PAGE
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1995
---------------------------------------
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
---------------- -----------------
Commission File Number 1-9936
SCEcorp
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4137452
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2244 Walnut Grove Avenue
(P.O. Box 999)
Rosemead, California
(Address of principal 91770
executive offices) (Zip Code)
818-302-2222
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at November 6, 1995
- - -------------------------- --------------------------------
Common Stock, no par value 445,289,374
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SCEcorp
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Consolidated Financial Statements:
Consolidated Statements of Income--Three and Nine
Months Ended September 30, 1995, and 1994 2
Consolidated Balance Sheets--September 30, 1995,
and December 31, 1994 3
Consolidated Statements of Cash Flows--Nine Months
Ended September 30, 1995, and 1994 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 11
Part II. Other Information:
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 24
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SCEcorp
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per-share amounts
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
-------------------------- --------------------------
1995 1994 1995 1994
---------- --------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Electric utility revenue $2,509,848 $2,529,783 $5,969,459 $5,952,901
Diversified operations 160,158 148,337 383,417 349,974
---------- ---------- ---------- ----------
Total operating revenue 2,670,006 2,678,120 6,352,876 6,302,875
---------- ---------- ---------- ----------
Fuel 213,558 274,378 517,022 672,336
Purchased power 917,547 922,815 1,954,370 1,949,676
Provisions for regulatory adjustment
clauses -- net 146,463 121,536 191,918 82,097
Other operating expenses 350,719 356,823 1,015,516 1,062,075
Maintenance 86,488 77,269 269,212 249,748
Depreciation and decommissioning 253,720 245,620 750,271 721,220
Income taxes 202,602 195,661 419,150 395,665
Property and other taxes 50,612 54,075 158,990 161,434
---------- ---------- ---------- ----------
Total operating expenses 2,221,709 2,248,177 5,276,449 5,294,251
---------- ---------- ---------- ----------
Operating income 448,297 429,943 1,076,427 1,008,624
---------- ---------- ---------- ----------
Provision for rate phase-in plan (33,082) (37,196) (90,947) (101,422)
Allowance for equity funds used
during construction 4,392 3,807 14,915 11,296
Interest income 16,625 9,903 46,695 30,154
Minority interest (11,284) (11,416) (34,378) (33,221)
Other nonoperating income -- net 10,241 23,340 29,023 60,360
---------- ---------- ---------- ----------
Total other income (deductions) -- net (13,108) (11,562) (34,692) (32,833)
---------- ---------- ---------- ----------
Income before interest and other expenses 435,189 418,381 1,041,735 975,791
---------- ---------- ---------- ----------
Interest on long-term debt 140,913 130,037 399,141 382,771
Other interest expense 14,676 20,276 61,580 60,946
Allowance for borrowed funds used
during construction (3,335) (3,733) (11,326) (11,537)
Capitalized interest (16,012) (11,118) (43,581) (33,511)
Dividends on subsidiary preferred
securities 11,378 10,020 34,934 30,060
---------- ---------- ---------- ----------
Total interest and other expenses -- net 147,620 145,482 440,748 428,729
---------- ---------- ---------- ----------
Net income $ 287,569 $ 272,899 $ 600,987 $ 547,062
========== ========== ========== ==========
Weighted-average shares of common stock
outstanding 445,855 447,799 446,755 447,799
Earnings per share $.65 $.61 $1.35 $1.22
Dividends declared per common share .25 .25 .75 .855
</TABLE>
The accompanying notes are an integral part of these financial statements.
PAGE
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SCEcorp
CONSOLIDATED BALANCE SHEETS
In thousands
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Utility plant, at original cost $19,628,641 $19,121,964
Less -- accumulated provision for
depreciation and decommissioning 8,360,622 7,710,227
----------- -----------
11,268,019 11,411,737
Construction work in progress 791,058 906,766
Nuclear fuel, at amortized cost 152,668 98,044
----------- -----------
Total utility plant 12,211,745 12,416,547
----------- -----------
Nonutility property -- less
accumulated provision for
depreciation of $129,238 and $101,093
at respective dates 2,078,049 1,977,069
Nuclear decommissioning trusts 1,172,079 919,351
Investments in partnerships and
unconsolidated subsidiaries 1,551,829 1,200,927
Investments in leveraged leases 570,100 555,564
Other investments 67,916 39,584
----------- -----------
Total other property and investments 5,439,973 4,692,495
----------- -----------
Cash and equivalents 544,519 533,957
Receivables, including unbilled
revenue, less allowances of
$23,433 and $23,934 for uncollectible
accounts at respective dates 1,245,009 975,064
Fuel inventory 118,286 116,929
Materials and supplies, at average cost 156,797 129,109
Accumulated deferred income taxes -- net 465,573 271,308
Prepayments and other current assets 144,916 107,731
----------- -----------
Total current assets 2,675,100 2,134,098
----------- -----------
Unamortized debt issuance and
reacquisition expense 357,347 356,557
Rate phase-in plan 158,930 240,730
Unamortized nuclear plant -- net 108,367 171,071
Income tax-related deferred charges 1,754,953 1,816,414
Other deferred charges 569,529 562,335
----------- -----------
Total deferred charges 2,949,126 3,147,107
----------- -----------
Total assets $23,275,944 $22,390,247
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
PAGE
<PAGE>
SCEcorp
CONSOLIDATED BALANCE SHEETS
In thousands, except share amounts
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- -----------
(Unaudited)
CAPITALIZATION AND LIABILITIES
Common shareholders' equity:
Common stock (445,421,874 and 447,799,172
<S> <C> <C>
shares outstanding at respective dates) $ 2,677,454 $ 2,691,574
Retained earnings 3,691,821 3,451,842
----------- -----------
6,369,275 6,143,416
Preferred securities of subsidiaries:
Not subject to mandatory redemption 433,755 446,255
Subject to mandatory redemption 275,000 275,000
Long-term debt 6,751,326 6,347,188
----------- -----------
Total capitalization 13,829,356 13,211,859
----------- -----------
Other long-term liabilities 345,029 311,063
----------- -----------
Current portion of long-term debt 43,224 231,370
Short-term debt 433,002 845,514
Accounts payable 393,598 412,930
Accrued taxes 830,267 530,163
Accrued interest 130,667 99,770
Dividends payable 113,787 115,803
Regulatory balancing accounts -- net 296,764 55,710
Deferred unbilled revenue and other
current liabilities 1,116,994 865,758
----------- -----------
Total current liabilities 3,358,303 3,157,018
----------- -----------
Accumulated deferred income
taxes -- net 4,047,221 4,059,372
Accumulated deferred investment
tax credits 411,900 432,265
Customer advances and other
deferred credits 646,518 616,110
----------- -----------
Total deferred credits 5,105,639 5,107,747
----------- -----------
Minority interest 637,617 602,560
----------- -----------
Commitments and contingencies
(Notes 1 and 2)
Total capitalization and liabilities $23,275,944 $22,390,247
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
PAGE
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SCEcorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
<TABLE>
<CAPTION>
9 Months Ended
September 30,
------------------------
1995 1994
--------- -----------
(Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income $ 600,987 $ 547,062
Adjustments for non-cash items:
Depreciation and decommissioning 750,271 721,220
Amortization 47,347 105,922
Rate phase-in plan 81,800 91,778
Deferred income taxes and investment tax
credits (166,959) (135,583)
Equity in income from partnerships and
unconsolidated subsidiaries (113,770) (111,341)
Other long-term liabilities 33,966 48,514
Other -- net (23,622) (100,180)
Changes in working capital:
Receivables (269,945) (362,850)
Regulatory balancing accounts 241,054 51,816
Fuel inventory, materials and supplies (29,045) (26,524)
Prepayments and other current assets (37,183) (21,853)
Accrued interest and taxes 331,001 442,570
Accounts payable and other current
liabilities 185,013 324,059
Distributions from partnerships and
unconsolidated subsidiaries 118,033 148,492
---------- ----------
Net cash provided by operating activities 1,748,948 1,723,102
---------- ----------
Cash flows from financing activities:
Long-term debt issued 836,335 110,224
Long-term debt repayments (762,790) (257,741)
Preferred securities issued 62,500 --
Preferred securities redemptions (75,000) --
Common stock repurchases (39,850) --
Nuclear fuel financing -- net 42,775 (25,915)
Short-term debt financing -- net (322,512) (114,431)
Dividends received (10,150) --
Dividends paid (335,374) (429,887)
---------- ----------
Net cash used by financing activities (604,066) (717,750)
---------- ----------
Cash flows from investing activities:
Additions to property and plant (719,964) (853,379)
Funding of nuclear decommissioning trusts (111,897) (101,031)
Investments in partnerships and
unconsolidated subsidiaries (310,523) (167,111)
Other -- net 8,064 72,998
---------- ----------
Net cash used by investing activities (1,134,320) (1,048,523)
---------- ----------
Net increase (decrease) in cash and
equivalents 10,562 (43,171)
Cash and equivalents, beginning of period 533,957 420,510
---------- ----------
Cash and equivalents, end of period $ 544,519 $ 377,339
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
PAGE
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SCEcorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management's Statement
In the opinion of management, all adjustments have been made that are
necessary to present a fair statement of the financial position and
results of operations for the periods covered by this report.
SCEcorp's significant accounting policies were described in Note 1 of
"Notes to Consolidated Financial Statements" included in its 1994 Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
SCEcorp follows the same accounting policies for interim reporting
purposes. This quarterly report should be read in conjunction with
SCEcorp's 1994 Annual Report.
Certain prior-period amounts have been reclassified to conform to the
September 30, 1995, financial statement presentation.
Note 1. Regulatory Matters
1995 General Rate Case Proposed Settlement Agreement
In 1994, Edison and the California Public Utilities Commission's (CPUC)
Division of Ratepayer Advocates (DRA) filed a settlement agreement related
to the 1995 general rate case. The settlement, which requires CPUC
approval, includes a $67 million reduction in 1995 non-fuel revenue and,
beginning February 1, 1996, accelerated recovery (by 2003, instead of
2012) of Edison's remaining investment in San Onofre Units 2 and 3, with
an incentive pricing plan for future operating costs. The $67 million
revenue reduction has been included in 1995 rates.
Edison's unrecovered investment in Units 2 and 3 (approximately $2.7
billion) would be collected over an eight-year period earning a reduced
rate of return of 7.78%, compared to the current 9.8%. Under the
incentive pricing plan, which would replace traditional regulation and
rate recovery, Edison will receive approximately 4 cents per kilowatt-hour
to cover its portion of San Onofre's ongoing operating and incremental
capital expenditures during the eight-year period. At the end of this
period, customers would bear no further obligation for the units, except
certain costs associated with decommissioning and permanent closure.
Edison would then sell power generated by San Onofre under prices, terms
and conditions which conform to any then-existing regulatory procedures.
In April 1995, the DRA filed supplemental testimony recommending a 0.25-
cent-per-kilowatt-hour decrease to the incentive price originally agreed
to in the settlement agreement. The DRA claims the decrease is based on
"new information" obtained after the settlement was negotiated, but prior
to the hearings. In May 1995, hearings concluded after Edison filed
rebuttal testimony showing that the "new information" does not form the
basis for any change to the agreement and requesting that the CPUC adopt
the original settlement.
On September 14, 1995, a CPUC administrative law judge (ALJ) issued a
proposed decision that would reduce Edison's 1995 revenue by $105 million.
The additional $38 million reduction would be retroactive to January 1,
1995. The ALJ also recommended that the general rate case settlement
agreement with the DRA be rejected, including the portion pertaining to
San Onofre. The ALJ viewed the latter as being premature in light of
California's restructuring proceeding and stated that it could be
resubmitted as part of the restructuring proceeding or other appropriate
proceeding. A final CPUC decision on the general rate case is expected
by year-end. If the CPUC adopts the ALJ recommendation to move the San
Onofre Units 2 and 3 agreement to another proceeding, Edison believes the
PAGE
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SCEcorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
unrecovered investment would be recovered through a competition transition
charge or other mechanism (see CPUC Restructuring Proposals).
CPUC Restructuring Proposals
Since April 1994, the CPUC has been considering its proposal for
restructuring California's electric utility industry, seeking to lower
energy prices and provide customers with a choice of generation suppliers.
As a part of these proceedings, Edison filed a proposal with the CPUC in
November 1994 recommending implementation of a competition transition
charge (CTC), beginning in 1998, as a mechanism to allow for full recovery
of generation-related utility investments and obligations incurred to
serve customers under the existing regulatory framework. In its filing,
Edison estimates its potential transition costs through 2025 to be
approximately $9.3 billion (net present value), based on an assumed 1998
market price of 4 cents per kilowatt-hour. The potential transition costs
are comprised of: $4.9 billion from Edison's qualifying facility
contracts, which are the direct result of legislative and regulatory
mandates; $600 million from costs pertaining to certain generating plants;
and $3.8 billion from regulatory commitments consisting of costs incurred
to provide service to customers whose recovery has been deferred. Such
commitments include the recovery of income-tax benefits previously flowed-
through to customers, postretirement benefit transition costs, accelerated
recovery of nuclear plants (including accelerated recovery of San Onofre
Unit 1 and recovery of San Onofre Units 2 and 3 as discussed above),
nuclear decommissioning and certain other costs. At September 30, 1995,
these commitments included recorded generation-related regulatory assets
of approximately $1.2 billion, primarily for the recovery of income-tax
benefits previously flowed-through to customers, the Palo Verde phase-in
plan and unamortized loss on reacquired debt.
On May 24, 1995, the CPUC issued for public comment two policy proposals
on restructuring. Although the proposals differ, they both recommend
moving to a restructured competitive electric industry within two years
and generally endorse recovery of costs incurred under prior regulatory
rules. The majority's proposal, supported by three of the four
commissioners, recommends a power pool that would commence operation by
the beginning of 1997. One commissioner offered an alternate proposal
that would provide for individual customer agreements with power
producers. This proposal would also require the immediate sale or spin-
off of all utility-owned generating facilities, and may allow utilities
to recover only 90% of costs incurred under prior regulatory rules. On
July 24, 1995, Edison filed comments supporting the majority proposal as
it believes this proposal will be more successful at achieving CPUC goals
set in April 1994 for a restructured electric industry in California.
On September 11, 1995, Edison and a broad coalition of electricity
customers and independent power producers submitted, as a joint
recommendation to the CPUC, a set of principles to modify and refine the
CPUC's two policy proposals. According to the Memorandum of
Understanding: an independent system operator would control the scheduling
and dispatch of all electricity on the state's power grid; a separate
power exchange would manage electricity supply and demand through an
economic auction; physical direct access would be phased in over a five-
year schedule, allowing for individual contracts and aggregation of
smaller customers; a non-bypassable transition charge would
be collected to pay for past regulatory commitments; and, California's
social and environmental public policy programs would be funded through
a separate charge to all customers during the transition period.
Hearings were held on the joint recommendation in September 1995 and a
final CPUC decision on industry restructuring is expected by year-end;
PAGE
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SCEcorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
however, the state legislature has requested the CPUC to withhold
implementation of any restructuring plan until its impact can be evaluated
by the legislature and governor.
FERC Restructuring Proposal
In March 1995, the Federal Energy Regulatory Commission (FERC) proposed
rules which would require utilities to provide wholesale open transmission
access to the nation's interstate transmission grid, while allowing them
to recover stranded costs associated with open access. The proposal
defines stranded costs as legitimate, prudent and verifiable costs
incurred to provide service to customers that would subsequently become
unbundled wholesale transmission service customers of the utility. Edison
supports the FERC's proposal and filed comments in August 1995. A final
FERC decision is expected in mid-1996.
Financial Impact of Restructuring Proposals
Edison currently applies accounting standards that recognize the economic
effects of rate regulation. As a result of applying these standards,
Edison has recorded net regulatory assets of approximately $2.4 billion
as of September 30, 1995, which include generation-related regulatory
assets of $1.2 billion. Effective January 1996, a new accounting standard
will impose stricter criteria for the retention of regulatory-created
assets. Under this standard, Edison must be able to conclude that
regulatory assets continue to be probable of recovery. Currently, a
conclusion that such assets are not probable of loss is required.
Accordingly, if rate recovery of generation-related costs does not
continue to be probable, whether due to competition or regulatory action,
regulatory accounting standards may no longer apply to Edison's generation
operations and the $1.2 billion ($700 million after-tax) in recorded
generation-related regulatory assets would be a non-cash charge against
earnings. Additionally, Edison may have write-offs associated with its
potential transition costs if all or a portion of these costs are not
recovered through a CTC or other mechanism. Until the CPUC issues a final
policy decision specifying definitive procedures to identify, value,
calculate, allocate and recover transition costs, SCEcorp cannot predict
the effect, if any, on its results of operations.
Mohave Generating Station
A 1994 CPUC decision stated that Edison was liable for expenditures
related to a 1985 accident at the Mohave Generating Station. The CPUC
ordered a second phase of this proceeding to quantify the disallowance.
SCEcorp believes that the final outcome of this matter will not materially
affect its results of operations.
Note 2. Contingencies
In addition to the matters disclosed in these notes, SCEcorp is involved
in legal, tax and regulatory proceedings before various courts and
governmental agencies with regard to matters arising in the ordinary
course of business. SCEcorp believes that the final outcome of these
proceedings will not materially affect its results of operations or
liquidity.
Environmental Protection
SCEcorp is subject to numerous environmental laws and regulations, which
require it to incur substantial costs to operate existing facilities,
construct and operate new facilities, and mitigate or remove the effect
of past operations on the environment.
PAGE
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SCEcorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCEcorp records its environmental liabilities when site assessments and/or
remedial actions are probable and a range of reasonably likely cleanup
costs can be estimated. SCEcorp reviews its sites and measures the
liability quarterly, by assessing a range of reasonably likely costs for
each identified site using currently available information, including
existing technology, presently enacted laws and regulations, experience
gained at similar sites, and the probable level of involvement and
financial condition of other potentially responsible parties. These
estimates include costs for site investigations, remediation, operations
and maintenance, monitoring and site closure. Unless there is a probable
amount, SCEcorp records the lower end of this reasonably likely range of
costs (classified as other long-term liabilities at undiscounted amounts).
While SCEcorp has numerous insurance policies that it believes may provide
coverage for some of these liabilities, it does not recognize recoveries
in its financial statements until they are realized.
At September 30, 1995, SCEcorp's recorded estimated minimum liability to
remediate its 62 identified sites was $114 million. The ultimate costs
to clean up SCEcorp's identified sites may vary from its recorded
liability due to numerous uncertainties inherent in the estimation
process, such as: the extent and nature of contamination; the scarcity of
reliable data for identified sites; the varying costs of alternative
cleanup methods; developments resulting from investigatory studies; the
possibility of identifying additional sites; and the time periods over
which site remediation is expected to occur. SCEcorp believes that, due
to these uncertainties, it is reasonably possible that cleanup costs could
exceed its recorded liability by up to $215 million. The upper limit of
this range of costs was estimated using assumptions least favorable to
SCEcorp among a range of reasonably possible outcomes.
SCEcorp expects to clean up its identified sites over a period of up to
30 years. Remediation costs in each of the next several years are
expected to range from $4 million to $8 million.
SCEcorp's identified sites include several sites for which there is a lack
of currently available information, including the nature and magnitude of
contamination and the extent, if any, that SCEcorp may be held responsible
for contributing to any costs incurred for remediating these sites. Thus,
no reasonable estimate of cleanup costs can be made for these sites at
this time.
The CPUC allows Edison to recover environmental-cleanup costs at 24 of its
sites, representing $90 million of SCEcorp's recorded liability, through
an incentive mechanism (Edison may request to include additional sites).
Under this mechanism, Edison will recover 90% of cleanup costs through
customer rates; shareholders fund the remaining 10%, with the opportunity
to recover these costs through insurance and other third-party recoveries.
Edison has settled insurance claims with several carriers, and is
continuing to pursue additional recovery. Costs incurred at Edison's
remaining 34 sites are expected to be recovered through customer rates.
Edison has filed a request with the CPUC to add 11 of these sites ($12
million) to the incentive mechanism. Edison has recorded a regulatory
asset of $104 million for its estimated minimum environmental-cleanup
costs expected to be recovered through customer rates.
SCEcorp's 62 identified sites consist of 58 Edison sites and four Mission
Energy sites. In 1994, Edison utilized an estimating technique to
quantify its potential liability for environmental cleanup in an effort
to obtain a reasonably possible objective and reliable estimate of
environmental cleanup. Mission Energy is in the process of conducting a
similar review of its sites, which is expected to be completed in 1995.
PAGE
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SCEcorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This review could result in an increase to SCEcorp's number of identified
sites and/or its estimated minimum liability.
Based on currently available information, SCEcorp believes it is not
likely that it will incur amounts in excess of the upper limit of the
estimated range and, based upon the CPUC's regulatory treatment of
environmental-cleanup costs, SCEcorp believes that costs ultimately
recorded will not have a material adverse effect on its results of
operations or financial position. There can be no assurance, however,
that future developments, including additional information about existing
sites or the identification of new sites, will not require material
revisions to such estimates.
Nuclear Insurance
Federal law limits public liability claims from a nuclear incident to $8.9
billion. Edison and other owners of San Onofre and Palo Verde Nuclear
Generating Station have purchased the maximum private primary insurance
available ($200 million). The balance is covered by the industry's
retrospective rating plan that uses deferred premium charges. Federal
regulations require this secondary level of financial protection. The
Nuclear Regulatory Commission exempted San Onofre Unit 1 from this
secondary level, effective June 1994. The maximum deferred premium for
each nuclear incident is $79 million per reactor, but not more than $10
million per reactor may be charged in any one year for each incident.
Based on its ownership interests, Edison could be required to pay a
maximum of $158 million per nuclear incident. However, it would have to
pay no more than $20 million per incident in any one year. Such amounts
include a 5% surcharge if additional funds are needed to satisfy public
liability claims and are subject to adjustment for inflation.
Property damage insurance covers losses up to $500 million, including
decontamination costs, at San Onofre and Palo Verde. Decontamination
liability and property damage coverage exceeding the primary $500 million
also has been purchased in amounts greater than federal requirements.
Additional insurance covers part of replacement power expenses during an
accident-related nuclear unit outage. These policies are issued primarily
by mutual insurance companies owned by utilities with nuclear facilities.
If losses at any nuclear facility covered by the arrangement were to
exceed the accumulated funds for these insurance programs, Edison could
be assessed retrospective premium adjustments of up to $45 million per
year. Insurance premiums are charged to operating expense.
PAGE
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SCEcorp
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
Earnings
SCEcorp's earnings per share for the three- and nine-month periods ended
September 30, 1995, were 65 cents and $1.35, respectively, compared with
61 cents and $1.22 for the year-earlier periods. Southern California
Edison Company's quarterly earnings were up 4 cents per share and year-
to-date earnings increased 10 cents per share, primarily due to a higher
authorized return on common equity for 1995 and improved operating
efficiencies, partially offset by employee severance costs. The Mission
companies' quarterly earnings were unchanged while the year-to-date
earnings increased 4 cents per share reflecting Mission Energy's higher
returns on oil and gas investments, favorable fuel prices, and improved
results at its energy projects primarily during the first quarter of 1995.
In 1993, Mission Energy recognized the reduced value of its investment in
five geothermal projects. These projects have 30-year power sales
contracts that are based on the market price of natural gas after an
initial 10-year fixed-price period. The market price of gas is not
expected to escalate as originally projected, thus Mission Energy has
discontinued recording earnings from these projects. This decision
negatively affected 1994 earnings by 3 cents per share and is expected to
continue to affect earnings in 1995 and possibly beyond.
Operating Revenue
Electric utility revenue remained virtually unchanged for the three- and
nine-month periods ended September 30, 1995, compared with the same
periods in 1994, as a 2.6% California Public Utilities Commission (CPUC)-
authorized rate increase was offset by a decline in energy usage caused
by milder weather in 1995 and a decrease in the volume of sales to resale
cities. Over 98% of electric utility revenue is from retail sales. Retail
rates are regulated by the CPUC and wholesale rates are regulated by the
Federal Energy Regulatory Commission (FERC).
In March 1995, Edison announced that it intends to freeze average rates
for residential, small business and agricultural customers through 1996,
and announced a five-year goal to reduce system average rates by 25%
(after adjusting for inflation), subject to CPUC approval. Edison also
urged the CPUC to re-examine certain rate design issues, including
possible elimination of the kilowatt-hour sales balancing account, which
adjusts utility revenue for differences between CPUC-authorized and actual
base-rate revenue. In July 1995, Edison filed expanded rate options and
requested that the CPUC expedite the filing in order to offer these
services by 1996. Edison does not anticipate that these proposals will
have a material effect on future earnings trends, however, if the
balancing account mechanism were to be revised or eliminated, the seasonal
variability of Edison's earnings could be affected.
Revenue from diversified operations increased 8% and 10%, respectively,
for the quarter and year-to-date periods, compared to the year-earlier
periods, mainly from an increase in Mission Energy's electric revenue from
its Roosecote project, which was out of service for the majority of the
comparable periods in 1994 due to a transformer failure and scheduled
maintenance. Improved operating performance at a number of domestic
projects, and an increase in the number of operating projects, also
contributed to the year-to-date increase. The year-to-date increase was
partially offset by the sale of an apartment complex in the second quarter
of 1994 by Mission Land Company.
<PAGE>
Operating Expenses
Fuel expense decreased 22% and 23%, respectively, in the three and nine
months ended September 30, 1995, compared with the same periods in 1994.
The decreases primarily reflect a change in Edison's fuel mix from the
year-earlier periods. Edison's hydro generation was up significantly in
1995, due to greater rainfall, resulting in lower gas purchases compared
with the same periods in 1994. In addition, during the third quarter of
1995, San Onofre Nuclear Generating Station Unit 3 was out of service for
two months for refueling and maintenance. Edison also received an $11
million fuel credit from the Department of Energy. Lower overall gas
prices and a higher than average operating capacity at San Onofre Units
2 and 3 also contributed to the decrease in Edison's year-to-date energy
costs. The year-to-date decline was partially offset by an increase at
Mission Energy as its Roosecote project was out of service for slightly
more than five months during the year-to-date period ended September 30,
1994, due to the transformer failure and scheduled maintenance.
Provisions for regulatory adjustment clauses increased in both periods as
CPUC-authorized fuel and purchased-power cost estimates exceeded Edison's
actual energy costs. Edison's actual energy costs were lower than
estimated due to the increase in hydro generation, San Onofre Unit 3's
scheduled refueling outage, and lower gas prices.
Other operating expenses include severance charges at Edison of $12
million for the nine-month period ended September 30, 1995. As Edison's
operating environment continues to evolve toward a more competitive
future, it is anticipated that workforce reductions will continue to
occur. At this time, Edison does not have plans for company-wide
workforce reductions that would be considered a restructuring for
financial reporting purposes; however, each operating department will
continue to review staffing needs during this period of change. Excluding
severance charges, other operating expenses decreased in both periods
primarily due to operating efficiencies at Edison.
Maintenance expense increased 12% in the third quarter of 1995, compared
with the year-earlier period, due to the scheduled refueling and
maintenance outage at San Onofre Unit 3. Unit 3 returned to service on
September 26, 1995.
Other Income and Deductions
The provision for rate phase-in plan reflects a CPUC-authorized, 10-year
rate phase-in plan, which deferred the collection of revenue during the
first four years of operation for the Palo Verde Nuclear Generating
Station. Revenue previously deferred (including interest) will be
collected by the end of 1996 for Units 1 and 2, and 1998 for Unit 3. The
provision is a non-cash offset to the collection of deferred revenue.
Interest income increased 68% and 55%, respectively, for the three- and
nine-month periods ended September 30, 1995, compared to the year-earlier
periods, primarily due to higher interest rates and higher investment
balances. The higher investment balances reflect the decline in dividend
payments, which began in June 1994, and an increase in Mission Energy's
loans to projects. Also, both periods in 1995 include interest income
from Mission Energy's receivable from its partners in the Carbon II
project in Mexico resulting from termination of its investment in the
project in the third quarter of 1994.
Other nonoperating income decreased for the quarter and year-to-date
periods, compared to the same periods in 1994, primarily due to Mission
Energy's receipt of insurance proceeds in the third quarter of 1994
related to the transformer failure at its Roosecote project. The year-
to-date decrease also reflects a $5 million CPUC-authorized incentive
award received by Edison in the first quarter of 1994 related to nuclear
plant performance and a 1994 benefit resulting from the effect of a drop
in SCEcorp's stock price on Edison's stock option plan.
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Interest Expense
Other interest expense decreased 28% for the quarter as a portion of
Mission Energy's revolving line of credit related to its Brooklyn Navy
Yard project was reclassified to long-term debt, until other financing is
secured (see discussion under Cash Flows from Financing Activities). This
reclassification reduced short-term interest expense, with a corresponding
increase in interest on long-term debt. Other interest expense remained
virtually unchanged for the year-to-date period, compared to the year-
earlier period, as the third quarter decrease at Mission Energy was offset
by an increase at Edison due to rising interest rates on short-term
borrowings and higher balances in the regulatory balancing accounts.
Capitalized interest increased 44% and 30%, respectively, for the three-
and nine-month periods ended September 30, 1995, compared to the year-
earlier periods, mainly from an increase in construction activity and debt
levels at Mission Energy's Paiton and Brooklyn Navy Yard projects.
Dividends on subsidiary preferred securities increased 14% and 16%,
respectively, for the three- and nine-month periods ended September 30,
1995, compared to the year-earlier periods, due to Mission Energy's
issuance of $87 million in preferred securities in the fourth quarter of
1994 as partial funding for the equity requirements for its Loy Yang B
project and an additional issuance of $63 million in preferred securities
in August of 1995.
FINANCIAL CONDITION
SCEcorp's liquidity is primarily affected by debt maturities, dividend
payments, capital expenditures and investments in partnerships and
unconsolidated subsidiaries. Capital resources include cash from
operations and external financings.
In June 1994, SCEcorp lowered its quarterly common stock dividend by 30%,
as the result of uncertainty of future earnings levels arising from the
changing nature of the electric utility industry intensified by recently
proposed changes in California utility regulation. SCEcorp's dividends
to earnings ratio (payout ratio) for the twelve-month period ended
September 30, 1995, was 61%, which compared favorably with the utility
industry average of about 80%. The cash flow coverage of dividends for
the twelve-month period ended September 30, 1995, increased to 5.2 times
from 4.0 times for the year-earlier period, primarily from the lower
dividend rate.
In January 1995, SCEcorp authorized the repurchase of up to $150 million
of its common stock. SCEcorp repurchased 2,774,298 shares ($46 million)
through November 3, 1995, funded by dividends from SCEcorp subsidiaries.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $1.7 billion for both
of the nine-month periods ended September 30, 1995, and 1994,
respectively. Cash from operations exceeded capital requirements for all
periods presented.
Cash Flows from Financing Activities
At September 30, 1995, SCEcorp and its subsidiaries had $1.8 billion of
borrowing capacity available under lines of credit totaling $2.1 billion.
Edison has available lines of credit of $1.4 billion, with $900 million
supporting commercial paper and $500 million for the long-term refinancing
of its variable-rate pollution control bonds. The holding company has
available a $100 million one-year term line of credit for short-term debt.
The Mission companies had available lines of credit of $600 million, with
$300 million of borrowing capacity available to finance general cash
requirements. SCEcorp's unsecured revolving lines of credit are at
negotiated or bank index rates with various expiration dates; the majority
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with five-year terms. Mission Energy's borrowing capacity under its
revolving line of credit increased with the closing of its Auburndale
project on October 27, 1995. The increased borrowing capacity is expected
to be utilized for additional funding of the Brooklyn Navy Yard project.
Although Mission Energy owns 50% of the Brooklyn Navy Yard project, it is
funding all of the estimated $400 million in costs for the project; $250
million had been spent through September 30, 1995. In order for Mission
Energy to close a $254 million tax-exempt financing for the project, it
will be required to provide a letter of credit or guarantee; however, no
assurance can be given that such financing will be obtained prior to the
end of the current year. In addition, Mission Energy believes that its
anticipated returns with respect to the Brooklyn Navy Yard project may be
substantially less than it had originally anticipated.
Edison's short-term debt is used to finance fuel inventories, balancing
account undercollections and general cash requirements. The Mission
companies' short-term debt is used mainly for construction projects until
long-term construction or project loans are secured. Long-term debt is
used mainly to finance capital expenditures. Edison's external financings
are influenced by market conditions and other factors, including
limitations imposed by its articles of incorporation and trust indenture.
As of September 30, 1995, Edison could issue approximately $7.2 billion
of additional first and refunding mortgage bonds and $4.3 billion of
preferred stock at current interest and dividend rates.
In April 1995, Mission Energy and its partners completed a $1.8 billion
financing for the Paiton power project in Indonesia. Mission Energy has
firm commitments and contingent obligations to make equity contributions
of $226 million and $115 million, respectively, over the expected four-
year construction period. Mission Energy believes it will have sufficient
liquidity to meet these equity requirements from cash provided by
operating activities, proceeds from the repayment of loans to energy
projects, funds available from Mission Energy's revolving line of credit
and additional corporate borrowings.
California law prohibits Edison from incurring or guaranteeing debt for
its nonutility affiliates. Additionally, the CPUC regulates Edison's
capital structure, limiting the dividends Edison may pay SCEcorp. At
September 30, 1995, Edison had the capacity to pay $400 million in
additional dividends to SCEcorp and continue to maintain its authorized
capital structure. These restrictions are not expected to affect
SCEcorp's ability to meet its cash obligations.
Cash Flows from Investing Activities
The primary uses of cash for investing activities are additions to
property and plant, the Mission companies' investments in partnerships and
unconsolidated subsidiaries, and funding of nuclear decommissioning
trusts. Decommissioning costs are accrued and recovered in rates over the
term of each nuclear generating facility's operating license through
charges to depreciation expense. Edison estimates that it will spend
approximately $12.7 billion to decommission its nuclear facilities,
primarily between 2013-2070. This estimate is based on Edison's current-
dollar decommissioning costs ($1.8 billion), escalated using a 6.65% rate
and an earnings assumption on trust funds ranging from 5.50% to 5.75%.
These amounts are expected to be funded from independent decommissioning
trusts (see Notes to Consolidated Financial Statements), which receive
Edison contributions of approximately $100 million per year (until
decommissioning begins). The Financial Accounting Standards Board is
reviewing current accounting practices for removal costs, including
decommissioning of nuclear power plants. If current industry accounting
practices are changed, Edison could be required to report its estimated
decommissioning costs as a liability, rather than recognize these costs
over the term of each facility's operating license. SCEcorp does not
believe that such changes, if any, would have an adverse effect on its
results of operations due to its current and expected future ability to
recover these costs through Edison's customer rates.
PAGE
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Cash used for the Mission companies' investing activities was $432 million
for the nine-month period ended September 30, 1995, compared to $214
million for the same period in 1994. The increase was primarily due to
Mission Energy's additional investments in and loans to energy projects.
SCEcorp's risk management policy allows the use of derivative financial
instruments to mitigate risk. Mission Energy has attempted to mitigate
the risk of interest rate fluctuations by arranging for fixed rate
financing or variable rate financing with interest rate swaps or other
hedging mechanisms for the majority of its projects. As a result of
interest rate hedging mechanisms, interest expense increased $5 million
for both year-to-date periods presented. As Mission Energy continues to
expand into foreign markets, fluctuations in foreign currency exchange
rates will continue to affect the amount of Mission Energy's equity
contributions to, distributions from, and results of operations for its
foreign projects. Mission Energy has hedged and will continue to hedge
the majority of its exposure to fluctuations in foreign exchange rates
through forward contracts, options, offsetting obligations denominated in
foreign currencies, and indexing underlying project agreements to U.S.
dollars or other indices reasonably expected to correlate with foreign
exchange movements.
Projected Capital Requirements
SCEcorp's projected capital requirements for the next five years are:
1995--$1.1 billion; 1996--$1.0 billion; 1997--$949 million; 1998--$908
million; and 1999--$993 million.
Long-term debt maturities and sinking fund requirements for the five
twelve-month periods following September 30, 1995, are: 1996--$28 million;
1997--$552 million; 1998--$336 million; 1999--$781 million; and 2000--$397
million.
REGULATORY MATTERS
Edison's 1995 CPUC-authorized revenue increased $193 million, or 2.6%,
primarily due to a $192 million increase for fuel and purchased power
($167 million for federally required purchases), a $121 million increase
for higher costs of debt and equity, a $64 million decrease for 1993
postretirement benefits other than pensions (collected in 1994 rates) and
a $67 million decrease for a pending settlement agreement with the CPUC's
Division of Ratepayer Advocates (DRA) related to Edison's 1995 general
rate case (see 1995 General Rate Case Proposed Settlement Agreement
below).
The CPUC's 1995 cost-of-capital decision authorized an increase to
Edison's equity ratio from 47.25% to 47.75%, and an increase to Edison's
return on common equity from 11% to 12.1% in 1995. This decision,
excluding the effects of other rate actions, would increase 1995 earnings
by approximately 14 cents per share. In its 1996 cost-of-capital
proceeding, Edison requested to increase its common equity ratio from
47.75% to 48% with no change to its authorized return on common equity.
On October 6, 1995, a CPUC administrative law judge (ALJ) issued a
proposed decision recommending a decrease to Edison's return on common
equity from 12.1% to 11.6%. This recommendation, if adopted, could reduce
1996 earnings by approximately 4 cents per share, excluding the effects
of other rate actions. A CPUC decision is expected in late November 1995.
A 1994 CPUC decision stated that Edison was liable for expenditures
related to a 1985 accident at the Mohave Generating Station. The CPUC
ordered a second phase of this proceeding to quantify the disallowance.
SCEcorp believes that the final outcome of this matter will not materially
affect its results of operations.
In October 1994, the CPUC authorized Edison to accelerate recovery of its
nuclear plant investments by $75 million per year, through 2011. The rate
impact of this accelerated cost recovery is offset by a corresponding
<PAGE>
deceleration in recovery of transmission and distribution facilities
through revised depreciation estimates over their remaining useful lives.
1995 General Rate Case Proposed Settlement Agreement
In 1994, Edison and the DRA filed a settlement agreement, which requires
CPUC approval, related to the 1995 general rate case. The settlement
includes: a $67 million reduction in 1995 non-fuel revenue, effective
January 1, 1995; and, accelerated recovery of Edison's remaining
investment (approximately $2.7 billion) in San Onofre Units 2 and 3 at a
reduced rate of return (7.78% compared to 9.8%), beginning February 1,
1996. Future operating costs at San Onofre would be recovered through an
incentive pricing plan. At the end of the accelerated recovery period
(2003, instead of 2012), customers would bear no further obligation for
Units 2 and 3, except for certain costs associated with decommissioning
and permanent closure. Edison would then sell power generated by San
Onofre under prices, terms and conditions which conform to any then-
existing regulatory procedures.
In April 1995, the DRA filed supplemental testimony requesting a decrease
to the incentive prices originally agreed upon in the settlement. Edison
filed rebuttal testimony requesting that the CPUC adopt the original
settlement. Hearings concluded in May 1995.
On September 14, 1995, an ALJ issued a proposed decision recommending that
the settlement agreement with the DRA be rejected, including the portion
related to San Onofre, and recommended an additional reduction to Edison's
1995 revenue of $38 million. The proposed decision stated that recovery
of San Onofre could be resubmitted as part of the CPUC restructuring
proceeding or other appropriate proceeding. A final CPUC decision is
expected by year-end. If the CPUC adopts the ALJ recommendation to move
the San Onofre Units 2 and 3 agreement to another proceeding, Edison
believes the unrecovered investment would be recovered through a
competition transition charge or other mechanism (see Competitive
Environment).
Performance-Based Ratemaking
In 1993, Edison filed a proposal with the CPUC for a performance-based
rate-making mechanism that would determine most of Edison's revenue
(excluding fuel) from 1996-2000. The filing proposed a revenue-indexing
formula that would combine operating expenses and capital-related costs
into a single index. In July 1994, the CPUC ordered Edison to divide its
performance-based rate-making application into two phases - transmission
and distribution, and power generation. Hearings concluded in December
1994 for the transmission and distribution phase and a decision is
expected by year-end. Edison expects to file its proposal for the power
generation phase after the CPUC issues its final decision on industry
restructuring (see Competitive Environment).
COMPETITIVE ENVIRONMENT
Electric utilities operate in a highly regulated environment in which they
have an obligation to provide electric service to their customers in
return for an exclusive franchise within their service territory. This
regulatory environment is changing. The generation sector has experienced
competition from nonutility power producers and regulators have proposed
restructuring the electric utility industry. Edison expects the
generation sector to continue to experience competition and other changes
over the next decade.
Since April 1994, the CPUC has been considering its proposal for
restructuring California's electric utility industry, seeking to lower
energy prices and provide customers with a choice of generation providers.
As part of these proceedings, Edison filed a proposal with the CPUC in
November 1994 recommending implementation of a competition transition
charge (CTC), beginning in 1998, as a mechanism to allow for full recovery
<PAGE>
of generation-related utility investments and obligations incurred to
serve customers under the existing regulatory framework. In its filing,
Edison estimates its potential transition costs through 2025 to be
approximately $9.3 billion (net present value), based on an assumed 1998
market price of 4 cents per kilowatt-hour. The potential transition costs
are comprised of: $4.9 billion from qualifying facility contracts, which
are the direct result of legislative and regulatory mandates; $600 million
from costs pertaining to certain generating plants; and $3.8 billion from
regulatory commitments consisting of costs incurred to provide service to
customers whose recovery has been deferred. Such commitments include the
recovery of income-tax benefits previously flowed-through to customers,
postretirement benefit transition costs, accelerated recovery of nuclear
plants (including accelerated recovery of San Onofre Unit 1 and recovery
of San Onofre Units 2 and 3 as discussed in the 1995 General Rate Case
Proposed Settlement Agreement), nuclear decommissioning and certain other
costs. At September 30, 1995, these commitments included recorded
generation-related regulatory assets of approximately $1.2 billion,
primarily for the recovery of income-tax benefits previously flowed-
through to customers, the Palo Verde phase-in plan and unamortized loss
on reacquired debt.
On May 24, 1995, the CPUC issued for public comment two policy proposals
that recommend moving to a restructured competitive electric industry
within two years. Although the proposals differ, both generally endorse
recovery of costs incurred under prior regulatory rules. The majority's
proposal, supported by three of the four commissioners, recommends
deregulation of electric generation through a power pool mechanism. The
alternate proposal recommends deregulation of electric generation through
individual customer agreements with power producers. This proposal would
also require the immediate sale or spin-off of all utility owned
generation facilities, and may only allow utilities to recover 90% of
costs incurred under prior regulatory rules. SCEcorp supports the
majority proposal as it believes this proposal would be more successful
at achieving CPUC goals set in April 1994 for a restructured electric
industry in California.
On September 11, 1995, Edison and a broad coalition of electricity
customers and independent power producers submitted a joint recommendation
to the CPUC which would modify and refine the CPUC's two policy proposals.
Key provisions of the joint recommendation include: an independent system
operator to schedule and dispatch statewide electricity; a separate power
exchange to manage supply and demand through an economic auction; five-
year phase-in of direct customer access; a non-bypassable transition
charge to recover past regulatory commitments; and, a separate charge for
funding the state's social and environmental programs during the
transition period. Hearings were held on the joint recommendation in
September 1995 and a final CPUC decision on industry restructuring is
expected by year-end; however, the state legislature has requested the
CPUC to withhold implementation of any restructuring plan until its impact
can be evaluated by the legislature and governor.
SCEcorp is engaged in an ongoing analysis of the effect of industry
restructuring on its internal corporate structure. In addition, Edison
is seeking to enhance its competitive position by cutting costs and
increasing productivity, and by developing new revenue sources.
FERC Restructuring Proposal
In March 1995, the FERC proposed rules which would require utilities to
provide wholesale open transmission access to the nation's interstate
transmission grid, while allowing them to recover stranded costs
associated with open access. The proposal defines stranded costs as
legitimate, prudent and verifiable costs incurred to provide service to
customers that would subsequently become unbundled wholesale transmission
service customers of the utility. Edison supports the FERC's proposal and
filed comments in August 1995. A final FERC decision is expected in mid-
1996.
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Financial Impact of Restructuring Proposals
Edison currently applies accounting standards that recognize the economic
effects of rate regulation. As a result of applying these standards,
Edison had recorded net regulatory assets of approximately $2.4 billion
at September 30, 1995, which includes generation-related regulatory assets
of $1.2 billion. Effective January 1996, a new accounting standard will
impose stricter criteria for the retention of regulatory-created assets.
Under this standard, Edison must be able to conclude that regulatory
assets continue to be probable of recovery. Currently, a conclusion that
such assets are not probable of loss is required. Accordingly, if rate
recovery of generation-related costs does not continue to be probable,
whether due to competition or regulatory action, regulatory accounting
standards may no longer apply to Edison's generation operations and the
$1.2 billion ($700 million after-tax) in recorded generation-related
regulatory assets would be a non-cash charge against earnings.
Additionally, Edison may have write-offs associated with its potential
transition costs if all or a portion of these costs are not recovered
through a CTC or other mechanism. Until the CPUC issues a final policy
decision specifying definitive procedures to identify, value, calculate,
allocate and recover transition costs, SCEcorp cannot predict the effect,
if any, on its results of operations.
CPUC-MANDATED POWER CONTRACTS
In 1994, the CPUC ordered the California utilities to proceed with an
energy auction to solicit bids for new contracts with unregulated power
producers. This decision would have forced Edison to purchase 686 MW of
new power at fixed prices starting in 1997, costing Edison customers $14
billion over the lives of the contracts. Edison had requested the CPUC
to reconsider its decision as it has no need for additional generating
capacity until at least 2005. Furthermore, Edison believes the contracts
would increase customer rates and the decision is inconsistent with the
CPUC's restructuring goal to ultimately lower rates. Edison negotiated
agreements, at substantially lower costs than those mandated by auction,
with seven unregulated power producers, representing 627 MW of the 686 MW
mandated. These agreements, which are subject to CPUC approval, would
save Edison customers about 80% of anticipated overpayments compared with
the mandated contracts. In January 1995, Edison appealed the CPUC
decision to the FERC. In February 1995, the FERC ruled that the CPUC
violated the federal Public Utility Regulatory Policies Act and FERC
regulations because the CPUC did not consider all potential sources of
capacity in reaching its avoided cost determination. On July 5, 1995, the
CPUC issued a ruling supporting resolution of the energy auction through
negotiated settlements and set criteria to be used to evaluate the
settlements. Edison is currently evaluating these criteria to determine
the impact on its existing settlement agreements and ongoing settlement
negotiations.
ENVIRONMENTAL PROTECTION
SCEcorp is subject to numerous environmental laws and regulations, which
require it to incur substantial costs to operate existing facilities,
construct and operate new facilities, and mitigate or remove the effect
of past operations on the environment.
SCEcorp records its environmental liabilities when site assessments and/or
remedial actions are probable and a range of reasonably likely cleanup
costs can be estimated. SCEcorp reviews its sites and measures the
liability quarterly, by assessing a range of reasonably likely costs for
each identified site. Unless there is a probable amount, SCEcorp records
the lower end of this reasonably likely range of costs (see Note 2 to
Consolidated Financial Statements).
At September 30, 1995, SCEcorp's recorded estimated minimum liability to
remediate its 62 identified sites was $114 million. The ultimate costs
to clean up SCEcorp's identified sites may vary from its recorded
<PAGE>
liability due to numerous uncertainties inherent in the estimation
process, such as: the extent and nature of contamination; the scarcity
of reliable data for identified sites; the varying costs of alternative
cleanup methods; developments resulting from investigatory studies; the
possibility of identifying additional sites; and the time periods over
which site remediation is expected to occur. SCEcorp believes that due
to these uncertainties, it is reasonably possible that cleanup costs could
exceed its recorded liability by up to $215 million. The upper limit of
this range of costs was estimated using assumptions least favorable to
SCEcorp among a range of reasonably possible outcomes.
The CPUC allows Edison to recover environmental-cleanup costs at 24 of its
sites, representing $90 million of SCEcorp's recorded liability, through
an incentive mechanism (Edison may request to include additional sites).
Under this mechanism, Edison will recover 90% of cleanup costs through
customer rates; shareholders fund this remaining 10%, with the opportunity
to recover these costs through insurance and other third-party recoveries.
Edison has settled insurance claims with several carriers, and is
continuing to pursue additional recovery. Costs incurred at Edison's
remaining 34 sites are expected to be recovered through customer rates.
Edison has filed a request with the CPUC to add 11 of these sites ($12
million) to the incentive mechanism. Edison has recorded regulatory
assets of $104 million for its estimated minimum environmental-cleanup
costs expected to be recovered through customer rates.
SCEcorp's identified sites include several sites for which there is a lack
of currently available information, including the nature and magnitude of
contamination, and the extent, if any, that SCEcorp may be held
responsible for contributing to any costs incurred for remediating these
sites. Thus, no reasonable estimate of cleanup costs can be made for these
sites at this time.
SCEcorp expects to clean up its identified sites over a period of up to
30 years. Remediation costs in each of the next several years are
expected to range from $4 million to $8 million.
One of Edison's sites is a former pole-treating facility, which is
considered a federal Superfund site and represents 71% of SCEcorp's
recorded liability. Remedial actions to clean up soil and ground-water
contamination that occurred during pole-treating operations (1925-1980)
are expected to continue at this site for 30 years. Rate recovery of
environmental-cleanup costs for this site is authorized by the CPUC
through an incentive mechanism (discussed below).
SCEcorp's 62 identified sites consist of 58 Edison sites and 4 Mission
Energy sites. In 1994, Edison utilized an estimating technique to
quantify its potential liability for environmental cleanup in an effort
to obtain a reasonably possible objective and reliable estimate of
environmental cleanup. Mission Energy is in the process of conducting a
similar review of its sites, which is expected to be complete in 1995.
This review could result in an increase to SCEcorp's number of identified
sites and/or its estimated minimum liability.
Based on currently available information, SCEcorp believes it is not
likely that it will incur amounts in excess of the upper limit of the
estimated range and, based upon the CPUC's regulatory treatment of
environmental-cleanup costs, SCEcorp believes that costs ultimately
recorded will not have a material adverse effect on its results of
operations or financial position. There can be no assurance, however,
that future developments, including additional information about existing
sites or the identification of new sites, will not require material
revisions to such estimates.
The 1990 federal Clean Air Act requires power producers to have emissions
allowances to emit sulfur dioxide. Power companies receive emissions
allowances from the federal government and may bank or sell excess
allowances. Edison expects to have excess allowances under Phase II of
<PAGE>
the Clean Air Act (2000 and later). The act also calls for a study to
determine if additional regulations are needed to reduce regional haze in
the southwestern U.S. In addition, another study is underway to determine
the specific impact of air contaminant emissions from the Mohave Coal
Generating Station on visibility in Grand Canyon National Park. The
potential effect of these studies on sulfur dioxide emissions regulations
for Mohave is unknown.
SCEcorp's projected capital expenditures to protect the environment are
$1.3 billion for the 1995-1999 period, mainly for aesthetics treatment,
including undergrounding certain transmission and distribution lines.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric
sources may result in adverse health effects is receiving increased
attention. The scientific community has not yet reached a consensus on
the nature of any health effects of EMF. However, the CPUC has issued a
decision which provides for a rate-recoverable research and public
education program conducted by California electric utilities, and
authorizes these utilities to take no-cost or low-cost steps to reduce EMF
in new electric facilities. Edison is unable to predict when or if the
scientific community will be able to reach a consensus on any health
effects of EMF, or the effect that such a consensus, if reached, could
have on future electric operations.
PAGE
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PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Qualified Facilities ("QF") Litigation
On May 20, 1993, four geothermal QFs filed a lawsuit against Edison in Los
Angeles County Superior Court, claiming that Edison underpaid, and
continues to underpay, the plaintiffs for energy. Edison denied the
allegations in its response to the complaint. The action was brought on
behalf of Vulcan/BN Geothermal Power Company, Elmore L.P., Del Ranch L.P.,
and Leathers L.P., each of which is partially owned by a subsidiary of
Mission Energy Company (a subsidiary of SCEcorp). In October 1994,
plaintiffs submitted an amended complaint to the court to add causes of
action for unfair competition and restraint of trade. The plaintiffs
alleged that the underpayments totaled at least $21,000,000 as of the
filing of the amended complaint. In other court filings, plaintiffs
contend that the total amount of additional contract payments expected to
be owing through the end of the contract term is approximately
$60,000,000. As a result of motion practice, the plaintiffs have recently
filed a fourth amended complaint which includes all of the previous claims
except for the alleged restraint of trade. In addition to seeking
compensatory damages and declaratory relief, the fourth amended complaint
also seeks unspecified punitive damages and an injunction to enjoin Edison
from "future" unfair competition. Trial on the fourth amended complaint
is set for March 13, 1996. The materiality of a judgment in favor of the
plaintiffs would be largely dependent on the extent to which additional
payments resulting from such a judgment are recoverable through Edison's
Energy Cost Adjustment Clause ("ECAC").
Between January 1994 and October 1994, Edison was named as a defendant in
a series of eight lawsuits brought by independent power producers of wind
generation. Seven of the lawsuits were filed in Los Angeles County
Superior Court and one was filed in Kern County Superior Court. The
lawsuits allege Edison incorrectly interpreted contracts with the
plaintiffs by limiting fixed energy payments to a single 10-year period
rather than beginning a new 10-year period of fixed energy payments for
each stage of development. In its responses to the complaints, Edison
denied the plaintiffs' allegations. In each of the lawsuits, the
plaintiffs seek declaratory relief regarding the proper interpretation of
the contracts. Plaintiffs allege a combined total of approximately
$189,000,000 in damages, which includes consequential damages claimed in
seven of the eight lawsuits. On March 1, 1995, the court in the lead Los
Angeles County Superior Court case granted the plaintiffs' motion seeking
summary adjudication that the contract language in question is not
reasonably susceptible to Edison's position that there is only a single,
10-year period of fixed payments. On April 5, 1995, Edison filed a
petition seeking writ review of the March 1, 1995, ruling in the
California Court of Appeal. On May 3, 1995, the Court of Appeal issued
an Order to Show Cause why the March 1 ruling should not be vacated. The
matter was heard August 3, 1995, and on August 9, 1995, the Court of
Appeal issued its decision vacating the March 1 summary adjudication order
and directing the trial court to issue an order denying the summary
adjudication motion. A pending summary adjudication motion in the Kern
County case has been withdrawn in light of the Court of Appeal decision
and an April 22, 1996, trial date has been set in that case. In March
1995, an eighth lawsuit was filed in the Los Angeles County Superior Court
raising claims similar to those alleged in the first seven cases in that
Court. Edison has responded to the complaint in the new lawsuit by
denying its material allegations. The materiality of final judgments in
favor of the plaintiffs in these cases would be largely dependent on the
extent to which any damages or additional payments which might result from
such judgments would be recoverable through Edison's ECAC.
This matter was previously reported under the heading "QF Litigation" in
Part I, Item 3 of SCEcorp's Annual Report on Form 10-K for the year ended
PAGE
<PAGE>
December 31, 1994, and Part II, Item 1 of the Quarterly Reports on Form
10-Q for the periods ended March 31, 1995, and June 30, 1995.
Electric and Magnetic Fields ("EMF") Litigation
Edison has been served with two lawsuits, both of which allege, among
other things, that certain plaintiffs developed cancer as a result of EMF
emitted from Edison facilities in an office building. The lawsuits, filed
in Orange County Superior Court and served on Edison in June 1994 and
January 1995, request compensatory and punitive damages. Although no
specific damage amounts are alleged in the complaints, in subsequent court
filings, plaintiffs estimated general and compensatory damages of
$8,000,000 and $13,500,000, plus unspecified punitive damages. The same
co-defendant in both actions has filed cross-complaints against the other
co-defendants, including Edison, requesting indemnification and
declaratory relief concerning the rights and responsibilities of the
parties. The case served in June 1994, is set to go to trial on January
8, 1996. The case served in January 1995 is proceeding toward trial but
a trial date has not yet been set.
A third case was filed in Orange County Superior Court and served on
Edison in March 1995. The complaint seeks compensatory and punitive
damages. The plaintiff alleges, among other things, that he developed
cancer as a result of EMF emitted from Edison facilities which he alleges
were not constructed in accordance with CPUC standards. No specific
damage amounts are alleged in the complaint but supplemental documentation
prepared by the plaintiff indicates that plaintiff will allege
compensatory damages of approximately $5,500,000, plus unspecified
punitive damages. This case is set to go to trial on May 20, 1996.
Edison believes that there is no proven scientific basis for the
allegation that EMF are hazardous to health and, therefore, believes that
the EMF lawsuits described above are without merit.
These matters were previously reported under the heading "Environmental
Litigation" in Part I, Item 3 of SCEcorp's Annual Report on Form 10-K for
the year ended December 31, 1994, and Part II, Item 1 of the Quarterly
Reports on Form 10-Q for the periods ended March 31, 1995, and June 30,
1995.
San Onofre Personal Injury Litigation
An engineer for two contractors providing services for San Onofre has been
diagnosed with chronic myelogenous leukemia. On July 12, 1994, the
engineer and his wife sued Edison, San Diego Gas and Electric Company
("SDG&E") and Combustion Engineering, the manufacturer of the fuel rods
for the plant, in the United States District Court for the Southern
District of California. The plaintiffs alleged that the engineer's
illness resulted from contact with radioactive fuel particles released
from failed fuel rods. Plant records showed that the engineer's exposure
to radiation was well below Nuclear Regulatory Commission ("NRC") safety
levels. In the complaint, plaintiffs sought unspecified compensatory and
punitive damages. The trial began August 3, 1995, and on October 12,
1995, an eight member jury unanimously decided that radiation exposure at
San Onofre was not the cause of the leukemia. On October 31, 1995,
plaintiffs filed a motion for new trial.
An Edison engineer employed at San Onofre died in 1991 from cancer of the
abdomen. On February 6, 1995, his children sued Edison, SDG&E and
Combustion Engineering in the United States District Court for the
Southern District of California. The plaintiffs allege that the
engineer's illness resulted from, and was aggravated by, exposure to
radiation at San Onofre, including contact with radioactive fuel
particles. Plant records show that the engineer's exposure to radiation
was well below NRC safety levels. In the complaint, plaintiffs sought
unspecified compensatory and punitive damages.
PAGE
<PAGE>
On April 3, 1995, the Court granted the defendants' motion to dismiss 14
of plaintiffs' 15 claims. Punitive damages are not available under the
remaining claim. Edison's April 20, 1995, answer to the complaint denied
all material allegations. On October 10, 1995, the Court ruled in favor
of plaintiffs request to include the Institute of Nuclear Power Operations
(an organization dedicated to achieving excellence in nuclear power
operations) as a defendant in the suit. The trial is set for October 1,
1996.
These matters were previously reported under the heading "San Onofre
Personal Injury Litigation" in Part I, Item 3 of SCEcorp's Annual Report
on Form 10-K for the year ended December 31, 1994, and Part II, Item 1 of
the Quarterly Reports on Form 10-Q for the periods ended March 31, 1995,
and June 30, 1995.
On July 5, 1995, a former Edison reactor operator employed at San Onofre
and his wife sued Edison, SDG&E, Combustion Engineering and the Institute
of Nuclear Power Operations in the U.S. District Court for the Southern
District of California. Plaintiffs allege the former employee's acute
myelogenous leukemia resulted from, and was aggravated by, exposure to
radiation at San Onofre, including contact with radioactive fuel
particles. The former employee subsequently died from his illness.
Plaintiffs seek unspecified compensatory and punitive damages. Edison
intends to deny the plaintiffs' material allegations. Plaintiffs' counsel
has indicated that the complaint will be amended to allege wrongful death.
This matter was previously reported under the heading "San Onofre Personal
Injury Litigation" in Part II, Item 1 of the Quarterly Report on Form 10-
Q for the period ended June 30, 1995.
On August 31, 1995, the family of a former worker for a contractor at San
Onofre, and later a temporary and then a permanent Edison employee at San
Onofre, sued Edison, SDG&E, Combustion Engineering and the Institute of
Nuclear Power Operations in the U.S. District Court for the Southern
District of California. Plaintiffs allege the former employee's acute
myelogenous leukemia, which resulted in his death in 1994, resulted from,
and was aggravated by, exposure to radiation at San Onofre, including
contact with radioactive fuel particles. Plaintiffs seek unspecified
compensatory and punitive damages. Edison intends to deny the plaintiffs'
material allegations.
Employment Discrimination Litigation
On September 21, 1994, nine African-American employees filed a lawsuit
against SCEcorp and Edison on behalf of an alleged class of African-
American employees, alleging racial discrimination in job advancement,
pay, training and evaluation. The lawsuit was filed in the United States
District Court for the Central District of California. The plaintiffs
seek injunctive relief, as well as an unspecified amount of compensatory
and punitive damages, attorneys' fees, costs and interest. SCEcorp and
Edison have responded by denying the material allegations of the complaint
and asserting several affirmative defenses. The Court has ordered that
plaintiffs file their motion for class certification no later than
December 6, 1995, and that the hearing on that motion be held on March 4,
1996.
This matter was previously reported under the heading "Employment
Discrimination Litigation" in Part I, Item 3 of SCEcorp's Annual Report
on Form 10-K for the year ended December 31, 1994, and the Quarterly
Reports on Form 10-Q for the periods ended March 31, 1995, and June 30,
1995.
PAGE
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K:
August 15, 1995 -- Item 5--Other Events--
Proposed Restructuring of
California Utility Industry
September 20, 1995 -- Item 5--Other Events--
Industry Restructuring
Proposed General Rate
Case Decision
PAGE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCEcorp
(Registrant)
By R. K. BUSHEY
---------------------------------
R. K. BUSHEY
Vice President and Controller
By W. J. SCILACCI
---------------------------------
W. J. SCILACCI
Assistant Treasurer
November 9, 1995
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SCEcorp Financial Data Schedule -- Exhibit 27
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