25.000 shares. The company exercised an 1989. SEGCO did not pay any dividends. In 1988 and 1987, SEGCO paid dividends totaling $5,422.000 and $500.000, option to redeem 25.000 additional shares. respectively. SEGCO s net income was $7,500,000, $6.604.000 and $6.880.000 for 1989,1988 and 1987, respectively. -

9. ADJUSTABLE RATE PREFERRED STOCK:

The company and one of its affiliates, Mississippi, own as The company issued 2.000.000 shares of Adjustable Rate tenants in common in the proportions of 60 percent and 40 Class A Preferred Stock in September 1983. with a stated percent, respectively, a 500,000 kilowatt steam electne capital of $25 per share In February 1988. the company generating plant in Greene County, Alabama. The plant was issued an adoitional 2.000.000 shares of Adjustable Rate placed in service in 1965 and the Company's gross invest-Class A Preferred Stock with a stated capital of $25 per ment at December 31,1989, amounted to $78.537,000. The share. The d,vidend rate on each of these series is adjusted company's share of expenses is included in the correspond-quarterly using a formula based upon certain U. S. Treasury ing operating expense accounts in the Statements of income. secunty rates Homver, the applicable dividend rate for any dividend penod shallin no event be, for the 1983 senes, less

12. PROPOSED SALE OF INTEREST IN PLANT:

than 7.20 percent per annum or greater than 1328 percent The company proposes to sell an 8.16 percent undivided por annum and, for the 1988 senes, less than 5.92 percent per ownership interest in units 1 and 2 of Plant Miller and related annum or greater than 11.04 percent per annum, The per facilities to Alabama Electne Cooperative, Inc (AEC). AEC's annum dividend rates are shown below: ownership interest would represent about 108 megawatts of the two units' capacity of 1.320 megawatts. 1983 Senes 1988 Senes This purchase by AEC will be in lieu of a purchase of an First quarter 1989 8 48 % 7.52 % interest in Piant Farley in accordance with conditions imposed Second quarter 1989 - 8 64 7.68 by the NRC on the operating licenses for Plant Farley in an 3 Third quarter 1989: 7.84 6.72 antitrust review. The agreement for sale of the ownership Fourth quarter 1989 7.68 6.72 interest in Plant Miller units 1 and 2, has received the requisite - First quarter 1990 7.52 6 40 regulatory approvals < The proposed sale will be closed on or - c L 31

att January 1.1991, and no lat:r than June 1,1992. The ServlCe Commission which d'sallowed the recoMry of tne purchase price will be established by a formula under which caoacity Charges under these contracts. As a result of tnese a calcu!ation will be made at the time of sate. If computed actions, Gulf States advised Southem that the capacity currently, the formula would y eld approximately $50 milhon. charges apphCable to the Texas and Louisana junsdictions would not be deposted with the Court or paid to the

13. NONTERRITORIAL REVENUES:

operating affiliates. Because of Gulf States' refusal to pay, the The operating subsidianes of the Southem efectne system, operating affshates were allo ^ed by the FERC to suspend j including the company, have entered into long-term and performance under the Contracts effective July 1988. In _ short term contractual agreements for the sale of capacity December 1988, Southem filed a counterclaim against Gulf and energy to certain nonaffikated utihties located outside the States seeking recovery of all past due payments and j system's service territory Cenain of tnese agreements are ' damages fot breach of the contracts. The case is pending before the U. S. Distnct Court in Texas. .j nonfirm and are based on capacity of the system in general, Other agreements are firm and pertain to capacity related to _ in consokdated proceedings initiated by Gulf States and specific generating units. Because the energy is generally Southern s operat;ng subsidianes, the FERC in 1988 found sold at cost under these agreements, revenues from capacity the contracts not to be unjust or unreasonable, granted the sales pnmarily affect profitabihty. The company's portion of declaratory rehef sought by Southem s operating subsidianes, off system capacity revenues has been as follows: and dismissed the Complaint filed by Gulf States This deci-sion has been affirmed by the U. S. Court of Appeals for the Distnct of Columbia Circuit, in February 1991 Gulf States e Other - Other filed a petition requesting the U.S Supreme Court to review = Unit. Long-Term ShortTerm the FERC decision The FERC had previously ruled that it Year Power Nonfirm Nonfirm Total does not have juhsdiction over the question of whether (in Thousands) Southem negotiated in good fatth to reduce the amount of 1989 $137,024 $ 1,290 $758 $139,072 capacity purchases and engaged in fraudulent conduct in 1988 121.008 4.695-125.703 entenng into the contracts. 1967 142.195 10.476 152.671 Revenues recorded after June 1988, do not include any amounts for sales to Gulf States under unit power and other Long term nonfirm power is currently being sold to the City long-term power contracts Pnor to that date, revenues of Tallahassee, Flonda, under a contract that expires in the included the full amount due under these Contracts. Some of year 2000. Also beginning in 1990, nonfirm power is being - ' these revenues have been withheld by Gulf States since sold to Flonda Power Corporation (FPC), and these sales will 1986. Because of disclosure in reports filed with the SEC by continue through 1992. An agreement with Virginia Electne J Gulf States concerning its financial condition, most of these and Power Company for short term nonfirm power was revenues, after taxes, have been excluded from net income entered into and expired dunng 1989 through charges to the provision for uncollectible accounts Unit power from Plant Miller is being sold to Flonda Power shown below; & Ught Company and Jacksonville Electnc Authonty and, Cumulative beginning in 1994 will be sold to FPC. Under these 1986 1988 1988-1987: agreements, approximately 1,000 megawatts of capacity is (In Thousands) scheduled to be sold dunng the penod 1990 through 1993. Disposition of Gulf States - Thereafter, these sales will increase to approximately 1,200 Revenue: megawatts by mid 1995 and remain at that level, unless Total revenues $148,924 $25,442 - $58.565 reduced by the customers after 1999. untif the expiration of Revenues withheld or - the contracts in 2010. These megawatts of capacity sales do deposited, . 91,796 20,113 43.822 'r not include any amounts under contracts to Gulf States Charged to provision for . 20.113' 43,692 Utilities Company (Gulf States), which were suspended in uncollectible accounts- ' 73,389 1988 as discussed below Excluded from after tax In July 1986, Gulf States filed suit in the U. S. Distnct Court incoma 43,291 12,829 25,432 for the Eastem Distnct of Texas (Court) against Southem, its operating subsidianos (excluding Savannah), and SCS. The Certain immatonal adjustments were recorded in 1989 complaint seeks a judgment declanng that Gulf States is reflecting true up provisions of the contract and are included excused from further obhgation under its unit power and in the cumulative amounts other long term power sales contracts with the company and in management's opinion, the outcome of the lawsuit will the other operating affihates of Southem and an award to not materially affect the company's financial statements, e Gulf States for unspecified damages Gulf States alleges. howe er, the ultimate outcome of this matter Cannot now be - among other things. that Southem failed to negotiate and determined. renegotiate in good faith to reduce the amount of capacity purchases under the contracts and engaged in fraudulent 14, DMDEND RESTRICTIONS: conduct in entenng into the Contracts. The Court permitted The company's first mortgage bonds and preferred stock Gulf States to make payments due under the Contracts by outstanding are entitled to the benehts of indenture covenants depositing funds with the Court pending the outcome of the or Charter provisions restnCttng the payment of cash dividends i lawsuit. Subsequently. Gutt States recorved orders from the on common stock (except those paid Concurrently with the t Public_ Utihty Commission of Texas and the Louisiana Pubhc receipt of a cash capital contnbution in like amount) Under t t 1

the most restnctive of these a first mortg;ge bond indentur) apphcible trust indentures. The NRC hO proposed en covenant, $273455000 of retained eamings were restncted amendment to this rule to postpone the rule s implementation against the payment of common dividends at December 31, date from Apol 4,1990, until one year from the e*fective date 1989 of the amendment. The company expects to comply with this rule. 15, NUCLEAR INSURANCE: Under the Pnce. Anderson Amendments Act of 1968 (Act), 16, ASSETS SUBJECT TO LIEN: the company maintains agreements of indemnity with the The company s mortgage, as amenced and supplemented, NRC which, together with private insurance, cover third-party secunng the first mortgage bonds issued by the company, habikty ansing from any nuclear incident occumng at Plant constitutes a direct first hen on substantially all of the Com-Farley. The Act hmits to $7.8 bilkon pubhc habikty claims that Could anse from a single nuclear incident. Plant Fariev is pany's fixed property and franchises. insured against this habihty to a maximum of $200 milkon by pnvate insurance, with the remaining coverage provided by a

17. ALABAMA MUNICIPAL ELECTRIC AUTHORITY mandatory program of deferred premiums which would be (AMEA) CAPACITY CONTRACT:

assessed, after a nuclear incident, against all owners of in August 1986, the company entered into a firm power nuclear reactors A company could be assessed up to $66 purchase contract with AMEA entithng AMEA to scheduled mdhon per incident for each licensed reactor it operates but amounts of capacity (to a maximum of 100 megawatts) for a not more than an aggregate of $10 milkon per incident to be penod of 15 years commencing September 1,1986. This paid in a calendar year for each reactor. Such maximum power will be sold to AMEA for its member municipakties tnat assessment for the company is $132 milkon per incident but previously were served directly by the company as wholesale not more than an aggregate of $20 million to be paid for customers. Under the terms of the contract, the company eachincident in any one year. received a payment from AMEA representing the net present The company is a member of Nuclear Mutual Limited value of the revenue associated with this capacity entitle-(NML), a mutual insurer estabhshed to provide property ment. This payment is being amortized to operating revenue damage insurance in an amount up to $500 million for with a corresponding charge to other interest expense at an members' nuclor gerierating facikties. The members are effecthe discount rate of 9.96 percent, subject to a retrosp9ctive premium adjustment in the event in order to secure AMEA's advance payment and the that losses excecd accumulated resere funds. The com-company's performance obhgation under the contract, the pany's maximum assessment per incident is hmited to $32 company issued and dehvered to an escrow agent $1133 milhon under the current pokcy. million of first mortgage bonds representing the maximum Additionally, the company has pokcies which c0rrently amount of hquidated damages payable by the company in provide coverage up to $1.5 bilkon for losses in excess of the the event of a defautt under the contract. No principal or $500 milkon NM L coverage. This excess insurance is provided interest is payable on such bonds unless and until a default by Nuclear Electric Insurance Umited (NEIL), a mutual by the company occurs. As the liquidated damages dechne insurance company, and Amencan Nuclear Insurers' Mutual under the contract, a portion of the bonds equal to such Atomic Enefgy Uabikty Underwnters. decrease will be returned to the company. At December 31, NEIL also covers the additional costs which would be 1989, $1.6 milhon of such bonds have been deliwred to the incurred in obtaining replacement power during a prolonged company by the escrow agent. i accidental outage at a member's nuclear plant. Members i can be insured against increased costs of replacement

18. QUARTERLY FINANCIAL DATA (UNAUDITED):

power in an amount up to $3.5 milhon per week (starting 21 Summanzed quarterty financial data for 1989 and 1988 are weeks after the outage) for one year and up to $2.3 milkon as folk and $1.2 milkon por veek for the second and third years-Net income respectively. after Dividends Under each of the NEIL pohcies, members are subject to Operating Operating on Preferred assessments if losses each year exceed the accumulated Revenues income Stock funds available to the insurer under that pokcy. The present maximum assessments per incident for the company for (in Thousands) 3ggg excess property damage would be $68 milkon and for replacement power would be $7.8 milhon under each current St I I 7 I O all property pohcies, the NRC has issued a proposed Third 717,850 179,704 112,735 rule providing that, no later than April 4,1990, on site property Fourth 586,741 109,914 44,512_ j damage insurance pohcies for commercial nuclear power 1988 plants be amended to provide that all proceeds from such First $557,432 $108.084. $ 56,768 insurance shall be apphed first for the sole purpose of plac-Second 586,515 98,392 45,885 . Ing the reactor in a safe and stable condition after an acci-Third 696,272 172,556 119,458 dent. Any remaining proceeds are first apphed tcward the Fourth 544,095 111,852 61,364 costs of decontamination and debns removal operations ordered by the NRC, and second, paid to either the Com-The company's business is influenced by seasonal weather pany or its bond trustees as may be appropnate under conditions and the timing of rate adjustments. 33

Cenerv7/ Officers Jerry L Harris, Assistant Comptroller Continental Stock Transfer & Trust Company E. Wayne Boston, Assistant Secretary 72 Reade Street I er B Harr, Pr s ent and and Assistant Treasurer New York, New York 10007 a )e,$stant 3ecmtay and (All series except the 8.72% series. Nistan Travis J. Bowden, Executive Vice Adjustable Rate Class A 1988 series, President and Auction Class A 1988 senes) r thy L ssig, Assistant Secetant Bill M. Guthrie, Executive Vice Southern Company Services,Inc. President Shirley A. Thomas, Assistant Secretary 3 64 Perimeter Center East Atlanta, Georgia 30346 William L McDonough, Executive Vice John H. Snyder, Assistant Secretary (For the Adjustable Rate Class A 1988 William L Smith, Assistant Treasurerd R. P. Mcdonald, Executive Vice Bankers Trust Company President David L Whitson, Assistant Treasurer Four Albany Street New York, New York 10015 W. George Hairston ill, Senior Vice (For the Auction Class A 1988 series) President, Nuclear Operations 8""In"ReI*rceNe President, Division Officers V um O Stephen E. Bradley, Vice President, John B. Byars Jr., Vice President, Public Affairs Eufaula AmSouth Bank, N.A. Robert A. Buettner, Vice President and Jerry J. Thomley, Vice President, Stock Transfer Department Counsel Annistons R0. Box 11426 Birmingham, Alabama 35202 Rayford F. Davis, Vice Dresident, Robert H. Haubein Jr., Vice President, Poer Delivery Tuscaloosa Harris Trust Company of New York 77 Water Street John E, Dorsett, Vice President, Power J. Bruce Jones, Vice President, Mobile New York, New York 10005 Generation Services Homer H. Tumer Jr., Vice President, R. S. Hardigree, Vice President, Birmingham Contine.italStock Transfer Corporate Services & Trust Company Clyde H. Wood, Vice President, 72 Reade Street R. E. Huffman, Vice President, Montgomery New York, New York 10007 Operating Services (All series except the 8.72% series, h$fion lass A198 s rie ) ^ Vi ia tchins lil, Vice President 2 Retired effective January 1,1990 Southern Company Services, Inc. T. H. Jones, Vice President, Fossil 3 Effective July 28,1989 64 Perimeter Center East Generation

• Retired effective February 1,1990 Atlanta, Georgia 30346 C. Alan Martin, Vice President, 5 Effective April 28,1989 (For the Adjustable Rate Class A1988 Marketing series)

Charlton B. McArthur, Vice President, Bankers Trust Company Economic Development Yjrk10015 U8 Ci 86Hl8 (For the Auction Class A 1988 series) Jack D. Woodard, Vice President, Nuclear Generation Alabama Power Company Jackson W. Minor, Vice President and 600 North 18th Street Comptroller Birmingham, Alabama 35291 Art P. Beattie, Secretary Harris Trust Company of New York 77 Water Street Balch & Bingham Charles M. Deason, Assistant New York, New York 10005 P.O. Box 306 Comptroller (For the 8.72% series) Birmingham, Alabama 35201 34

Directon John C. Webb IV, Demopolis (1977) Gerald H. Powell, Jacksonville (1986)' President. President n,n. p ny Al bama, Inc. Elmer B. Harris, Birmingham (1989)t. h'h e I Lumbe President and Chief Executive Officer Winton M. Blount 111, Montgomery James C. Inzer Jr., Gadsden (1965) William 0. Whitt, Birmingham (1979)i (1986)* Partner Executive Director, Association of Chairman and Chief Executive Officer Inzer, Suttle, Swann & Stivender, P.A. Edison illuminating Companies, Inc. Winton M. Blount lit and Associates Attomeys Retired Executive Vice President Dtversified Investments Crawford T. Johnson Ill, Birmingham Whit Armstrong, Enterprise (1982) $e n rsty o Alaba a (1969)t President, Chairman and Chief Chairman and Chief Executive Officer Executive Officer Travis J. Bowden, Birmingham (1988)t Coca-Cola Bottling Company United. The Citizens Bank Inc. Executive Vice President Bottlers of Soft Drinks Edward L. Addison, Atlanta (1983) Carl E. Jones Jr., Mobile (1988)* President President, Chairman and S. Eason Balch, Birmingham (1970) Partner The Southern Company Chief Executive Officer Balch & Bingham Electric Utility Holding Company First Alabama Bank of Mobile Attorneys James H. Sanford, Prattville (1983)" Dr. John W. Rouse, Birmingham William J. Rushtonill, Birmingham President (1988)t (1970)t HOME Place Farms,Inc. President and Chief Executive Officer Chairman and Chief Executive Officer Diversified Farmers and Ginners Southern ResearchInstitute Protective Life Corporation Sales and Service of Life and Health Bill M. Guthrie, Birmingham (1988)t Louis J. Willie, Birmingham (1984)t insurance President, Chairman and Chief ExecuttaVice President i fhar an d hef E e u1m Booker.Wa hngtonInsurance

• Audit Coumittee member l

h ""h } e er AmSouth Bancorporation Company " Audit Comattee attemate member t Executive Coamittee member Multibank Holding Company 1 AdvisoryDirecer William L. McDonough, Birmingham, Fred Morgan Clark, Eufaula (1977) (1985)t Years in parentheses 2ndicate date of Retired Executive Vice President election. ? as j

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