UNITED STATES
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, 1998
------------------------------------------------
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
EDISON INTERNATIONAL
(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)
(626) 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 (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 October 29, 1998
- --------------------------------------- ------------------------------------
Common Stock, no par value 352,708,197
<PAGE>
EDISON INTERNATIONAL
INDEX
Page
No
----
Part I. Financial Information:
Item 1. Consolidated Financial Statements:
Consolidated Statements of Income -- Three and Nine
Months Ended September 30, 1998, and 1997 1
Consolidated Statements of Comprehensive Income -- Three
and Nine Months Ended September 30, 1998, and 1997 1
Consolidated Balance Sheets -- September 30, 1998,
and December 31, 1997 2
Consolidated Statements of Cash Flows -- Nine Months
Ended September 30, 1998, and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 12
Part II. Other Information:
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 33
<PAGE>
EDISON INTERNATIONAL
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,
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Sales to ultimate consumers $2,258,782 $2,349,316 $5,336,067 $5,740,733
Sales to power exchange 687,171 -- 990,856 --
Other 110,710 84,210 274,896 232,161
- -----------------------------------------------------------------------------------------------------------------------
Total electric utility revenue 3,056,663 2,433,526 6,601,819 5,972,894
Diversified operations 384,156 304,255 991,279 932,797
- -----------------------------------------------------------------------------------------------------------------------
Total operating revenue 3,440,819 2,737,781 7,593,098 6,905,691
- -----------------------------------------------------------------------------------------------------------------------
Fuel 101,438 463,069 369,018 857,630
Purchased power -- contracts 908,407 900,781 2,010,269 2,117,116
Purchased power -- power exchange 1,080,910 -- 1,424,694 --
Provisions for regulatory adjustment clauses -- net (447,676) (185,416) (289,314) (277,439)
Other operating expenses 626,763 438,553 1,576,464 1,226,558
Maintenance 104,363 89,883 304,929 302,885
Depreciation, decommissioning and amortization 408,766 342,422 1,224,120 1,024,799
Income taxes 175,816 186,116 411,544 395,732
Property and other taxes 32,460 32,338 106,416 105,329
Loss (gain) on sale of utility plant 89,939 (271) (529,099) (3,105)
- -----------------------------------------------------------------------------------------------------------------------
Total operating expenses 3,081,186 2,267,475 6,609,041 5,749,505
- -----------------------------------------------------------------------------------------------------------------------
Operating income 359,633 470,306 984,057 1,156,186
- -----------------------------------------------------------------------------------------------------------------------
Provision for rate phase-in plan -- (13,218) -- (35,908)
Allowance for equity funds used during construction 3,051 1,691 8,740 5,591
Interest and dividend income 28,202 21,996 83,996 56,987
Minority interest 279 (779) (2,088) (38,468)
Other nonoperating income (deductions) -- net 11,988 (20,419) (6,317) (30,153)
- -----------------------------------------------------------------------------------------------------------------------
Total other income (deductions) -- net 43,520 (10,729) 84,331 (41,951)
- -----------------------------------------------------------------------------------------------------------------------
Income before interest and other expenses 403,153 459,577 1,068,388 1,114,235
- -----------------------------------------------------------------------------------------------------------------------
Interest on long-term debt 165,802 144,139 492,420 448,947
Other interest expense 19,036 34,001 60,568 90,261
Allowance for borrowed funds used during
construction (2,076) (2,036) (5,947) (6,733)
Capitalized interest (4,822) (3,381) (13,187) (11,457)
Dividends on subsidiary preferred securities 8,916 10,063 28,924 32,593
- -----------------------------------------------------------------------------------------------------------------------
Total interest and other expenses -- net 186,856 182,786 562,778 553,611
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 216,297 $ 276,791 $ 505,610 $ 560,624
- -----------------------------------------------------------------------------------------------------------------------
Weighted-average shares of common stock
outstanding 353,285 394,076 361,417 407,133
Basic earnings per share $.61 $.70 $1.40 $1.38
Diluted earnings per share $.60 $.70 $1.38 $1.37
Dividends declared per common share $.26 $.25 $.78 $ .75
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In thousands
3 Months Ended 9 Months Ended
September 30, September 30,
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
(Unaudited)
Net income $216,297 $276,791 $505,610 $560,624
Cumulative translation adjustments -- net 6,913 (17,058) 7,646 (36,689)
Unrealized gain (loss) on securities -- net (24,665) 8,182 (9,267) 22,630
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive income $198,545 $267,915 $503,989 $546,565
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
EDISON INTERNATIONAL
CONSOLIDATED BALANCE SHEETS
In thousands
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Transmission and distribution:
Utility plant, at original cost, subject to
<S> <C> <C>
cost-based rate regulation $11,591,649 $11,213,352
Accumulated provision for depreciation (5,841,948) (5,573,742)
Construction work in progress 504,388 492,614
- -----------------------------------------------------------------------------------------------------------------------
6,254,089 6,132,224
- -----------------------------------------------------------------------------------------------------------------------
Generation:
Utility plant, at original cost,
not subject to cost-based rate regulation 1,728,929 9,522,127
Accumulated provision for depreciation,
decommissioning and amortization (923,158) (4,970,137)
Construction work in progress 78,181 100,283
Nuclear fuel, at amortized cost 141,569 154,757
- -----------------------------------------------------------------------------------------------------------------------
1,025,521 4,807,030
- -----------------------------------------------------------------------------------------------------------------------
Total utility plant 7,279,610 10,939,254
- -----------------------------------------------------------------------------------------------------------------------
Nonutility property -- less accumulated provision for
depreciation of $278,253 and $238,386 at respective dates 3,075,243 3,178,375
Nuclear decommissioning trusts 2,013,293 1,831,460
Investments in partnerships and
unconsolidated subsidiaries 1,379,371 1,340,853
Investments in leveraged leases 1,569,635 959,646
Other investments 579,090 260,427
- -----------------------------------------------------------------------------------------------------------------------
Total other property and investments 8,616,632 7,570,761
- -----------------------------------------------------------------------------------------------------------------------
Cash and equivalents 1,195,954 1,906,505
Receivables, including unbilled revenue, less allowances of
$21,204 and $26,722 for uncollectible accounts at respective dates 1,407,221 1,077,671
Fuel inventory 50,561 58,059
Materials and supplies, at average cost 121,408 132,980
Accumulated deferred income taxes -- net 271,683 123,146
Regulatory balancing accounts -- net 407,536 193,311
Prepayments and other current assets 207,295 105,811
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 3,661,658 3,597,483
- -----------------------------------------------------------------------------------------------------------------------
Unamortized nuclear investment -- net 2,387,998 --
Unamortized debt issuance and reacquisition expense 356,018 359,304
Rate phase-in plan -- 3,777
Income tax-related deferred charges 1,454,606 1,543,380
Other deferred charges 1,258,452 1,087,108
- -----------------------------------------------------------------------------------------------------------------------
Total deferred charges 5,457,074 2,993,569
- -----------------------------------------------------------------------------------------------------------------------
Total assets $25,014,974 $25,101,067
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
EDISON INTERNATIONAL
CONSOLIDATED BALANCE SHEETS
In thousands, except share amounts
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES (Unaudited)
Common shareholders' equity:
Common stock (352,708,197 and 375,764,429
<S> <C> <C>
shares outstanding at respective dates) $2,122,245 $ 2,260,974
Accumulated other comprehensive income:
Cumulative translation adjustments -- net 38,102 30,456
Unrealized gain in equity securities -- net 50,763 60,030
Retained earnings 2,882,897 3,175,883
- -----------------------------------------------------------------------------------------------------------------------
5,094,007 5,527,343
- -----------------------------------------------------------------------------------------------------------------------
Preferred securities of subsidiaries:
Not subject to mandatory redemption 128,755 183,755
Subject to mandatory redemption 405,700 425,000
Long-term debt 8,290,435 8,870,781
- -----------------------------------------------------------------------------------------------------------------------
Total capitalization 13,918,897 15,006,879
- -----------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 515,930 479,637
- -----------------------------------------------------------------------------------------------------------------------
Current portion of long-term debt 912,322 868,026
Short-term debt 305,599 329,550
Accounts payable 685,863 441,049
Accrued taxes 861,755 576,841
Accrued interest 109,951 131,885
Dividends payable 91,943 95,146
Deferred unbilled revenue and other current liabilities 1,516,769 1,285,679
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,484,202 3,728,176
- -----------------------------------------------------------------------------------------------------------------------
Accumulated deferred income taxes -- net 4,352,343 4,085,296
Accumulated deferred investment tax credits 327,698 350,685
Customer advances and other deferred credits 1,400,879 1,441,303
- -----------------------------------------------------------------------------------------------------------------------
Total deferred credits 6,080,920 5,877,284
- -----------------------------------------------------------------------------------------------------------------------
Minority interest 15,025 9,091
- -----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
(Notes 1 and 2)
Total capitalization and liabilities $25,014,974 $25,101,067
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
EDISON INTERNATIONAL
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
<TABLE>
<CAPTION>
9 Months Ended
September 30,
- ------------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income $ 505,610 $ 560,624
Adjustments for non-cash items:
Depreciation, decommissioning and amortization 1,224,120 1,024,799
Other amortization 123,953 60,582
Rate phase-in plan 3,777 34,483
Deferred income taxes and investment tax credits 170,246 4,499
Equity in income from partnerships and unconsolidated
subsidiaries (160,710) (164,170)
Other long-term liabilities 36,293 80,809
Regulatory asset related to the sale of utility plant (219,301) --
Net gains on sale of oil and gas plant (551,984) --
Other -- net (214,286) (83,113)
Changes in working capital:
Receivables (351,185) (283,344)
Regulatory balancing accounts (214,225) (282,423)
Fuel inventory, materials and supplies 19,070 20,957
Prepayments and other current assets (91,469) (45,063)
Accrued interest and taxes 262,980 277,924
Accounts payable and other current liabilities 533,401 218,830
Distributions from partnerships and unconsolidated subsidiaries 117,108 126,411
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,193,398 1,551,805
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term debt issued 944,916 1,474,873
Long-term debt repaid (1,287,354) (2,011,200)
Common stock repurchased (653,740) (884,686)
Preferred securities redeemed (74,300) (100,000)
Rate reduction notes repaid (161,070) --
Nuclear fuel financing -- net (11,478) (12,628)
Short-term debt financing -- net (23,951) 1,046,208
Dividends paid (281,870) (310,354)
Other -- net 367 4,708
- ------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (1,548,480) (793,079)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and plant (622,625) (514,396)
Proceeds from sale of plant 1,200,213 151,267
Funding of nuclear decommissioning trusts (118,196) (109,202)
Investments in partnerships and unconsolidated subsidiaries (85,007) (219,819)
Unrealized gain (loss) on securities -- net (9,267) 22,630
Investment in subsidiaries (258,000) --
Investments in leveraged leases (458,509) (326,950)
Other -- net (4,078) (73,830)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (355,469) (1,070,300)
- ------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and equivalents (710,551) (311,574)
Cash and equivalents, beginning of period 1,906,505 896,594
- ------------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of period $1,195,954 $ 585,020
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
EDISON INTERNATIONAL
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.
Edison International's significant accounting policies were described in Note 1
of "Notes to Consolidated Financial Statements" included in its 1997 Annual
Report on Form 10-K filed with the Securities and Exchange Commission. Edison
International follows the same accounting policies for interim reporting
purposes. This quarterly report should be read in conjunction with Edison
International's 1997 Annual Report.
As a result of industry restructuring legislation enacted by the State of
California and a related change in the application of accounting principles for
rate-regulated enterprises adopted by the Financial Accounting Standards Board's
Emerging Issues Task Force, during the third quarter of 1997, Southern
California Edison Company (SCE) began accounting for its investments in
generation facilities in accordance with accounting principles applicable to
enterprises in general, and Edison International's balance sheets display a
separate caption for its investments in generation. Application of such
accounting principles to SCE's generation assets did not result in any
adjustment of their carrying value; however, SCE's nuclear investments were
reclassified as a regulatory asset in second quarter 1998.
In June 1998, a new accounting standard for derivative instruments and hedging
activities was issued. The new standard, which will be effective January 1,
2000, requires all derivatives to be recognized on the balance sheet at fair
value. Gains or losses from changes in fair value would be recognized in
earnings in the period of change unless the derivative is designated as a
hedging instrument. Gains or losses from hedges of a forecasted transaction or
foreign currency exposure would be reflected in other comprehensive income.
Gains or losses from hedges of a recognized asset or liability or a firm
commitment would be reflected in earnings for the ineffective portion of the
hedge. SCE anticipates that most of its derivatives under the new standard would
qualify for hedge accounting. SCE expects to recover in rates any market price
changes from its derivatives that could potentially affect earnings. Edison
International is studying the impact of the new standard on its nonutility
subsidiaries, and is unable to predict at this time the impact on its financial
statements.
Certain prior-period amounts were reclassified to conform to the September 30,
1998, financial statement presentation.
Note 1. Regulatory Matters
California Electric Utility Industry Restructuring
Restructuring Decision -- The California Public Utilities Commission's (CPUC)
December 1995 decision on restructuring California's electric utility industry
started the transition to a new market structure; competition and customer
choice began on April 1, 1998. Key elements of the CPUC's restructuring decision
included: creation of the power exchange (PX) and independent system operator
(ISO); availability of customer choice for electricity supply and certain
billing and metering services; performance-based ratemaking (PBR) for those
utility services not subject to competition; voluntary divestiture of at least
50% of utilities' gas-fueled generation; and implementation of the competition
transition charge (CTC).
Restructuring Statute -- In September 1996, the State of California enacted
legislation to provide a transition to a competitive market structure. The
Statute substantially adopted the CPUC's December 1995 restructuring decision by
addressing stranded-cost recovery for utilities and providing a certain
cost-recovery time period for the transition costs associated with utility-owned
generation-related assets. Transition costs related to power-purchase contracts
are being recovered through the terms of their contracts while most of the
remaining transition costs will be recovered through 2001. The Statute also
5
<PAGE>
EDISON INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
included provisions to finance a portion of the stranded costs that residential
and small commercial customers would have paid between 1998 and 2001, which
allowed SCE to reduce rates by at least 10% to these customers, effective
January 1, 1998. The Statute included a rate freeze for all other customers,
including large commercial and industrial customers, as well as provisions for
continued funding for energy conservation, low-income programs and renewable
resources. Despite the rate freeze, SCE expects to be able to recover its
revenue requirement during the 1998-2001 transition period. In addition, the
Statute mandated the implementation of the CTC that provides utilities the
opportunity to recover costs made uneconomic by electric utility restructuring.
Finally, the Statute contained provisions for the recovery (through 2006) of
reasonable employee-related transition costs, incurred and projected, for
retraining, severance, early retirement, outplacement and related expenses. A
voter initiative, known as California Proposition 9, seeks to overturn major
portions of the Statute. A more detailed discussion of Proposition 9 is in Note
2 to the Consolidated Financial Statements.
Rate Reduction Notes -- In December 1997, after receiving approval from both the
CPUC and the California Infrastructure and Economic Development Bank, a limited
liability company created by SCE issued approximately $2.5 billion of rate
reduction notes. Residential and small commercial customers, whose 10% rate
reduction began January 1, 1998, are repaying the notes over the expected
10-year term through non-bypassable charges based on electricity consumption.
Proposition 9 seeks to prohibit the collection of these non-bypassable charges,
or if the charges are found enforceable by a court, require SCE to offset such
charges with an equal credit to customers. See Note 2 to the Consolidated
Financial Statements.
Rate-setting -- In August 1997, the CPUC issued a decision which adopted a
methodology for determining CTC residually (see "CTC" discussion below) and
adopted SCE's revenue requirement components for public benefit programs and
nuclear decommissioning. The decision also adjusted SCE's proposed distribution
revenue requirement (see "PBR" discussion below) by reallocating $76 million of
it annually to other functions such as generation and transmission. Under the
decision, SCE will be able to recover most of the reallocated amount through
market revenue, other rate-making mechanisms or operation and maintenance
contracts with the new owners of the divested generation plants. Beginning
January 1, 1998, SCE's rates were unbundled into separate charges for energy,
transmission, distribution, the CTC, public benefit programs and nuclear
decommissioning. The transmission component is being collected through Federal
Energy Regulatory Commission (FERC)-approved rates, subject to refund.
PX and ISO -- On March 31, 1998, both the PX and ISO began accepting bids and
schedules for April 1, 1998, when the ISO took over operational control of the
transmission system. The hardware and software systems being utilized by the PX
and ISO in their bidding and scheduling activities were financed through loans
of $300 million (backed by utility guarantees) obtained by restructuring trusts
established by a CPUC order in 1996. The PX and ISO will repay the trusts' loans
through charges for service to future PX and ISO customers. The restructuring
implementation costs related to the start-up and development of the PX, which
are paid by the utilities, will be recovered from all retail customers over the
four-year transition period. SCE's share of the charge is $45 million, plus
interest and fees. SCE's share of the ISO's start-up and development costs
(approximately $16 million per year) will be paid over a 10-year period.
Direct Customer Access -- Effective April 1, 1998, customers are now able to
choose to remain utility customers with either bundled electric service or an
hourly PX pricing option from SCE (which is purchasing its power through the
PX), or choose direct access, which means the customer can contract directly
with either independent power producers or energy service providers (ESPs) such
as power brokers, marketers and aggregators. Additionally, all
investor-owned-utility customers are paying the CTC whether or not they choose
to buy power through SCE. Electric utilities are continuing to provide the core
distribution service of delivering energy through their distribution system
regardless of a customer's choice of electricity supplier. The CPUC is
continuing to regulate the prices and service obligations related to
distribution services.
6
<PAGE>
EDISON INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Cycle Services -- Effective April 1, 1998, customers have options
regarding metering, billing and related services (referred to as revenue cycle
services) that have been provided by California's investor-owned utilities. Now
ESPs can provide their customers with one consolidated bill for their services
and the utility's services, request the utility to provide a consolidated bill
to the customer or elect to have both the ESP and the utility bill the customer
for their respective charges. In addition, customers with maximum demand above
20 kW (primarily industrial and medium and large commercial) can choose SCE or
any other supplier to provide their metering service. All other customers will
have this option beginning in January 1999. In September 1998, the CPUC issued a
decision regarding the credits that would be provided to customers if they elect
to obtain revenue cycle services from someone other than SCE. Although the
decision adopted SCE's recommendation of using the net avoided cost, it also
adopted a methodology which results in higher credits to customers but requires
ESPs to pay service fees to SCE for the costs that SCE incurs as a result of
dealing with the ESP.
PBR -- In September 1996, the CPUC adopted a transmission and distribution (T&D)
PBR mechanism for SCE which began on January 1, 1997. Beginning in April 1998,
the transmission portion was separated from PBR and subject to ratemaking under
the rules of the FERC. The distribution-only PBR will extend through December
2001. Key elements of PBR include: T&D rates indexed for inflation based on the
Consumer Price Index less a productivity factor; elimination of the
kilowatt-hour sales adjustment; adjustments for cost changes that are not within
SCE's control; a cost-of-capital trigger mechanism based on changes in a bond
index; standards for service reliability and safety; and a net revenue-sharing
mechanism that determines how customers and shareholders will share gains and
losses from T&D operations.
The CPUC is considering unbundling SCE's cost of capital based on major utility
function. In May 1998, SCE filed an application on this issue. A CPUC decision
is expected in early 1999.
Beginning in 1998, SCE's hydroelectric plants are operating under a PBR-type
mechanism. The mechanism sets the hydroelectric revenue requirement and
establishes a formula for extending it through the duration of the electric
industry restructuring transition period, or until market valuation of the
hydroelectric facilities, whichever occurs first. The mechanism provides that
power sales revenue from hydroelectric facilities in excess of the hydroelectric
revenue requirement be credited against the costs to transition to a competitive
market (see "CTC" discussion below).
Divestiture -- In November 1996, SCE filed an application with the CPUC to
voluntarily divest, by auction, all 12 of its gas- and oil-fueled generation
plants. Under this proposal, SCE would continue to operate and maintain the
divested power plants for at least two years following their sale, as mandated
by the restructuring legislation enacted in September 1996. In addition, SCE
would offer workforce transition programs to those employees who may be impacted
by divestiture-related job reductions. In September 1997, the CPUC approved
SCE's proposal to auction the 12 plants.
SCE has sold and transferred ownership of all 12 of its gas- and oil-fueled
generation plants. The total sales price of the 12 plants was $1.2 billion, over
$500 million more than the combined book value. Net proceeds of the sales were
used to reduce stranded costs, which otherwise were expected to be collected
through the CTC mechanism.
CTC -- The costs to transition to a competitive market are being recovered
through a non-bypassable CTC. This charge applies to all customers who were
using or began using utility services on or after the CPUC's December 20, 1995,
decision date. The CTC is being determined residually by subtracting other rate
components for the PX, T&D, nuclear decommissioning and public benefit programs
from the frozen rate levels. SCE currently estimates its transition costs to be
approximately $10.6 billion (1998 net present value) from 1998 through 2030.
This estimate is based on incurred costs, forecasts of future costs and assumed
market prices. However, changes in the assumed market prices could materially
affect these estimates. The potential transition costs are comprised of $6.4
billion from SCE's qualifying
7
<PAGE>
EDISON INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
facilities contracts, which are the direct result of prior legislative and
regulatory mandates, and $4.2 billion from costs pertaining to certain
generating assets (successful completion of the sale of SCE's oil- and
gas-fueled generation plants has reduced this estimate of transition costs for
SCE-owned generation) and regulatory commitments consisting of costs incurred
(whose recovery has been deferred by the CPUC) to provide service to customers.
Such commitments include the recovery of income tax benefits previously flowed
through to customers, postretirement benefit transition costs, accelerated
recovery of San Onofre Nuclear Generating Station (San Onofre) Units 2 and 3 and
the Palo Verde Nuclear Generating Station (Palo Verde) units and certain other
costs. This issue was separated into two phases; Phase 1 addressed the
rate-making issues and Phase 2 the quantification issues.
Major elements of the CPUC's CTC Phase 1 and Phase 2 decisions were: the
establishment of a transition cost balancing account and annual transition cost
proceedings; the setting of a market rate forecast for 1998 transition costs;
the requirement that generation-related regulatory assets be amortized ratably
over a 48-month period; the establishment of calculation methodologies and
procedures for SCE to collect its transition costs from 1998 through the end of
the rate freeze; and the reduction of SCE's authorized rate of return on certain
assets eligible for transition cost recovery (primarily fossil- and
hydroelectric-generation related assets) beginning July 1997, five months
earlier than anticipated. SCE has filed an application for rehearing on the 1997
rate of return issue.
Accounting for Generation-Related Assets -- If the CPUC's electric industry
restructuring plan continues as described above, SCE would be allowed to recover
its CTC through non-bypassable charges to its distribution customers (although
its investment in certain generation assets would be subject to a lower
authorized rate of return). During the third quarter of 1997, SCE discontinued
application of accounting principles for rate-regulated enterprises for its
investment in generation facilities based on new accounting guidance. The
financial reporting effect of this discontinuance was to segregate these assets
on the balance sheet; the new guidance did not require SCE to write off any of
its generation-related assets, including related regulatory assets. However, the
new guidance did not specifically address the application of asset impairment
standards to these assets. SCE has retained these assets on its balance sheet
because the legislation and restructuring plan referred to above make probable
their recovery through a non-bypassable CTC to distribution customers. The
regulatory assets relate primarily to the recovery of accelerated income tax
benefits previously flowed through to customers, purchased power contract
termination payments and unamortized losses on reacquired debt. The new
accounting guidance also permits the recording of new generation-related
regulatory assets during the transition period that are probable of recovery
through the CTC mechanism.
During the second quarter of 1998, additional guidance was developed relating to
the application of asset impairment standards to these assets. Using this
guidance has resulted in SCE reducing its remaining nuclear plant investment by
$2.6 billion (as of June 30, 1998) and recording a regulatory asset on its
balance sheet for the same amount. For this impairment assessment, the fair
value of the investment was calculated by discounting future net cash flows.
This reclassification had no effect on SCE's results of operations.
If during the transition period events were to occur that made the recovery of
these generation-related regulatory assets no longer probable, SCE would be
required to write off the remaining balance of such assets (approximately $2.5
billion, after tax, at September 30, 1998) as a one-time, non-cash charge
against earnings.
If events occur during the restructuring process that result in all or a portion
of the CTC being improbable of recovery, SCE could have additional write-offs
associated with these costs if they are not recovered through another regulatory
mechanism. At this time, SCE cannot predict what other revisions will ultimately
be made during the restructuring process in subsequent proceedings or
implementation phases, or the effect, after the transition period, that
competition will have on its results of operations or financial position.
8
<PAGE>
EDISON INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Contingencies
In addition to the matters disclosed in these notes, Edison International is
involved in other legal, tax and regulatory proceedings before various courts
and governmental agencies regarding matters arising in the ordinary course of
business. Edison International believes the outcome of these other proceedings
will not materially affect its results of operations or liquidity.
California Voter Initiative
On November 3, 1998, California voters will vote on Proposition 9, an initiative
supported by various consumer groups.
Proposition 9 would overturn major provisions of California's electric industry
restructuring legislation. Proposition 9 purports to: (1) require SCE and the
other California investor-owned utilities to provide at least a 20% rate
reduction to their residential and small commercial customers to be achieved
through cutting payments for nuclear and other fossil generation transition
costs; (2) eliminate cost recovery for nuclear generation plants and related
assets and obligations (other than reasonable decommissioning costs), except to
the extent such costs are recovered from competitive market sales through the PX
or contracts with the ISO; (3) eliminate cost recovery for non-nuclear
generation plants and related assets and obligations (other than costs
associated with QFs), except to the extent such costs are recovered from
competitive market sales through the PX or contracts with the ISO, unless the
CPUC finds that the utilities would be deprived of the opportunity to earn a
fair rate of return; and (4) prohibit the collection of any customer charges
necessary to pay principal, interest and other costs on the rate reduction bonds
(Fixed Transition Amounts or FTAs) or, if a court finds that the CPUC orders
authorizing the collection of FTAs are nevertheless enforceable, require the
FTAs to be offset with a concurrent equal credit. Proposition 9's purported rate
reduction would be in lieu of the 10% rate reduction for residential and small
commercial customers that went into effect on January 1, 1998.
If Proposition 9 is approved and implemented, and if SCE were unable to conclude
that it is probable that Proposition 9 ultimately would be found invalid, then
under applicable accounting principles SCE would be required to write off
generation-related regulatory assets and certain investments in electric
generation plant to the extent SCE were to conclude that such assets were no
longer probable of recovery due to reductions in future revenue. SCE anticipates
that such a one-time write-off would amount to as much as $3.4 billion pre-tax.
This pre-tax write-off would result in an after-tax write-off of as much as $1.9
billion, or approximately $5 per share, representing 50% of SCE's total
shareholders' equity of $3.8 billion at September 30, 1998.
Such an after-tax write-off, which would exceed SCE's current retained earnings
($820 million as of September 30, 1998), would severely impair SCE's ability to
pay dividends to its preferred shareholders and Edison International's ability
to pay dividends to its common shareholders. The potential earnings reductions
described below also would impair the payment of dividends. In addition, an
after-tax write-off of $1.9 billion would reduce the common equity ratio of
SCE's capital structure from approximately 49% to approximately 30%.
The duration and amount of the rate decrease contemplated by Proposition 9 is
uncertain and, if Proposition 9 is approved, will be subject to interpretation
by the courts and regulatory agencies. If all provisions of Proposition 9
ultimately are upheld against legal challenge and interpreted in an adverse
manner, the amount of the average earnings reductions to SCE could be as much as
$210 million per year from 1999 through 2001, and gradually decreasing to as
much as $10 million in 2007.
The earnings reduction and write-off estimates ultimately will depend on how the
courts and regulators interpret Proposition 9 and how future rate changes
unrelated to Proposition 9 affect SCE's electric revenue.
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EDISON INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The financial impacts described above, either singly or in combination, would
likely cause the rating agencies that rate SCE's debt and preferred securities
to lower those ratings substantially, which would immediately reduce the market
value of SCE's $4.2 billion in outstanding debt and preferred securities,
increase the cost of raising new capital, and possibly preclude the use of
certain financial instruments for raising capital.
If the voters approve Proposition 9, then legal challenges by the California
utilities, including SCE, and others will ensue. SCE intends to vigorously
challenge Proposition 9 as unconstitutional and to seek an immediate stay of its
provisions pending court review of the merits of its challenge. Although SCE
believes the litigation arguments challenging the enforceability of Proposition
9 would be compelling, no assurances can be given whether or when Proposition 9
would be overturned.
Environmental Protection
Edison International 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.
Edison International records its environmental liabilities when site assessments
and/or remedial actions are probable and a range of reasonably likely cleanup
costs can be estimated. Edison International 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, Edison International records the
lower end of this reasonably likely range of costs (classified as other
long-term liabilities at undiscounted amounts).
Edison International's recorded estimated minimum liability to remediate its 50
identified sites is $177 million. The ultimate costs to clean up Edison
International'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. Edison
International believes that, due to these uncertainties, it is reasonably
possible that cleanup costs could exceed its recorded liability by up to $247
million. The upper limit of this range of costs was estimated using assumptions
least favorable to Edison International among a range of reasonably possible
outcomes. SCE has sold all of its gas- and oil-fueled generation plants and has
retained some liability associated with the divested properties.
The CPUC allows SCE to recover environmental-cleanup costs at 41 of its sites,
representing $90 million of Edison International's recorded liability, through
an incentive mechanism (SCE may request to include additional sites). Under this
mechanism, SCE will recover 90% of cleanup costs through customer rates;
shareholders fund the remaining 10%, with the opportunity to recover these costs
from insurance carriers and other third parties. SCE has successfully settled
insurance claims with all responsible carriers. Costs incurred at SCE's
remaining sites are expected to be recovered through customer rates. SCE has
recorded a regulatory asset of $145 million for its estimated minimum
environmental-cleanup costs expected to be recovered through customer rates.
Edison International'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 Edison International may be held
responsible for contributing to any costs incurred for remediating these sites.
Thus, no reasonable estimate of cleanup costs can now be made for these sites.
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EDISON INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Edison International 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 $10 million.
Based on currently available information, Edison International believes it is
unlikely 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, Edison International believes that costs ultimately
recorded will not materially affect 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 $9.9
billion. SCE and other owners of San Onofre and Palo Verde 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 to every reactor licensee if a nuclear incident at any licensed reactor
in the United States results in claims and/or costs which exceed the primary
insurance at that plant site. 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 $88 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, SCE could be required to pay a maximum of $175
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. If the public liability limit above is
insufficient, federal regulations may impose further revenue-raising measures to
pay claims, including a possible additional assessment on all licensed reactor
operators.
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 has also 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, SCE could be assessed retrospective premium adjustments of
up to $25 million per year. Insurance premiums are charged to operating expense.
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EDISON INTERNATIONAL
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Earnings
Edison International's basic earnings per share for the three and nine months
ended September 30, 1998, were 61(cent) and $1.40, respectively, compared with
70(cent) and $1.38 for the same periods in 1997. Southern California Edison
Company's (SCE) earnings for the three and nine months ended September 30, 1998,
were 46(cent) and $1.04, respectively, down 11(cent) and 9(cent) from the
year-earlier periods, primarily due to reduced authorized returns on generating
assets and a lower earning asset base. The lower earning asset base is mainly
the result of the accelerated recovery of investments and divestiture of gas-
and oil-fueled generation assets. Edison Mission Energy (EME) and Edison Capital
had combined earnings for the three and nine months ended September 30, 1998, of
21(cent) and 48(cent), respectively, up 6(cent) and 17(cent) from the
year-earlier periods. The increases were primarily due to earnings generated by
Edison Capital's investments in affordable housing and cross-border lease
transactions in the Netherlands, South Australia and South Africa. Edison
Enterprises and the parent company were responsible for the following negative
income effects: 6(cent) per share for third quarter 1998 and 12(cent) for the
nine months ended September 30, 1998, compared to 2(cent) and 6(cent) for the
same periods in 1997, primarily due to continued start-up costs at Edison
Enterprises (Edison International's retail businesses: Edison Source, Edison
Select and Edison Utility Services).
Operating Revenue
Since April 1, 1998, SCE is required to sell all of its generated power to the
power exchange (PX). For more details, see "Competitive Environment." Excluding
the sales to the PX, electric utility revenue decreased 3% and 6%, respectively,
for the three and nine months ended September 30, 1998, compared to the
year-earlier periods. The decreases reflect lower average residential rates
(mandated by legislation enacted in September 1996). The quarterly decrease was
partially offset by a 5% increase in retail sales volume due to the unusually
warm weather in third quarter 1998. Over 99% of electric utility revenue
(excluding sales to the PX) is from retail sales. Retail rates are regulated by
the California Public Utilities Commission (CPUC) and wholesale rates are
regulated by the Federal Energy Regulatory Commission (FERC).
Legislation enacted in September 1996 provided for, among other things, at least
a 10% rate reduction (financed through the issuance of rate reduction notes) for
residential and small commercial customers in 1998 and other rates to remain
frozen at June 1996 levels (system average of 10.1(cent) per kilowatt-hour). See
discussion in "Competitive Environment."
Revenue from diversified operations increased 26% and 6%, respectively, for the
three and nine months ended September 30, 1998, compared to the same periods in
1997. The increases were primarily due to increased revenue at Edison Capital,
related to its cross-border lease transactions and increased revenue at Edison
Source.
Operating Expenses
Fuel expense decreased 78% and 57%, respectively, for the three and nine months
ended September 30, 1998, compared to the same periods in 1997. The decreases
resulted from the sale of SCE's gas- and oil-fueled generation plants. The
year-to-date decrease also reflects significantly lower gas prices at SCE in the
first quarter of 1998.
Since April 1, 1998, SCE is required to purchase all of its power from the PX
for distribution to its retail customers. SCE is continuing to purchase power
from certain nonutility generators (known as qualifying facilities) and under
existing inter-utility contracts. This purchased power is sold to the PX. SCE is
required under federal law to purchase power from certain qualifying facilities
even though energy prices
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under these contracts are generally higher than other sources. For the twelve
months ended September 30, 1998, SCE paid about $1.5 billion (including energy
and capacity payments) more for these power purchases than the cost of power
available from other sources. The CPUC has mandated the prices for these
contracts.
Provisions for regulatory adjustment clauses decreased for the quarter and nine
months ended September 30, 1998, compared to the same periods in 1997. The
quarterly decrease is primarily due to undercollections in the transition cost
balancing account resulting from high qualifying facilities energy costs. The
year-to-date decrease was mainly due to undercollections related to the issuance
of the rate reduction notes in December 1997. These undercollections were
partially offset by overcollections related to the gain on sales of the gas- and
oil-fueled generation plants in second quarter 1998 and other transition costs.
The year-to-date decrease in the provision was also offset by overcollections
related to the administration of public-purpose funds.
Other operating expenses increased for the three and nine months ended September
30, 1998, compared to the same periods in 1997, primarily due to must-run
reliability services, direct access activities, and PX and independent system
operator (ISO) activities at SCE, as well as higher expenses at Edison Source.
The year-to-date increase also reflects storm damage expense at SCE resulting
from a harsher winter in 1998.
Maintenance expense increased 16% for the quarter ended September 30, 1998,
compared to the year-earlier period, mainly due to additional expenses incurred
at SCE's distribution facilities.
Depreciation, decommissioning and amortization expense increased 19% for both
the quarter and nine months ended September 30, 1998, compared to the same
periods in 1997. The increases are primarily due to the further acceleration of
San Onofre Nuclear Generating Station Units 2 and 3 and the Palo Verde Nuclear
Generating Station units and the amortization of the loss on plant sales. The
year-to-date increase also reflects accelerated recovery of the gas- and
oil-fueled generation plants. The amortization of the loss on plant sales, as
well as the accelerated recoveries implemented in 1998 are part of the
competition transition charge (CTC) mechanism (see further discussion under
"California Electric Utility Industry Restructuring").
Income taxes decreased 6% for the three months ended September 30, 1998,
compared to the same period in 1997, primarily due to lower pre-tax income at
SCE, partially offset by additional amortization at SCE related to the CTC
mechanism and higher pre-tax income and a lower United Kingdom deferred tax
adjustment at EME. Also, this additional amortization related to the CTC
mechanism will continue to cause an increase in the effective tax rate.
Loss (gain) on sale of utility plant resulted from the sale of SCE's 12 gas- and
oil-fueled generation plants in 1998. Gain on sales of SCE's gas- and oil-fueled
plants was used to reduce stranded costs. Loss on sales will be recovered from
customers over the transition period.
Other Income and Deductions
The provision for rate phase-in plan reflected 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 units. The deferred revenue (including
interest) was collected evenly over the final six years of each unit's plan. The
plan ended in February 1996, September 1996 and January 1998 for Units 1, 2 and
3, respectively. The provision was a non-cash offset to the collection of
deferred revenue.
Interest and dividend income increased 28% and 47%, respectively, for the three
and nine months ended September 30, 1998, compared to the year-earlier periods.
The increases reflect higher investment balances due to the sale of SCE's gas-
and oil-fueled generation plants, as well as increases in interest earned on
higher balancing account undercollections.
Minority interest decreased for the nine months ended September 30, 1998,
compared to the same period last year, due to EME's May 1997 acquisition of the
remaining 49% ownership interest in the Loy Yang B project.
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Other nonoperating income increased for the three and nine months ended
September 30, 1998, compared to the year-earlier periods, mostly due to
additional accruals in 1997 at SCE for regulatory matters.
Interest and Other Expenses
Interest on long-term debt increased 15% and 10%, respectively, for the three
and nine months ended September 30, 1998, compared to the year-earlier periods,
mainly due to an increase at SCE related to the issuance of rate reduction notes
in December 1997. The year-to-date increase was partially offset by lower
expenses at EME due to lower principal balances on outstanding debt. Interest on
the rate reduction notes was $37 million and $113 million, respectively, for the
three and nine months ended September 30, 1998.
Other interest expense decreased 44% and 33%, respectively, for the three and
nine months ended September 30, 1998, compared to the same periods in 1997. The
decreases are due to lower overall short-term debt balances in 1998,
particularly short-term debt at SCE used to finance fuel inventories. These fuel
inventories are no longer needed because of the divestiture of the gas- and
oil-fueled plants.
Financial Condition
Edison International's liquidity is primarily affected by debt maturities,
dividend payments and capital expenditures, and investments in partnerships and
unconsolidated subsidiaries. Capital resources include cash from operations and
external financings.
Edison International's Board of Directors has authorized the repurchase of up to
$2.8 billion (increased from $2.3 billion in July 1998) of its outstanding
shares of common stock. Edison International has repurchased 95.5 million shares
($2.2 billion) between January 1995 and October 30, 1998, funded by dividends
from its subsidiaries and the issuance of rate reduction notes.
Edison International's cash flow coverage of dividends for the nine months ended
September 30, 1998, was 4.2 times, compared to 5.0 times for the same period in
1997. The decrease was primarily due to the ongoing share repurchase program, as
well as the gain on sale of SCE's 12 gas- and oil-fueled generation plants.
Edison International's dividend payout ratio for the twelve-month period ended
September 30, 1998, was 58%.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $1.2 billion for the
nine-month period ended September 30, 1998, compared with $1.6 billion in 1997.
Cash from operations exceeded capital requirements for both periods presented.
Cash Flows from Financing Activities
At September 30, 1998, Edison International and its subsidiaries had $2.3
billion of borrowing capacity available under lines of credit totaling $2.6
billion. SCE had available lines of credit of $1.3 billion, with $735 million
for general purpose short-term debt and $515 million for the long-term
refinancing of its variable-rate pollution-control bonds. The parent company had
total lines of credit of $500 million, with $300 million available. The
nonutility companies had total lines of credit of $800 million, with $710
million available to finance general cash requirements. Edison International's
unsecured lines of credit are at negotiated or bank index rates with various
expiration dates.
SCE's short-term debt is used to finance fuel inventories and general cash
requirements. Long-term debt is used mainly to finance capital expenditures.
SCE'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, 1998, SCE could issue approximately $12.0 billion
of additional first and refunding mortgage bonds and $4.5 billion of preferred
stock at current interest and dividend rates.
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EME has firm commitments of $265 million to make equity and other contributions,
primarily for the ISAB project in Italy, the Paiton project in Indonesia, the
Tri Energy project in Thailand, and the Doga project in Turkey. EME also has
contingent obligations to make additional contributions of $199 million,
primarily for equity support guarantees related to Paiton.
EME may incur additional obligations to make equity and other contributions to
projects in the future. EME 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 and funds available from EME's
revolving line of credit.
California law prohibits SCE from incurring or guaranteeing debt for its
nonutility affiliates. Additionally, the CPUC regulates SCE's capital structure,
limiting the dividends it may pay Edison International. At September 30, 1998,
SCE had the capacity to pay $800 million in additional dividends and continue to
maintain its authorized capital structure. These restrictions are not expected
to affect Edison International's ability to meet its cash obligations.
In December 1997, SCE Funding LLC, a special purpose entity (SPE), of which SCE
is the sole member, issued approximately $2.5 billion of rate reduction notes to
Bankers Trust Company of California, as certificate trustee for the California
Infrastructure and Economic Development Bank Special Purpose Trust SCE-1
(Trust), which is a special purpose entity established by the State of
California. The terms of the rate reduction notes generally mirror the terms of
the pass-through certificates issued by the Trust, which are known as rate
reduction certificates. The proceeds of the rate reduction notes were used by
the SPE to purchase from SCE an enforceable right known as transition property.
Transition property is a current property right created pursuant to the
restructuring legislation and a financing order of the CPUC and consists
generally of the right to be paid a specified amount from a non-bypassable
tariff levied on residential and small commercial customers. Notwithstanding the
legal sale of the transition property by SCE to the SPE, the amounts reflected
as assets on SCE's balance sheet have not been reduced by the amount of the
transition property sold to the SPE, and the liabilities of the SPE for the rate
reduction notes are for accounting purposes reflected as long-term liabilities
on the consolidated balance sheet of SCE. SCE used the proceeds from the sale of
the transition property to retire debt and equity securities.
The rate reduction notes have maturities ranging from one to 10 years, and bear
interest at rates ranging from 5.98% to 6.42%. The rate reduction notes are
secured solely by the transition property and certain other assets of the SPE,
and there is no recourse to SCE or Edison International.
Although the SPE is consolidated with SCE in the financial statements, as
required by generally accepted accounting principles, the SPE is legally
separate from SCE, the assets of the SPE are not available to creditors of SCE
or Edison International, and the transition property is legally not an asset of
SCE or Edison International.
A voter initiative, known as California Proposition 9 on the November 1998
ballot, proposes to, among other things, prohibit the collection of any charges
in connection with the financing order for the purpose of making payments on
rate reduction notes. If Proposition 9 is voted into law and is not immediately
overturned or is not stayed pending judicial review of its merits, the
collection of charges necessary to pay the certificates while the litigation is
pending could be precluded, which would adversely affect the certificates and
the secondary market for the certificates, including pricing, liquidity, dates
of maturity, and weighted-average lives of the certificates. In addition, if
Proposition 9 is voted into law and upheld by the courts, it could have a
further material adverse effect on the certificates and the holders of the
certificates could incur a loss on their investment. A more detailed discussion
is in "California Voter Initiative."
Cash Flows from Investing Activities
Cash flows from investing activities are affected by additions to property and
plant, the nonutilities' investments in partnerships and unconsolidated
subsidiaries, proceeds from the sale of plant (see discussion in "Competitive
Environment -- Divestiture"), and funding of nuclear decommissioning trusts.
Decommissioning costs are accrued and recovered in rates over the term of each
nuclear generating
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facility's operating license through charges to depreciation expense. SCE
estimates that it will spend approximately $12.7 billion between 2013-2070 to
decommission its nuclear facilities. This estimate is based on SCE's
current-dollar decommissioning costs ($2.2 billion), escalated using a 6.65%
annual rate. These costs are expected to be funded from independent
decommissioning trusts, which will receive SCE contributions of approximately
$100 million per year. Any plan to decommission San Onofre Unit 1 prior to 2013
is not expected to affect SCE's annual contributions to the decommissioning
trusts.
Cash used for the nonutility subsidiaries' investing activities was $606 million
for the nine-month period ended September 30, 1998, compared to $519 million for
the same period in 1997. The increase is primarily due to Edison Capital's
investment in leveraged leases.
Market Risk Exposures
Edison International's primary market risk exposures arise from fluctuations in
energy prices, interest rates and foreign exchange rates. Edison International's
risk management policy allows the use of derivative financial instruments to
manage its financial exposures, but prohibits the use of these instruments for
speculative or trading purposes.
As a result of the rate freeze established in the restructuring statute, SCE's
transition costs are recovered as the residual component of rates once the costs
for distribution, transmission, public purpose programs, nuclear decommissioning
and the cost of supplying power to its customers through the PX and ISO have
already been recovered. Accordingly, more revenue will be available to cover
transition costs when market prices in the PX and ISO are low than when PX and
ISO prices are high. Market prices in the PX and ISO to date have generally been
reasonable, though some irregular price spikes have occurred. The ISO has
responded to price spikes in the market for reliability services (referred to as
ancillary services) by imposing a price cap of $250/MW on the market for such
services until certain actions have been completed to improve the functioning of
those markets. Similarly, the ISO currently maintains a cap of $250/MWh on its
market for imbalance energy while a software problem affecting the efficient
operation of that market persists. The caps in these markets mitigate the risk
of costly price spikes that would reduce the revenue available to SCE to pay
transition costs. During the upcoming year, the ISO will be considering removing
these price caps, which could increase the risk of high market prices. SCE's
exposure to high electricity prices is also partially mitigated by hedges
against high natural gas prices, since increases in natural gas prices tend to
raise the price of electricity purchased from the PX.
Changes in interest rates, electricity pool pricing and fluctuations in foreign
currency exchange rates can have a significant impact on EME's results of
operations. EME has mitigated the risk of interest rate fluctuations by
arranging for fixed rate or variable rate financing with interest rate swaps or
other hedging mechanisms for the majority of its project financings. As a result
of interest rate hedging mechanisms, interest expense includes $16 million in
the nine months ended September 30, 1998, compared to $14 million for the same
period in 1997. The maturity dates of several of EME's interest rate swap and
collar agreements do not correspond to the term of the underlying debt. EME does
not believe that interest rate fluctuations will have a material adverse effect
on its results of operations or financial position.
Projects in the United Kingdom sell their electric energy and capacity through a
centralized electricity pool, which establishes a half-hourly clearing price or
pool price for electric energy. The pool price is extremely volatile, and can
vary by a factor of ten or more over the course of a few hours due to large
differentials in demand according to the time of day. First Hydro mitigates a
portion of the market risk of the pool by entering into contracts for
differences (electricity rate swap agreements), related to either the selling or
purchasing price of power, where a contract specifies a price at which the
electricity will be traded, and the parties to the agreements make payments,
calculated based on the difference between the price in the contract and the
pool price for the element of power under contract. These contracts can be sold
in two structures: one-way contracts, where a specified monthly amount is
received in advance and difference payments are made when the pool price is
above the price specified in the contract, and two-way contracts, where the
counterparty pays First Hydro when the pool price is below the contract priced
instead of a specified monthly amount. These contracts act as a means of
stabilizing production
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revenue or purchasing costs by removing an element of First Hydro's net exposure
to pool price volatility. First Hydro's electric revenue increased by $36
million for the nine months ended September 30, 1998, compared to an increase of
$27 million for the same period in 1997, as a result of electricity rate swap
agreements. A proposal to replace the current structure of the forward-contracts
market and the pool has been made by the Director General of Electricity Supply,
at the request of the Minister of Science, Energy and Industry in the United
Kingdom. The Minister has recommended that the proposal be implemented by April
2000. Further definition of the proposal will be required before the effects of
the changes can be evaluated. Implementation of the proposal may also require
legislation.
Loy Yang B sells its electric energy through a centralized electricity pool,
which provides for a system of generator bidding, central dispatch and a
settlements system based on a clearing market for each half-hour of every day.
The Victorian Power Exchange, operator and administrator of the pool, determines
a system marginal price each half-hour. To mitigate the exposure to price
volatility of the electricity traded in the pool, Loy Yang B has entered into a
number of financial hedges. From May 8, 1997, to December 31, 2000,
approximately 53% to 64% of the plant output sold is hedged under vesting
contracts, with the remainder of the plant capacity hedged under the state hedge
described below. Vesting contracts were put into place by the State Government
of Victoria (State), between each generator and each distributor, prior to the
privatization of electric power distributors in order to provide more
predictable pricing for those electricity customers that were unable to choose
their electricity retailer. Vesting contracts set base strike prices at which
the electricity will be traded, and the parties to the agreement make payments,
calculated based on the difference between the price in the contract and the
half-hourly pool clearing price for the element of power under contract. These
contracts can be sold as one-way or two-way contracts which are structured
similar to the electricity rate swap agreements described above. These contracts
are accounted for as electricity rate swap agreements. The state hedge is a
long-term contractual arrangement based upon a fixed price commencing May 8,
1997, and terminating October 31, 2016. The State guarantees the State
Electricity Commission of Victoria's obligations under the state hedge. Loy Yang
B's electric revenue increased by $52 million for the nine months ended
September 30, 1998, compared to an increase of $43 million for the same period
in 1997, as a result of hedging contract arrangements.
As EME continues to expand into foreign markets, fluctuations in foreign
currency exchange rates can affect the amount of its equity contributions to,
distributions from and results of operations of its foreign projects. At times,
EME has hedged a portion of its current exposure to fluctuations in foreign
exchange rates where it deems appropriate through financial derivatives,
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. Statistical forecasting
techniques are used to help assess foreign exchange risk and the probabilities
of various outcomes. There can be no assurance, however, that fluctuations in
exchange rates will be fully offset by hedges or that currency movements and the
relationship between macroeconomic variables will behave in a manner that is
consistent with historical or forecasted relationships.
Construction on the two-unit Paiton project is approximately 97% complete, and
commercial operation is expected in the first half of 1999. The tariff is higher
in the early years and steps down over time, and the tariff for the Paiton
project includes infrastructure to be used in common by other units at the
Paiton complex. The plant's output is fully contracted with the state-owned
electricity company for payment in U.S. dollars and supported by the Indonesian
government. The projected rate of growth of the Indonesian economy and the
exchange rate of Indonesian Rupiah into U.S. dollars have deteriorated
significantly since the Paiton project was contracted, approved and financed.
The project received substantial finance and insurance support from the
Export-Import Bank of the United States, The Export-Import Bank of Japan, the
U.S. Overseas Private Investment Corporation and the Ministry of International
Trade and Industry of Japan. The Paiton project's senior debt ratings have been
reduced from investment grade to speculative grade based on the rating agencies'
perceived increased risk that the state-owned electricity company might not be
able to honor the electricity sales contract with Paiton. The Indonesian
government has arranged to reschedule sovereign debt owed to foreign governments
and has entered into discussions about rescheduling sovereign debt owed to
private lenders. A presidential decree has deemed some independent power
projects, but not including the Paiton project, subject to review, postponement
or cancellation. The Indonesian government has announced that it will propose a
policy related to independent power projects, which is expected in fourth
quarter 1998. The
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Paiton project continues to discuss the situation in Indonesia with the
state-owned electricity company, the Indonesian government and its officials and
commercial lenders. EME continues to monitor the situation closely.
Projected Capital Requirements
Edison International's projected construction expenditures for the next five
years are: 1998 -- $861 million; 1999 -- $815 million; 2000 -- $674 million;
2001 -- $680 million; and 2002 -- $655 million.
Long-term debt maturities and sinking fund requirements for the five
twelve-month periods following September 30, 1998, are: 1999 -- $889 million;
2000 -- $956 million; 2001 -- $857 million; 2002 -- $444 million; and 2003 --
$703 million.
Preferred stock redemption requirements for the five twelve-month periods
following September 30, 1998, are: 1999 through 2001 -- zero; 2002 -- $105
million; and 2003 -- $9 million.
Generating Station Acquisition
On August 2, 1998, EME entered into agreements to acquire the 1,884-MW Homer
City Generating Station for approximately $1.8 billion. Homer City, jointly
owned by subsidiaries of GPU, Inc. and New York State Electric & Gas
Corporation, is the only major regional coal-fired facility with direct high
voltage interconnection to the New York Power Pool and the Pennsylvania-New
Jersey-Maryland Power Pool. The plant is located near Pittsburgh, Pennsylvania.
EME will operate the plant, which is one of the lowest-cost generation
facilities in the region. The sale is subject to approval by the Pennsylvania
Public Utility Commission, the New York State Public Service Commission and
other regulatory agencies, and is expected to be completed by the first quarter
of 1999. EME plans to finance this acquisition with a combination of debt
secured by the project, EME corporate debt and cash. The acquisition is expected
to have no effect on 1999 earnings and a positive effect on earnings in 2000 and
beyond.
Regulatory Matters
Legislation enacted in September 1996 provided for, among other things, a 10%
rate reduction for residential and small commercial customers in 1998 and other
rates to remain frozen at June 1996 levels (system average of 10.1(cent) per
kilowatt-hour). See further discussion in "Competitive Environment
- --Restructuring Statute."
In 1998, revenue is determined by various mechanisms depending on the utility
operation. Revenue related to distribution operations is determined through a
performance-based rate-making mechanism (PBR) (see discussion in "Competitive
Environment -- PBR") and the distribution assets have the opportunity to earn a
CPUC-authorized 9.49% return. Until the ISO began operation, transmission
revenue was determined by the same mechanism as distribution operations. After
March 31, 1998, transmission revenue is determined through FERC-authorized rates
and transmission assets earn a 9.43% return. These rates are subject to refund.
See discussion in "Competitive Environment -- Rate-setting."
Revenue from generation-related operations is determined through the CTC
mechanism, nuclear rate-making agreements and the competitive market. Revenue
related to fossil and hydroelectric generation operations is recovered from two
sources. The portion that is made uneconomic by electric industry restructuring
is recovered through the CTC mechanism. The portion that is economic is
recovered through the market. In 1998, fossil and hydroelectric generation
assets earn a 7.22% return. A more detailed discussion is in "Competitive
Environment -- CTC."
The CPUC has authorized revised rate-making plans for SCE's nuclear facilities,
which call for the accelerated recovery of its nuclear investments in exchange
for a lower authorized rate of return. SCE's nuclear assets are earning an
annual rate of return of 7.35%. In addition, the San Onofre plan authorizes a
fixed rate of approximately 4(cent) per kilowatt-hour generated for operating
costs including incremental capital costs, and nuclear fuel and nuclear fuel
financing costs. The San Onofre plan commenced in April 1996, and ends in
December 2001 for the accelerated recovery portion and in December 2003 for
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the incentive pricing portion. Palo Verde's operating costs, including
incremental capital costs, and nuclear fuel and nuclear fuel financing costs,
are subject to balancing account treatment. The Palo Verde plan commenced in
January 1997 and ends in December 2001. Beginning January 1, 1998, both the San
Onofre and Palo Verde rate-making plans became part of the CTC mechanism.
The changes in revenue from the regulatory mechanisms discussed above, excluding
the effects of other rate actions, are expected to have a minimal impact on 1998
earnings. However, the issuance of the rate reduction notes in December 1997,
which enabled the repurchase of debt and equity, will have a negative impact on
1998 earnings of approximately $97 million. The impact on earnings per share is
mitigated by the repurchase of common stock from the rate reduction note
proceeds.
Prior to the restructuring of the electric utility industry, SCE recovered its
non-nuclear capital additions to utility plant through depreciation rates
authorized in the general rate case. As part of the CTC Phase 2 decision, the
CPUC authorized recovery of the December 31, 1995, balances of non-nuclear
generating facilities through the CTC mechanism. The CPUC stated that rate
recovery for capital additions to the non-nuclear generating facilities should
be sought through a separate filing. In October 1997, SCE filed an application
with the CPUC requesting rate recovery of $61 million of 1996 capital additions
to its non-nuclear generating facilities. Hearings were held in early 1998. The
CPUC's Office of Ratepayer Advocates and The Utility Reform Network recommended
a combined total disallowance of $37 million. On September 21, 1998, a CPUC
administrative law judge proposed a $4 million disallowance. A final CPUC
decision is expected in fourth quarter 1998. In fourth quarter 1998, SCE plans
to file an application for rate recovery of capital additions to these same
generating facilities for the period January 1, 1997, through March 31, 1998, or
the date of divestiture for divested facilities.
Competitive Environment
SCE currently operates in a highly regulated environment in which it has an
obligation to deliver electric service to customers in return for an exclusive
franchise within its service territory. This regulatory environment is changing.
The generation sector has experienced competition from nonutility power
producers and regulators are restructuring California's electric utility
industry.
California Electric Utility Industry Restructuring
Restructuring Decision -- The CPUC's December 1995 decision on restructuring
California's electric utility industry started the transition to a new market
structure; competition and customer choice began on April 1, 1998. Key elements
of the CPUC's restructuring decision included: creation of the PX and ISO;
availability of customer choice for electricity supply and certain billing and
metering services; PBR for those utility services not subject to competition;
voluntary divestiture of at least 50% of utilities' gas-fueled generation; and
implementation of the CTC.
Restructuring Statute -- In September 1996, the State of California enacted
legislation to provide a transition to a competitive market structure. The
Statute substantially adopted the CPUC's December 1995 restructuring decision by
addressing stranded-cost recovery for utilities and providing a certain
cost-recovery time period for the transition costs associated with utility-owned
generation-related assets. Transition costs related to power-purchase contracts
are being recovered through the terms of their contracts while most of the
remaining transition costs will be recovered through 2001. The Statute also
included provisions to finance a portion of the stranded costs that residential
and small commercial customers would have paid between 1998 and 2001, which
allowed SCE to reduce rates by at least 10% to these customers, effective
January 1, 1998. The Statute included a rate freeze for all other customers,
including large commercial and industrial customers, as well as provisions for
continued funding for energy conservation, low-income programs and renewable
resources. Despite the rate freeze, SCE expects to be able to recover its
revenue requirement during the 1998-2001 transition period. In addition, the
Statute mandated the implementation of the CTC that provides utilities the
opportunity to recover costs made uneconomic by electric utility restructuring.
Finally, the Statute contained provisions for the recovery (through 2006) of
reasonable employee-related transition costs, incurred and projected, for
retraining, severance, early retirement, outplacement and related expenses. A
voter initiative, known as California Proposition 9, seeks to overturn major
portions of the Statute. A more detailed discussion of Proposition 9 is in
"California Voter Initiative."
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Rate Reduction Notes -- In December 1997, after receiving approval from both the
CPUC and the California Infrastructure and Economic Development Bank, a limited
liability company created by SCE issued approximately $2.5 billion of rate
reduction notes. Residential and small commercial customers, whose 10% rate
reduction began January 1, 1998, are repaying the notes over the expected
10-year term through non-bypassable charges based on electricity consumption.
Proposition 9 seeks to prohibit the collection of these non-bypassable charges,
or if the charges are found enforceable by a court, require SCE to offset such
charges with an equal credit to customers. See discussion in "Cash Flows from
Financing Activities."
Rate-setting -- In August 1997, the CPUC issued a decision which adopted a
methodology for determining CTC residually (see "CTC" discussion below) and
adopted SCE's revenue requirement components for public benefit programs and
nuclear decommissioning. The decision also adjusted SCE's proposed distribution
revenue requirement (see "PBR" discussion below) by reallocating $76 million of
it annually to other functions such as generation and transmission. Under the
decision, SCE will be able to recover most of the reallocated amount through
market revenue, other rate-making mechanisms or operation and maintenance
contracts with the new owners of the divested generation plants. Beginning
January 1, 1998, SCE's rates were unbundled into separate charges for energy,
transmission, distribution, the CTC, public benefit programs and nuclear
decommissioning. The transmission component is being collected through
FERC-approved rates, subject to refund.
PX and ISO -- On March 31, 1998, both the PX and ISO began accepting bids and
schedules for April 1, 1998, when the ISO took over operational control of the
transmission system. The hardware and software systems being utilized by the PX
and ISO in their bidding and scheduling activities were financed through loans
of $300 million (backed by utility guarantees) obtained by restructuring trusts
established by a CPUC order in 1996. The PX and ISO will repay the trusts' loans
through charges for service to future PX and ISO customers. The restructuring
implementation costs related to the start-up and development of the PX, which
are paid by the utilities, will be recovered from all retail customers over the
four-year transition period. SCE's share of the charge is $45 million, plus
interest and fees. SCE's share of the ISO's start-up and development costs
(approximately $16 million per year) will be paid over a 10-year period.
Direct Customer Access -- Effective April 1, 1998, customers are now able to
choose to remain utility customers with either bundled electric service or an
hourly PX pricing option from SCE (which is purchasing its power through the
PX), or choose direct access, which means the customer can contract directly
with either independent power producers or energy service providers (ESPs) such
as power brokers, marketers and aggregators. Additionally, all
investor-owned-utility customers are paying the CTC whether or not they choose
to buy power through SCE. Electric utilities are continuing to provide the core
distribution service of delivering energy through their distribution system
regardless of a customer's choice of electricity supplier. The CPUC is
continuing to regulate the prices and service obligations related to
distribution services. As of October 1, 1998, approximately 42,000 of SCE's 4.3
million customers have requested the direct access option.
Revenue Cycle Services -- Effective April 1, 1998, customers have options
regarding metering, billing and related services (referred to as revenue cycle
services) that have been provided by California's investor-owned utilities. Now
ESPs can provide their customers with one consolidated bill for their services
and the utility's services, request the utility to provide a consolidated bill
to the customer or elect to have both the ESP and the utility bill the customer
for their respective charges. In addition, customers with maximum demand above
20 kW (primarily industrial and medium and large commercial) can choose SCE or
any other supplier to provide their metering service. All other customers will
have this option beginning in January 1999. In September 1998, the CPUC issued a
decision regarding the credits that would be provided to customers if they elect
to obtain revenue cycle services from someone other than SCE. Although the
decision adopted SCE's recommendation of using the net avoided cost, it also
adopted a methodology which results in higher credits to customers but requires
ESPs to pay service fees to SCE for the costs that SCE incurs as a result of
dealing with the ESP. SCE may experience a reduction in revenue security as a
result of this unbundling.
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PBR -- In September 1996, the CPUC adopted a transmission and distribution (T&D)
PBR mechanism for SCE which began on January 1, 1997. Beginning in April 1998,
the transmission portion was separated from PBR and subject to ratemaking under
the rules of the FERC. The distribution-only PBR will extend through December
2001. Key elements of PBR include: T&D rates indexed for inflation based on the
Consumer Price Index less a productivity factor; elimination of the
kilowatt-hour sales adjustment; adjustments for cost changes that are not within
SCE's control; a cost-of-capital trigger mechanism based on changes in a bond
index; standards for service reliability and safety; and a net revenue-sharing
mechanism that determines how customers and shareholders will share gains and
losses from T&D operations.
The CPUC is considering unbundling SCE's cost of capital based on major utility
function. In May 1998, SCE filed an application on this issue. A CPUC decision
is expected in early 1999.
Beginning in 1998, SCE's hydroelectric plants are operating under a PBR-type
mechanism. The mechanism sets the hydroelectric revenue requirement and
establishes a formula for extending it through the duration of the electric
industry restructuring transition period, or until market valuation of the
hydroelectric facilities, whichever occurs first. The mechanism provides that
power sales revenue from hydroelectric facilities in excess of the hydroelectric
revenue requirement be credited against the costs to transition to a competitive
market (see "CTC" discussion below).
Divestiture -- In November 1996, SCE filed an application with the CPUC to
voluntarily divest, by auction, all 12 of its gas- and oil-fueled generation
plants. Under this proposal, SCE would continue to operate and maintain the
divested power plants for at least two years following their sale, as mandated
by the restructuring legislation enacted in September 1996. In addition, SCE
would offer workforce transition programs to those employees who may be impacted
by divestiture-related job reductions. In September 1997, the CPUC approved
SCE's proposal to auction the 12 plants.
SCE has sold and transferred ownership of all 12 of its gas- and oil-fueled
generation plants. The total sales price of the 12 plants was $1.2 billion, over
$500 million more than the combined book value. Net proceeds of the sales were
used to reduce stranded costs, which otherwise were expected to be collected
through the CTC mechanism.
CTC -- The costs to transition to a competitive market are being recovered
through a non-bypassable CTC. This charge applies to all customers who were
using or began using utility services on or after the CPUC's December 20, 1995,
decision date. The CTC is being determined residually by subtracting other rate
components for the PX, T&D, nuclear decommissioning and public benefit programs
from the frozen rate levels. SCE currently estimates its transition costs to be
approximately $10.6 billion (1998 net present value) from 1998 through 2030.
This estimate is based on incurred costs, forecasts of future costs and assumed
market prices. However, changes in the assumed market prices could materially
affect these estimates. The potential transition costs are comprised of $6.4
billion from SCE's qualifying facilities contracts, which are the direct result
of prior legislative and regulatory mandates, and $4.2 billion from costs
pertaining to certain generating assets (successful completion of the sale of
SCE's gas-fired generating plants has reduced this estimate of transition costs
for SCE-owned generation) and regulatory commitments consisting of costs
incurred (whose recovery has been deferred by the CPUC) to provide service to
customers. Such commitments include the recovery of income tax benefits
previously flowed through to customers, postretirement benefit transition costs,
accelerated recovery of San Onofre Units 2 and 3 and the Palo Verde units (as
discussed in "Regulatory Matters"), and certain other costs. This issue was
separated into two phases; Phase 1 addressed the rate-making issues and Phase 2
the quantification issues.
Major elements of the CPUC's CTC Phase 1 and Phase 2 decisions were: the
establishment of a transition cost balancing account and annual transition cost
proceedings; the setting of a market rate forecast for 1998 transition costs;
the requirement that generation-related regulatory assets be amortized ratably
over a 48-month period; the establishment of calculation methodologies and
procedures for SCE to collect its transition costs from 1998 through the end of
the rate freeze; and the reduction of SCE's authorized rate of return on certain
assets eligible for transition cost recovery (primarily fossil- and
hydroelectric-generation related assets) beginning July 1997, five months
earlier than anticipated. SCE has filed an application for rehearing on the 1997
rate of return issue.
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Accounting for Generation-Related Assets -- If the CPUC's electric industry
restructuring plan continues as described above, SCE would be allowed to recover
its CTC through non-bypassable charges to its distribution customers (although
its investment in certain generation assets would be subject to a lower
authorized rate of return). During the third quarter of 1997, SCE discontinued
application of accounting principles for rate-regulated enterprises for its
investment in generation facilities based on new accounting guidance. The
financial reporting effect of this discontinuance was to segregate these assets
on the balance sheet; the new guidance did not require SCE to write off any of
its generation-related assets, including related regulatory assets. However, the
new guidance did not specifically address the application of asset impairment
standards to these assets. SCE has retained these assets on its balance sheet
because the legislation and restructuring plan referred to above make probable
their recovery through a non-bypassable CTC to distribution customers. The
regulatory assets relate primarily to the recovery of accelerated income tax
benefits previously flowed through to customers, purchased power contract
termination payments and unamortized losses on reacquired debt. The new
accounting guidance also permits the recording of new generation-related
regulatory assets during the transition period that are probable of recovery
through the CTC mechanism.
During the second quarter of 1998, additional guidance was developed relating to
the application of asset impairment standards to these assets. Using this
guidance has resulted in SCE reducing its remaining nuclear plant investment by
$2.6 billion (as of June 30, 1998) and recording a regulatory asset on its
balance sheet for the same amount. For this impairment assessment, the fair
value of the investment was calculated by discounting future net cash flows.
This reclassification had no effect on SCE's results of operations.
If during the transition period events were to occur that made the recovery of
these generation-related regulatory assets no longer probable, SCE would be
required to write off the remaining balance of such assets (approximately $2.5
billion, after tax, at September 30, 1998) as a one-time, non-cash charge
against earnings.
If events occur during the restructuring process that result in all or a portion
of the CTC being improbable of recovery, SCE could have additional write-offs
associated with these costs if they are not recovered through another regulatory
mechanism. At this time, SCE cannot predict what other revisions will ultimately
be made during the restructuring process in subsequent proceedings or
implementation phases, or the effect, after the transition period, that
competition will have on its results of operations or financial position.
California Voter Initiative
On November 3, 1998, California voters will vote on Proposition 9, an initiative
supported by various consumer groups.
Proposition 9 would overturn major provisions of California's electric industry
restructuring legislation. Proposition 9 purports to: (1) require SCE and the
other California investor-owned utilities to provide at least a 20% rate
reduction to their residential and small commercial customers to be achieved
through cutting payments for nuclear and other fossil generation transition
costs; (2) eliminate cost recovery for nuclear generation plants and related
assets and obligations (other than reasonable decommissioning costs), except to
the extent such costs are recovered from competitive market sales through the PX
or contracts with the ISO; (3) eliminate cost recovery for non-nuclear
generation plants and related assets and obligations (other than costs
associated with QFs), except to the extent such costs are recovered from
competitive market sales through the PX or contracts with the ISO, unless the
CPUC finds that the utilities would be deprived of the opportunity to earn a
fair rate of return; and (4) prohibit the collection of any customer charges
necessary to pay principal, interest and other costs on the rate reduction bonds
(Fixed Transition Amounts or FTAs) or, if a court finds that the CPUC orders
authorizing the collection of FTAs are nevertheless enforceable, require the
FTAs to be offset with a concurrent equal credit. Proposition 9's purported rate
reduction would be in lieu of the 10% rate reduction for residential and small
commercial customers that went into effect on January 1, 1998.
If Proposition 9 is approved and implemented, and if SCE were unable to conclude
that it is probable that Proposition 9 ultimately would be found invalid, then
under applicable accounting principles SCE would
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be required to write off generation-related regulatory assets and certain
investments in electric generation plant to the extent SCE were to conclude that
such assets were no longer probable of recovery due to reductions in future
revenue. SCE anticipates that such a one-time write-off would amount to as much
as $3.4 billion pre-tax. This pre-tax write-off would result in an after-tax
write-off of as much as $1.9 billion, or approximately $5 per share,
representing 50% of SCE's total shareholders' equity of $3.8 billion at
September 30, 1998.
Such an after-tax write-off, which would exceed SCE's current retained earnings
($820 million as of September 30, 1998), would severely impair SCE's ability to
pay dividends to its preferred shareholders and Edison International's ability
to pay dividends to its common shareholders. The potential earnings reductions
described below also would impair the payment of dividends. In addition, an
after-tax write-off of $1.9 billion would reduce the common equity ratio of
SCE's capital structure from approximately 49% to approximately 30%.
The duration and amount of the rate decrease contemplated by Proposition 9 is
uncertain and, if Proposition 9 is approved, will be subject to interpretation
by the courts and regulatory agencies. If all provisions of Proposition 9
ultimately are upheld against legal challenge and interpreted in an adverse
manner, the amount of the average earnings reductions to SCE could be as much as
$210 million per year from 1999 through 2001, and gradually decreasing to as
much as $10 million in 2007.
The earnings reduction and write-off estimates ultimately will depend on how the
courts and regulators interpret Proposition 9 and how future rate changes
unrelated to Proposition 9 affect SCE's electric revenue.
The financial impacts described above, either singly or in combination, would
likely cause the rating agencies that rate SCE's debt and preferred securities
to lower those ratings substantially, which would immediately reduce the market
value of SCE's $4.2 billion in outstanding debt and preferred securities,
increase the cost of raising new capital, and possibly preclude the use of
certain financial instruments for raising capital.
If the voters approve Proposition 9, then legal challenges by the California
utilities, including SCE, and others will ensue. SCE intends to vigorously
challenge Proposition 9 as unconstitutional and to seek an immediate stay of its
provisions pending court review of the merits of its challenge. Although SCE
believes the litigation arguments challenging the enforceability of Proposition
9 would be compelling, no assurances can be given whether or when Proposition 9
would be overturned.
Environmental Protection
Edison International 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.
As further discussed in Note 2 to the Consolidated Financial Statements, Edison
International records its environmental liabilities when site assessments and/or
remedial actions are probable and a range of reasonably likely cleanup costs can
be estimated. Edison International 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, Edison International records the lower
end of this likely range of costs.
Edison International's recorded estimated minimum liability to remediate its 50
identified sites is $177 million. One of SCE's sites, a former pole-treating
facility, is considered a federal Superfund site and represents 40% of its
recorded liability. The ultimate costs to clean up Edison International's
identified sites may vary from its recorded liability due to numerous
uncertainties inherent in the estimation process. Edison International believes
that, due to these uncertainties, it is reasonably possible that cleanup costs
could exceed its recorded liability by up to $247 million. The upper limit of
this range of costs was estimated using assumptions least favorable to Edison
International among a range of reasonably possible outcomes. SCE has sold all of
its gas- and oil-fueled power plants and has retained some liability associated
with the divested properties.
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The CPUC allows SCE to recover environmental-cleanup costs at 41 of its sites,
representing $90 million of its recorded liability, through an incentive
mechanism. Under this mechanism, SCE will recover 90% of cleanup costs through
customer rates; shareholders fund the remaining 10%, with the opportunity to
recover these costs from insurance carriers and other third parties. SCE has
successfully settled insurance claims with all responsible carriers. Costs
incurred at SCE's remaining sites are expected to be recovered through customer
rates. SCE has recorded a regulatory asset of $145 million for its estimated
minimum environmental-cleanup costs expected to be recovered through customer
rates.
Edison International'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 Edison International 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.
Edison International 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 $10 million.
Based on currently available information, Edison International believes it is
unlikely 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, Edison International believes that costs ultimately
recorded will not materially affect 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. SCE expects
to have excess allowances under Phase II of 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
in progress 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.
Edison International's projected environmental capital expenditures are $935
million for the 1998-2002 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 has been the subject of scientific research. After many
years of research, scientists have not found that exposure to EMF causes disease
in humans. Research on this topic is continuing. 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. SCE 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.
San Onofre Steam Generator Tubes
The San Onofre Units 2 and 3 steam generators have performed relatively well
through the first 15 years of operation, with low rates of ongoing steam
generator tube degradation. However, during the Unit 2 scheduled refueling and
inspection outage, which was completed in Spring 1997, an increased rate of tube
degradation was identified, which resulted in the removal of more tubes from
service than had been expected. The steam generator design allows for the
removal of up to 10% of the tubes before the rated capacity of the unit must be
reduced. As a result of the increased degradation, a mid-cycle inspection outage
was conducted in early 1998 for Unit 2. Continued degradation was found during
this inspection. Monitoring of this degradation will occur at the next scheduled
refueling outage in January 1999. An additional mid-cycle inspection outage may
be required early in 2000. With the results from the February 1998 outage, 7% of
the tubes have now been removed from service. In September 1998, San
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Onofre Unit 2 experienced a small amount of leakage from a steam generator tube
plug which required an 11-day outage to repair.
During Unit 3's refueling outage, which was completed in July 1997, inspections
of structural supports for steam generator tubes identified several areas where
the thickness of the supports had been reduced, apparently by erosion during
normal plant operation. A follow-up mid-cycle inspection indicated that the
erosion had been stabilized. Additional monitoring inspections are planned
during the next scheduled refueling outage in 1999. To date, 5% of Unit 3's
tubes have been removed from service. During Unit 2's February 1998 mid-cycle
outage, similar tube supports showed no significant levels of such erosion.
New Accounting Rules
A recently issued accounting rule requires that costs related to start-up
activities be expensed as incurred, effective January 1, 1999. Edison
International currently expenses its start-up costs and therefore does not
expect this new accounting rule to materially affect its results of operations
or financial position.
In June 1998, a new accounting standard for derivative instruments and hedging
activities was issued. The new standard, which will be effective January 1,
2000, requires all derivatives to be recognized on the balance sheet at fair
value. Gains or losses from changes in fair value would be recognized in
earnings in the period of change unless the derivative is designated as a
hedging instrument. Gains or losses from hedges of a forecasted transaction or
foreign currency exposure would be reflected in other comprehensive income.
Gains or losses from hedges of a recognized asset or liability or a firm
commitment would be reflected in earnings for the ineffective portion of the
hedge. SCE anticipates that most of its derivatives under the new standard would
qualify for hedge accounting. SCE expects to recover in rates any market price
changes from its derivatives that could potentially affect earnings. Edison
International is studying the impact of the new standard on its nonutility
subsidiaries, and is unable to predict at this time the impact on its financial
statements.
Year 2000 Issue
Many of Edison International's existing computer systems were originally
programmed to represent any date by using six digits (e.g., 12/31/99) rather
than eight digits (e.g., 12/31/1999). Accordingly, such programs could fail or
create erroneous results when attempting to process information containing dates
after December 31, 1999. This situation has been referred to generally as the
Year 2000 Issue.
SCE has a comprehensive program in place to address potential Year 2000 impacts.
SCE divides its Year 2000 activities into five phases: inventory, impact
assessment, remediation, testing and implementation. SCE's plan for the Year
2000 readiness of critical systems is to be 75% complete by year-end 1998, and
100% complete by July 1999. A critical system is defined as those applications
and systems, including embedded processor technology, which if not appropriately
remediated, may have a significant impact on customers, the revenue stream,
regulatory compliance, or the health and safety of personnel.
The scope of this program includes three categories: mainframe computing,
distributed computing and physical assets (also known as embedded processors).
For mainframe financial systems, Year 2000 remediation was completed in the
fourth quarter of 1997. Remediation for the material management system was
completed in the second quarter of 1998. The customer information and billing
system is scheduled to be replaced by the first quarter of 1999 with a system
designed to be Year 2000-ready. Distributed computing assets include operations
and business information systems. The critical operations information systems
include outage management, power management, and plant monitoring and access
retrieval systems. Business information systems include a data acquisition
system for billing, the computer call center support system, credit support and
maintenance management. The physical asset portfolio includes systems in the
generation, transmission, distribution, telecommunications and facilities areas.
SCE has completed the inventory and impact assessment phases. Remediation,
testing and implementation activities are in progress for each of the three
categories. SCE is on schedule to
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have its mainframe computing, distributed computing and physical assets Year
2000-ready within the timeframe discussed above.
The other essential component of the SCE Year 2000 readiness program is to
identify and assess vendor products and business partners (external parties) for
Year 2000 readiness, as these external parties may have the potential to impact
SCE's Year 2000 readiness. SCE has a process in place to identify and contact
vendors and business partners to determine their Year 2000 status, and is
evaluating the responses. SCE's general policy requires that all newly purchased
products be Year 2000-ready or otherwise designed to allow SCE to determine
whether such products present Year 2000 issues. SCE is also working to address
Year 2000 issues related to all ISO and PX interfaces, as well as joint
ownership facilities. SCE also intends to exchange Year 2000 readiness
information (including, but not limited to, test results and related data) with
certain external parties as part of SCE's internal Year 2000 readiness efforts.
The current estimate of the costs to complete these modifications, including the
cost of new hardware and software application modification, is $80 million,
about half of which is expected to be capital costs. SCE's Year 2000 costs
expended through September 30, 1998, were $20 million. SCE expects current rate
levels for providing electric service to be sufficient to provide funding for
these modifications.
Although SCE is confident that its critical systems will be fully Year
2000-ready prior to year-end 1999, SCE believes that prudent business practices
call for the development of contingency plans. Such contingency plans shall
include developing strategies for dealing with the most reasonably likely worst
case scenario concerning Year 2000-related processing failures or malfunctions
due to SCE's internal systems or from external parties. As noted above, SCE is
currently in the remediation and testing phases for many of its internal systems
and is assessing risks posed by external parties. SCE is working with certain
industry groups, including the North American Electric Reliability Council and
the Electric Power Research Institute, in an effort to help define a reasonably
likely worst case scenario and in the development of contingency plans. SCE's
contingency plans are expected to be completed by March 1999; therefore, these
risk factors are not yet fully known, and SCE's reasonably likely worst case
scenario also is unknown at this time. Edison International does not expect the
Year 2000 issue to have a material adverse effect on its results of operation or
financial position; however, if not effectively remediated, negative effects
from Year 2000 issues, including those related to internal systems, vendors,
business partners, the ISO, the PX or customers, could cause results to differ.
Edison Mission Energy is continuing its Year 2000 Issue review at its power
projects and does not anticipate material expenditures to resolve this issue.
Forward-looking Information
In the preceding Management's Discussion and Analysis of Results of Operations
and Financial Condition and elsewhere in this quarterly report, the words
estimates, expects, anticipates, believes, and other similar expressions are
intended to identify forward-looking information that involves risks and
uncertainties. Actual results or outcomes could differ materially as a result of
such important factors as further actions by state and federal regulatory bodies
setting rates and implementing the restructuring of the electric utility
industry; the effects of new laws and regulations relating to restructuring and
other matters; the effects of increased competition in the electric utility
business, including direct customer access to retail energy suppliers and the
unbundling of revenue cycle services such as metering and billing; changes in
prices of electricity and fuel costs; changes in market interest or currency
exchange rates; foreign currency devaluation; new or increased environmental
liabilities; the effects of the Year 2000 Issue; the passage and implementation
of California Proposition 9; and other unforeseen events.
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Edison International
Tradename Litigation
As previously reported in Part II, Item 1 of the Registrant's Quarterly Reports
on Form 10-Q for the quarters ended March 31, 1998, and June 30, 1998, on
September 30, 1997, an action was filed against Edison International in the
United States District Court for the Southern District of New York alleging
trademark infringement under the Lanham Act and related state causes of action
for unfair competition. The complaint requested injunctive relief restraining
Edison International from using various tradenames and trademarks utilizing the
"Edison" name and sought to recover unspecified damages in profits from Edison
International allegedly arising from infringing activities. On November 19,
1997, Edison International filed and served its answer to the complaint denying
all of the substantive allegations and asserting affirmative defenses. After an
initial status conference, the court stayed discovery in this matter to allow
the parties to discuss a resolution of the matter. Such discussions are
continuing and the stay of discovery has been extended by agreement of the
parties.
Geothermal Generators' Litigation
Edison International, along with Southern California Edison Company (SCE), The
Mission Group and Mission Power Engineering Company, has been named as a
defendant in a lawsuit more fully described under "Southern California Edison
Company - Geothermal Generators' Litigation."
Edison Mission Energy
PMNC Litigation
As previously reported in Part II, Item 1 of the Registrant's Quarterly Reports
on Form 10-Q for the quarters ended March 31, 1998, and June 30, 1998, in
February 1997, a civil action was commenced in the Superior Court of the State
of California, Orange County, entitled The Parsons Corporation and PMNC v.
Brooklyn Navy Yard Cogeneration Partners, L.P. (Brooklyn Navy Yard), Mission
Energy New York, Inc. and B-41 Associates, L.P., in which plaintiffs assert
general monetary claims under the construction turnkey agreement in the amount
of $136.8 million. In addition to defending this action, Brooklyn Navy Yard has
also filed an action entitled Brooklyn Navy Yard Cogeneration Partners, L.P. v.
PMNC, Parsons Main of New York, Inc., Nab Construction Corporation, L.K.
Comstock & Co., Inc. and The Parsons Corporation in the Supreme Court of the
State of New York, Kings County, asserting general monetary claims in excess of
$13 million under the construction turnkey agreement. On March 26, 1998, the
Superior Court in the California action granted PMNC's motion for attachment
against Brooklyn Navy Yard in the amount of $43 million. PMNC subsequently
attached three checking accounts in the approximate amount of $500,000. On the
same day, the court stayed all proceedings in the California action pending an
order by the New York Appellate Court of the appeal by PMNC of a denial of its
motion to dismiss the New York action.
Southern California Edison Company
Wind Generators' Litigation
As previously reported in Part II, Item 1 of the Registrant's Quarterly Reports
on Form 10-Q for the quarters ended March 31, 1998, and June 30, 1998, between
January 1994 and October 1994, SCE 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 alleged SCE 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, SCE
denied the plaintiffs' allegations. In each of the lawsuits, the plaintiffs
sought declaratory relief regarding
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the proper interpretation of the contracts. Plaintiffs alleged a combined total
of approximately $189 million in which included consequential damages claimed in
seven of the eight lawsuits. Following the March 1 ruling, a ninth lawsuit was
filed in Los Angeles County raising claims similar to those alleged in the first
eight. SCE subsequently responded to the complaint in the new lawsuit by denying
its material allegations.
After receiving a favorable decision in the liability phase of the lead case,
SCE agreed to settle with the plaintiffs in seven of the lawsuits on terms
whereby SCE waived its rights to recover costs against such plaintiffs in
exchange for their agreement that there is only one fixed price period under
each of their power purchase contracts with SCE and a mutual dismissal with
prejudice of claims. SCE also entered into a settlement agreement with the
plaintiff in another of the lawsuits which resolved the issue of multiple fixed
price periods on the same terms and which also resolved a related issue unique
to that plaintiff in exchange for a nominal payment by SCE. This settlement was
subject to bankruptcy court approval in bankruptcy proceedings involving the
plaintiff. On April 24, 1998, the bankruptcy court issued an order approving the
settlement. Although the court has not yet set a date for trial of the
outstanding issues in the lead case related to SCE's cross-claim for damages, a
trial setting conference has been set for December 3, 1998.
Geothermal Generators' Litigation
As previously reported in Part II, Item 1 of the Registrant's quarterly Reports
on Form 10-Q for the quarters ended March 31, 1998, and June 30, 1998, on June
9, 1997, SCE filed a complaint in Los Angeles County Superior Court against an
independent power producer of geothermal generation and six of its affiliated
entities (Coso parties). SCE alleges that in order to avoid power production
plant shutdowns caused by excessive noncondensable gas in the geothermal field
brine, the Coso parties routinely vented highly toxic hydrogen sulfide gas from
unmonitored release points beginning in 1990 and continuing through at least
1994, in violation of applicable federal, state and local environmental law.
According to SCE, these violations constituted material breaches by the Coso
parties of their obligations under their contracts with SCE and applicable law.
The complaint sought termination of the contracts and damages for excess power
purchase payments made to the Coso parties. The Coso parties' motion to transfer
venue to Inyo County Superior Court was granted on August 31, 1997.
The Coso parties have also asserted various claims against SCE, as well as The
Mission Group and Mission Power Engineering (Mission parties) in a
cross-complaint filed in the action commenced by SCE as well as in a separate
action filed against SCE by three of the Coso parties in Inyo County Superior
Court. Following a hearing on November 20, 1997, the court struck all but two
causes of action asserted in the separate action on the grounds that they should
have been raised as part of the Coso parties' cross-complaint, and ordered the
remaining two causes of action consolidated for all purposes with the action
filed by SCE.
As a result of motion practice by SCE and the Mission parties, the Coso parties
filed a second amended cross-complaint on December 29, 1997, and a third amended
cross-complaint on August 21, 1998. The third amended cross-complaint names SCE,
the Mission parties and Edison International. As against SCE, the third amended
cross-complaint purports to state causes of action for declaratory relief;
breach of the covenant of good faith and fair dealing; inducing breach of
agreements between the Coso parties and their former employees; breach of an
earlier settlement agreement between the Mission parties and the Coso parties;
slander and disparagement; injunctive relief and restitution for unfair business
practices; anticipatory breach of the contracts; and violations of Public
Utilities Code ss.ss. 453, 702 and 2106. As against the Mission parties, the
third amended cross-complaint seeks damages for breach of warranty of authority
with respect to the settlement agreement and equitable indemnity. The third
amended cross-complaint seeks restitution, compensatory damages in excess of
$115,000,000, punitive damages in an amount not less than $400,000,000,
interest, attorney's fees, declaratory relief and injunctive relief.
On September 21, 1998, SCE filed an answer to the third amended cross-complaint
generally denying the allegations contained therein and asserting appropriate
affirmative defenses. In addition, SCE filed a cross-complaint for reformation
of the contracts alleging that if they are not susceptible to SCE's
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interpretation, they should be reformed to reflect the parties' true intention.
At this time, the Coso parties have not filed a response to SCE's
cross-complaint.
SCE has also filed a motion for summary adjudication with respect to the fourth
cause of action of the third amended cross-complaint for inducing breach of
employment agreements. The hearing on the motion is currently scheduled for
November 4, 1998.
The Mission parties and Edison International demurred to and moved to strike
portions of the third amended cross-complaint. These matters were heard by the
court on October 22, 1998. On October 27, 1998, the court issued an order
continuing the hearing on Edison International's demurrer to December 17, 1998,
and stayed discovery with respect to Edison International until that time. The
Mission parties' demurrer and motion to strike are still under submission. The
court's further disposition of these matters may result in the filing of further
amended pleadings with respect to Edison International and/or SCE.
On October 19, 1998, the Coso parties purported to file a first amended
cross-complaint against Edison International only. In the amended pleading, the
Coso parties assert, among other things, that SCE and Edison International are
alter egos; that SCE engaged in anticompetitive conduct; and that SCE violated
rules of the California Public Utilities Commission governing transactions
between SCE and its affiliates. These allegations are similar to those set forth
in the second amended complaint filed by three of the Coso parties, described
below. In its reply brief in support of its demurrer and at the October 22
hearing, described in the preceding paragraph, Edison International objected to
the filing of the first amended cross-complaint on the grounds that it was filed
without leave of court and has no legal effect. On October 27, 1998, the court
issued an order striking the purported first amended cross-complaint in its
entirety.
On August 21, 1998, the court granted SCE's motion to set aside a default
entered with respect to the first amended complaint filed by three of the Coso
parties in the separately filed (now consolidated) action. SCE filed an answer
to the first amended complaint on September 21, 1998, generally denying its
allegations and asserting appropriate affirmative defenses. Since then, the
parties have agreed to stipulate to the filing of a second amended complaint,
and it is likely that the court will approve the filing of the amended pleading,
which names SCE and Edison International. The proposed second amended complaint
seeks injunctive relief and restitution for unfair competition with respect to a
broad range of purported anticompetitive conduct by SCE with respect to its
administration and interpretation of standard offer contracts and with respect
to implementation and operation of the restructured power market. In addition,
the proposed second amended complaint alleges that SCE engaged in false
advertising with respect to the cost and reliability of power generated by
qualifying facilities, such as the facilities owned by the Coso parties. The
proposed amended pleading also alleges violations of Public Utilities Code ss.
2106. The proposed amended pleading seeks restitution, injunctive relief,
unspecified compensatory damages and punitive damages in an amount not less than
$500,000,000. Assuming that the court grants the Coso parties leave to file the
second amended complaint in its current form, Edison International and SCE
intend to file a demurrer and a motion to strike.
On June 29, 1998, the Court adopted a revised discovery plan which provides for
approximately eighteen months of discovery and periodic status conferences.
Discovery and motion practice related to discovery is active, except that the
court has stayed discovery with respect to Edison International through at least
December 17, 1998. On August 28, 1998, following the first status conference,
the court set a trial date of March 1, 2000. The court reserved jurisdiction to
advance or continue the trial date. The materiality of net final judgments
against Edison International or SCE in these actions would be largely dependent
on the extent to which any damages or additional payments which might result
therefrom are recoverable through rates.
Electric and Magnetic Fields (EMF) Litigation
As previously reported in Part II, Item 1 of the Registrant's quarterly Reports
on Form 10-Q for the quarters ended March 31, 1998, and June 30, 1998, SCE is
involved in three lawsuits alleging that various plaintiffs developed cancer as
a result of exposure to EMF from SCE facilities. SCE denied the material
allegations in its responses to each of these lawsuits.
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In December 1995, the court granted SCE's motion for summary judgment in the
first lawsuit and dismissed the case. Plaintiffs have filed a Notice of Appeal.
Briefs have been submitted but no date for oral argument has been set.
The second lawsuit has been dismissed by the plaintiffs. However, one of the
named plaintiffs is now deceased and a wrongful death action was filed by her
husband and children on May 7, 1998. This action was dismissed by the court
without leave to amend on September 16, 1998.
On July 23, 1998, the court granted SCE's motion for summary judgment in the
third lawsuit and dismissed this case.
A California Court of Appeal decision, Cynthia Jill Ford et al. v. Pacific Gas
and Electric Co. (Ford), has held that the Superior Courts do not have
jurisdiction to decide issues, such as those concerning EMF, which are regulated
by the CPUC. The California Supreme Court recently denied the plaintiffs'
petition for review in Ford and it is now binding throughout California. SCE
intends to seek dismissal of the remaining case in light of the Court of
Appeal's decision.
San Onofre Personal Injury Litigation
As previously reported in Part II, Item 1 of the Registrant's quarterly Reports
on Form 10-Q for the quarters ended March 31, 1998, and June 30, 1998, SCE is
involved in six lawsuits alleging personal injuries relating to San Onofre.
An SCE engineer employed at San Onofre died in 1991 from cancer of the abdomen.
On February 6, 1995, his children sued SCE and San Diego Gas & Electric Company
(SDG&E), as well as Combustion Engineering, the manufacturer of the fuel rods
for the plant, in the U.S. District Court for the Southern District of
California in the first lawsuit. On December 7, 1995, the court granted SCE's
motion for summary judgment on the sole outstanding claim against it, basing the
ruling on the worker's compensation system being the exclusive remedy for the
claim. Plaintiffs appealed this ruling to the Ninth Circuit Court of Appeals. On
May 28, 1998, the Ninth Circuit Court affirmed the lower court's judgment in
favor of SCE.
On July 5, 1995, a former SCE reactor operator and his wife sued SCE and SDG&E
in the U.S. District Court for the Southern District of California in a second
lawsuit. Plaintiffs also named Combustion Engineering and the Institute of
Nuclear Power Operations as defendants. On December 22, 1995, SCE filed a motion
to dismiss or, in the alternative, for summary judgment based on worker's
compensation exclusivity. On March 25, 1996, the court granted SCE's motion for
summary judgment. Plaintiffs appealed this ruling to the Ninth Circuit Court of
Appeals. On May 28, 1998, the Ninth Circuit Court affirmed the lower court's
judgment in favor of SCE.
On August 31, 1995, the wife and daughter of a former San Onofre security
supervisor sued SCE and SDG&E in the U.S. District Court for the Southern
District of California in the third lawsuit. Plaintiffs also named Combustion
Engineering and the Institute of Nuclear Power Operations as defendants. All
trial court proceedings have been stayed pending the ruling of the Court of
Appeals, issued by the Ninth Circuit on May 28, 1998 affirming the lower court's
judgment in favor of SCE, in the cases described in the above two paragraphs. A
trial date has not yet been set.
On November 17, 1995, an SCE employee and his wife sued SCE in the U.S. District
Court for the Southern District of California in the fourth lawsuit. Plaintiffs
also named Combustion Engineering. The trial in this case took place over
approximately 22 days between January and March 1998 and resulted in a jury
verdict for both defendants. On March 19, 1998, the plaintiffs filed a motion
for a new trial. That motion was denied on June 9, 1998. On July 6, 1998,
plaintiffs filed a notice of appeal stating that they will appeal the trial
court's judgment to the Ninth Circuit Court of Appeals.
On November 28, 1995, a former contract worker at San Onofre, her husband, and
her son, sued SCE in the U.S. District Court for the Southern District of
California in the fifth lawsuit. Plaintiffs also named Combustion Engineering.
On August 12, 1996, the Court dismissed the claims of the former worker and her
husband with prejudice. This case, with only the son as plaintiff, is expected
to go to trial in early 1999.
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On November 20, 1997, a former contract worker at San Onofre and his wife sued
SCE in the Superior Court of California, County of San Diego in the sixth
lawsuit. The case was removed to the U.S. District Court for the Southern
District of California. SCE filed a motion to dismiss the complaint for failure
to state a claim. In April 1998, the plaintiffs and SCE stipulated that SCE's
motion to dismiss be granted and that the plaintiffs be given leave to file an
amended complaint on or before May 11, 1998. On May 11, 1998, the plaintiffs
filed a first amended complaint. On May 22, 1998, SCE filed an answer denying
the material allegations of the first amended complaint. A pre-trial conference
is scheduled for May 17, 1999.
False Claims Act Litigation
As previously reported in Part II, Item 1 of the Registrant's quarterly Reports
on Form 10-Q for the quarters ended March 31, 1998, and June 30, 1998, in
September 1997, SCE became aware of a complaint filed in the Southern District
of the U.S. District Court of California by a former San Onofre employee, acting
at his own initiative on behalf of the United States under the False Claims Act,
against SCE and SDG&E. SCE and SDG&E filed separate motions to dismiss this
lawsuit on November 6, 1997. The former employee responded to both motions on
December 20, 1997. SCE and SDG&E replied to the former employee's responses on
January 13, 1998. Oral argument on the motion to dismiss was heard on January
20, 1998. On July 1, 1998, the U.S. District Court granted SCE's motion to
dismiss. The court found that the filed rate doctrine barred the former
employee's federal claims, but declined to rule on whether the state law claims
would be likewise barred. Instead, the court declined to exercise jurisdiction
over the state law claims in the wake of the dismissal of the federal claims.
The period for appeal of the U.S. District Court's decision has passed. Mr.
Rubaii did not file an appeal. As a result, this litigation at the U.S. District
Court is now dismissed with prejudice.
Mohave Generating Station Environmental Litigation
As previously reported in Part II, Item 1 of the Registrant's quarterly Reports
on Form 10-Q for the quarters ended March 31, 1998, and June 30, 1998, on
February 19, 1998, the Sierra Club and the Grand Canyon Trust filed suit in the
U.S. District Court of Nevada against SCE, which operates Mohave, and the other
three co-owners of the Mohave Generating Station. The lawsuit alleges that
Mohave has been violating various provisions of the Clean Air Act, the Nevada
state implementation plan, certain Environmental Protection Agency orders, and
applicable pollution permits relating to opacity and sulfur dioxide emission
limits over the last five years. The plaintiffs seek declaratory and injunctive
relief as well as civil penalties. Under the Clean Air Act, the maximum civil
penalty obtainable is $25,000 per day per violation. SCE and the co-owners
obtained an extension to respond to the complaint and on April 10, 1998, a
motion to dismiss was filed. The plaintiffs filed an opposition to the motion to
dismiss and a motion for partial summary judgment on May 8, 1998. On May 29,
1998, SCE and the co-owners filed their reply brief to the plaintiffs'
opposition. On June 15, 1998, the plaintiffs filed their final reply brief. SCE
and the co-owners filed their final reply to plaintiffs' opposition on June 25,
1998. The initial ruling by the court on these motions is expected in early
1999.
In addition, on June 4, 1998, the plaintiffs served SCE and its co-owners with a
60-day supplemental notice of intent to sue. This supplemental notice identified
additional causes of action as well as an additional plaintiff (National Parks
and Conservation Association) to be added to the proceedings. On October 9,
1998, Plaintiffs filed a motion to extend time to add a party and amend
complaint. Notwithstanding their supplemental notice of intent to sue,
Plaintiffs missed the deadline pursuant to the court's Discovery Plan and
Scheduling Order to file an amended complaint. On October 26, 1998, the
co-owners filed a combined opposition to plaintiffs' motion to extend time to
add a party and amend the complaint. Various discovery motions have been filed
by both parties. It is not expected that these additional filings will
substantially change the timetable for the court's initial ruling on the pending
motions to dismiss and for partial summary judgment.
California Proposition 9 Litigation
As previously reported in Part II, Item 1 of the Registrant's quarterly Report
on Form 10-Q for the quarter ended June 30, 1998, California voters will vote on
Proposition 9, an initiative supported by various consumer groups, in
California's November 3, 1998, general election. Proposition 9 would overturn
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major portions of California's electric industry restructuring legislation.
Proposition 9 purports to: (1) require SCE and the other California
investor-owned utilities to provide at least a 20% rate reduction to their
residential and small commercial customers to be achieved through cutting
payments for nuclear and other fossil generation transition costs; (2) eliminate
cost recovery for nuclear generation plants and related assets and obligations
(other than reasonable decommissioning costs), except to the extent such costs
are recovered from competitive market sales through the Power Exchange or
contracts with the Independent System Operator; (3) eliminate cost recovery for
non-nuclear generation plants and related assets and obligations (other than
costs associated with qualifying facilities), except to the extent such costs
are recovered from competitive market sales through the Power Exchange or
contracts with the Independent System Operator, unless the CPUC finds that the
utilities would be deprived of the opportunity to earn a fair rate of return;
and (4) prohibit the collection of any customer charges necessary to pay
principal, interest and other costs on the rate reduction bonds or, if a court
finds that the CPUC orders authorizing the collection of such charges are
nevertheless enforceable, require the charges to be offset with a concurrent
equal credit. Proposition 9's purported rate reduction would be in lieu of the
10% rate reduction for residential and small commercial customers that went into
effect on January 1, 1998.
In May 1998, a coalition of California business organizations and utilities
filed a petition for writ of mandate challenging Proposition 9 as illegal and
unconstitutional on its face and seeking to have it removed from the November
1998 ballot. In July 1998, the petition was denied by the California Court of
Appeal and an appeal was denied by the California Supreme Court.
Under the terms of a servicing agreement relating to the rate reduction notes,
SCE (acting as the servicer) is required to take such legal or administrative
actions as may be reasonably necessary to block or overturn any attempts to
cause a repeal of, modification of, or supplement to the electric industry
restructuring legislation, the financing order issued by the CPUC, or the rights
of holders of the property right authorized by the legislation and the financing
order, by legislative enactment, voter initiative or constitutional amendment
that would be adverse to holders of the rate reduction certificates.
Bankers Trust Company of California, N.A., acting as trustee for the holders of
rate reduction certificates, has sent a letter to the holders of record on
October 14, 1998, notifying them about certain actions the trustee is taking
related to Proposition 9. The letter states that Proposition 9, if approved by
the voters and upheld by the courts, would impair the rights of the holders and
would lead to a default in the payment of principal and interest. The letter
also states that Proposition 9, if approved, would breach the statutory and
contractual pledge by the State of California not to limit or alter payment of
principal and interest on the rate reduction certificates, and that such breach
would constitute an event of default under the agreements pursuant to which the
certificates were issued. Therefore, the letter states, the trustee is
requesting authorization from the holders to commence litigation to enjoin
Proposition 9 if it passes, to collect damages on behalf of the holders for the
breach of the State's statutory and contractual pledge, and for other
appropriate relief. The trustee's letter also attached letters from SCE, Pacific
Gas and Electric Company, and San Diego Gas & Electric Company, in their
capacities as servicers, restating their intention to comply with their
obligations under the related agreements to take reasonable and necessary legal
actions to overturn Proposition 9 if it is approved by the voters.
If California voters approve Proposition 9, legal challenges by the California
utilities, including SCE, and others will ensue. SCE intends to vigorously
challenge Proposition 9 as unconstitutional and to seek an immediate stay of its
provisions pending court review of the merits of SCE's challenge. Although SCE
believes the litigation arguments challenging the enforceability of Proposition
9 would be compelling, no assurances can be given whether or when Proposition 9
would be overturned.
SCE is unable to predict the outcome of this matter, but if Proposition 9 is
voted into law, and not immediately stayed and ultimately invalidated by the
courts, it could have a material adverse effect on SCE's results of operations
and financial position as more specifically described in "California Voter
Initiative" in Item 2 of Part 1 of this quarterly Report, which is hereby
incorporated by reference.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation (File No. 1-9936, Form 10-Q for the
quarterly period ended March 31, 1996)*
3.2 Bylaws as adopted by the Board of Directors effective
September 17, 1998
11. Computation of Primary and Fully Diluted Earnings Per Share
27. Financial Data Schedule
(b) Reports on Form 8-K:
July 13, 1998 Item 5: Other Events: Proposed Initiative
July 27, 1998 Item 5. Other Events: Stock Repurchase Plan
California Voter Initiative
Agreement for Subsidiary's Purchase
of Home Security Company
- ----------------------
* Incorporated by reference pursuant to Rule 12b-32 .
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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.
EDISON INTERNATIONAL
(Registrant)
By R. K. BUSHEY
--------------------------------
R. K. BUSHEY
Vice President and Controller
By K. S. STEWART
--------------------------------
K. S. STEWART
Assistant General Counsel and
Assistant Secretary
October 30, 1998
To Holders of the Company's Bylaws:
Effective September 17, 1998, Article II, Section 4, was amended
to change the advance notice requirements for certain matters
to be presented by shareholders at an annual meeting.
BEVERLY P. RYDER
Corporate Secretary
BYLAWS
OF
EDISON INTERNATIONAL
AS AMENDED TO AND INCLUDING
SEPTEMBER 17, 1998
<PAGE>
INDEX
Page
ARTICLE I -- PRINCIPAL OFFICE
Section 1. Principal Office...........................................1
ARTICLE II -- SHAREHOLDERS
Section 1. Meeting Locations.........................................1
Section 2. Annual Meetings...........................................1
Section 3. Special Meetings..........................................2
Section 4. Notice of Annual or Special Meeting.......................2
Section 5. Quorum....................................................4
Section 6. Adjourned Meeting and Notice Thereof......................4
Section 7. Voting....................................................4
Section 8. Record Date...............................................6
Section 9. Consent of Absentees......................................7
Section 10. Action Without Meeting.....................................7
Section 11. Proxies....................................................8
Section 12. Inspectors of Election.....................................8
ARTICLE III -- DIRECTORS
Section 1. Powers....................................................9
Section 2. Number of Directors.......................................9
Section 3. Election and Term of Office..............................10
Section 4. Vacancies................................................10
Section 5. Place of Meeting.........................................11
Section 6. Regular Meetings.........................................11
Section 7. Special Meetings.........................................11
Section 8. Quorum...................................................12
Section 9. Participation in Meetings by Conference Telephone........12
Section 10. Waiver of Notice..........................................12
Section 11. Adjournment...............................................12
Section 12. Fees and Compensation.....................................13
Section 13. Action Without Meeting....................................13
Section 14. Rights of Inspection......................................13
Section 15. Committees................................................13
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ARTICLE IV -- OFFICERS
Section 1. Officers.................................................14
Section 2. Election.................................................14
Section 3. Eligibility of Chairman or President.....................15
Section 4. Removal and Resignation..................................15
Section 5. Appointment of Other Officers............................15
Section 6. Vacancies................................................15
Section 7. Salaries.................................................15
Section 8. Furnish Security for Faithfulness........................16
Section 9. Chairman's Duties; Succession to
Such Duties in Chairman's Absence or Disability..16
Section 10. President's Duties........................................16
Section 11. Chief Financial Officer...................................16
Section 12. Vice President's Duties...................................17
Section 13. General Counsel's Duties..................................17
Section 14. Associate General Counsel's and Assistant General
Counsel's Duties.................................17
Section 15. Controller's Duties.......................................17
Section 16. Assistant Controllers' Duties.............................17
Section 17. Treasurer's Duties........................................17
Section 18. Assistant Treasurers' Duties..............................18
Section 19. Secretary's Duties........................................18
Section 20. Assistant Secretaries' Duties.............................19
Section 21. Secretary Pro Tempore.....................................19
Section 22. Election of Acting Treasurer or Acting Secretary..........19
Section 23. Performance of Duties.....................................19
ARTICLE V -- OTHER PROVISIONS
Section 1. Inspection of Corporate Records..........................20
Section 2. Inspection of Bylaws.....................................21
Section 3. Contracts and Other Instruments, Loans, Notes
and Deposits of Funds............................21
Section 4. Certificates of Stock....................................22
Section 5. Transfer Agent, Transfer Clerk and Registrar.............22
Section 6. Representation of Shares of Other Corporations...........22
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ARTICLE V -- OTHER PROVISIONS (Cont.)
Section 7. Stock Purchase Plans.................................... 23
Section 8. Fiscal Year and Subdivisions............................ 23
Section 9. Construction and Definitions............................ 23
ARTICLE VI -- INDEMNIFICATION
Section 1. Indemnification of Directors and Officers............... 24
Section 2. Indemnification of Employees and Agents................. 25
Section 3. Right of Directors and Officers to Bring Suit........... 26
Section 4. Successful Defense...................................... 26
Section 5. Non-Exclusivity of Rights............................... 26
Section 6. Insurance............................................... 26
Section 7. Expenses as a Witness................................... 27
Section 8. Indemnity Agreements.................................... 27
Section 9. Separability............................................ 27
Section 10. Effect of Repeal or Modification......................... 27
ARTICLE VII -- EMERGENCY PROVISIONS
Section 1. General................................................. 27
Section 2. Unavailable Directors................................... 28
Section 3. Authorized Number of Directors.......................... 28
Section 4. Quorum.................................................. 28
Section 5. Creation of Emergency Committee......................... 28
Section 6. Constitution of Emergency Committee..................... 29
Section 7. Powers of Emergency Committee........................... 29
Section 8. Directors Becoming Available............................ 29
Section 9. Election of Board of Directors.......................... 29
Section 10. Termination of Emergency Committee....................... 30
ARTICLE VIII -- AMENDMENTS
Section 1. Amendments.............................................. 30
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BYLAWS
Bylaws for the regulation, except as otherwise provided
by statute or its Articles of Incorporation
of
EDISON INTERNATIONAL
AS AMENDED TO AND INCLUDING
SEPTEMBER 17, 1998
ARTICLE I -- PRINCIPAL OFFICE
Section 1. Principal Office.
The principal office of the Corporation is hereby fixed and located at
2244 Walnut Grove Avenue, in the City of Rosemead, County of Los Angeles, State
of California. The Board of Directors is hereby granted full power and authority
to change said principal office from one location to another.
ARTICLE II -- SHAREHOLDERS
Section 1. Meeting Locations.
All meetings of shareholders shall be held at the principal office of
the corporation or at such other place or places within or without the State of
California as may be designated by the Board of Directors (the "Board"). In the
event such places shall prove inadequate in capacity for any meeting of
shareholders, an adjournment may be taken to and the meeting held at such other
place of adequate capacity as may be designated by the officer of the
corporation presiding at such meeting.
Section 2. Annual Meetings.
The annual meeting of shareholders shall be held on the third Thursday
of the month of April of each year at 10:00 a.m. on said day to elect directors
to hold office for the year next ensuing and until their successors shall be
elected, and to consider and act upon such other matters as may lawfully be
presented to such meeting; provided, however, that should said day fall upon a
legal holiday, then any such annual meeting of shareholders shall be held at the
same time and place on the next day thereafter ensuing which is not a legal
holiday.
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Section 3. Special Meetings.
Special meetings of the shareholders may be called at any time by the
Board, the Chairman of the Board, the President, or upon written request of any
three members of the Board, or by the holders of shares entitled to cast not
less than ten percent of the votes at such meeting. Upon request in writing to
the Chairman of the Board, the President, any Vice President or the Secretary by
any person (other than the Board) entitled to call a special meeting of
shareholders, the officer forthwith shall cause notice to be given to the
shareholders entitled to vote that a meeting will be held at a time requested by
the person or persons calling the meeting, not less than thirty-five nor more
than sixty days after the receipt of the request. If the notice is not given
within twenty days after receipt of the request, the persons entitled to call
the meeting may give the notice.
Section 4. Notice of Annual or Special Meeting.
Written notice of each annual or special meeting of shareholders shall
be given not less than ten (or if sent by third-class mail, thirty) nor more
than sixty days before the date of the meeting to each shareholder entitled to
vote thereat. Such notice shall state the place, date, and hour of the meeting
and (i) in the case of a special meeting, the general nature of the business to
be transacted, and no other business may be transacted, or (ii) in the case of
an annual meeting, those matters which the Board, at the time of the mailing of
the notice, intends to present for action by the shareholders, but, subject to
the provisions of applicable law and these Bylaws, any proper matter may be
presented at an annual meeting for such action. The notice of any special or
annual meeting at which directors are to be elected shall include the names of
nominees intended at the time of the notice to be presented by the Board for
election. For any matter to be presented by a shareholder at an annual meeting
held after December 31, 1993, but on or before December 31, 1999, including the
nomination of any person (other than a person nominated by or at the direction
of the Board) for election to the Board, written notice must be received by the
Secretary of the corporation from the shareholder not less than sixty nor more
than one hundred twenty days prior to the date of the annual meeting specified
in these Bylaws and to which the shareholder's notice relates; provided however,
that in the event the annual meeting to which the shareholder's written notice
relates is to be held on a date which is more than thirty days earlier than the
date of the annual meeting specified in these Bylaws, the notice from a
shareholder must be received by the Secretary not later than the close of
business on the tenth day following the date on which public disclosure of the
date of the annual meeting was made or given to the shareholders. For any matter
to be presented by a shareholder at an annual meeting held after December 31,
1999, including the nomination of any person (other than a person nominated by
or at the direction of the Board) for election to the Board, written
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notice must be received by the Secretary of the corporation from the shareholder
not more than one hundred eighty days nor less than one hundred twenty days
prior to the date on which the proxy materials for the prior year's annual
meeting were first released to shareholders by the corporation; provided
however, that in the event the annual meeting to which the shareholder's written
notice relates is to be held on a date which is more than thirty days earlier or
later than the date of the annual meeting specified in these Bylaws, the notice
from a shareholder must be received by the Secretary not earlier than two
hundred twenty days prior to the date of the annual meeting to which the
shareholder's notice relates nor later than one hundred sixty days prior to the
date of such annual meeting, unless less than one hundred seventy days' prior
public disclosure of the date of the meeting is made by the earliest possible
quarterly report on Form 10-Q, or, if impracticable, any means reasonably
calculated to inform shareholders including without limitation a report on Form
8-K, a press release or publication once in a newspaper of general circulation
in the county in which the principal office is located, in which event notice by
the shareholder to be timely must be received not later than the close of
business on the tenth day following the date of such public disclosure. The
shareholder's notice to the Secretary shall set forth (a) a brief description of
each matter to be presented at the annual meeting by the shareholder; (b) the
name and address, as they appear on the corporation's books, of the shareholder;
(c) the class and number of shares of the corporation which are beneficially
owned by the shareholder; and (d) any material interest of the shareholder in
the matters to be presented. Any shareholder who intends to nominate a candidate
for election as a director shall also set forth in such a notice (i) the name,
age, business address and residence address of each nominee that he or she
intends to nominate at the meeting, (ii) the principal occupation or employment
of each nominee, (iii) the class and number of shares of capital stock of the
corporation beneficially owned by each nominee, and (iv) any other information
concerning the nominee that would be required under the rules of the Securities
and Exchange Commission in a proxy statement soliciting proxies for the election
of the nominee. The notice shall also include a consent, signed by the
shareholder's nominees, to serve as a director of the corporation if elected.
Notwithstanding anything in these Bylaws to the contrary, and subject to the
provisions of any applicable law, no business shall be conducted at a special or
annual meeting except in accordance with the procedures set forth in this
Section 4.
Notice of a shareholders' meeting shall be given either personally or
by first-class mail (or, if the outstanding shares of the corporation are held
of record by 500 or more persons on the record date for the meeting, by
third-class mail) or by other means of written communication, addressed to the
shareholder at the address of such shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice; or, if no such address appears or is given, at the place where the
principal office of the corporation is located or by publication at least once
in a newspaper of general
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circulation in the county in which the principal office is located. Notice by
mail shall be deemed to have been given at the time a written notice is
deposited in the United States mails, postage prepaid. Any other written notice
shall be deemed to have been given at the time it is personally delivered to the
recipient or is delivered to a common carrier for transmission, or actually
transmitted by the person giving the notice by electronic means, to the
recipient.
Section 5. Quorum.
A majority of the shares entitled to vote, represented in person or by
proxy, shall constitute a quorum at any meeting of shareholders. The affirmative
vote of a majority of the shares represented and voting at a duly held meeting
at which a quorum is present (which shares voting affirmatively also constitute
at least a majority of the required quorum) shall be the act of the
shareholders, unless the vote of a greater number or voting by classes is
required by law or the Articles; provided, however, that the shareholders
present at a duly called or held meeting at which a quorum is present may
continue to do business until adjournment, notwithstanding the withdrawal of
enough shareholders to have less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
Section 6. Adjourned Meeting and Notice Thereof.
Any shareholders' meeting, whether or not a quorum is present, may be
adjourned from time to time by the vote of a majority of the shares, the holders
of which are either present in person or represented by proxy thereat, but in
the absence of a quorum (except as provided in Section 5 of this Article) no
other business may be transacted at such meeting.
It shall not be necessary to give any notice of the time and place of
the adjourned meeting or of the business to be transacted thereat, other than by
announcement at the meeting at which such adjournment is taken. At the adjourned
meeting, the corporation may transact any business which might have been
transacted at the original meeting. However, when any shareholders' meeting is
adjourned for more than forty-five days or, if after adjournment a new record
date is fixed for the adjourned meeting, notice of the adjourned meeting shall
be given as in the case of an original meeting.
Section 7. Voting.
The shareholders entitled to notice of any meeting or to vote at any
such meeting shall be only persons in whose name shares stand on the stock
records of the corporation on the record date determined in accordance with
Section 8 of this Article.
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Voting shall in all cases be subject to the provisions of Chapter 7 of the
California General Corporation Law, and to the following provisions:
(a) Subject to clause (g), shares held by an administrator, executor,
guardian, conservator or custodian may be voted by such holder either in person
or by proxy, without a transfer of such shares into the holder's name; and
shares standing in the name of a trustee may be voted by the trustee, either in
person or by proxy, but no trustee shall be entitled to vote shares held by such
trustee without a transfer of such shares into the trustee's name.
(b) Shares standing in the name of a receiver may be voted by such
receiver; and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into the receiver's name if authority
to do so is contained in the order of the court by which such receiver was
appointed.
(c) Subject to the provisions of Section 705 of the California General
Corporation Law and except where otherwise agreed in writing between the
parties, a shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
(d) Shares standing in the name of a minor may be voted and the
corporation may treat all rights incident thereto as exercisable by the minor,
in person or by proxy, whether or not the corporation has notice, actual or
constructive, of the non-age unless a guardian of the minor's property has been
appointed and written notice of such appointment given to the corporation.
(e) Shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent or proxyholder as the bylaws of
such other corporation may prescribe or, in the absence of such provision, as
the Board of Directors of such other corporation may determine or, in the
absence of such determination, by the chairman of the board, president or any
vice president of such other corporation, or by any other person authorized to
do so by the chairman of the board, president or any vice president of such
other corporation. Shares which are purported to be voted or any proxy purported
to be executed in the name of a corporation (whether or not any title of the
person signing is indicated) shall be presumed to be voted or the proxy executed
in accordance with the provisions of this subdivision, unless the contrary is
shown.
(f) Shares of the corporation owned by any of its subsidiaries shall
not be entitled to vote on any matter.
(g) Shares of the corporation held by the corporation in a fiduciary
capacity, and shares of the corporation held in a fiduciary capacity by any of
its subsidiaries, shall not be entitled to vote on any matter, except to the
extent that
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the settlor or beneficial owner possesses and exercises a right to vote or to
give the corporation binding instructions as to how to vote such shares.
(h) If shares stand of record in the names of two or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in common,
husband and wife as community property, tenants by the entirety, voting
trustees, persons entitled to vote under a shareholder voting agreement or
otherwise, or if two or more persons (including proxyholders) have the same
fiduciary relationship respecting the same shares, unless the secretary of the
corporation is given written notice to the contrary and is furnished with a copy
of the instrument or order appointing them or creating the relationship wherein
it is so provided, their acts with respect to voting shall have the following
effect:
(i) If only one votes, such act binds all;
(ii) If more than one vote, the act of the majority so voting
binds all;
(iii) If more than one vote, but the vote is evenly split on any
particular matter, each faction may vote the securities in
question proportionately.
If the instrument so filed or the registration of the shares shows that any such
tenancy is held in unequal interests, a majority or even split for the purpose
of this section shall be a majority or even split in interest.
No shareholder of any class of stock of this corporation shall be
entitled to cumulate votes at any election of directors of this corporation.
Elections for directors need not be by ballot; provided, however, that
all elections for directors must be by ballot upon demand made by a shareholder
at the meeting and before the voting begins.
In any election of directors, the candidates receiving the highest
number of votes of the shares entitled to be voted for them up to the number of
directors to be elected by such shares are elected.
Section 8. Record Date.
The Board may fix, in advance, a record date for the determination of
the shareholders entitled to notice of any meeting or to vote or entitled to
receive payment of any dividend or other distribution, or any allotment of
rights, or to exercise rights in respect of any other lawful action. The record
date so fixed shall be not more than sixty days nor less than ten days prior to
the date of the meeting nor more than sixty days prior to any other action. When
a record date is so fixed, only shareholders of record at the close of business
on that date are entitled to notice of and to vote at the meeting or to receive
the dividend,
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distribution, or allotment of rights, or to exercise the rights, as the case may
be, notwithstanding any transfer of shares on the books of the corporation after
the record date, except as otherwise provided by law or these Bylaws. A
determination of shareholders of record entitled to notice of or to vote at a
meeting of shareholders shall apply to any adjournment of the meeting unless the
Board fixes a new record date for the adjourned meeting. The Board shall fix a
new record date if the meeting is adjourned for more than forty-five days.
If no record date is fixed by the Board, the record date for
determining shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the business day next
preceding the day on which notice is given or, if notice is waived, at the close
of business on the business day next preceding the day on which the meeting is
held. The record date for determining shareholders for any purpose other than as
set forth in this Section 8 or Section 10 of this Article shall be at the close
of business on the day on which the Board adopts the resolution relating
thereto, or the sixtieth day prior to the date of such other action, whichever
is later.
Section 9. Consent of Absentees.
The transactions of any meeting of shareholders, however called and
noticed, and wherever held, are as valid as though had at a meeting duly held
after regular call and notice, if a quorum is present either in person or by
proxy, and if, either before or after the meeting, each of the persons entitled
to vote, not present in person or by proxy, signs a written waiver of notice or
a consent to the holding of the meeting or an approval of the minutes thereof.
All such waivers, consents or approvals shall be filed with the corporate
records or made a part of the minutes of the meeting. Neither the business to be
transacted at nor the purpose of any regular or special meeting of shareholders
need be specified in any written waiver of notice, consent to the holding of the
meeting or approval of the minutes thereof, except as provided in Section 601
(f) of the California General Corporation Law.
Section 10. Action Without Meeting.
Subject to Section 603 of the California General Corporation Law, any
action which, under any provision of the California General Corporation Law, may
be taken at any annual or special meeting of shareholders may be taken without a
meeting and without prior notice if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding shares having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted. Unless a record date for voting purposes be fixed as provided
in Section 8 of this Article, the record date for determining shareholders
entitled to give consent pursuant to this Section 10, when no prior action by
the
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Board has been taken, shall be the day on which the first written consent is
given.
Section 11. Proxies.
Every person entitled to vote shares has the right to do so either in
person or by one or more persons, not to exceed three, authorized by a written
proxy executed by such shareholder and filed with the Secretary. Subject to the
following sentence, any proxy duly executed continues in full force and effect
until revoked by the person executing it prior to the vote pursuant thereto by a
writing delivered to the corporation stating that the proxy is revoked or by a
subsequent proxy executed by the person executing the prior proxy and presented
to the meeting, or by attendance at the meeting and voting in person by the
person executing the proxy; provided, however, that a proxy is not revoked by
the death or incapacity of the maker unless, before the vote is counted, written
notice of such death or incapacity is received by this corporation. No proxy
shall be valid after the expiration of eleven months from the date of its
execution unless otherwise provided in the proxy.
Section 12. Inspectors of Election.
In advance of any meeting of shareholders, the Board may appoint any
persons other than nominees as inspectors of election to act at such meeting and
any adjournment thereof. If inspectors of election are not so appointed, or if
any persons so appointed fail to appear or refuse to act, the chairman of any
such meeting may, and on the request of any shareholder or shareholder's proxy
shall, make such appointments at the meeting. The number of inspectors shall be
either one or three. If appointed at a meeting on the request of one or more
shareholders or proxies, the majority of shares present shall determine whether
one or three inspectors are to be appointed.
The duties of such inspectors shall be as prescribed by Section 707 (b)
of the California General Corporation Law and shall include: determining the
number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum, and the authenticity,
validity and effect of proxies; receiving votes, ballots or consents; hearing
and determining all challenges and questions in any way arising in connection
with the right to vote; counting and tabulating all votes or consents;
determining when the polls shall close; determining the result; and doing such
acts as may be proper to conduct the election or vote with fairness to all
shareholders. If there are three inspectors of election, the decision, act or
certificate of a majority is effective in all respects as the decision, act or
certificate of all. Any report or certificate made by the inspectors of election
is prima facie evidence of the facts stated therein.
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ARTICLE III -- DIRECTORS
Section 1. Powers.
Subject to limitations of the Articles, of these Bylaws and of the
California General Corporation Law relating to action required to be approved by
the shareholders or by the outstanding shares, the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised by or
under the direction of the Board. The Board may delegate the management of the
day-to-day operation of the business of the corporation provided that the
business and affairs of the corporation shall be managed and all corporate
powers shall be exercised under the ultimate direction of the Board. Without
prejudice to such general powers, but subject to the same limitations, it is
hereby expressly declared that the Board shall have the following powers in
addition to the other powers enumerated in these Bylaws:
(a) To select and remove all the other officers, agents and employees
of the corporation, prescribe the powers and duties for them as may not be
inconsistent with law, with the Articles or these Bylaws, fix their compensation
and require from them security for faithful service.
(b) To conduct, manage and control the affairs and business of the
corporation and to make such rules and regulations therefor not inconsistent
with law, or with the Articles or these Bylaws, as they may deem best.
(c) To adopt, make and use a corporate seal, and to prescribe the forms
of certificates of stock, and to alter the form of such seal and of such
certificates from time to time as in their judgment they may deem best.
(d) To authorize the issuance of shares of stock of the corporation
from time to time, upon such terms and for such consideration as may be lawful.
(e) To borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations or other evidences of debt and securities therefor.
Section 2. Number of Directors.
The authorized number of directors shall be not less than fifteen nor
more than twenty until changed by amendment of the Articles or by a Bylaw duly
adopted by the shareholders. The exact number of directors shall be fixed,
within the limits specified, by the Board by adoption of a resolution or by the
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shareholders in the same manner provided in these Bylaws for the amendment
thereof.
Section 3. Election and Term of Office.
The directors shall be elected at each annual meeting of the
shareholders, but if any such annual meeting is not held or the directors are
not elected thereat, the directors may be elected at any special meeting of
shareholders held for that purpose. Each director shall hold office until the
next annual meeting and until a successor has been elected and qualified.
Section 4. Vacancies.
Any director may resign effective upon giving written notice to the
Chairman of the Board, the President, the Secretary or the Board, unless the
notice specifies a later time for the effectiveness of such resignation. If the
resignation is effective at a future time, a successor may be elected to take
office when the resignation becomes effective.
Vacancies in the Board, except those existing as a result of a removal
of a director, may be filled by a majority of the remaining directors, though
less than a quorum, or by a sole remaining director, and each director so
elected shall hold office until the next annual meeting and until such
director's successor has been elected and qualified. Vacancies existing as a
result of a removal of a director may be filled by the shareholders as provided
by law.
A vacancy or vacancies in the Board shall be deemed to exist in case of
the death, resignation or removal of any director, or if the authorized number
of directors be increased, or if the shareholders fail, at any annual or special
meeting of shareholders at which any director or directors are elected, to elect
the full authorized number of directors to be voted for at that meeting.
The Board may declare vacant the office of a director who has been
declared of unsound mind by an order of court or convicted of a felony.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors. Any such election by
written consent other than to fill a vacancy created by removal requires the
consent of a majority of the outstanding shares entitled to vote. If the Board
accepts the resignation of a director tendered to take effect at a future time,
the Board or the shareholders shall have power to elect a successor to take
office when the resignation is to become effective.
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No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of the director's term
of office.
Section 5. Place of Meeting.
Regular or special meetings of the Board shall be held at any place
within or without the State of California which has been designated from time to
time by the Board or as provided in these Bylaws. In the absence of such
designation, regular meetings shall be held at the principal office of the
corporation.
Section 6. Regular Meetings.
Promptly following each annual meeting of shareholders the Board shall
hold a regular meeting for the purpose of organization, election of officers and
the transaction of other business.
Regular meetings of the Board shall be held at the principal office of
the corporation without notice on the third Thursday of the months of February,
April, May, July and September, and on the second Thursday in December, at the
hour of 9:00 a.m. or as soon thereafter as the regular meeting of the Board of
Directors of Southern California Edison Company is adjourned, and on the third
Thursday in March, at the hour of 8:00 a.m. or as soon thereafter as the regular
meeting of the Board of Directors of Southern California Edison Company is
adjourned. Call and notice of all regular meetings of the Board are not
required.
Section 7. Special Meetings.
Special meetings of the Board for any purpose or purposes may be called
at any time by the Chairman of the Board, the President, any Vice President, the
Secretary or by any two directors.
Special meetings of the Board shall be held upon four days' written
notice or forty-eight hours' notice given personally or by telephone, telegraph,
telex, facsimile, electronic mail or other similar means of communication. Any
such notice shall be addressed or delivered to each director at such director's
address as it is shown upon the records of the corporation or as may have been
given to the corporation by the director for purposes of notice or, if such
address is not shown on such records or is not readily ascertainable, at the
place in which the meetings of the directors are regularly held. The notice need
not specify the purpose of such special meeting.
Notice by mail shall be deemed to have been given at the time a written
notice is deposited in the United States mail, postage prepaid. Any other
written
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notice shall be deemed to have been given at the time it is personally delivered
to the recipient or is delivered to a common carrier for transmission, or
actually transmitted by the person giving the notice by electronic means to the
recipient. Oral notice shall be deemed to have been given at the time it is
communicated, in person or by telephone, radio or other similar means to the
recipient or to a person at the office of the recipient who the person giving
the notice has reason to believe will promptly communicate it to the recipient.
Section 8. Quorum.
One-third of the number of authorized directors constitutes a quorum of
the Board for the transaction of business, except to adjourn as provided in
Section ll of this Article. Every act or decision done or made by a majority of
the directors present at a meeting duly held at which a quorum is present shall
be regarded as the act of the Board, unless a greater number is required by law
or by the Articles; provided, however, that a meeting at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of directors, if any action taken is approved by at least a majority
of the required quorum for such meeting.
Section 9. Participation in Meetings by Conference Telephone.
Members of the Board may participate in a meeting through use of
conference telephone or similar communications equipment, so long as all members
participating in such meeting can hear one another. Such participation
constitutes presence in person at such meeting.
Section 10. Waiver of Notice.
The transactions of any meeting of the Board, however called and
noticed or wherever held, are as valid as though had at a meeting duly held
after regular call and notice if a quorum is present and if, either before or
after the meeting, each of the directors not present signs a written waiver of
notice, a consent to holding such meeting or an approval of the minutes thereof.
All such waivers, consents or approvals shall be filed with the corporate
records or made a part of the minutes of the meeting.
Section 11. Adjournment.
A majority of the directors present, whether or not a quorum is
present, may adjourn any directors' meeting to another time and place. Notice of
the time and place of holding an adjourned meeting need not be given to absent
directors if the time and place is fixed at the meeting adjourned. If the
meeting is adjourned for more than twenty-four hours, notice of any adjournment
to another
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time or place shall be given prior to the time of the adjourned meeting to the
directors who were not present at the time of the adjournment.
Section 12. Fees and Compensation.
Directors and members of committees may receive such compensation, if
any, for their services, and such reimbursement for expenses, as may be fixed or
determined by the Board.
Section 13. Action Without Meeting.
Any action required or permitted to be taken by the Board may be taken
without a meeting if all members of the Board shall individually or collectively
consent in writing to such action. Such written consent or consents shall have
the same force and effect as a unanimous vote of the Board and shall be filed
with the minutes of the proceedings of the Board.
Section 14. Rights of Inspection.
Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records and documents of every kind and to inspect
the physical properties of the corporation and also of its subsidiary
corporations, domestic or foreign. Such inspection by a director may be made in
person or by agent or attorney and includes the right to copy and make extracts.
Section 15. Committees.
The Board may appoint one or more committees, each consisting of two or
more directors, to serve at the pleasure of the Board. The Board may delegate to
such committees any or all of the authority of the Board except with respect to:
(a) The approval of any action for which the California General
Corporation Law also requires shareholders' approval or approval of the
outstanding shares;
(b) The filling of vacancies on the Board or in any committee;
(c) The fixing of compensation of the directors for serving on the
Board or on any committee;
(d) The amendment or repeal of Bylaws or the adoption of new Bylaws;
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(e) The amendment or repeal of any resolution of the Board which by its
express terms is not so amendable or repealable;
(f) A distribution to the shareholders of the corporation except at a
rate or in a periodic amount or within a price range determined by the Board; or
(g) The appointment of other committees of the Board or the members
thereof.
Any such committee, or any member or alternate member thereof, must be
appointed by resolution adopted by a majority of the exact number of authorized
directors as specified in Section 2 of this Article. The Board shall have the
power to prescribe the manner and timing of giving of notice of regular or
special meetings of any committee and the manner in which proceedings of any
committee shall be conducted. In the absence of any such prescription, such
committee shall have the power to prescribe the manner in which its proceedings
shall be conducted. Unless the Board or such committee shall otherwise provide,
the regular and special meetings and other actions of any such committee shall
be governed by the provisions of this Article applicable to meetings and actions
of the Board. Minutes shall be kept of each meeting of each committee.
ARTICLE IV -- OFFICERS
Section 1. Officers.
The officers of the corporation shall be a Chairman of the Board, a
President, a Chief Financial Officer, one or more Vice Presidents, a General
Counsel and a Secretary. The corporation may also have, at the discretion of the
Board, one or more Associate General Counsel, one or more Assistant General
Counsel, a Controller, one or more Assistant Controllers, a Treasurer, one or
more Assistant Treasurers and one or more Assistant Secretaries, and such other
officers as may be elected or appointed in accordance with Section 5 of this
Article. The Board, the Chairman of the Board or the President may confer a
special title upon any Vice President not specified herein.
Section 2. Election.
The officers of the corporation, except such officers as may be elected
or appointed in accordance with the provisions of Section 5 or Section 6 of this
Article, shall be chosen annually by, and shall serve at the pleasure of the
Board, and shall hold their respective offices until their resignation, removal,
or other disqualification from service, or until their respective successors
shall be elected.
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Section 3. Eligibility of Chairman or President.
No person shall be eligible for the office of Chairman of the Board or
President unless such person is a member of the Board of the corporation; any
other officer may or may not be a director.
Section 4. Removal and Resignation.
Any officer may be removed, either with or without cause, by the Board
at any time or by any officer upon whom such power or removal may be conferred
by the Board. Any such removal shall be without prejudice to the rights, if any,
of the officer under any contract of employment of the officer.
Any officer may resign at any time by giving written notice to the
corporation, but without prejudice to the rights, if any, of the corporation
under any contract to which the officer is a party. Any such resignation shall
take effect at the date of the receipt of such notice or at any later time
specified therein and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
Section 5. Appointment of Other Officers.
The Board may appoint such other officers as the business of the
corporation may require, each of whom shall hold office for such period, have
such authority, and perform such duties as are provided in the Bylaws or as the
Board may from time to time determine.
Section 6. Vacancies.
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled at any time deemed
appropriate by the Board in the manner prescribed in these Bylaws for regular
election or appointment to such office.
Section 7. Salaries.
The salaries of the Chairman of the Board, President, Chief Financial
Officer, Vice Presidents, General Counsel, Controller, Treasurer and Secretary
of the corporation shall be fixed by the Board. Salaries of all other officers
shall be as approved from time to time by the chief executive officer.
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Section 8. Furnish Security for Faithfulness.
Any officer or employee shall, if required by the Board, furnish to the
corporation security for faithfulness to the extent and of the character that
may be required.
Section 9. Chairman's Duties; Succession to Such Duties in Chairman's
Absence or Disability.
The Chairman of the Board shall be the chief executive officer of the
corporation and shall preside at all meetings of the shareholders and of the
Board. Subject to the Board, the Chairman of the Board shall have charge of the
business of the corporation. The Chairman of the Board shall keep the Board
fully informed, and shall freely consult them concerning the business of the
corporation.
In the absence or disability of the Chairman of the Board, the
President shall act as the chief executive officer of the corporation; in the
absence or disability of the Chairman of the Board and the President, the next
in order of election by the Board of the Vice Presidents shall act as chief
executive officer of the corporation.
In the absence or disability of the Chairman of the Board, the
President shall act as Chairman of the Board at meetings of the Board; in the
absence or disability of the Chairman of the Board and the President, the next,
in order of election by the Board, of the Vice Presidents who is a member of the
Board shall act as Chairman of the Board at any such meeting of the Board; in
the absence or disability of the Chairman of the Board, the President, and such
Vice Presidents who are members of the Board, the Board shall designate a
temporary Chairman to preside at any such meeting of the Board.
Section 10. President's Duties.
The President shall perform such other duties as the Chairman of the
Board shall delegate or assign to such officer.
Section 11. Chief Financial Officer.
The Chief Financial Officer of the corporation shall be the chief
consulting officer in all matters of financial import and shall have control
over all financial matters concerning the corporation. If the corporation does
not have a currently elected and acting Controller, the Chief Financial Officer
shall also be the Chief Accounting Officer of the corporation.
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Section 12. Vice Presidents' Duties.
The Vice Presidents shall perform such other duties as the chief
executive officer shall designate.
Section 13. General Counsel's Duties.
The General Counsel shall be the chief consulting officer of the
corporation in all legal matters and, subject to the chief executive officer,
shall have control over all matters of legal import concerning the corporation.
Section 14. Associate General Counsel's and Assistant General Counsel's
Duties.
The Associate General Counsel shall perform such of the duties of the
General Counsel as the General Counsel shall designate, and in the absence or
disability of the General Counsel, the Associate General Counsel, in order of
election to that office by the Board at its latest organizational meeting, shall
perform the duties of the General Counsel. The Assistant General Counsel shall
perform such duties as the General Counsel shall designate.
Section 15. Controller's Duties.
The Controller shall be the chief accounting officer of the Corporation
and, subject to the Chief Financial Officer, shall have control over all
accounting matters concerning the Corporation and shall perform such other
duties as the Chief Executive Officer shall designate.
Section 16. Assistant Controllers' Duties.
The Assistant Controllers shall perform such of the duties of the
Controller as the Controller shall designate, and in the absence or disability
of the Controller, the Assistant Controllers, in order of election to that
office by the Board at its latest organizational meeting, shall perform the
duties of the Controller.
Section 17. Treasurer's Duties.
It shall be the duty of the Treasurer to keep in custody or control all
money, stocks, bonds, evidences of debt, securities and other items of value
that may belong to, or be in the possession or control of, the corporation, and
to dispose of the same in such manner as the Board or the chief executive
officer may direct, and to perform all acts incident to the position of
Treasurer.
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Section 18. Assistant Treasurers' Duties.
The Assistant Treasurers shall perform such of the duties of the
Treasurer as the Treasurer shall designate, and in the absence or disability of
the Treasurer, the Assistant Treasurers, in order of election to that office by
the Board at its latest organizational meeting, shall perform the duties of the
Treasurer, unless action is taken by the Board as contemplated in Article IV,
Section 22.
Section 19. Secretary's Duties.
The Secretary shall keep or cause to be kept full and complete records
of the proceedings of shareholders, the Board and its committees at all
meetings, and shall affix the corporate seal and attest by signing copies of any
part thereof when required.
The Secretary shall keep, or cause to be kept, a copy of the Bylaws of
the corporation at the principal office in accordance with Section 213 of the
California General Corporation Law.
The Secretary shall be the custodian of the corporate seal and shall
affix it to such instruments as may be required.
The Secretary shall keep on hand a supply of blank stock certificates
of such forms as the Board may adopt.
The Secretary shall serve or cause to be served by publication or
otherwise, as may be required, all notices of meetings and of other corporate
acts that may by law or otherwise be required to be served, and shall make or
cause to be made and filed in the principal office of the corporation, the
necessary certificate or proofs thereof.
An affidavit of mailing of any notice of a shareholders' meeting or of
any report, in accordance with the provisions of Section 60l (b) of the
California General Corporation Law, executed by the Secretary shall be prima
facie evidence of the fact that such notice or report had been duly given.
The Secretary may, with the Chairman of the Board, the President, or a
Vice President, sign certificates of ownership of stock in the corporation, and
shall cause all certificates so signed to be delivered to those entitled
thereto.
The Secretary shall keep all records required by the California General
Corporation Law.
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The Secretary shall generally perform the duties usual to the office of
secretary of corporations, and such other duties as the chief executive officer
shall designate.
Section 20. Assistant Secretaries' Duties.
Assistant Secretaries shall perform such of the duties of the Secretary
as the Secretary shall designate, and in the absence or disability of the
Secretary, the Assistant Secretaries, in the order of election to that office by
the Board at its latest organizational meeting, shall perform the duties of the
Secretary, unless action is taken by the Board as contemplated in Article IV,
Sections 21 and 22 of these Bylaws.
Section 21. Secretary Pro Tempore.
At any meeting of the Board or of the shareholders from which the
Secretary is absent, a Secretary pro tempore may be appointed and act.
Section 22. Election of Acting Treasurer or Acting Secretary.
The Board may elect an Acting Treasurer, who shall perform all the
duties of the Treasurer during the absence or disability of the Treasurer, and
who shall hold office only for such a term as shall be determined by the Board.
The Board may elect an Acting Secretary, who shall perform all the
duties of the Secretary during the absence or disability of the Secretary, and
who shall hold office only for such a term as shall be determined by the Board.
Whenever the Board shall elect either an Acting Treasurer or Acting
Secretary, or both, the officers of the corporation as set forth in Article IV,
Section 1 of these Bylaws, shall include as if therein specifically set out, an
Acting Treasurer or an Acting Secretary, or both.
Section 23. Performance of Duties.
Officers shall perform the duties of their respective offices as stated
in these Bylaws, and such additional duties as the Board shall designate.
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ARTICLE V -- OTHER PROVISIONS
Section 1. Inspection of Corporate Records.
(a) A shareholder or shareholders holding at least five percent in the
aggregate of the outstanding voting shares of the corporation or who hold at
least one percent of such voting shares and have filed a Schedule 14B with the
United States Securities and Exchange Commission relating to the election of
directors of the corporation shall have an absolute right to do either or both
of the following:
(i) Inspect and copy the record of shareholders' names and
addresses and shareholdings during usual business hours upon five business days'
prior written demand upon the corporation; or
(ii) Obtain from the transfer agent, if any, for the
corporation, upon five business days' prior written demand and upon the tender
of its usual charges for such a list (the amount of which charges shall be
stated to the shareholder by the transfer agent upon request), a list of the
shareholders' names and addresses who are entitled to vote for the election of
directors and their shareholdings, as of the most recent record date for which
it has been compiled or as of a date specified by the shareholder subsequent to
the date of demand.
(b) The record of shareholders shall also be open to inspection and
copying by any shareholder or holder of a voting trust certificate at any time
during usual business hours upon written demand on the corporation, for a
purpose reasonably related to such holder's interest as a shareholder or holder
of a voting trust certificate.
(c) The accounting books and records and minutes of proceedings of the
shareholders and the Board and committees of the Board shall be open to
inspection upon written demand on the corporation of any shareholder or holder
of a voting trust certificate at any reasonable time during usual business
hours, for a purpose reasonably related to such holder's interests as a
shareholder or as a holder of such voting trust certificate.
(d) Any such inspection and copying under this Article may be made in
person or by agent or attorney.
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Section 2. Inspection of Bylaws.
The corporation shall keep in its principle office the original or a
copy of these Bylaws as amended to date, which shall be open to inspection by
shareholders at all reasonable times during office hours.
Section 3. Contracts and Other Instruments, Loans, Notes and Deposits
of Funds.
The Chairman of the Board, the President, or a Vice President, either
alone or with the Secretary or an Assistant Secretary, or the Secretary alone,
shall execute in the name of the corporation such written instruments as may be
authorized by the Board and, without special direction of the Board, such
instruments as transactions of the ordinary business of the corporation may
require and, such officers without the special direction of the Board may
authenticate, attest or countersign any such instruments when deemed
appropriate. The Board may authorize any person, persons, entity, entities,
attorney, attorneys, attorney-in-fact, attorneys-in-fact, agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the corporation, and such authority may be general or confined to
specific instances.
No loans shall be contracted on behalf of the corporation and no
evidences of such indebtedness shall be issued in its name unless authorized by
the Board as it may direct. Such authority may be general or confined to
specific instances.
All checks, drafts, or other similar orders for the payment of money,
notes, or other such evidences of indebtedness issued in the name of the
corporation shall be signed by such officer or officers, agent or agents of the
corporation and in such manner as the Board or chief executive officer may
direct.
Unless authorized by the Board or these Bylaws, no officer, agent,
employee or any other person or persons shall have any power or authority to
bind the corporation by any contract or engagement or to pledge its credit or to
render it liable for any purpose or amount.
All funds of the corporation not otherwise employed shall be deposited
from time to time to the credit of the corporation in such banks, trust
companies, or other depositories as the Board may direct.
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Section 4. Certificates of Stock.
Every holder of shares of the corporation shall be entitled to have a
certificate signed in the name of the corporation by the Chairman of the Board,
the President, or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary, certifying the number of
shares and the class or series of shares owned by the shareholder. Any or all of
the signatures on the certificate may be facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if such person were an officer, transfer
agent or registrar at the date of issue.
Certificates for shares may be used prior to full payment under such
restrictions and for such purposes as the Board may provide; provided, however,
that on any certificate issued to represent any partly paid shares, the total
amount of the consideration to be paid therefor and the amount paid thereon
shall be stated.
Except as provided in this Section, no new certificate for shares shall
be issued in lieu of an old one unless the latter is surrendered and canceled at
the same time. The Board may, however, if any certificate for shares is alleged
to have been lost, stolen or destroyed, authorize the issuance of a new
certificate in lieu thereof, and the corporation may require that the
corporation be given a bond or other adequate security sufficient to indemnify
it against any claim that may be made against it (including expense or
liability) on account of the alleged loss, theft or destruction of such
certificate or the issuance of such new certificate.
Section 5. Transfer Agent, Transfer Clerk and Registrar.
The Board may, from time to time, appoint transfer agents, transfer
clerks, and stock registrars to transfer and register the certificates of the
capital stock of the corporation, and may provide that no certificate of capital
stock shall be valid without the signature of the stock transfer agent or
transfer clerk, and stock registrar.
Section 6. Representation of Shares of Other Corporations.
The chief executive officer or any other officer or officers authorized
by the Board or the chief executive officer are each authorized to vote,
represent and exercise on behalf of the corporation all rights incident to any
and all shares of any other corporation or corporations standing in the name of
the corporation.
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The authority herein granted may be exercised either by any such officer in
person or by any other person authorized so to do by proxy or power of attorney
duly executed by said officer.
Section 7. Stock Purchase Plans.
The corporation may adopt and carry out a stock purchase plan or
agreement or stock option plan or agreement providing for the issue and sale for
such consideration as may be fixed of its unissued shares, or of issued shares
acquired, to one or more of the employees or directors of the corporation or of
a subsidiary or to a trustee on their behalf and for the payment for such shares
in installments or at one time, and may provide for such shares in installments
or at one time, and may provide for aiding any such persons in paying for such
shares by compensation for services rendered, promissory notes or otherwise.
Any such stock purchase plan or agreement or stock option plan or
agreement may include, among other features, the fixing of eligibility for
participation therein, the class and price of shares to be issued or sold under
the plan or agreement, the number of shares which may be subscribed for, the
method of payment therefor, the reservation of title until full payment
therefor, the effect of the termination of employment and option or obligation
on the part of the corporation to repurchase the shares upon termination of
employment, restrictions upon transfer of the shares, the time limits of and
termination of the plan, and any other matters, not in violation of applicable
law, as may be included in the plan as approved or authorized by the Board or
any committee of the Board.
Section 8. Fiscal Year and Subdivisions.
The calendar year shall be the corporate fiscal year of the
corporation. For the purpose of paying dividends, for making reports and for the
convenient transaction of the business of the corporation, the Board may divide
the fiscal year into appropriate subdivisions.
Section 9. Construction and Definitions.
Unless the context otherwise requires, the general provisions, rules of
construction and definitions contained in the General Provisions of the
California Corporations Code and in the California General Corporation Law shall
govern the construction of these Bylaws.
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ARTICLE VI -- INDEMNIFICATION
Section 1. Indemnification of Directors and Officers.
Each person who was or is a party or is threatened to be made a party
to or is involved in any threatened, pending or completed action, suit or
proceeding, formal or informal, whether brought in the name of the corporation
or otherwise and whether of a civil, criminal, administrative or investigative
nature (hereinafter a "proceeding"), by reason of the fact that he or she, or a
person of whom he or she is the legal representative, is or was a director or
officer of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding is
an alleged action or inaction in an official capacity or in any other capacity
while serving as a director or officer, shall, subject to the terms of any
agreement between the corporation and such person, be indemnified and held
harmless by the corporation to the fullest extent permissible under California
law and the corporation's Articles of Incorporation, against all costs, charges,
expenses, liabilities and losses (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith, and such
indemnification shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that (A) the corporation shall indemnify any
such person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of the corporation; (B) the corporation shall indemnify
any such person seeking indemnification in connection with a proceeding (or part
thereof) other than a proceeding by or in the name of the corporation to procure
a judgment in its favor only if any settlement of such a proceeding is approved
in writing by the corporation; (C) that no such person shall be indemnified (i)
except to the extent that the aggregate of losses to be indemnified exceeds the
amount of such losses for which the director or officer is paid pursuant to any
directors' and officers' liability insurance policy maintained by the
corporation; (ii) on account of any suit in which judgment is rendered against
such person for an accounting of profits made from the purchase or sale by such
person of securities of the corporation pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law; (iii) if a court of
competent jurisdiction finally determines that any indemnification hereunder is
unlawful; and (iv) as to circumstances in which indemnity is expressly
prohibited by Section 317 of the General Corporation Law of California (the
"Law"); and (D) that no such person
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shall be indemnified with regard to any action brought by or in the right of the
corporation for breach of duty to the corporation and its shareholders (a) for
acts or omissions involving intentional misconduct or knowing and culpable
violation of law; (b) for acts or omissions that the director or officer
believes to be contrary to the best interests of the corporation or its
shareholders or that involve the absence of good faith on the part of the
director or officer; (c) for any transaction from which the director or officer
derived an improper personal benefit; (d) for acts or omissions that show a
reckless disregard for the director's or officer's duty to the corporation or
its shareholders in circumstances in which the director or officer was aware, or
should have been aware, in the ordinary course of performing his or her duties,
of a risk of serious injury to the corporation or its shareholders; (e) for acts
or omissions that constitute an unexcused pattern of inattention that amounts to
an abdication of the director's or officer's duties to the corporation or its
shareholders; and (f) for costs, charges, expenses, liabilities and losses
arising under Section 310 or 316 of the Law. The right to indemnification
conferred in this Article shall include the right to be paid by the corporation
expenses incurred in defending any proceeding in advance of its final
disposition; provided, however, that if the Law permits the payment of such
expenses incurred by a director or officer in his or her capacity as a director
or officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without limitation, service
to an employee benefit plan) in advance of the final disposition of a
proceeding, such advances shall be made only upon delivery to the corporation of
an undertaking, by or on behalf of such director or officer, to repay all
amounts to the corporation if it shall be ultimately determined that such person
is not entitled to be indemnified.
Section 2. Indemnification of Employees and Agents.
A person who was or is a party or is threatened to be made a party to
or is involved in any proceeding by reason of the fact that he or she is or was
an employee or agent of the corporation or is or was serving at the request of
the corporation as an employee or agent of another enterprise, including service
with respect to employee benefit plans, whether the basis of such action is an
alleged action or inaction in an official capacity or in any other capacity
while serving as an employee or agent, may, subject to the terms of any
agreement between the corporation and such person, be indemnified and held
harmless by the corporation to the fullest extent permitted by California law
and the corporation's Articles of Incorporation, against all costs, charges,
expenses, liabilities and losses, (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith.
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Section 3. Right of Directors and Officers to Bring Suit.
If a claim under Section 1 of this Article is not paid in full by the
corporation within 30 days after a written claim has been received by the
corporation, the claimant may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall also be entitled to be paid the expense of
prosecuting such claim. Neither the failure of the corporation (including its
Board, independent legal counsel, or its shareholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is permissible in the circumstances because he or she has met the
applicable standard of conduct, if any, nor an actual determination by the
corporation (including its Board, independent legal counsel, or its
shareholders) that the claimant has not met the applicable standard of conduct,
shall be a defense to the action or create a presumption for the purpose of an
action that the claimant has not met the applicable standard of conduct.
Section 4. Successful Defense.
Notwithstanding any other provision of this Article, to the extent that
a director or officer has been successful on the merits or otherwise (including
the dismissal of an action without prejudice or the settlement of a proceeding
or action without admission of liability) in defense of any proceeding referred
to in Section 1 or in defense of any claim, issue or matter therein, he or she
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred in connection therewith.
Section 5. Non-Exclusivity of Rights.
The right to indemnification provided by this Article shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, bylaw, agreement, vote of shareholders or disinterested
directors or otherwise.
Section 6. Insurance.
The corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the corporation would
have the power to indemnify such person against such expense, liability or loss
under the Law.
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Section 7. Expenses as a Witness.
To the extent that any director, officer, employee or agent of the
corporation is by reason of such position, or a position with another entity at
the request of the corporation, a witness in any action, suit or proceeding, he
or she shall be indemnified against all costs and expenses actually and
reasonably incurred by him or her on his or her behalf in connection therewith.
Section 8. Indemnity Agreements.
The corporation may enter into agreements with any director, officer,
employee or agent of the corporation providing for indemnification to the
fullest extent permissible under the Law and the corporation's Articles of
Incorporation.
Section 9. Separability.
Each and every paragraph, sentence, term and provision of this Article
is separate and distinct so that if any paragraph, sentence, term or provision
hereof shall be held to be invalid or unenforceable for any reason, such
invalidity or unenforceability shall not affect the validity or enforceability
of any other paragraph, sentence, term or provision hereof. To the extent
required, any paragraph, sentence, term or provision of this Article may be
modified by a court of competent jurisdiction to preserve its validity and to
provide the claimant with, subject to the limitations set forth in this Article
and any agreement between the corporation and claimant, the broadest possible
indemnification permitted under applicable law.
Section 10. Effect of Repeal or Modification.
Any repeal or modification of this Article shall not adversely affect
any right of indemnification of a director or officer existing at the time of
such repeal or modification with respect to any action or omission occurring
prior to such repeal or modification.
ARTICLE VII -- EMERGENCY PROVISIONS
Section 1. General.
The provisions of this Article shall be operative only during a
national emergency declared by the President of the United States or the person
performing the President's functions, or in the event of a nuclear, atomic or
other attack on the United States or a disaster making it impossible or
impracticable for the corporation to conduct its business without recourse to
the provisions of
27
<PAGE>
this Article. Said provisions in such event shall override all other Bylaws of
the corporation in conflict with any provisions of this Article, and shall
remain operative so long as it remains impossible or impracticable to continue
the business of the corporation otherwise, but thereafter shall be inoperative;
provided that all actions taken in good faith pursuant to such provisions shall
thereafter remain in full force and effect unless and until revoked by action
taken pursuant to the provisions of the Bylaws other than those contained in
this Article.
Section 2. Unavailable Directors.
All directors of the corporation who are not available to perform their
duties as directors by reason of physical or mental incapacity or for any other
reason or who are unwilling to perform their duties or whose whereabouts are
unknown shall automatically cease to be directors, with like effect as if such
persons had resigned as directors, so long as such unavailability continues.
Section 3. Authorized Number of Directors.
The authorized number of directors shall be the number of directors
remaining after eliminating those who have ceased to be directors pursuant to
Section 2, or the minimum number required by law, whichever number is greater.
Section 4. Quorum.
The number of directors necessary to constitute a quorum shall be
one-third of the authorized number of directors as specified in the foregoing
Section, or such other minimum number as, pursuant to the law or lawful decree
then in force, it is possible for the Bylaws of a corporation to specify.
Section 5. Creation of Emergency Committee.
In the event the number of directors remaining after eliminating those
who have ceased to be directors pursuant to Section 2 is less than the minimum
number of authorized directors required by law, then until the appointment of
additional directors to make up such required minimum, all the powers and
authorities which the Board could by law delegate, including all powers and
authorities which the Board could delegate to a committee, shall be
automatically vested in an emergency committee, and the emergency committee
shall thereafter manage the affairs of the corporation pursuant to such powers
and authorities and shall have all other powers and authorities as may by law or
lawful decree be conferred on any person or body of persons during a period of
emergency.
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Section 6. Constitution of Emergency Committee.
The emergency committee shall consist of all the directors remaining
after eliminating those who have ceased to be directors pursuant to Section 2,
provided that such remaining directors are not less than three in number. In the
event such remaining directors are less than three in number the emergency
committee shall consist of three persons, who shall be the remaining director or
directors and either one or two officers or employees of the corporation, as the
remaining director or directors may in writing designate. If there is no
remaining director, the emergency committee shall consist of the three most
senior officers of the corporation who are available to serve, and if and to the
extent that officers are not available, the most senior employees of the
corporation. Seniority shall be determined in accordance with any designation of
seniority in the minutes of the proceedings of the Board, and in the absence of
such designation, shall be determined by rate of remuneration. In the event that
there are no remaining directors and no officers or employees of the corporation
available, the emergency committee shall consist of three persons designated in
writing by the shareholder owning the largest number of shares of record as of
the date of the last record date.
Section 7. Powers of Emergency Committee.
The emergency committee, once appointed, shall govern its own
procedures and shall have power to increase the number of members thereof beyond
the original number, and in the event of a vacancy or vacancies therein, arising
at any time, the remaining member or members of the emergency committee shall
have the power to fill such vacancy or vacancies. In the event at any time after
its appointment all members of the emergency committee shall die or resign or
become unavailable to act for any reason whatsoever, a new emergency committee
shall be appointed in accordance with the foregoing provisions of this Article.
Section 8. Directors Becoming Available.
Any person who has ceased to be a director pursuant to the provisions
of Section 2 and who thereafter becomes available to serve as a director shall
automatically become a member of the emergency committee.
Section 9. Election of Board of Directors.
The emergency committee shall, as soon after its appointment as is
practicable, take all requisite action to secure the election of a board of
directors,
29
<PAGE>
and upon such election all the powers and authorities of the emergency committee
shall cease.
Section 10. Termination of Emergency Committee.
In the event, after the appointment of an emergency committee, a
sufficient number of persons who ceased to be directors pursuant to Section 2
become available to serve as directors, so that if they had not ceased to be
directors as aforesaid, there would be enough directors to constitute the
minimum number of directors required by law, then all such persons shall
automatically be deemed to be reappointed as directors and the powers and
authorities of the emergency committee shall be at an end.
ARTICLE VIII -- AMENDMENTS
Section 1. Amendments.
These Bylaws may be amended or repealed either by approval of the
outstanding shares or by the approval of the Board; provided, however, that a
Bylaw specifying or changing a fixed number of directors or the maximum or
minimum number or changing from a fixed to a variable Board or vice versa may
only be adopted by approval of the outstanding shares. The exact number of
directors within the maximum and minimum number specified in these Bylaws may be
amended by the Board alone.
EDISON INTERNATIONAL
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
For the Quarter ended
September 30
------------------------------
1998 1997
------ ------
(in thousands, except per-share amounts)
Consolidated net income $216,297 $276,791
Basic weighted average shares 353,285 394,076
Diluted weighted average shares 357,736 396,477
Basic earnings per share $0.61 $0.70
Diluted earnings per share $0.60 $0.70
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<CAPITAL-SURPLUS-PAID-IN> 88,865
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<LONG-TERM-DEBT-NET> 1,976,384
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<TOTAL-OPERATING-EXPENSES> 6,609,041
<OPERATING-INCOME-LOSS> 984,057
<OTHER-INCOME-NET> 84,331
<INCOME-BEFORE-INTEREST-EXPEN> 1,068,388
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<EARNINGS-AVAILABLE-FOR-COMM> 505,610
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