PAGE
<PAGE>
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 June 30, 1995
---------------------------------------
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------------- -----------------
Commission File Number 1-2313
SOUTHERN CALIFORNIA EDISON COMPANY
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-1240335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2244 Walnut Grove Avenue
(P.O. Box 800)
Rosemead, California
(Address of principal 91770
executive offices) (Zip Code)
818-302-1212
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at August 8, 1995
-------------------------- -----------------------------
Common Stock, no par value 434,888,104
PAGE
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SOUTHERN CALIFORNIA EDISON COMPANY
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Consolidated Financial Statements:
Report of Independent Public Accountants 2
Consolidated Statements of Income--Three, Six and
Twelve Months Ended June 30, 1995, and 1994 3
Consolidated Balance Sheets--June 30, 1995,
December 31, 1994, and June 30, 1994 4
Consolidated Statements of Cash Flows--
Three, Six and Twelve Months Ended
June 30, 1995, and 1994 6
Consolidated Statements of Retained Earnings--
Three, Six and Twelve Months Ended
June 30, 1995, and 1994 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 25
Part II. Other Information:
Item 1. Legal Proceedings 33
Item 6. Exhibits and Reports on Form 8-K 36
PAGE
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Southern California Edison Company:
We have audited the accompanying consolidated balance sheets of Southern
California Edison Company (Edison, a California corporation) and its
subsidiaries as of June 30, 1995, December 31, 1994, and June 30, 1994,
and the related consolidated statements of income, retained earnings and
cash flows for each of the three-, six- and twelve-month periods ended
June 30, 1995, and 1994. These financial statements are the
responsibility of Edison's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Edison and its
subsidiaries as of June 30, 1995, December 31, 1994, June 30, 1994, and
the results of their operations and their cash flows for each of the
three-, six- and twelve-month periods ended June 30, 1995, and 1994, in
conformity with generally accepted accounting principles.
As discussed in Note 2, the California Public Utilities Commission has
issued a proposal for restructuring the California electric utility
industry. If restructuring occurs, it is uncertain if certain costs and
obligations incurred to serve customers under the existing regulatory
framework will continue to be recovered. Edison has proposed recovery of
these costs through a competition transition charge mechanism. It is also
uncertain whether Edison will continue to meet the criteria for applying
Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation" to all of its operations if a new
regulatory framework is adopted. Edison is unable to predict the outcome
of the proposed restructuring and the accompanying financial statements
do not include adjustments related to the potential effects of any such
restructuring.
As discussed in Notes 5 and 6 to the financial statements, and as required
by generally accepted accounting principles, Edison changed its methods
of accounting for income taxes and postretirement benefits other than
pensions in 1993.
ARTHUR ANDERSEN LLP
Los Angeles, California
August 4, 1995
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
In thousands
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
-------------------- ---------------------- ----------------------
1995 1994 1995 1994 1995 1994
---------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue $1,737,894 $1,746,492 $3,459,677 $3,423,173 $7,835,103 $7,429,225
---------- ---------- ---------- ---------- ---------- ----------
Fuel 120,566 188,841 267,538 375,070 733,076 806,153
Purchased power 549,730 537,346 1,036,822 1,026,861 2,572,851 2,555,812
Provisions for regulatory
adjustment clauses--net 16,693 (30,532) 45,454 (39,439) 139,665 (332,405)
Other operating expenses 302,820 325,715 586,131 618,832 1,282,549 1,298,610
Maintenance 84,254 87,959 181,744 171,720 340,185 355,498
Depreciation and
decommissioning 239,380 224,812 469,332 451,198 908,789 900,035
Income taxes 111,807 108,250 234,475 211,501 530,602 514,450
Property and other taxes 51,327 50,761 104,135 103,727 203,120 204,623
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses 1,476,577 1,493,152 2,925,631 2,919,470 6,710,837 6,302,776
---------- ---------- ---------- ---------- ---------- ----------
Operating income 261,317 253,340 534,046 503,703 1,124,266 1,126,449
---------- ---------- ---------- ---------- ---------- ----------
Provision for rate
phase-in plan (28,090) (31,580) (57,865) (64,226) (130,235) (136,596)
Allowance for equity funds
used during construction 4,999 3,565 10,523 7,489 17,382 17,661
Interest income 9,579 8,142 17,785 14,385 34,479 26,646
Other nonoperating
income--net 13,970 6,894 17,858 24,926 57,538 45,865
---------- ---------- ---------- ---------- ---------- ----------
Total other income
(deductions)--net 458 (12,979) (11,699) (17,426) (20,836) (46,424)
---------- ---------- ---------- ---------- ---------- ----------
Income before interest
expense 261,775 240,361 522,347 486,277 1,103,430 1,080,025
---------- ---------- ---------- ---------- ---------- ----------
Interest on long-term debt 96,631 95,295 192,093 190,417 383,502 383,641
Other interest expense 19,491 16,801 40,620 30,758 71,510 58,471
Allowance for borrowed funds
used during construction (3,796) (3,715) (7,990) (7,804) (14,626) (15,920)
Capitalized interest (436) (89) (950) (136) (1,069) (736)
---------- ---------- ---------- ---------- ---------- ----------
Total interest
expense--net 111,890 108,292 223,773 213,235 439,317 425,456
---------- ---------- ---------- ---------- ---------- ----------
Net income 149,885 132,069 298,574 273,042 664,113 654,569
Dividends on preferred
stock 9,546 10,020 19,566 20,040 39,606 40,080
---------- ---------- ---------- ---------- ---------- ----------
Earnings available for
common stock $ 140,339 $ 122,049 $ 279,008 $ 253,002 $ 624,507 $ 614,489
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
In thousands
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1995 1994 1994
---------- ------------ ------------
ASSETS
<S> <C> <C> <C>
Utility plant, at original cost $19,455,895 $19,121,964 $18,738,591
Less--accumulated provision for depreciation
and decommissioning 8,129,802 7,710,227 7,463,420
----------- ----------- -----------
11,326,093 11,411,737 11,275,171
Construction work in progress 832,665 906,766 938,367
Nuclear fuel, at amortized cost 124,559 98,044 118,963
----------- ----------- -----------
Total utility plant 12,283,317 12,416,547 12,332,501
----------- ----------- -----------
Nonutility property--less accumulated provision
for depreciation of $31,815, $30,593 and $31,006
at respective dates 79,284 77,338 72,443
Nuclear decommissioning trusts 1,090,764 919,351 869,954
Other investments 63,299 39,584 41,803
----------- ----------- -----------
Total other property and investments 1,233,347 1,036,273 984,200
----------- ----------- -----------
Cash and equivalents 479,600 192,092 347,111
Receivables, including unbilled revenue, less
allowances of $24,453, $23,806 and $17,922 for
uncollectible accounts at respective dates 873,342 902,090 905,633
Fuel inventory 127,738 116,929 136,216
Materials and supplies, at average cost 161,644 129,109 118,237
Accumulated deferred income taxes--net 326,711 271,308 197,283
Regulatory balancing accounts--net -- -- 10,426
Prepayments and other current assets 11,920 98,778 12,498
----------- ----------- -----------
Total current assets 1,980,955 1,710,306 1,727,404
----------- ----------- -----------
Unamortized debt issuance and reacquisition
expense 349,282 356,557 370,728
Rate phase-in plan 189,465 240,730 306,218
Unamortized nuclear plant--net 119,808 171,071 222,521
Income tax-related deferred charges 1,814,766 1,816,414 1,836,360
Other deferred charges 351,718 327,613 341,161
----------- ----------- -----------
Total deferred charges 2,825,039 2,912,385 3,076,988
----------- ----------- -----------
Total assets $18,322,658 $18,075,511 $18,121,093
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
In thousands, except share amounts
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1995 1994 1994
----------- ------------ -----------
CAPITALIZATION AND LIABILITIES
Common shareholder's equity:
Common stock (434,888,104 shares outstanding
<S> <C> <C> <C>
at each date) $ 2,168,054 $ 2,168,054 $ 2,168,054
Additional paid-in capital 177,351 177,351 177,363
Retained earnings 2,688,402 2,683,568 2,568,970
----------- ----------- -----------
5,033,807 5,028,973 4,914,387
Preferred stock:
Not subject to mandatory redemption 283,755 358,755 358,755
Subject to mandatory redemption 275,000 275,000 275,000
Long-term debt 5,393,037 4,987,978 5,004,615
----------- ----------- -----------
Total capitalization 10,985,599 10,650,706 10,552,757
----------- ----------- -----------
Other long-term liabilities 339,017 311,063 302,573
----------- ----------- -----------
Current portion of long-term debt 1,275 201,275 201,200
Short-term debt 604,333 675,514 863,221
Accounts payable 286,641 317,082 326,747
Accrued taxes 563,409 514,441 542,363
Accrued interest 107,496 87,733 90,888
Dividends payable 139,011 115,803 115,803
Regulatory balancing accounts--net 113,613 55,710 --
Deferred unbilled revenue and other current liabilities 816,509 779,257 731,723
----------- ----------- -----------
Total current liabilities 2,632,287 2,746,815 2,871,945
----------- ----------- -----------
Accumulated deferred income taxes--net 3,390,083 3,386,775 3,407,026
Accumulated deferred investment tax credits 386,902 399,662 408,554
Customer advances and other deferred credits 588,770 580,490 578,238
----------- ----------- -----------
Total deferred credits 4,365,755 4,366,927 4,393,818
----------- ----------- -----------
Commitments and contingencies
(Notes 2, 8, 9 and 10)
Total capitalization and liabilities $18,322,658 $18,075,511 $18,121,093
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
------------------- ------------------- ----------------------
1995 1994 1995 1994 1995 1994
--------- --------- --------- --------- ---------- ----------
Cash flows from operating
activities:
<S> <C> <C> <C> <C> <C> <C>
Net income $ 149,885 $ 132,069 $ 298,574 $ 273,042 $ 664,113 $ 654,569
Adjustments for non-cash items:
Depreciation and
decommissioning 239,380 224,812 469,332 451,198 908,789 900,035
Amortization 9,738 46,439 21,799 74,123 73,807 120,260
Rate phase-in plan 25,010 28,262 51,265 57,991 116,753 123,944
Deferred income taxes and
investment tax credits (56,986) (23,925) (62,564) (35,851) (128,888) 123,566
Other long-term liabilities 4,162 161 27,954 35,978 36,444 63,195
Other--net (8,882) (1,165) (49,484) (10,655) (41,479) (16,999)
Changes in working capital:
Receivables (71,194) (162,262) 28,748 (105,057) 32,291 (69,809)
Regulatory balancing accounts 14,930 (49,250) 57,903 (68,358) 124,039 (366,938)
Fuel inventory, materials
and supplies (5,930) (26,196) (43,344) (29,502) (34,929) (20,644)
Prepayments and other
current assets 45,486 42,379 86,858 85,020 578 29,321
Accrued interest and taxes (49,910) 52,026 68,731 181,768 37,654 (106,506)
Accounts payable and other
current liabilities 46,653 103,888 6,811 51,910 44,680 112,699
--------- --------- -------- --------- ---------- ----------
Net cash provided by
operating activities 342,342 367,238 962,583 961,607 1,833,852 1,546,693
--------- --------- -------- --------- ---------- ----------
Cash flows from financing
activities:
Long-term debt issued 294,506 (13) 393,922 (362) 395,248 896,943
Preferred stock issued -- -- -- -- -- (28)
Long-term debt repayments (16,495) (23) (216,495) (169,024) (217,695)(1,115,880)
Preferred stock redemptions (75,000) -- (75,000) -- (75,000) --
Nuclear fuel financing--net (1,821) (12,359) 20,189 (13,816) 2,561 6,093
Short-term debt financing--net 142,790 177,349 (71,181) 250,127 (258,888) 325,861
Dividends paid (147,798) (168,989) (269,768) (337,977) (520,707) (525,927)
--------- --------- --------- --------- ---------- ----------
Net cash provided (used) by
financing activities 196,182 (4,035) (218,333) (271,052) (674,481) (412,938)
--------- --------- --------- --------- ---------- ----------
Cash flows from investing
activities:
Additions to property and
plant (177,351) (206,919) (373,038) (468,331) (886,601)(1,046,264)
Funding of nuclear
decommissioning trusts (48,399) (41,289) (72,557) (75,987) (126,725) (145,633)
Other--net (6,629) (1,513) (11,147) (4,045) (13,556) (10,525)
--------- --------- --------- --------- ---------- ----------
Net cash used by
investing activities (232,379) (249,721) (456,742) (548,363)(1,026,882)(1,202,422)
--------- --------- --------- --------- ---------- ----------
Net increase (decrease) in
cash and equivalents 306,145 113,482 287,508 142,192 132,489 (68,667)
Cash and equivalents,
beginning of period 173,455 233,629 192,092 204,919 347,111 415,778
--------- --------- --------- --------- ---------- ----------
Cash and equivalents, end
of period $ 479,600 $ 347,111 $ 479,600 $ 347,111 $ 479,600 $ 347,111
========= ========= ========= ========= ========== ==========
Cash payments for interest
and taxes:
Interest $104,200 $ 110,100 $176,500 $ 181,400 $360,200 $ 373,300
Taxes 111,996 74,754 141,326 (5,002) 590,130 388,045
</TABLE>
The accompanying notes are an integral part of these financial statements.
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
In thousands
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
--------------------- -------------------- -----------------------
1995 1994 1995 1994 1995 1994
---------- ---------- ---------- --------- ----------- ----------
Balance at beginning
<S> <C> <C> <C> <C> <C> <C>
of period $2,685,417 $2,558,871 $2,683,568 $2,586,890 $2,568,970 $2,543,331
Net income 149,885 132,069 298,574 273,042 664,113 654,569
Dividends declared on
common stock (136,590) (111,950) (273,410) (270,922) (504,311) (588,850)
Dividends declared on
preferred stock (9,546) (10,020) (19,566) (20,040) (39,606) (40,080)
Reacquired capital stock
expense (764) -- (764) -- (764) --
---------- ---------- ---------- ---------- ---------- ----------
Balance at end of period $2,688,402 $2,568,970 $2,688,402 $2,568,970 $2,688,402 $2,568,970
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Southern California Edison Company's outstanding common stock is owned
entirely by SCEcorp. Edison is a public utility which produces and
supplies electric energy in Central and Southern California. The
consolidated financial statements include Edison and its subsidiaries.
Intercompany transactions have been eliminated.
Edison's accounting policies conform with generally accepted accounting
principles for regulated enterprises and reflect the rate-making policies
of the California Public Utilities Commission (CPUC) and the Federal
Energy Regulatory Commission (FERC).
Certain prior-period amounts have been reclassified to conform to the June
30, 1995, financial statement presentation.
Debt Issuance and Reacquisition Expense
Debt premium, discount and issuance expenses are amortized over the life
of each issue. Under CPUC rate-making procedures, debt reacquisition
expenses are amortized over the remaining life of the reacquired debt or,
if refinanced, the life of the new debt.
Fuel Inventory
Fuel inventory is valued under the last-in, first-out method for fuel oil
and natural gas, and under the first-in, first-out method for coal.
Investments
Cash equivalents include tax-exempt investments ($450 million at June 30,
1995, $132 million at December 31, 1994, and $256 million at June 30,
1994), and time deposits and other investments ($22 million at June 30,
1995, $53 million at December 31, 1994, and $82 million at June 30, 1994)
with maturities of three months or less.
Unrealized gains and losses on equity investments are recorded as a
regulatory liability. Unrealized gains and losses on decommissioning
trust funds are recorded in the accumulated provision for decommissioning.
All investments are classified as available-for-sale.
Nuclear
A CPUC-authorized rate phase-in plan deferred the collection of $200
million in revenue for each unit at Palo Verde Nuclear Generating Station
during the first four years of operation. The deferred revenue (including
interest) is being collected evenly over the final six years of each
unit's plan. The plans end in 1996 for Units 1 and 2, and in 1998 for
Unit 3.
The cost of nuclear fuel, including disposal, is amortized to fuel expense
on the basis of generation. Under CPUC rate-making procedures, nuclear-
fuel financing costs are capitalized until the fuel is placed into
production.
Decommissioning costs are accrued and recovered in rates over the term of
each nuclear facility's operating license through charges to depreciation
expense (see Note 9).
Under the Energy Policy Act of 1992, Edison is liable for its share of the
estimated costs to decommission three federal nuclear enrichment
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
facilities (based on purchases). These costs, which will be paid over 15
years, are recorded as a fuel cost and recovered through customer rates.
Edison discontinued operation of San Onofre Nuclear Generating Station
Unit 1 in 1992. Edison will recover its remaining investment, earning an
8.98% rate of return, by August 1996.
In October 1994, the CPUC authorized accelerated recovery of Edison's
nuclear plant investments by $75 million per year through 2011, with a
corresponding deceleration in recovery of its transmission and
distribution assets through revised depreciation estimates over their
remaining useful lives.
Regulatory Balancing Accounts
The differences between CPUC-authorized and actual base-rate revenue from
kilowatt-hour sales and CPUC-authorized and actual energy costs are
accumulated in balancing accounts until they are refunded to, or recovered
from, utility customers through authorized rate adjustments (with
interest). Income tax effects on balancing account changes are deferred.
CPUC-established target generation levels act as performance incentives
for Edison's nuclear generating stations. Fuel savings or costs above or
below these targets are shared equally by Edison and its customers through
balancing account adjustments.
Research, Development and Demonstration (RD&D)
Edison capitalizes RD&D costs that are expected to result in plant
construction. If construction does not result, these costs are charged
to expense. RD&D expenses are recorded in a balancing account, and at the
end of the rate-case cycle, any authorized but unspent RD&D funds are
refunded to customers. RD&D expenses were $9 million, $15 million and
$52 million for the three, six and twelve months ended June 30, 1995,
respectively, and $13 million, $26 million and $58 million for the three,
six and twelve months ended June 30, 1994, respectively.
Revenue
Operating revenue includes amounts for services rendered but unbilled at
the end of each year.
Utility Plant
Plant additions, including replacements and betterments, are capitalized.
Such costs include direct material and labor, construction overhead and
an allowance for funds used during construction (AFUDC). AFUDC represents
the estimated cost of debt and equity funds that finance utility-plant
construction. AFUDC is capitalized during plant construction and reported
in current earnings. AFUDC is recovered in rates through depreciation
expense over the useful life of the related asset. Depreciation of
utility plant is computed on a straight-line, remaining-life basis.
Replaced or retired property and removal costs less salvage are charged
to the accumulated provision for depreciation.
Note 2. Regulatory Matters
1995 General Rate Case Proposed Settlement Agreement
In 1994, Edison and the CPUC's Division of Ratepayer Advocates (DRA) filed
a settlement agreement related to the 1995 general rate case. The
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
settlement, which requires CPUC approval, includes a $67 million reduction
in 1995 non-fuel revenue and, beginning February 1, 1996, accelerated
recovery (by 2003, instead of 2012) of Edison's remaining investment in
San Onofre Units 2 and 3, with an incentive pricing plan for future
operating costs. The $67 million revenue reduction has been included in
1995 rates. This reduction may change depending on the CPUC's final
decision expected in late 1995.
Edison's unrecovered investment in Units 2 and 3 (approximately $2.7
billion) would be collected over an eight-year period earning a reduced
rate of return of 7.78%, compared to the current 9.8%. Under the
incentive pricing plan, which would replace traditional regulation and
rate recovery, Edison will receive approximately 4 cents per kilowatt-hour
to cover its portion of San Onofre's ongoing operating and incremental
capital expenditures during the eight-year period. At the end of this
period, customers would bear no further obligation for the units, except
certain costs associated with decommissioning and permanent closure.
Edison would then sell power generated by San Onofre under prices, terms
and conditions which conform to any then-existing regulatory procedures.
In April 1995, the DRA filed supplemental testimony recommending a 0.25-
cent-per-kilowatt-hour decrease to the incentive prices originally agreed
to in the settlement agreement. The DRA claims the decrease is based on
"new information" obtained after the settlement was negotiated, but prior
to the hearings. On May 8, 1995, Edison filed rebuttal testimony showing
that the "new information" does not form the basis for any change to the
agreement and requesting that the CPUC adopt the original settlement.
Hearings concluded on May 24, 1995. A CPUC decision is expected in
October 1995.
CPUC Restructuring Proposals
Since April 1994, the CPUC has been considering its proposal for
restructuring California's electric utility industry, seeking to lower
energy prices and provide customers with a choice of generation suppliers
(direct access). As part of these proceedings, Edison filed a proposal
with the CPUC in November 1994 recommending implementation of a
competition transition charge mechanism beginning in 1998, for full
recovery of utility investments and obligations incurred to serve
customers under the existing regulatory framework. In its filing, Edison
estimates its potential transition costs through 2025 to be approximately
$9.3 billion (net present value), based on an assumed 1998 market price
of four cents per kilowatt-hour. The potential transition costs are
comprised of: $4.9 billion from Edison's qualifying facility contracts,
which are the direct result of legislative and regulatory mandates; $600
million from costs pertaining to certain generating plants; and $3.8
billion from regulatory commitments consisting of costs incurred to
provide service to customers whose recovery has been deferred. Such
commitments include deferred taxes, postretirement benefit transition
costs, accelerated recovery of nuclear plants, nuclear decommissioning and
certain other costs. At June 30, 1995, these commitments included
recorded generation-related regulatory assets of approximately $850
million.
On May 24, 1995, the CPUC issued for public comment two policy proposals
on restructuring. Although the proposals differ, they both recommend
moving to a restructured competitive electric industry within two years
and generally endorse recovery of costs incurred under prior regulatory
rules. The majority's proposal, supported by three of the four
commissioners, recommends a power pool that would commence operation by
the beginning of 1997. Under this proposal, an independent system
operator would coordinate a competitive bidding process that would
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
determine which generating plants supply power to the pool based on
demand. Edison and other utilities would obtain power from the pool for
distribution to their customers. After the initial two years of
operation, if market power, stranded cost recovery, and jurisdictional
issues were resolved, consumers would be allowed to buy electricity
directly from generators. Under this proposal, utilities would provide
transmission and distribution services under a performance-based rate-
making model.
One commissioner offered an alternate proposal that would provide for
"retail wheeling." Under this proposal, customers could enter into
individual agreements with power producers, and use Edison's and other
utilities' lines to transmit the power beginning January 1998. This
proposal calls for the immediate sale or spin-off of all utility-owned
generation facilities, and may allow utilities to recover only 90% of the
uneconomic portion of their generating assets.
On July 24, 1995, Edison filed comments supporting the majority proposal
because it believes this proposal will be more successful at achieving the
goals the CPUC originally set in April 1994 for a restructured electric
industry in California. Hearings on both proposals have been scheduled
for mid- to late August 1995. A final CPUC decision is expected in late
1995; however, the state legislature has requested the CPUC to withhold
implementation of any restructuring plan until its impact can be evaluated
by the legislature and governor.
FERC Restructuring Proposal
In March 1995, the FERC proposed rules which would require utilities to
provide wholesale open access to the nation's interstate transmission
grid, while allowing them to recover stranded costs associated with open
transmission access. To help insure that wholesale open access promotes
competition, the FERC proposed development of industry-wide real-time
information networks that would require utilities to provide simultaneous
information to all parties trading wholesale electric power. The proposal
defines stranded costs as legitimate, prudent and verifiable costs
incurred by a utility to provide service to customers that would
subsequently become unbundled wholesale transmission service customers of
the utility. Edison supports the FERC's proposal and filed comments on
August 7, 1995. A final FERC decision is expected in mid-1996.
Accounting for the Effects of Regulation
Edison currently applies accounting standards that recognize the economic
effects of rate regulation. If rate recovery of generation-related costs
becomes unlikely or uncertain, whether due to competition or regulatory
action, these accounting standards may no longer apply to Edison's
generation operations and the $850 million in recorded regulatory assets
would be a non-cash charge against earnings. Additionally, Edison may
have write-offs associated with its potential transition costs if these
costs are not fully recovered through a competition transition charge or
other mechanism. Until the CPUC establishes more definitive valuation and
pricing criteria for its restructuring proposal, including a recovery
mechanism for the transition charges, Edison cannot predict the effect of
the proposal on its results of operations.
A new accounting standard, effective January 1996, requires impairment
losses on long-lived assets to be recognized when an asset's book value
exceeds its expected future cash flows (undiscounted). The current
standard bases impairment losses on the probability of recovery of an
asset's book value. The new standard also imposes stricter criteria for
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
retention of regulatory-created assets. Due to the regulatory
uncertainties mentioned above, Edison cannot predict the effect of the new
accounting standard on its generation-related assets; however, the timing
of potential impairment losses for regulatory-created assets may be
affected.
Mohave Generating Station
A 1994 CPUC decision stated that Edison was liable for expenditures
related to a 1985 accident at the Mohave Generating Station. The CPUC
ordered a second phase of this proceeding to quantify the disallowance.
Edison believes that the final outcome of this matter will not materially
affect its results of operations.
Note 3. Financial Instruments
Long-Term Debt
California law prohibits Edison from incurring or guaranteeing debt for
its nonutility affiliates.
Almost all Edison properties are subject to a trust indenture lien.
Edison has pledged first and refunding mortgage bonds as security for
borrowed funds obtained from pollution-control bonds issued by government
agencies. Edison uses these proceeds to finance construction of
pollution-control facilities. Bondholders have limited discretion in
redeeming certain pollution-control bonds, and Edison has arranged with
securities dealers to remarket or purchase them if necessary.
Long-term debt maturities and sinking-fund requirements for the five
twelve-month periods following June 30, 1995, are: 1996--$1 million;
1997--$201 million; 1998--$576 million; 1999--$322 million; and 2000--$330
million.
Long-term debt consisted of:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1995 1994 1994
---------- ------------ ---------
(In millions)
First and refunding mortgage bonds:
<C> <C> <C> <C>
1995--1999 (5.45% to 7.5%) $ 800 $1,000 $1,000
2000--2004 (5.625% to 6.75%) 675 675 675
2017--2026 (6.9% to 9.25%) 1,834 1,850 1,850
Pollution-control bonds:
1999--2027 (5.4% to 7.2% and variable) 1,207 1,206 1,208
Funds held by trustees (2) (2) (2)
Debentures and notes:
1998--2003 (5.6% to 8.25%) 795 495 495
Subordinated debentures:
2044 (8-3/8%) 100 -- --
Commercial paper for nuclear fuel 59 39 57
Long-term debt due within one year (1) (201) (201)
Unamortized debt discount--net (74) (74) (77)
------ ------ ------
Total $5,393 $4,988 $5,005
====== ====== ======
</TABLE>
Short-Term Debt
Edison has lines of credit it can use at negotiated or bank index rates.
At June 30, 1995, such lines totaled $1.4 billion, with $900 million
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
supporting commercial paper and $500 million available for the long-term
refinancing of certain variable-rate pollution-control debt.
Short-term debt consisted of commercial paper used to finance fuel
inventories, balancing account undercollections and general cash
requirements. Commercial paper outstanding at June 30, 1995, December
31, 1994, and June 30, 1994, was $668 million, $717 million and $923
million, respectively. Commercial paper intended to be refinanced for a
period exceeding one year and used to finance nuclear fuel scheduled to
be used more than one year after the balance sheet date, is classified as
long-term debt. Weighted-average interest rates were 6.1%, 5.9% and 4.2%,
at June 30, 1995, December 31, 1994, and June 30, 1994, respectively.
Other Financial Instruments
Edison's risk management policy allows the use of derivative financial
instruments to limit financial exposure on its investments and contractual
obligations, but prohibits the use of these instruments for speculative
purposes.
Interest rate swaps and caps are used to reduce the potential impact of
interest rate fluctuations on floating rate long-term debt. The debt
related to these agreements is reported on the balance sheets at amortized
cost; the swap and cap agreements are not required to be recorded on the
financial statements. In accordance with an interest rate swap agreement,
either party is required to pledge collateral, if certain conditions
change pertaining to its bond rating and market interest rates. As the
result of a downgrade to its bond rating and a decline in market interest
rates, Edison has pledged $13 million as collateral as of June 30, 1995.
Edison is exposed to credit loss in the event of nonperformance by
counterparties to these agreements, but does not expect the counterparties
to fail to meet their obligations.
For all balance sheet dates presented, Edison had the following derivative
financial instruments:
<TABLE>
<CAPTION>
Category Contract Amount/Terms Purpose
-------- --------------------- -------
<S> <C> <C>
Interest rate swap $196 million change interest rate exposure
due 2008 to a fixed rate of 5.585%
Interest rate cap $30 million change interest rate exposure
expires 1997 to a fixed rate of 6%
debt due 2027
</TABLE>
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair values of financial instruments were:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1995 1994 1994
-------------------- ------------------- -----------------
Cost Fair Cost Fair Cost Fair
Instrument Basis Value Basis Value Basis Value
---------- -------- ------ -------- -------- ------- -----
(In millions)
Financial assets:
<S> <C> <C> <C> <C> <C> <C>
Decommissioning trusts $ 991 $1,091 $ 920 $ 919 $ 865 $ 870
Equity investments 9 34 9 26 9 26
Financial liabilities:
Interest rate swap & cap
agreements -- 13 -- 1 -- 7
Long-term debt 5,393 5,521 4,988 4,763 5,005 4,920
Nuclear enrichment obligation 62 50 66 45 66 49
Preferred stock subject to
mandatory redemption 275 285 275 257 275 266
</TABLE>
Financial assets are carried at their fair value, which is based on quoted
market prices. Financial liabilities are recorded at cost. Financial
liabilities' fair values were based on: termination costs--interest rate
swap and cap agreements; brokers' quotes--long-term debt and preferred
stock; and discounted future cash flows--nuclear enrichment obligation.
Amounts reported for cash equivalents and short-term debt approximate fair
value, due to the instruments' short maturities.
Note 4. Equity
The CPUC regulates Edison's capital structure, limiting the dividends it
may pay SCEcorp.
Authorized common stock is 560 million shares with no par value. Edison
split its stock two-for-one, effective June 1, 1993. Authorized shares
of preferred and preference stock are: $25 cumulative preferred--24
million; $100 cumulative preferred--12 million; and preference--50
million. All cumulative preferred stocks are redeemable. Mandatorily
redeemable preferred stocks are subject to sinking-fund provisions. When
preferred shares are redeemed, the premiums paid are charged to common
equity. There are no preferred stock redemption requirements for the next
five years.
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cumulative preferred stock consisted of:
<TABLE>
<CAPTION>
June 30, 1995
-------------------------
Shares Redemption June 30, December 31,June 30,
Outstanding Price 1995 1994 1994
----------- ---------- -------- ------------ --------
(In millions)
Not subject to mandatory redemption:
$25 Par value:
<S> <C> <C> <C> <C> <C>
4.08% Series 1,000,000 $ 25.50 $ 25 $ 25 $ 25
4.24 1,200,000 25.80 30 30 30
4.32 1,653,429 28.75 41 41 41
4.78 1,296,769 25.80 33 33 33
5.80 2,200,000 25.25 55 55 55
7.36 4,000,000 25.00 100 100 100
$100 Par value:
7.58% Series 750,000 101.00 -- 75 75
---- ---- ----
Total $284 $359 $359
==== ==== ====
Subject to mandatory redemption:
$100 Par value:
6.05% Series 750,000 $100.00 $ 75 $ 75 $ 75
6.45 1,000,000 100.00 100 100 100
7.23 1,000,000 100.00 100 100 100
---- ---- ----
Total $275 $275 $275
==== ==== ====
</TABLE>
In the second quarter of 1995, 750,000 shares of Series 7.58% preferred
stock were redeemed. There were no other preferred stock issuances or
redemptions for the periods presented.
Note 5. Income Taxes
Edison and its subsidiaries will be included in SCEcorp's consolidated
federal income tax and combined state franchise tax returns. Under income
tax allocation agreements, each subsidiary calculates its own tax
liability.
Change in Accounting Principle
Edison adopted a new income tax accounting standard in 1993 that requires
the balance sheet method to account for income taxes. Financial
statements prior to adoption reflect income taxes accounted for under the
income statement method. The cumulative effect of adoption increased 1993
earnings by $8 million and total assets and liabilities by about $2
billion.
Current and Deferred Taxes
Income tax expense includes the current tax liability from operations and
the change in deferred income taxes during the year. Investment tax
credits are amortized over the lives of the related properties.
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net accumulated deferred income tax liability were:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1995 1994 1994
--------- ------------ ---------
(In millions)
Deferred tax assets:
<S> <C> <C> <C>
Property-related $ 266 $ 260 $ 352
Investment tax credits 229 237 266
Regulatory balancing accounts 102 85 130
Other 582 521 560
------ ------ ------
Total $1,179 $1,103 $1,308
------ ------ ------
Deferred tax liabilities:
Property-related $3,702 $3,706 $3,933
Other 540 513 585
------ ------ ------
Total $4,242 $4,219 $4,518
------ ------ ------
Accumulated deferred income taxes--net $3,063 $3,116 $3,210
====== ====== ======
Classification of accumulated deferred income taxes:
Included in deferred credits $3,390 $3,387 $3,407
Included in current assets 327 271 197
</TABLE>
The current and deferred components of income tax expense were:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
----------------- ----------------- ----------------
1995 1994 1995 1994 1995 1994
------ ------ ------ ------ ------ ------
(In millions)
Current:
<S> <C> <C> <C> <C> <C> <C>
Federal $ 111 $ 88 $ 203 $ 168 $ 466 $ 211
State 41 27 64 52 135 76
----- ----- ----- ----- ----- -----
152 115 267 220 601 287
----- ----- ----- ----- ----- -----
Deferred--federal and state:
Accrued charges (7) (14) (3) (18) (10) (49)
Depreciation 10 10 12 21 38 51
Investment and energy tax credits--net (8) (6) (13) (13) (22) (26)
Prior year state tax (14) (2) 20 (4) 10 9
Rate phase-in plan (10) (12) (21) (24) (48) (51)
Regulatory balancing accounts (8) 16 (29) 14 (51) 154
Resale revenue -- 7 -- 7 -- 34
Retirement of debt (3) (2) (5) (4) (9) 28
Unbilled revenue (17) (18) (22) (16) (9) (8)
Other -- (3) (2) 1 (28) (18)
----- ----- ----- ----- ----- -----
(57) (24) (63) (36) (129) 124
----- ----- ----- ----- ----- -----
Total income tax expense $ 95 $ 91 $ 204 $ 184 $ 472 $ 411
===== ===== ===== ===== ===== =====
Classification of income taxes:
Included in operating income $ 112 $ 108 $ 234 $ 212 $ 531 $ 514
Included in other income (17) (17) (30) (28) (59) (103)
</TABLE>
The composite federal and state statutory income tax rate was 41.045% for
all periods presented.
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The federal statutory income tax rate is reconciled to the effective tax
rate below:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
--------------- ---------------- ----------------
1995 1994 1995 1994 1995 1994
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
Capitalized software (1.0) (2.3) (1.0) (2.2) (1.5) (2.0)
Depreciation and related timing
differences not deferred 1.5 5.2 2.1 4.6 3.4 5.8
Investment and energy tax
credits (3.3) (2.9) (2.5) (2.8) (1.9) (2.5)
State tax--net of federal
deduction 8.1 5.9 5.8 5.9 5.7 5.8
Tax rate change -- -- 2.1 -- 0.9 (0.6)
Other (1.4) (0.1) (0.9) (0.2) -- (2.9)
---- ---- ---- ---- ---- ----
Effective tax rate 38.9% 40.8% 40.6% 40.3% 41.6% 38.6%
==== ==== ==== ==== ==== ====
</TABLE>
Note 6. Employee Benefit Plans
Pension Plan
Edison has a noncontributory, defined-benefit pension plan that covers
employees meeting minimum service requirements. Benefits are based on
years of accredited service and average base pay. Edison funds the plan
on a level-premium actuarial method. These funds are accumulated in an
independent trust. Annual contributions meet minimum legal funding
requirements and do not exceed the maximum amounts deductible for income
taxes. Prior service costs from pension plan amendments are funded over
30 years. Plan assets are primarily common stocks, corporate and
government bonds, and short-term investments.
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The plan's funded status was:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1995 1994 1994
---------- ------------- ----------
(In millions)
Actuarial present value of benefit obligation:
<S> <C> <C> <C>
Vested benefits $1,285 $1,260 $1,363
Nonvested benefits 158 147 175
------ ------ ------
Accumulated benefit obligation 1,443 1,407 1,538
Value of projected future compensation levels 481 450 587
------ ------ ------
Projected benefit obligation $1,924 $1,857 $2,125
====== ====== ======
Fair value of plan assets $2,396 $2,194 $2,204
====== ====== ======
Projected benefit obligation less than plan
assets $ (472) $ (337) $ (79)
Unrecognized net gain 572 451 183
Unrecognized prior service cost (5) (5) (5)
Unrecognized net obligation
(17-year amortization) (52) (54) (57)
------ ------ ------
Pension liability $ 43 $ 55 $ 42
====== ====== ======
Discount rate 8.5% 8.5% 7.25%
Rate of increase in future compensation 5.0% 5.0% 5.0%
Expected long-term rate of return on assets 8.0% 8.0% 8.0%
</TABLE>
Edison recognizes pension expense calculated under the actuarial method
used for ratemaking.
The components of pension expense were:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
-------------- ---------------- ---------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
(In millions)
Service cost for benefits
<S> <C> <C> <C> <C> <C> <C>
earned $ 14 $ 18 $ 28 $ 36 $ 59 $ 70
Interest cost on projected
benefit obligation 39 37 77 73 152 142
Actual return on plan assets (113) (5) (196) (17) (208) (119)
Net amortization and deferral 67 (37) 105 (67) 32 (40)
---- ----- ---- ---- ---- -----
Pension expense under
accounting standards 7 13 14 25 35 53
Special termination benefits -- -- -- -- 15 --
Regulatory adjustment
--deferred 6 -- 11 -- 13 (5)
---- ----- ---- ---- ---- -----
Net pension expense
recognized $ 13 $ 13 $ 25 $ 25 $ 63 $ 48
==== ===== ==== ==== ==== =====
</TABLE>
Postretirement Benefits Other Than Pensions
Employees retiring at or after age 55, with at least 10 years of service,
are eligible for postretirement health care, dental, life insurance and
other benefits. Health care benefits are subject to deductibles,
copayment provisions and other limitations.
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1993, Edison adopted a new accounting standard for postretirement
benefits other than pensions, which requires the expected cost of these
benefits to be charged to expense during employees' years of service.
Edison is amortizing its obligation related to prior service over 20
years.
Edison funds these benefits (by contributions to independent trusts) up
to tax-deductible limits, in accordance with rate-making practices.
Edison began funding its liability for these benefits in 1991. Amounts
funded prior to 1993 were amortized and recovered in rates over 12 months.
Edison is continuing to amortize its obligation related to prior service
over 20 years. Any difference between recognized expense and amounts
authorized for rate recovery is not expected to be material and will be
charged to earnings.
Trust assets are primarily common stocks, corporate and government bonds,
and short-term investments.
The components of postretirement benefits other than pensions expense
were:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
--------------- -------------- ---------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Service cost for benefits earned $ 8 $ 7 $ 16 $ 15 $ 28 $ 28
Interest cost on benefit obligation 18 18 37 35 74 68
Actual return on plan assets (7) (5) (13) (10) (22) (16)
Amortization of transition obligation 9 9 17 18 35 36
---- ---- ---- ---- ---- ----
Net expense 28 29 57 58 115 116
Amortization of prior funding -- -- -- 2 -- 28
---- ---- ---- ---- ---- ----
Total expense $ 28 $ 29 $ 57 $ 60 $115 $144
==== ==== ==== ==== ==== ====
</TABLE>
The funded status of these benefits is reconciled to the recorded
liability below:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1995 1994 1994
------------- ------------- -------------
(In millions)
Actuarial present value of benefit obligation:
<S> <C> <C> <C>
Retirees $ 530 $ 530 $ 510
Employees eligible to retire 49 47 91
Other employees 322 293 385
----- ----- -----
Accumulated benefit obligation $ 901 $ 870 $ 986
===== ===== =====
Fair value of plan assets $ 351 $ 303 $ 257
===== ===== =====
Plan assets less than accumulated benefit
obligation $(550) $(567) $(729)
Unrecognized transition obligation 605 622 670
Unrecognized net loss (gain) (50) (50) 59
----- ----- -----
Recorded asset (liability) $ 5 $ 5 $ --
===== ===== =====
Discount rate 8.75% 8.75% 7.75%
Expected long-term rate of return on assets 8.5% 8.5% 8.5%
</TABLE>
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The assumed rate of future increases in the per-capita cost of health care
benefits is 11% for 1995, gradually decreasing to 5.5% for 2005 and
beyond. Increasing the health care cost trend rate by one percentage
point would increase the accumulated obligation as of June 30, 1995, by
$135 million and annual aggregate service and interest costs by $18
million.
Employee Savings Plan
Edison has a 401(k) stock plan designed to supplement employees'
retirement income. The plan received employer contributions of $5
million, $10 million and $21 million for the three, six and twelve months
ended June 30, 1995, respectively, and $6 million, $11 million and $22
million for the three, six and twelve months ended June 30, 1994,
respectively.
Note 7. Jointly Owned Utility Projects
Edison owns interests in several generating stations and transmission
systems for which each participant provides its own financing. Edison's
share of expenses for each project is included in the consolidated
statements of income.
The investment in each project, as included in the consolidated balance
sheet as of June 30, 1995, was:
<TABLE>
<CAPTION>
Plant in Accumulated Under Ownership
Service Depreciation Construction Interest
-------- ------------ ------------ ---------
(In millions)
Transmission systems:
<S> <C> <C> <C> <C>
Eldorado $ 28 $ 8 $ -- 60%
Pacific Intertie 219 67 8 50
Generating stations:
Four Corners (coal) Units 4 and 5 458 227 2 48
Mohave (coal) 286 145 16 56
Palo Verde (nuclear) 1,567 338 20 16
San Onofre (nuclear) 4,135 1,485 51 75
------ ------ ----
Total $6,693 $2,270 $ 97
====== ====== ====
</TABLE>
Note 8. Leases
Edison has operating leases, primarily for vehicles, with varying terms,
provisions and expiration dates.
Estimated remaining commitments for noncancelable leases at June 30, 1995,
were:
<TABLE>
<CAPTION>
Year ended December 31, (In millions)
<S> <C>
1995 $12
1996 20
1997 16
1998 13
1999 9
Thereafter 14
---
Total $84
===
</TABLE>
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Commitments
Nuclear Decommissioning
Edison plans to decommission its nuclear generating facilities at the end
of each facility's operating license by a prompt removal method authorized
by the Nuclear Regulatory Commission. Decommissioning is estimated to
cost $1.8 billion in current-year dollars, based on site-specific studies
performed in 1993 for San Onofre and 1992 for Palo Verde. Decommissioning
is scheduled to begin in 2013 at San Onofre and 2024 at Palo Verde. San
Onofre Unit 1, which shut down in 1992, will be stored until
decommissioning begins at the other San Onofre units.
Decommissioning costs, which are recovered through customer rates, are
recorded as a component of depreciation expense. Decommissioning expense
was $40 million, $73 million and $127 million for the three, six and
twelve months ended June 30, 1995, respectively, and $33 million, $68
million and $138 million for the three, six and twelve months ended June
30, 1994, respectively. The accumulated provision for decommissioning was
$757 million at June 30, 1995, $692 million at December 31, 1994, and $650
million at June 30, 1994. The estimated costs to decommission San Onofre
Unit 1 ($247 million) are recorded as a liability.
Decommissioning funds collected in rates are placed in independent trusts,
which, together with accumulated earnings, will be utilized solely for
decommissioning.
Trust investments include:
<TABLE>
<CAPTION>
Maturity June 30, December 31, June 30,
Dates 1995 1994 1994
---------- ----------- --------------- ----------
(In millions)
<S> <C> <C> <C> <C>
Municipal bonds 1996-2021 $ 328 $ 447 $ 592
Stocks -- 365 258 53
U.S. government and agency
issues 1998-2023 164 98 129
Short-term investments and
other 1994-1995 134 117 91
------ ------ ------
Trust fund balance (at cost) $ 991 $ 920 $ 865
====== ====== ======
</TABLE>
Trust fund earnings (based on specific identification) increase the trust
fund balance and the accumulated provision for decommissioning. Net
earnings were $15 million, $23 million and $29 million for the three, six
and twelve months ended June 30, 1995, respectively, and $9 million, $20
million and $41 million for the three, six and twelve months ended June
30, 1994, respectively. Proceeds from sales of securities (which are
reinvested) were $267 million, $498 million and $1.2 billion for the
three, six and twelve months ended June 30, 1995, respectively, and $358
million, $403 million and $564 million for the three, six and twelve
months ended June 30, 1994, respectively. Approximately 87% of the trust
fund contributions were tax-deductible.
The Financial Accounting Standards Board is reviewing current accounting
practices for removal costs, including decommissioning of nuclear power
plants, to determine the appropriate accounting treatment for these costs.
If current industry accounting practices are revised, Edison may be
required to report its estimated decommissioning costs as a liability,
rather than recognizing these costs over the term of each facility's
operating license. In addition, trust fund earnings could be recognized
as investment income, rather than a component of the accumulated provision
for decommissioning. Edison does not believe that such changes, if any,
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
would have an adverse effect on its results of operations due to its
current and expected future ability to recover these costs through
customer rates.
Other Commitments
Edison has fuel supply contracts which require payment only if the fuel
is made available for purchase.
Edison has power-purchase contracts with certain qualifying facilities
(cogenerators and small power producers) and other utilities. The
qualifying facility contracts provide for capacity payments if a facility
meets certain performance obligations and energy payments based on actual
power supplied to Edison. There are no requirements to make debt-service
payments.
Edison has unconditional purchase obligations for part of a power plant's
generating output, as well as firm transmission service from another
utility. Minimum payments are based, in part, on the debt-service
requirements of the provider, whether or not the plant or transmission
line is operable. The purchased-power contract is not expected to provide
more than 5% of current or estimated future operating capacity. Edison's
minimum commitment under both contracts is approximately $225 million
through 2017.
Certain commitments for the years 1995 through 1999 are estimated below:
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
(In millions)
<S> <C> <C> <C> <C> <C>
Construction expenditures $ 993 $ 978 $ 950 $ 908 $ 991
Fuel supply contracts 310 208 203 196 194
Purchased-power capacity payments 727 743 746 752 754
Unconditional purchase obligations 11 11 11 10 10
</TABLE>
Note 10. Contingencies
In addition to the matters disclosed in these notes, Edison is involved
in legal, tax and regulatory proceedings before various courts and
governmental agencies with regard to matters arising in the ordinary
course of business. Edison believes that the final outcome of these
proceedings will not materially affect its results of operations.
Environmental Protection
Edison 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 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 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 records the lower end of this reasonably likely range of
costs (classified as other long-term liabilities at undiscounted amounts).
PAGE
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
While Edison has numerous insurance policies that it believes may provide
coverage for some of these liabilities, it does not recognize recoveries
in its financial statements until they are realized.
At June 30, 1995, Edison's recorded estimated minimum liability to
remediate its 58 identified sites was $114 million, compared with $74
million at June 30, 1994. The increase resulted primarily from changes
in estimates for a former pole-treating facility. The ultimate costs to
clean up Edison'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 believes that, due to these
uncertainties, it is reasonably possible that cleanup costs could exceed
its recorded liability by up to $215 million. The upper limit of this
range of costs was estimated using assumptions least favorable to Edison
among a range of reasonably possible outcomes.
Edison expects to clean up its identified sites over a period of up to 30
years. Remediation costs in each of the next several years are expected
to range from $4 million to $8 million. Recorded costs for the twelve
months ended June 30, 1995, were $3 million.
Edison'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 may be held responsible
for contributing to any costs incurred for remediating these sites. Thus,
no reasonable estimate of cleanup costs can be made for these sites at
this time.
The CPUC allows Edison to recover environmental-cleanup costs at 24 of its
sites, representing $90 million of its recorded liability, through an
incentive mechanism (Edison may request to include additional sites).
Under this mechanism, Edison will recover 90% of cleanup costs through
customer rates; shareholders fund the remaining 10%, with the opportunity
to recover these costs through insurance and other third-party recoveries.
Edison has settled insurance claims with several carriers, and is
continuing to pursue additional recovery. Costs incurred at the remaining
34 sites are expected to be recovered through customer rates. Edison has
recorded a regulatory asset of $104 million for its estimated minimum
environmental-cleanup costs expected to be recovered through customer
rates.
Based on currently available information, Edison believes it is not likely
that it will incur amounts in excess of the upper limit of the estimated
range and, based upon the CPUC's regulatory treatment of environmental-
cleanup costs, Edison believes that costs ultimately recorded will not
have a material adverse effect on its results of operations or financial
position. There can be no assurance, however, that future developments,
including additional information about existing sites or the
identification of new sites, will not require material revisions to such
estimates.
Nuclear Insurance
Federal law limits public liability claims from a nuclear incident to $8.9
billion. Edison and other owners of San Onofre and Palo Verde have
purchased the maximum private primary insurance available ($200 million).
The balance is covered by the industry's retrospective rating plan that
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SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
uses deferred premium charges. Federal regulations require this secondary
level of financial protection. The Nuclear Regulatory Commission exempted
San Onofre Unit 1 from this secondary level, effective June 1994. The
maximum deferred premium for each nuclear incident is $79 million per
reactor, but not more than $10 million per reactor may be charged in any
one year for each incident. Based on its ownership interests, Edison
could be required to pay a maximum of $158 million per nuclear incident.
However, it would have to pay no more than $20 million per incident in any
one year. Such amounts include a 5% surcharge if additional funds are
needed to satisfy public liability claims and are subject to adjustment
for inflation.
Property damage insurance covers losses up to $500 million, including
decontamination costs, at San Onofre and Palo Verde. Decontamination
liability and property damage coverage exceeding the primary $500 million
also has been purchased in amounts greater than federal requirements.
Additional insurance covers part of replacement power expenses during an
accident-related nuclear unit outage. These policies are issued primarily
by mutual insurance companies owned by utilities with nuclear facilities.
If losses at any nuclear facility covered by the arrangement were to
exceed the accumulated funds for these insurance programs, Edison could
be assessed retrospective premium adjustments of up to $45 million per
year. Insurance premiums are charged to operating expense.
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SOUTHERN CALIFORNIA EDISON COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATION
Earnings
Southern California Edison Company's earnings for the three, six and
twelve months ended June 30, 1995, were $140 million, $279 million and
$625 million, respectively, compared with $122 million, $253 million and
$614 million for the same periods in 1994. The higher earnings primarily
reflect Edison's higher authorized return on common equity for 1995 and
improved operating efficiencies, partially offset by employee severance
costs. The increase in the twelve-month period ended June 30, 1995,
compared to the year-earlier period, was reduced by an $18 million
after-tax charge for employee severance expenses in the fourth quarter of
1994 and a lower authorized return on common equity for 1994, compared
with 1993.
Operating Revenue
Operating revenue remained virtually unchanged for the three- and
six-month periods ended June 30, 1995, compared with the same periods in
1994, as a 2.6% California Public Utilities Commission (CPUC)-authorized
rate increase was offset by a decline in energy usage caused by milder
weather in 1995. Operating revenue increased 6% for the twelve months
ended June 30, 1995, over the same period in 1994, primarily from an
increase in sales volume. Volume increases were primarily due to warmer
weather in the third quarter of 1994, compared to 1993, and an increase
in wholesale demand as Edison's power was priced lower than many other
sources (see Operating Expenses). Over 98% of electric utility revenue
is from retail sales. Retail rates are regulated by the CPUC and
wholesale rates are regulated by the Federal Energy Regulatory Commission
(FERC).
In March 1995, Edison announced that it intends to freeze average rates
through 1996 for residential, small business and agricultural customers
and announced a five-year goal to reduce system average rates by 25%
(after adjusting for inflation), subject to CPUC approval. Edison also
urged the CPUC to re-examine certain rate design issues, including
possible elimination of the kilowatt-hour sales balancing account, which
adjusts utility revenue for differences between CPUC-authorized and actual
base-rate revenue. In July 1995, Edison filed expanded rate options and
requested that the CPUC expedite the filing in order to offer these
services by 1996. Edison does not anticipate that these proposals will
have a material effect on future earnings trends, however, if the
balancing account mechanism were to be revised or eliminated, the seasonal
variability of Edison's earnings could be affected.
Operating Expenses
Fuel expense decreased 36%, 29% and 9% in the three, six and twelve months
ended June 30, 1995, compared with the same periods in 1994. The quarter
and year-to-date decreases were due to lower electric demand in the second
quarter of 1995 caused by milder weather, an increase in hydro generation
due to greater rainfall in 1995 and a decrease in overall gas prices. The
decrease for the twelve-month period ended June 30, 1995, compared with
the year-earlier period, was partially offset by an increase in Edison's
power generation during the latter half of 1994. This increase in power
generation was due to lower overall gas prices and a higher than average
operating capacity at San Onofre Units 2 and 3, which caused an increase
in wholesale demand for Edison's lower priced energy.
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Purchased-power expense remained virtually unchanged for all periods
presented. Edison makes federally-required power purchases from
nonutility generators based on contracts with CPUC-mandated pricing.
Energy prices under these contracts are generally higher than other energy
sources, and for the twelve months ended June 30, 1995, Edison paid about
$1.7 billion (including energy and capacity payments) more than the cost
of power available from other sources.
Provisions for regulatory adjustment clauses increased as CPUC-authorized
fuel and purchased-power cost estimates exceeded Edison's actual energy
costs, due to lower than estimated gas prices, lower energy usage and an
increase in hydro generation.
Other Income and Deductions
The provision for rate phase-in plan reflects a CPUC-authorized, 10-year
rate phase-in plan, which deferred the collection of revenue during the
first four years of operation for the Palo Verde Nuclear Generating
Station. Revenue previously deferred (including interest) will be
collected by the end of 1996 for Units 1 and 2, and 1998 for Unit 3. The
provision is a non-cash offset to the collection of deferred revenue.
Interest income increased 18%, 24% and 29% for the three-, six- and
twelve-month periods ended June 30, 1995, over the comparable periods in
1994, primarily due to higher interest rates and higher investment
balances. The higher investment balances reflect the decline in dividend
payments, which began in June 1994.
Other nonoperating income increased for the second quarter of 1995,
compared with the same period in 1994, primarily due to a CPUC-authorized
program to accelerate amortization of certain energy conservation programs
in 1994. Other nonoperating income decreased for the year-to-date period,
compared to the same period in 1994, primarily due to a $5 million
CPUC-authorized incentive award received in the first quarter of 1994
related to nuclear plant performance and a 1994 benefit resulting from the
effect of a drop in SCEcorp's stock price on Edison's stock option plan.
The increase for the twelve months ended June 30 1995, compared to the
year-earlier period, reflects a 1994 environmental insurance settlement
and an $11 million fourth quarter 1994 CPUC-authorized incentive award for
energy conservation programs, both of which more than offset the
year-to-date decline.
Interest Expense
Other interest expense increased 16%, 32% and 22% for the three, six and
twelve months ended June 30, 1995, compared to the year-earlier periods,
mainly due to rising interest rates on short-term borrowings and higher
balances in the regulatory balancing accounts.
FINANCIAL CONDITION
Edison's liquidity is primarily affected by debt maturities, dividend
payments and capital expenditures. Capital resources include cash from
operations and external financings.
In June 1994, SCEcorp lowered its quarterly common stock dividend by 30%,
as the result of uncertainty of future earnings levels arising from the
changing nature of the electric utility industry, intensified by recently
proposed changes in California utility regulation.
In January 1995, SCEcorp authorized the repurchase of up to $150 million
of its common stock during 1995. As excess cash becomes available, Edison
intends to pay cash dividends to SCEcorp, while maintaining its
CPUC-authorized capital structure. SCEcorp has repurchased 1,866,598
shares ($31 million) through August 4, 1995, funded by dividends from
SCEcorp subsidiaries.
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Cash Flows from Operating Activities
Net cash provided by operating activities totaled $342 million, $963
million and $1.8 billion for the three-, six- and twelve-month periods
ended June 30, 1995, respectively, compared with $367 million, $962
million and $1.5 billion for the same periods in 1994. Cash from
operations exceeded capital requirements for all periods presented.
Cash Flows from Financing Activities
Short-term debt is used to finance fuel inventories, balancing account
undercollections and general cash requirements. Long-term debt is used
mainly to finance capital expenditures. External financings are
influenced by market conditions and other factors, including limitations
imposed by its articles of incorporation and trust indenture. As of June
30, 1995, Edison could issue approximately $6.3 billion of additional
first and refunding mortgage bonds and $3.7 billion of preferred stock at
current interest and dividend rates.
Edison has lines for credit of $900 million for short-term debt and $500
million for the long-term refinancing of variable-rate pollution control
bonds.
California law prohibits Edison from incurring or guaranteeing debt for
its nonutility affiliates. Additionally, the CPUC regulates Edison's
capital structure, limiting the dividends Edison may pay SCEcorp.
Cash Flows from Investing Activities
The primary uses of cash for investing activities are additions to
property and plant and funding of nuclear decommissioning trusts.
Decommissioning costs are accrued and recovered in customer rates over the
term of each nuclear generating facility's operating license through
charges to depreciation expense. Edison estimates that it will spend
approximately $12.7 billion to decommission its nuclear facilities,
primarily between 2013-2070. This estimate is based on Edison's
current-dollar decommissioning costs ($1.8 billion), escalated using a
6.65% rate and an earnings assumption on trust funds ranging from 5.50%
to 5.75%. These amounts are expected to be funded from independent
decommissioning trusts (see Notes to Consolidated Financial Statements),
which receive Edison contributions of approximately $100 million per year
(until decommissioning begins). The Financial Accounting Standards Board
is reviewing current accounting practices for removal costs, including
decommissioning of nuclear power plants. If current industry accounting
practices are revised, Edison may be required to report its estimated
decommissioning costs as a liability, rather than recognize these costs
over the term of each facility's operating license. Edison does not
believe that such changes, if any, would have an adverse effect on its
results of operations due to its current and expected future ability to
recover these costs through customer rates.
Projected Capital Requirements
Edison's projected capital requirements for the next five years are:
1995--$993 million; 1996--$978 million; 1997--$950 million; 1998--$908
million; and 1999--$991 million.
Long-term debt maturities and sinking fund requirements for the five
twelve-month periods following June 30, 1995, are: 1996--$1 million;
1997--$201 million; 1998--$576 million; 1999--$322 million; and 2000--$330
million.
REGULATORY MATTERS
Edison's 1995 CPUC-authorized revenue increased $193 million, or 2.6%,
primarily due to a $192 million increase for fuel and purchased power
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($167 million for federally required purchases), a $121 million increase
for higher costs of debt and equity, a $64 million decrease for 1993
postretirement benefits other than pensions (collected in 1994 rates) and
a $67 million decrease for a pending settlement agreement with the CPUC's
Division of Ratepayer Advocates (DRA) related to the 1995 general rate
case (see 1995 General Rate Case below).
The CPUC's 1995 cost-of-capital decision authorized an increase to
Edison's equity ratio from 47.25% to 47.75%, and an increase to Edison's
return on common equity from 11% to 12.1% in 1995. This decision,
excluding the effects of other rate actions, would increase 1995 earnings
by about $64 million. In its 1996 cost-of-capital proceeding, Edison
requested to increase its common equity ratio from 47.75% to 48% with no
change to its authorized return on common equity. On July 31, 1995, the
DRA recommended a decrease to Edison's 1996 return on common equity from
12.1% to 11.15%. This recommendation, if adopted, could reduce 1996
earnings by about $50 million. A CPUC decision is expected in November
1995.
A 1994 CPUC decision stated that Edison was liable for expenditures
related to a 1985 accident at the Mohave Generating Station. The CPUC
ordered a second phase of this proceeding to quantify the disallowance.
Edison believes that the final outcome of this matter will not materially
affect its results of operations.
In October 1994, the CPUC authorized Edison to accelerate recovery of its
nuclear plant investments by $75 million per year, through 2011. The rate
impact of this accelerated cost recovery is offset by a corresponding
deceleration in recovery of transmission and distribution facilities
through revised depreciation estimates over their remaining useful lives.
1995 General Rate Case
In 1994, Edison and the DRA filed a settlement agreement related to the
1995 general rate case. The settlement, which requires CPUC approval,
includes a $67 million reduction in 1995 non-fuel revenue and, beginning
February 1, 1996, accelerated recovery (by 2003, instead of 2012) of
Edison's remaining investment (approximately $2.7 billion) in San Onofre
Units 2 and 3. Edison would earn a reduced rate of return of 7.78%,
compared to the current 9.8%, on its remaining investment. Future
operating costs would be recovered through an incentive pricing plan. At
the end of the recovery period, customers would bear no further obligation
for Units 2 and 3, except for certain costs associated with
decommissioning and permanent closure. Edison would then sell power
generated by San Onofre under prices, terms and conditions which conform
to any then-existing regulatory procedures.
The $67 million revenue reduction has been included in 1995 rates and is
subject to change, pending the CPUC's final decision expected in late
1995.
In April 1995, the DRA filed supplemental testimony requesting a decrease
to the incentive prices originally agreed upon in the settlement
agreement. On May 8, 1995, Edison filed rebuttal testimony requesting
that the CPUC adopt the original settlement. Hearings concluded on May
24, 1995. A CPUC decision is expected in late 1995.
Performance-Based Ratemaking
In 1993, Edison filed a proposal with the CPUC for a performance-based
rate-making mechanism that would determine most of Edison's revenue
(excluding fuel) from 1996-2000. The filing proposed a revenue-indexing
formula that would combine operating expenses and capital-related costs
into a single index. In July 1994, the CPUC ordered Edison to divide its
performance-based rate-making application into two phases--transmission
and distribution, and power generation. Hearings concluded in December
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1994 for the transmission and distribution phase and a decision is
expected in late 1995. Edison expects to file its proposal for the power
generation phase in late 1995.
COMPETITIVE ENVIRONMENT
Electric utilities operate in a highly regulated environment in which they
have an obligation to provide electric service to their customers in
return for an exclusive franchise within their service territory. This
regulatory environment is changing. The generation sector has experienced
competition from nonutility power producers and regulators have proposed
restructuring the electric utility industry. Edison expects the
generation sector to continue to experience competition and other changes
over the next decade.
CPUC Restructuring Proposals
Since April 1994, the CPUC has been considering its proposal for
restructuring California's electric utility industry, seeking to lower
energy prices and provide customers with a choice of generation suppliers
(direct access). As part of these proceedings, Edison filed a proposal
with the CPUC in November 1994, recommending implementation of a
competition transition charge mechanism beginning in 1998, for full
recovery of utility investments and obligations incurred to serve
customers under the existing regulatory framework. In its filing, Edison
estimates its potential transition costs through 2025 to be approximately
$9.3 billion (net present value), based on an assumed 1998 market price
of four cents per kilowatt-hour. The potential transition costs are
comprised of: $4.9 billion from Edison's qualifying facility contracts,
which are the direct result of legislative and regulatory mandates; $600
million from costs pertaining to certain generating plants; and $3.8
billion from regulatory commitments consisting of costs incurred to
provide service to customers whose recovery has been deferred. Such
commitments include deferred taxes, postretirement benefit transition
costs, accelerated recovery of nuclear plants, nuclear decommissioning and
certain other costs. At June 30, 1995, these commitments included
recorded generation-related regulatory assets of approximately $850
million.
On May 24, 1995, the CPUC issued for public comment two policy proposals
on restructuring. Although the proposals differ, they both recommend
moving to a restructured competitive electric industry within two years
and generally endorse recovery of costs incurred under prior regulatory
rules. The majority's proposal, supported by three of the four
commissioners, recommends a power pool that would commence operation by
the beginning of 1997. Under this proposal, an independent system
operator would coordinate a competitive bidding process that would
determine which generating plants supply power to the pool based on
demand. Edison and other utilities would obtain power from the pool for
distribution to their customers. After the initial two years of
operation, if market power, stranded cost recovery, and jurisdictional
issues were resolved, consumers would be allowed to buy electricity
directly from generators. Under this proposal, utilities would provide
transmission and distribution services under a performance-based rate-
making model.
One commissioner offered an alternate proposal that would provide for
"retail wheeling." Under this proposal, customers could enter into
individual agreements with power producers, and use Edison's and other
utilities' lines to transmit the power, beginning January 1998. This
proposal calls for the immediate sale or spin-off of all utility-owned
generation facilities, and may allow utilities to recover only 90% of the
uneconomic portion of their generating assets.
On July 24, 1995, Edison filed comments supporting the majority proposal
because it believes this proposal will be more successful at achieving the
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goals the CPUC originally set in April 1994 for a restructured electric
industry in California. Hearings on both proposals have been scheduled
for mid- to late August 1995. A final CPUC decision is expected in late
1995; however, the state legislature has requested the CPUC to withhold
implementation of any restructuring plan until its impact can be evaluated
by the legislature and governor.
FERC Restructuring Proposal
In March 1995, the FERC proposed rules which would require utilities to
provide wholesale open access to the nation's interstate transmission
grid, while allowing them to recover stranded costs associated with open
transmission access. To help insure that wholesale open access promotes
competition, the FERC proposed development of industry-wide real-time
information networks that would require utilities to provide simultaneous
information to all parties trading wholesale electric power. The proposal
defines stranded costs as legitimate, prudent and verifiable costs
incurred by a utility to provide service to customers that would
subsequently become unbundled wholesale transmission service customers of
the utility. Edison supports the FERC's proposal and filed comments on
August 7, 1995. A final FERC decision is expected in mid-1996.
Accounting for the Effects of Regulation
Edison currently applies accounting standards that recognize the economic
effects of rate regulation. If rate recovery of generation-related costs
becomes unlikely or uncertain, whether due to competition or regulatory
action, these accounting standards may no longer apply to Edison's
generation operations and the $850 million in recorded regulatory assets
would be a non-cash charge against earnings. Additionally, Edison may
have write-offs associated with its potential transition costs if these
costs are not fully recovered through a competition transition charge or
other mechanism. Until the CPUC establishes more definitive valuation and
pricing criteria for its restructuring proposal, including a recovery
mechanism for the transition charges, Edison cannot predict the effect of
the proposal on its results of operations.
A new accounting standard, effective January 1996, requires recognition
of impairment losses on long-lived assets when an asset's book value
exceeds its expected future cash flows (undiscounted). Currently
impairment losses are based on the probability that an asset's book value
will be recovered. The new standard also imposes stricter criteria for
retention of regulatory-created assets. Due to the regulatory
uncertainties mentioned above, Edison cannot predict the effect of the new
accounting standard on its generation-related assets; however, the timing
of potential impairment losses for regulatory-created assets may be
affected.
Edison is engaged in an ongoing review of possible responses to the
regulatory and competitive changes affecting the electric utility
industry, including various corporate, financial, legal and legislative
alternatives. In addition, Edison is seeking to enhance its competitive
position by cutting costs and increasing productivity, and by developing
new revenue sources.
CPUC-MANDATED POWER CONTRACTS
In 1994, the CPUC ordered the California utilities to proceed with an
energy auction to solicit bids for new contracts with unregulated power
producers. This decision would have forced Edison to purchase 686 MW of
new power at fixed prices starting in 1997, costing Edison customers $14
billion over the lives of the contracts. Edison had requested the CPUC
to reconsider its decision, as it has no need for additional generating
capacity until at least 2005, it believes the contracts would increase
customer rates and it believes the decision is inconsistent with the
CPUC's restructuring proposal goal to ultimately lower rates. Edison
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negotiated agreements, at substantially lower costs than those mandated
by auction, with seven unregulated power producers, representing 627 MW
of the 686 MW mandated. These agreements, which are subject to CPUC
approval, would save Edison customers about 80% of anticipated
overpayments compared with the mandated contracts. On January 6, 1995,
Edison appealed the CPUC decision to the FERC. On February 23, 1995, the
FERC ruled that the CPUC violated the federal Public Utility Regulatory
Policies Act and FERC regulations because the CPUC did not consider all
potential sources of capacity in reaching its avoided cost determination.
The CPUC requested a rehearing on the FERC decision; however, the FERC's
final decision denied the CPUC's request and reaffirmed the earlier FERC
ruling. In response, the CPUC supported resolution of the energy auction
through negotiated settlements and set criteria that will be used to
evaluate the settlements. Edison is currently evaluating these criteria
to determine the impact on its existing settlement agreements and ongoing
settlement negotiations.
ENVIRONMENTAL PROTECTION
Edison 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 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 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 records the lower end of this reasonably likely range of
costs (classified as other long-term liabilities at undiscounted amounts).
While Edison has numerous insurance policies that it believes may provide
coverage for some of these liabilities, it does not recognize recoveries
in its financial statements until they are realized.
At June 30, 1995, Edison's recorded estimated minimum liability to
remediate its 58 identified sites was $114 million, compared with $74
million at June 30, 1994. The increase resulted primarily from revised
estimates for a former pole-treating facility. The ultimate costs to
clean up Edison'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 believes that due to these
uncertainties, it is reasonably possible that cleanup costs could exceed
its recorded liability by up to $215 million. The upper limit of this
range of costs was estimated using assumptions least favorable to Edison
among a range of reasonably possible outcomes.
Edison expects to clean up its identified sites over a period of up to 30
years. Remediation costs in each of the next several years are expected
to range from $4 million to $8 million. Recorded costs for the
twelve-month period ended June 30, 1995, were $3 million.
One of Edison's sites is a former pole-treating facility, which is
considered a federal Superfund site and represents 71% of Edison's
recorded liability. Remedial actions to clean up soil and ground-water
contamination that occurred during pole-treating operations (1925-1980)
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are expected to continue at this site for 30 years. Rate recovery of
environmental-cleanup costs for this site is authorized by the CPUC
through an incentive mechanism (discussed below).
Edison'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 may be held responsible
for contributing to any costs incurred for remediating these sites. Thus,
no reasonable estimate of cleanup costs can be made for these sites at
this time.
The CPUC allows Edison to recover environmental-cleanup costs at 24 of its
sites, representing $90 million of its recorded liability, through an
incentive mechanism (Edison may request to include additional sites).
Under this mechanism, Edison will recover 90% of cleanup costs through
customer rates; shareholders fund the remaining 10%, with the opportunity
to recover these costs through insurance and other third-party recoveries.
Edison has settled insurance claims with several carriers, and will
continue to pursue additional recovery. Costs incurred at Edison's
remaining 34 sites are expected to be recovered through customer rates.
Edison has recorded a regulatory asset of $104 million for its estimated
minimum environmental-cleanup costs expected to be recovered through
customer rates.
Based on information available at this time, Edison believes it is not
likely that it will incur amounts in excess of the upper limit of the
estimated range and, based upon the CPUC's regulatory treatment of
environmental-cleanup costs, Edison believes that costs ultimately
recorded will not have a material adverse effect on its results of
operations or financial position. There can be no assurance, however,
that future developments, including additional information about existing
sites or the identification of new sites, will not require material
revisions to such estimates.
The 1990 federal Clean Air Act requires power producers to have emissions
allowances to emit sulfur dioxide. Power companies receive emissions
allowances from the federal government and may bank or sell excess
allowances. Edison expects to have excess allowances under Phase II of
the Clean Air Act (2000 and later). The act also calls for a study to
determine if additional regulations are needed to reduce regional haze in
the southwestern U.S. In addition, another study is underway to determine
the specific impact of the effect 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's projected capital expenditures to protect the environment are
$1.2 billion for 1995-1999, mainly for aesthetics treatment, including
undergrounding certain transmission and distribution lines.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric
sources may result in adverse health effects is receiving increased
attention. The scientific community has not yet reached a consensus on
the nature of any health effects of EMF. However, the CPUC has issued a
decision which provides for a rate-recoverable research and public
education program conducted by California electric utilities, and
authorizes these utilities to take no-cost or low-cost steps to reduce EMF
in new electric facilities. Edison is unable to predict when or if the
scientific community will be able to reach a consensus on any health
effects of EMF, or the effect that such a consensus, if reached, could
have on future electric operations.
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PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Qualified Facilities ("QF") Litigation
On May 20, 1993, four geothermal QFs filed a lawsuit against Edison in Los
Angeles County Superior Court, claiming that Edison underpaid, and
continues to underpay, the plaintiffs for energy. Edison denied the
allegations in its response to the complaint. The action was brought on
behalf of Vulcan/BN Geothermal Power Company, Elmore L.P., Del Ranch L.P.,
and Leathers L.P., each of which is partially owned by a subsidiary of
Mission Energy Company (a subsidiary of SCEcorp). In October 1994,
plaintiffs submitted an amended complaint to the court to add causes of
action for unfair competition and restraint of trade. The plaintiffs
alleged that the underpayments totaled at least $21,000,000 as of the
filing of the amended complaint. In other court filings, plaintiffs
contend that additional contract payments owing through the end of the
contract term could total approximately $60,000,000. In the amended
complaint, plaintiffs also sought treble damages for the alleged restraint
of trade violations, unspecified punitive damages, and an injunction to
enjoin Edison from "future" unfair competition. On February 9, 1995, the
court sustained some of Edison's demurrers to plaintiffs first amended
complaint and overruled others. The Court also granted plaintiffs 30 days
in which to amend their complaint further. On or about March 9, 1995,
plaintiffs filed a second amended complaint, realleging the substance of
the claims included in the first amended complaint. The Company's
demurrer to four of the causes of action alleged in the second amended
complaint and motion to strike portions of eight other causes of action
alleged in the same pleading were heard on May 18, 1995. Following the
hearing, the court granted portions of Edison's demurrer and motion to
strike. On June 6, 1995, plaintiffs served their third amended complaint,
which essentially realleged the same material facts as in the second
amended complaint and sought damages in the same amounts, although the
allegations pertaining to restraint of trade were omitted. On July 11,
1995, the court sustained Edison's motions to strike portions of the third
amended complaint which alleged certain violations of the FERC regulations
requiring payment of avoided cost for QF power. However, the court
granted plaintiffs leave to file a further amended complaint within 20
days. On July 27, 1995, plaintiffs served their fourth amended complaint,
which essentially repeated the material allegations of the third amended
complaint. If Edison does not make another motion to strike portions of
the fourth amended complaint, it will respond to the complaint by denying
its material allegations. The materiality of a judgment in favor of the
plaintiffs would be largely dependent on the extent to which additional
payments resulting from such a judgment are recoverable through Edison's
Energy Cost Adjustment Clause ("ECAC").
Between January 1994 and October 1994, Edison was named as a defendant in
a series of eight lawsuits brought by independent power producers of wind
generation. Seven of the lawsuits were filed in Los Angeles County
Superior Court and one was filed in Kern County Superior Court. The
lawsuits allege Edison incorrectly interpreted contracts with the
plaintiffs by limiting fixed energy payments to a single 10-year period
rather than beginning a new 10-year period of fixed energy payments for
each stage of development. In its responses to the complaints, Edison
denied the plaintiffs' allegations. In each of the lawsuits, the
plaintiffs seek declaratory relief regarding the proper interpretation of
the contracts. Plaintiffs allege a combined total of approximately
$189,000,000 in damages, which includes consequential damages claimed in
seven of the eight lawsuits. On March 1, 1995, the court in the lead Los
Angeles County Superior Court case granted the plaintiffs' motion seeking
summary adjudication that the contract language in question is not
reasonably susceptible to Edison's position that there is only a single,
10-year period of fixed payments. On March 8, 1995, the court in the Kern
County Superior Court case directed Edison to submit a proposed order that
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would deny a similar summary adjudication motion brought by the plaintiff
in that case. Although a proposed order was subsequently submitted to the
court in the Kern County case, it was not signed. In addition, on April
12, 1995, the court issued a minute order stating that its March 8, 1995,
directive should not be construed as a ruling on the merits of the
plaintiff's motion. Subsequently, the judge who heard the summary
adjudication motion in the Kern County case recused himself, resulting in
a new judge being assigned to the case. Edison believes the March 1,
1995, ruling in the Los Angeles case is erroneous and has asked the court
to reconsider its ruling. On April 5, 1995, Edison filed a petition
seeking writ review of the March 1, 1995, ruling in the California Court
of Appeal. On May 3, 1995, the Court of Appeal issued an Order to Show
Cause why the March 1 ruling should not be vacated. The matter was heard
August 3, 1995, and on August 9, 1995, the Court of Appeal issued its decision
vacating the March 1 summary adjudication order and directing the trial court
to issue an order denying the summary adjudication motion. The summary
adjudication motion in the Kern County case will be reset for hearing
following the Court of Appeal's decision in the Los Angeles case.
Following the March 1, 1995, ruling, an eighth lawsuit was filed in the
Los Angeles County Superior Court raising claims similar to those alleged
in the first seven cases in that court. Edison has responded to the
complaint in the new lawsuit by denying its material allegations. The
materiality of final judgments in favor of the plaintiffs in these cases
would be largely dependent on the extent to which any damages or
additional payments which might result from such judgments would be
recoverable through Edison's ECAC.
This matter was previously reported under the heading "QF Litigation" in
Part I, Item 3 of Edison's Annual Report on Form 10-K for the year ended
December 31, 1994, and the Quarterly Report on Form 10-Q for the period
ended March 31, 1995.
Electric and Magnetic Fields ("EMF") Litigation
Edison has been served with two lawsuits, both of which allege, among
other things, that certain plaintiffs developed cancer as a result of EMF
emitted from Edison facilities in an office building. The lawsuits, filed
in Orange County Superior Court and served on Edison in June 1994 and
January 1995, request compensatory and punitive damages. Although no
specific damage amounts are alleged in the complaints, in subsequent court
filings, plaintiffs estimated general and compensatory damages of
$8,000,000 and $13,500,000, plus unspecified punitive damages. The same
co-defendant in both actions have filed cross-complaints against the other
co-defendants, including Edison, requesting indemnification and
declaratory relief concerning the rights and responsibilities of the
parties. The case served in June 1994 is set to go to trial on January
8, 1996. In the case served in January 1995, Edison attempted to have the
California appellate courts review the question of whether a California
Superior Court has jurisdiction over personal injury claims based on EMF
emitted from public utility operated electric facilities. This attempt
was ultimately unsuccessful. As a result, this case is proceeding toward
trial but a trial date has not yet been set.
A third case was filed in Orange County Superior Court and served on
Edison in March 1995. The complaint seeks compensatory and punitive
damages. The plaintiff alleges, among other things, that he developed
cancer as a result of EMF emitted from Edison facilities which he alleges
were not constructed in accordance with CPUC standards. No specific
damage amounts are alleged in the complaint but supplemental documentation
prepared by the plaintiff indicates that plaintiff will allege
compensatory damages of approximately $5,500,000, plus unspecified
punitive damages. This case is set to go to trial on March 11, 1996.
Edison believes that there is no proven scientific basis for the
allegation that EMF are hazardous to health and, therefore, believes that
the EMF lawsuits described above are without merit.
PAGE
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These matters were previously reported under the heading "Environmental
Litigation" in Part I, Item 3 of Edison's Annual Report on Form 10-K for
the year ended December 31, 1994, and the Quarterly Report on Form 10-Q
for the period ended March 31, 1995.
San Onofre Personal Injury Litigation
An engineer for two contractors providing services for San Onofre has been
diagnosed with leukemia. On July 12, 1994, the engineer and his wife sued
Edison, San Diego Gas and Electric Company ("SDG&E"), and the manufacturer
of the fuel rods for the plant in the United States District Court for the
Southern District of California. The plaintiffs allege that the
engineer's illness resulted from contact with radioactive fuel particles
released from failed fuel rods. Plant records show that the engineer's
exposure to radiation was well below Nuclear Regulatory Commission ("NRC")
safety levels. In the complaint, plaintiffs seek unspecified compensatory
and punitive damages. In its response to the complaint, Edison denies all
material allegations. The trial began August 3, 1995.
An Edison engineer employed at San Onofre died in 1991 from cancer of the
abdomen. On February 6, 1995, his children sued Edison, SDG&E and the
manufacturer of the fuel rods for the plant in the United States District
Court for the Southern District of California. The plaintiffs allege that
the engineer's illness resulted from, and was aggravated by, exposure to
radiation at San Onofre, including contact with radioactive fuel particles
released from failed fuel rods. Plant records show that the engineer's
exposure to radiation was well below NRC safety levels. In the complaint,
plaintiffs sought unspecified compensatory and punitive damages.
On April 3, 1995, the Court granted the defendants' motion to dismiss 14
of plaintiffs' 15 claims. Punitive damages are not available under the
remaining claim. Edison's April 20, 1995, answer to the complaint denies
all material allegations.
These matters were previously reported under the heading "San Onofre
Personal Injury Litigation" in Part I, Item 3 of Edison's Annual Report
on Form 10-K for the year ended December 31, 1994, and the Quarterly
Report on Form 10-Q for the period ended March 31, 1995.
On July 5, 1995, a former Edison reactor operator employed at San Onofre
and his wife sued Edison and SDG&E, as well as Combustion Engineering, the
manufacturer of the fuel rods for the plant and the Institute of Nuclear
Power Operations, in the U.S. District Court for the Southern District of
California. Plaintiffs allege the former employee's accute myelogenous
leukemia resulted from contact with radioactive fuel particles released
from fuel rods at San Onofre. The former employee subsequently died from
his illness. Plaintiffs seek unspecified compensatory and punitive
damages. Edison intends to deny the plaintiffs' allegations.
Employment Discrimination Litigation
On September 21, 1994, nine African-American employees filed a lawsuit
against SCEcorp and Edison on behalf of an alleged class of African-
American employees, alleging racial discrimination in job advancement,
pay, training and evaluation. The lawsuit was filed in the United States
District Court for the Central District of California. The plaintiffs
seek injunctive relief, as well as an unspecified amount of compensatory
and punitive damages, attorneys' fees, costs and interest. SCEcorp and
Edison have responded by denying the material allegations of the complaint
and asserting several affirmative defenses. The Court has ordered that
plaintiffs file their motion for class certification no later than
September 22, 1995, and that the hearing on that motion be held on
December 11, 1995.
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This matter was previously reported under the heading "Employment
Discrimination Litigation" in Part I, Item 3 of Edison's Annual Report on
Form 10-K for the year ended December 31, 1994, and the Quarterly Report
on Form 10-Q for the period ended March 31, 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
23. Consent of Independent Public Accountants
27. Financial Data Schedule
(b) Reports on Form 8-K:
May 24, 1995 -- Item 5--Other Events--
8-3/8% Junior Subordinated
Deferrable Interest Debentures,
Series A, Due 2044
June 1, 1995 -- Item 5--Other Matters--
Proposed Restructuring of
California Utility Industry
June 9, 1995 -- --Other Events--
6 1/2% Notes, Due 2001
PAGE
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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.
SOUTHERN CALIFORNIA EDISON COMPANY
(Registrant)
By R. K. BUSHEY
------------------------------------
R. K. BUSHEY
Vice President and Controller
By W. J. SCILACCI
------------------------------------
W. J. SCILACCI
Assistant Treasurer
August 8, 1995
PAGE
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EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report included in this quarterly report on Form
10-Q for the quarter ended June 30, 1995 of Southern California Edison
Company in the previously filed Registration Statements which follow:
Registration Form File No. Effective Date
----------------- -------- --------------
Form S-3 33-53288 November 6, 1992
Form S-3 33-50251 September 21, 1993
Form S-3 33-59001 May 15, 1995
ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
August 8, 1995
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Edison Financial Data Schedule -- Exhibit 27
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<FISCAL-YEAR-END> DEC-31-1994
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