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 September 30, 1995
---------------------------------------
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------------- -----------------
Commission File Number 1-2313
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 November 6, 1995
- - -------------------------- -------------------------------
Common Stock, no par value 434,888,104
PAGE
<PAGE>
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, Nine and
Twelve Months Ended September 30, 1995, and 1994 3
Consolidated Balance Sheets--September 30, 1995,
December 31, 1994, and September 30, 1994 4
Consolidated Statements of Cash Flows--
Three, Nine and Twelve Months Ended
September 30, 1995, and 1994 6
Consolidated Statements of Retained Earnings--
Three, Nine and Twelve Months Ended
September 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 1
<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 September 30, 1995, December 31, 1994, and September
30, 1994, and the related consolidated statements of income, retained
earnings and cash flows for each of the three-, nine- and twelve-month
periods ended September 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 September 30, 1995, December 31, 1994, and September
30, 1994, and the results of their operations and their cash flows for
each of the three-, nine- and twelve-month periods ended September 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
November 3, 1995
page 2
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
In thousands
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
----------------------- ------------------------- ------------------------
1995 1994 1995 1994 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue $2,509,877 $2,529,783 $5,969,553 $5,952,957 $7,815,198 $7,695,949
---------- ---------- ---------- ---------- ---------- ----------
Fuel 196,266 261,233 463,806 636,303 668,109 854,228
Purchased power 917,547 922,815 1,954,370 1,949,676 2,567,584 2,555,252
Provisions for regulatory
adjustment clauses--net 146,463 121,536 191,918 82,097 164,592 (94,495)
Other operating expenses 305,133 318,594 891,263 937,426 1,269,087 1,285,655
Maintenance 86,080 76,791 267,823 248,511 349,473 348,433
Depreciation and decommissioning 239,402 225,298 708,734 676,496 922,892 900,816
Income taxes 201,358 196,390 435,832 407,891 535,578 523,909
Property and other taxes 48,384 51,584 152,519 155,311 199,920 203,772
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses 2,140,633 2,174,241 5,066,265 5,093,711 6,677,235 6,577,570
---------- ---------- ---------- ---------- ---------- ----------
Operating income 369,244 355,542 903,288 859,246 1,137,963 1,118,379
---------- ---------- ---------- ---------- ---------- ----------
Provision for rate phase-in plan (33,082) (37,196) (90,947) (101,422) (126,121) (136,596)
Allowance for equity funds
used during construction 4,392 3,807 14,915 11,296 17,967 16,670
Interest income 9,993 9,073 27,775 23,458 35,399 29,511
Other nonoperating income--net 14,089 13,886 31,951 38,811 57,746 47,360
---------- ---------- ---------- ---------- ---------- ----------
Total other income
(deductions)--net (4,608) (10,430) (16,306) (27,857) (15,009) (43,055)
---------- ---------- ---------- ---------- ---------- ----------
Income before interest expense 364,636 345,112 886,982 831,389 1,122,954 1,075,324
---------- ---------- ---------- ---------- ---------- ----------
Interest on long-term debt 96,309 95,481 288,402 285,898 384,332 381,324
Other interest expense 20,766 16,029 61,386 46,786 76,245 61,100
Allowance for borrowed funds
used during construction (3,335) (3,733) (11,326) (11,537) (14,229) (15,825)
Capitalized interest (494) (7) (1,444) (142) (1,555) (511)
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense--net 113,246 107,770 337,018 321,005 444,793 426,088
---------- ---------- ---------- ---------- ---------- ----------
Net income 251,390 237,342 549,964 510,384 678,161 649,236
Dividends on preferred stock 8,599 10,020 28,165 30,060 38,185 40,080
---------- ---------- ---------- ---------- ---------- ----------
Earnings available for
common stock $ 242,791 $ 227,322 $ 521,799 $ 480,324 $ 639,976 $ 609,156
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
page 3
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
In thousands
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
-------------- ------------ --------------
ASSETS
<S> <C> <C> <C>
Utility plant, at original cost $19,628,641 $19,121,964 $18,939,285
Less--accumulated provision for depreciation
and decommissioning 8,360,622 7,710,227 7,565,584
----------- ----------- -----------
11,268,019 11,411,737 11,373,701
Construction work in progress 791,058 906,766 900,700
Nuclear fuel, at amortized cost 152,668 98,044 105,267
----------- ----------- -----------
Total utility plant 12,211,745 12,416,547 12,379,668
----------- ----------- -----------
Nonutility property--less accumulated provision
for depreciation of $31,094, $30,593 and $30,271
at respective dates 78,269 77,338 73,122
Nuclear decommissioning trusts 1,172,079 919,351 895,089
Other investments 67,916 39,584 40,873
----------- ----------- -----------
Total other property and investments 1,318,264 1,036,273 1,009,084
----------- ----------- -----------
Cash and equivalents 407,895 192,092 150,312
Receivables, including unbilled revenue, less
allowances of $23,326, $23,806 and $23,947 for
uncollectible accounts at respective dates 1,174,757 902,090 1,190,176
Fuel inventory 118,286 116,929 127,003
Materials and supplies, at average cost 156,797 129,109 124,472
Accumulated deferred income taxes--net 465,573 271,308 295,552
Prepayments and other current assets 141,961 98,778 132,142
----------- ----------- -----------
Total current assets 2,465,269 1,710,306 2,019,657
----------- ----------- -----------
Unamortized debt issuance and reacquisition
expense 357,347 356,557 364,306
Rate phase-in plan 158,930 240,730 272,431
Unamortized nuclear plant--net 108,367 171,071 196,867
Income tax-related deferred charges 1,754,953 1,816,414 1,816,741
Other deferred charges 347,800 327,613 344,951
----------- ----------- -----------
Total deferred charges 2,727,397 2,912,385 2,995,296
----------- ----------- -----------
Total assets $18,722,675 $18,075,511 $18,403,705
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
page 4
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
In thousands, except share amounts
<TABLE>
<CAPTION>
September 30, December 31, September 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 2,794,832 2,683,568 2,677,342
----------- ----------- -----------
5,140,237 5,028,973 5,022,759
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 5,225,926 4,987,978 4,992,373
----------- ----------- -----------
Total capitalization 10,924,918 10,650,706 10,648,887
----------- ----------- -----------
Other long-term liabilities 345,029 311,063 315,109
----------- ----------- -----------
Current portion of long-term debt 1,375 201,275 201,275
Short-term debt 432,301 675,514 439,469
Accounts payable 394,262 317,082 363,519
Accrued taxes 829,352 514,441 813,850
Accrued interest 116,265 87,733 90,537
Dividends payable 138,787 115,803 122,803
Regulatory balancing accounts--net 296,764 55,710 109,748
Deferred unbilled revenue and other current liabilities 932,794 779,257 952,567
----------- ----------- -----------
Total current liabilities 3,141,900 2,746,815 3,093,768
----------- ----------- -----------
Accumulated deferred income taxes--net 3,335,295 3,386,775 3,375,004
Accumulated deferred investment tax credits 380,521 399,662 404,113
Customer advances and other deferred credits 595,012 580,490 566,824
----------- ----------- -----------
Total deferred credits 4,310,828 4,366,927 4,345,941
----------- ----------- -----------
Commitments and contingencies
(Notes 2, 8, 9 and 10)
Total capitalization and liabilities $18,722,675 $18,075,511 $18,403,705
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
page 5
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
--------------------- --------------------- ------------------------
1995 1994 1995 1994 1995 1994
--------- --------- ---------- --------- ---------- ----------
Cash flows from operating activities:
<S> <C> <C> <C> <C> <C> <C>
Net income $ 251,390 $ 237,342 $ 549,964 $ 510,384 $ 678,161 $ 649,236
Adjustments for non-cash items:
Depreciation and
decommissioning 239,402 225,298 708,734 676,496 922,892 900,816
Amortization 21,406 26,525 43,205 100,648 68,688 123,263
Rate phase-in plan 30,535 33,787 81,800 91,778 113,501 123,851
Deferred income taxes and
investment tax credits (142,489) (115,718) (205,064) (151,569) (155,674) 20,530
Other long-term liabilities 6,012 12,536 33,966 48,514 29,920 55,662
Other--net 2,807 (17,827) (46,668) (49,677) (20,832) (78,806)
Changes in working capital:
Receivables (301,415) (284,543) (272,667) (352,397) 15,419 62,504
Regulatory balancing accounts 183,151 120,174 241,054 51,816 187,016 (128,964)
Fuel inventory, materials
and supplies 14,299 2,978 (29,045) (26,524) (23,608) (11,566)
Prepayments and other
current assets (130,041) (119,644) (43,183) (34,624) (9,819) 15,067
Accrued interest and taxes 274,712 271,136 343,443 420,032 41,230 73,855
Accounts payable and other
current liabilities 223,906 257,616 230,717 326,389 10,970 89,842
--------- --------- --------- --------- ---------- ----------
Net cash provided by
operating activities 673,675 649,660 1,636,256 1,611,266 1,857,864 1,895,290
--------- --------- --------- --------- ---------- ----------
Cash flows from financing activities:
Long-term debt issued -- -- 393,922 (362) 395,248 559,150
Long-term debt repayments (205,697) (1,200) (422,192) (170,224) (422,192) (387,019)
Preferred stock redemptions -- -- (75,000) -- (75,000) --
Nuclear fuel financing--net 22,586 (12,099) 42,775 (25,915) 37,245 (38,350)
Short-term debt financing--net (172,032) (423,752) (243,213) (173,625) (7,168) (118,797)
Dividends paid (145,178) (121,970) (414,946) (459,947) (543,915) (628,930)
--------- --------- --------- --------- ---------- ----------
Net cash used by
financing activities (500,321) (559,021) (718,654) (830,073) (615,782) (613,946)
--------- --------- --------- --------- ---------- ----------
Cash flows from investing activities:
Additions to property and plant (200,186) (261,287) (573,224) (729,618) (825,500) (1,035,703)
Funding of nuclear decommissioning
trusts (39,340) (25,044) (111,897) (101,031) (141,021) (134,994)
Other--net (5,533) (1,107) (16,678) (5,151) (17,978) (8,554)
--------- --------- --------- --------- ---------- ----------
Net cash used by
investing activities (245,059) (287,438) (701,799) (835,800) (984,499) (1,179,251)
--------- --------- --------- --------- ---------- ----------
Net increase (decrease) in cash
and equivalents (71,705) (196,799) 215,803 (54,607) 257,583 102,093
Cash and equivalents, beginning
of period 479,600 347,111 192,092 204,919 150,312 48,219
--------- --------- --------- --------- ---------- ----------
Cash and equivalents, end
of period $ 407,895 $ 150,312 $ 407,895 $ 150,312 $ 407,895 $ 150,312
========= ========= ========= ========= ========== ==========
Cash payments for interest and taxes:
Interest $ 81,196 $ 90,287 $ 257,679 $ 271,702 $ 351,103 $ 365,807
Taxes 209,456 185,464 333,806 180,462 520,295 334,278
</TABLE>
The accompanying notes are an integral part of these financial statements.
page 6
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
In thousands
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
---------------------- ---------------------- ------------------------
1995 1994 1995 1994 1995 1994
---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $2,688,402 $2,568,970 $2,683,568 $2,586,890 $2,677,342 $2,617,022
Net income 251,390 237,342 549,964 510,384 678,161 649,236
Dividends declared on common stock (136,361) (118,950) (409,771) (389,872) (521,722) (548,836)
Dividends declared on preferred
stock (8,599) (10,020) (28,165) (30,060) (38,185) (40,080)
Reacquired capital stock expense -- -- (764) -- (764) --
---------- ---------- ---------- ---------- ---------- ----------
Balance at end of period $2,794,832 $2,677,342 $2,794,832 $2,677,342 $2,794,832 $2,677,342
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
page 7
<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 its parent company, 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
September 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 ($371 million at September
30, 1995, $132 million at December 31, 1994, and $130 million at September
30, 1994), and time deposits and other investments ($30 million at
September 30, 1995, $53 million at December 31, 1994, and $14 million at
September 30, 1994) with maturities of three months or less.
Unrealized gains (losses) on equity investments are recorded as regulatory
liabilities (assets). 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 8
<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.
In July 1991, Edison requested that the CPUC find future operation of San
Onofre Nuclear Generating Station Unit 1 cost-effective and authorize
recovery of capital expenditures of approximately $100 million through
1994. In September 1991, the CPUC's Division of Ratepayer Advocates (DRA)
stated that it believed continuation of Unit 1 was not cost-effective and
recommended the unit be shut down, with recovery of its book value
amortized over four years with no return. In August 1992, the CPUC
approved a settlement agreement between Edison and the DRA to discontinue
operation of Unit 1 at the end of its then-current fuel cycle. As part
of the agreement, Edison will recover its remaining investment, earning
an 8.98% rate of return, by August 1996. In November 1992, Edison
discontinued operation of Unit 1.
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 $6 million, $21 million and
$45 million for the three, nine and twelve months ended September 30,
1995, respectively, and $14 million, $40 million and $52 million for the
three, nine and twelve months ended September 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.
page 9
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Replaced or retired property and removal costs less salvage are charged
to the accumulated provision for depreciation. Depreciation expense
stated as a percent of average original cost of depreciable utility plant
was 3.7%, 3.6% and 3.6%, respectively, for the three, nine and twelve
months ended September 30, 1995, compared to 3.6% for each of the same
periods in 1994.
Note 2. Regulatory Matters
1995 General Rate Case Proposed Settlement Agreement
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 in San Onofre Units 2 and 3, with an
incentive pricing plan for future operating costs. The $67 million
revenue reduction has been included in 1995 rates.
Edison's unrecovered investment in Units 2 and 3 (approximately $2.7
billion) would be collected over an eight-year period earning a reduced
rate of return of 7.78%, compared to the current 9.8%. Under the
incentive pricing plan, which would replace traditional regulation and
rate recovery, Edison will receive approximately 4 cents per kilowatt-hour
to cover its portion of San Onofre's ongoing operating and incremental
capital expenditures during the eight-year period. At the end of this
period, customers would bear no further obligation for the units, except
certain costs associated with decommissioning and permanent closure.
Edison would then sell power generated by San Onofre under prices, terms
and conditions which conform to any then-existing regulatory procedures.
In April 1995, the DRA filed supplemental testimony recommending a 0.25-
cent-per-kilowatt-hour decrease to the incentive price originally agreed
to in the settlement agreement. The DRA claims the decrease is based on
"new information" obtained after the settlement was negotiated, but prior
to the hearings. In May 1995, hearings concluded after Edison filed
rebuttal testimony showing that the "new information" does not form the
basis for any change to the agreement and requesting that the CPUC adopt
the original settlement.
On September 14, 1995, a CPUC administrative law judge (ALJ) issued a
proposed decision that would reduce Edison's 1995 revenue by $105 million.
The additional $38 million reduction would be retroactive to January 1,
1995. The ALJ also recommended that the general rate case settlement
agreement with the DRA be rejected, including the portion pertaining to
San Onofre. The ALJ viewed the latter as being premature in light of
California's restructuring proceeding and stated that it could be
resubmitted as part of the restructuring proceeding or other appropriate
proceeding. A final CPUC decision on the general rate case is expected
by year-end. If the CPUC adopts the ALJ recommendation to move the San
Onofre Units 2 and 3 agreement to another proceeding, Edison believes the
unrecovered investment would be recovered through a competition transition
charge or other mechanism (see CPUC Restructuring Proposals).
CPUC Restructuring Proposals
Since April 1994, the CPUC has been considering its proposal for
restructuring California's electric utility industry, seeking to lower
energy prices and provide customers with a choice of generation suppliers.
As a part of these proceedings, Edison filed a proposal with the CPUC in
November 1994 recommending implementation of a competition transition
charge (CTC), beginning in 1998, as a mechanism to allow for full recovery
page 10
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of generation-related utility investments and obligations incurred to
serve customers under the existing regulatory framework. In its filing,
Edison estimates its potential transition costs through 2025 to be
approximately $9.3 billion (net present value), based on an assumed 1998
market price of 4 cents per kilowatt-hour. The potential transition costs
are comprised of: $4.9 billion from Edison's qualifying facility
contracts, which are the direct result of legislative and regulatory
mandates; $600 million from costs pertaining to certain generating plants;
and $3.8 billion from regulatory commitments consisting of costs incurred
to provide service to customers whose recovery has been deferred. Such
commitments include the recovery of income-tax benefits previously flowed-
through to customers, postretirement benefit transition costs, accelerated
recovery of nuclear plants (including San Onofre Unit 1 as discussed in
Note 1 and San Onofre Units 2 and 3 as discussed above), nuclear
decommissioning and certain other costs. At September 30, 1995, these
commitments included recorded generation-related regulatory assets of
approximately $1.2 billion, primarily for the recovery of income-tax
benefits previously flowed-through to customers, the Palo Verde phase-in
plan and unamortized loss on reacquired debt.
On May 24, 1995, the CPUC issued for public comment two policy proposals
on restructuring. Although the proposals differ, they both recommend
moving to a restructured competitive electric industry within two years
and generally endorse recovery of costs incurred under prior regulatory
rules. The majority's proposal, supported by three of the four
commissioners, recommends a power pool that would commence operation by
the beginning of 1997. One commissioner offered an alternate proposal
that would provide for individual customer agreements with power
producers. This proposal would also require the immediate sale or spin-
off of all utility-owned generating facilities, and may allow utilities
to recover only 90% of costs incurred under prior regulatory rules. On
July 24, 1995, Edison filed comments supporting the majority proposal as
it believes this proposal will be more successful at achieving CPUC goals
set in April 1994 for a restructured electric industry in California.
On September 11, 1995, Edison and a broad coalition of electricity
customers and independent power producers submitted, as a joint
recommendation to the CPUC, a set of principles to modify and refine the
CPUC's two policy proposals. According to the Memorandum of
Understanding: an independent system operator would control the scheduling
and dispatch of all electricity on the state's power grid; a separate
power exchange would manage supply and demand through an economic auction;
physical direct access would be phased in over a five-year schedule,
allowing for individual contracts and aggregation of smaller customers;
a non-bypassable transition charge would be collected to pay for past
regulatory commitments; and California's social and environmental public
policy programs would be funded through a separate charge to all customers
during the transition period.
Hearings were held on the joint recommendation in September 1995 and a
final CPUC decision on industry restructuring is expected by year-end;
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 transmission access to the nation's interstate
transmission grid, while allowing them to recover stranded costs
associated with open access. The proposal defines stranded costs as
legitimate, prudent and verifiable costs incurred to provide service to
page 11
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
customers that would subsequently become unbundled wholesale transmission
service customers of the utility. Edison supports the FERC's proposal and
filed comments in August 1995. A final FERC decision is expected in mid-
1996.
Financial Impact of Restructuring Proposals
Edison currently applies accounting standards that recognize the economic
effects of rate regulation. As a result of applying these standards,
Edison has recorded net regulatory assets of approximately $2.4 billion
as of September 30, 1995, which include generation-related regulatory
assets of $1.2 billion. Effective January 1996, a new accounting standard
will impose stricter criteria for the retention of regulatory-created
assets. Under this standard, Edison must be able to conclude that
regulatory assets continue to be probable of recovery. Currently, a
conclusion that such assets are not probable of loss is required.
Accordingly, if rate recovery of generation-related costs does not
continue to be probable, whether due to competition or regulatory action,
regulatory accounting standards may no longer apply to Edison's generation
operations and the $1.2 billion ($700 million after-tax) in recorded
generation-related regulatory assets would be a non-cash charge against
earnings. Additionally, Edison may have write-offs associated with its
potential transition costs if all or a portion of these costs are not
recovered through a CTC or other mechanism. Until the CPUC issues a final
policy decision specifying definitive procedures to identify, value,
calculate, allocate and recover transition costs, Edison cannot predict
the effect, if any, on its results of operations.
Mohave Generating Station
A 1994 CPUC decision stated that Edison was liable for expenditures
related to a 1985 accident at the Mohave Generating Station. The CPUC
ordered a second phase of this proceeding to quantify the disallowance.
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 September 30, 1995, are: 1996--$1 million;
1997--$501 million; 1998--$277 million; 1999--$325 million; and 2000--$325
million.
page 12
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consisted of:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
-------------- ------------ -------------
(In millions)
First and refunding mortgage bonds:
<C> <C> <C> <C>
1997--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%) 1,638 1,850 1,850
Pollution-control bonds:
1999--2027 (5.4% to 7.2% and variable) 1,205 1,206 1,207
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 82 39 44
Long-term debt due within one year (1) (201) (201)
Unamortized debt discount--net (66) (74) (76)
------ ------ ------
Total $5,226 $4,988 $4,992
====== ====== ======
</TABLE>
Short-Term Debt
Edison has lines of credit it can use at negotiated or bank index rates.
At September 30, 1995, available lines totaled $1.4 billion, with $900
million 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 September 30, 1995,
December 31, 1994, and September 30, 1994, was $516 million, $717 million
and $486 million, respectively. A portion of commercial paper intended
to finance nuclear fuel scheduled to be used more than one year after the
balance sheet date is classified as long-term debt in connection with
refinancing terms under five-year term lines of credit with commercial
banks. Weighted-average interest rates were 5.8%, 5.9% and 4.8%, at
September 30, 1995, December 31, 1994, and September 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 had pledged $13 million as collateral as of September 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.
page 13
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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%, over the
debt due 2027 variable term of the debt
</TABLE>
Fair values of financial instruments were:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
-------------------- ------------------- -----------------
Cost Fair Cost Fair Cost Fair
Instrument Basis Value Basis Value Basis Value
- - ---------- -------- ------ -------- -------- ------- -----
(In millions)
Financial assets:
<C> <C> <C> <C> <C> <C> <C>
Decommissioning trusts $ 1,031 $ 1,172 $ 920 $ 919 $ 890 $ 895
Equity investments 9 38 9 26 9 26
Financial liabilities:
Interest rate swap & cap
agreements -- 9 -- 1 -- 1
Long-term debt 5,226 5,505 4,988 4,763 4,992 4,820
Nuclear enrichment obligation 62 50 66 45 66 48
Preferred stock subject to
mandatory redemption 275 291 275 257 275 264
</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 agreements; brokers' quotes--long-term debt, preferred stock and cap
agreements; 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. At September 30, 1995, Edison had the capacity to pay
$400 million in additional dividends to SCEcorp and continue to maintain
its authorized capital structure.
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 14
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cumulative preferred stock consisted of:
<TABLE>
<CAPTION>
September 30, 1995
---------------------------
Shares Redemption September 30, December 31, September 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 15
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net accumulated deferred income tax liability were:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
------------- ------------ -------------
(In millions)
Deferred tax assets:
<S> <C> <C> <C>
Property-related $ 267 $ 260 $ 357
Investment tax credits 226 237 266
Regulatory balancing accounts 177 85 130
Other 651 521 449
------ ------ ------
Total $1,321 $1,103 $1,202
------ ------ ------
Deferred tax liabilities:
Property-related $3,691 $3,706 $3,761
Other 499 513 520
------ ------ ------
Total $4,190 $4,219 $4,281
------ ------ ------
Accumulated deferred income taxes--net $2,869 $3,116 $3,079
====== ====== ======
Classification of accumulated deferred income taxes:
Included in deferred credits $3,335 $3,387 $3,375
Included in current assets 466 271 296
</TABLE>
The current and deferred components of income tax expense were:
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
----------------- ---------------- -----------------
1995 1994 1995 1994 1995 1994
------ ------ ------ ------ ------ ------
(In millions)
Current:
<S> <C> <C> <C> <C> <C> <C>
Federal $ 258 $ 233 $ 461 $ 401 $ 492 $ 297
State 71 63 135 115 144 99
----- ----- ----- ----- ----- -----
329 296 596 516 636 396
----- ----- ----- ----- ----- -----
Deferred--federal and state:
Accrued charges 14 (5) 11 (22) 9 (51)
Depreciation 2 12 14 33 27 51
Investment and energy tax credits--net (6) (4) (19) (17) (24) (24)
Prior year state tax (23) (15) (3) (18) 1 (2)
Rate phase-in plan (13) (14) (34) (38) (47) (51)
Regulatory balancing accounts (74) (46) (103) (32) (78) 68
Resale revenue -- -- -- 8 -- 33
Retirement of debt (3) (2) (7) (6) (9) 24
Unbilled revenue (36) (32) (58) (48) (13) (11)
Other (3) (10) (6) (12) (22) (16)
----- ----- ----- ----- ----- -----
(142) (116) (205) (152) (156) 21
----- ----- ----- ----- ----- -----
Total income tax expense $ 187 $ 180 $ 391 $ 364 $ 480 $ 417
===== ===== ===== ===== ===== =====
Classification of income taxes:
Included in operating income $ 201 $ 196 $ 436 $ 408 $ 536 $ 524
Included in other income (14) (16) (45) (44) (56) (107)
</TABLE>
The composite federal and state statutory income tax rate was 41.045% for
all periods presented.
page 16
<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 9 Months Ended 12 Months Ended
September 30, September 30, September 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 (0.6) (1.2) (0.8) (1.8) (1.3) (2.1)
Depreciation and related timing
differences not deferred 1.7 4.2 1.9 4.4 2.4 5.7
Investment and energy tax credits (1.5) (1.1) (2.0) (2.0) (2.0) (2.3)
State tax--net of federal deduction 6.7 5.9 6.2 5.9 5.9 5.9
Other 1.4 0.3 1.3 0.1 1.4 (3.1)
---- ---- ---- ---- ---- ----
Effective tax rate 42.7% 43.1% 41.6% 41.6% 41.4% 39.1%
==== ==== ==== ==== ==== ====
</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 17
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The plan's funded status was:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
-------------- ------------- --------------
(In millions)
Actuarial present value of benefit obligation:
<S> <C> <C> <C>
Vested benefits $1,296 $1,260 $1,438
Nonvested benefits 162 147 186
------ ------ ------
Accumulated benefit obligation 1,458 1,407 1,624
Value of projected future compensation levels 497 450 602
------ ------ ------
Projected benefit obligation $1,955 $1,857 $2,226
====== ====== ======
Fair value of plan assets $2,507 $2,194 $2,296
====== ====== ======
Projected benefit obligation less than plan assets $ (552) $ (337) $ (70)
Unrecognized net gain 648 451 174
Unrecognized prior service cost (5) (5) (5)
Unrecognized net obligation (17-year amortization) (52) (54) (56)
------ ------ ------
Pension liability $ 39 $ 55 $ 43
====== ====== ======
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 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
-------------- ---------------- ---------------
1995 1994 1995 1994 1995 1994
------ ------ ------ ------- ------ ------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Service cost for benefits earned $ 15 $ 17 $ 43 $ 53 $ 57 $ 69
Interest cost on projected benefit
obligation 39 38 116 111 153 145
Actual return on plan assets (121) (100) (318) (117) (229) (179)
Net amortization and deferral 74 58 180 (9) 49 15
---- ----- ---- ---- ---- -----
Pension expense under accounting
standards 7 13 21 38 30 50
Regulatory adjustment--deferred 5 -- 16 (1) 18 (1)
---- ----- ---- ---- ---- -----
Net pension expense recognized $ 12 $ 13 $ 37 $ 37 $ 48 $ 49
==== ===== ==== ==== ==== =====
</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 18
<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 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
--------------- -------------- ---------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Service cost for benefits earned $ 8 $ 7 $ 23 $ 22 $ 28 $ 28
Interest cost on benefit obligation 18 18 56 53 75 70
Actual return on plan assets (7) (5) (20) (15) (24) (18)
Amortization of transition obligation 9 9 26 27 35 36
---- ---- ---- ---- ---- ----
Net expense 28 29 85 87 114 116
Amortization of prior funding -- -- -- 2 -- 15
---- ---- ---- ---- ---- ----
Total expense $ 28 $ 29 $ 85 $ 89 $114 $131
==== ==== ==== ==== ==== ====
</TABLE>
The funded status of these benefits is reconciled to the recorded
liability below:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
------------- ------------- -------------
(In millions)
Actuarial present value of benefit obligation:
<S> <C> <C> <C>
Retirees $ 530 $ 530 $ 509
Employees eligible to retire 50 47 92
Other employees 336 293 399
----- ----- ------
Accumulated benefit obligation $ 916 $ 870 $1,000
===== ===== ======
Fair value of plan assets $ 374 $ 303 $ 280
===== ===== ======
Plan assets less than accumulated benefit
obligation $(542) $(567) $ (720)
Unrecognized transition obligation 596 622 661
Unrecognized net loss (gain) (50) (50) 59
----- ----- ------
Recorded asset (liability) $ 4 $ 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 19
<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 September 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 $4
million, $15 million and $20 million for the three, nine and twelve months
ended September 30, 1995, respectively, and $5 million, $16 million and
$21 million for the three, nine and twelve months ended September 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 September 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 68 12 50
Generating stations:
Four Corners Units 4 and 5 (coal) 456 227 2 48
Mohave (coal) 287 146 16 56
Palo Verde (nuclear) 1,573 338 17 16
San Onofre (nuclear) 4,160 1,534 58 75
------ ------ ----
Total $6,723 $2,321 $105
====== ====== ====
</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 September 30,
1995, were:
<TABLE>
<CAPTION>
Year ended December 31, (In millions)
<S> <C>
1995 $ 8
1996 21
1997 17
1998 14
1999 10
Thereafter 14
---
Total $84
===
</TABLE>
page 20
<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 $39 million, $112 million and $133 million for the three, nine and
twelve months ended September 30, 1995, respectively, and $33 million,
$101 million and $140 million for the three, nine and twelve months ended
September 30, 1994, respectively. The accumulated provision for
decommissioning was $792 million at September 30, 1995, $692 million at
December 31, 1994, and $677 million at September 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 September 30, December 31, September 30,
Dates 1995 1994 1994
---------- ------------- --------------- -------------
(In millions)
<S> <C> <C> <C> <C>
Municipal bonds 1996-2021 $ 334 $ 447 $ 548
Stocks -- 358 258 156
U.S. government and agency issues 1998-2023 206 98 114
Short-term investments and other 1994-1995 133 117 72
------ ------ ------
Trust fund balance (at cost) $1,031 $ 920 $ 890
====== ====== ======
</TABLE>
Trust fund earnings (based on specific identification) increase the trust
fund balance and the accumulated provision for decommissioning. Net
earnings were $15 million, $37 million and $34 million for the three, nine
and twelve months ended September 30, 1995, respectively, and $9 million,
$29 million and $44 million for the three, nine and twelve months ended
September 30, 1994, respectively. Proceeds from sales of securities
(which are reinvested) were $261 million, $759 million and $1.2 billion
for the three, nine and twelve months ended September 30, 1995,
respectively, and $305 million, $708 million and $776 million for the
three, nine and twelve months ended September 30, 1994, respectively.
Approximately 88% 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 21
<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 $ 973 $ 995 $ 948 $ 907 $ 992
Fuel supply contracts 291 209 204 193 198
Purchased-power capacity payments 728 722 727 731 735
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 or
liquidity.
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 22
<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 September 30, 1995, Edison's recorded estimated minimum liability to
remediate its 58 identified sites was $114 million, compared with $74
million at September 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 September 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
filed a request with the CPUC to add 11 of these sites ($12 million) to
the incentive mechanism. Edison has recorded a regulatory asset of $104
million for its estimated minimum environmental-cleanup costs expected to
be recovered through customer rates.
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
page 23
<PAGE>
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.
page 24
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
Earnings
Southern California Edison Company's earnings for the three, nine and
twelve months ended September 30, 1995, were $243 million, $522 million
and $640 million, respectively, compared with $227 million, $480 million
and $609 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 September
30, 1995, compared to the year-earlier period, was also lowered by a 1993
benefit from refinancing long-term debt.
Operating Revenue
Operating revenue remained virtually unchanged for the three- and nine-
month periods ended September 30, 1995, compared with the same periods in
1994, as a 2.6% California Public Utilities Commission (CPUC)-authorized
rate increase was offset by a decline in energy usage caused by milder
weather in 1995 and a decrease in the volume of sales to resale cities.
Wholesale revenue decreased 19% for the twelve months ended September 30,
1995, compared with the same period in 1994. The decrease was due to a
23% decrease in rates, offset by a 4% increase in 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
for residential, small business and agricultural customers through 1996,
and announced a five-year goal to reduce system average rates by 25%
(after adjusting for inflation), subject to CPUC approval. Edison also
urged the CPUC to re-examine certain rate design issues, including
possible elimination of the kilowatt-hour sales balancing account, which
adjusts utility revenue for differences between CPUC-authorized and actual
base-rate revenue. In July 1995, Edison filed expanded rate options and
requested that the CPUC expedite the filing in order to offer these
services by 1996. Edison does not anticipate that these proposals will
have a material effect on future earnings trends, however, if the
balancing account mechanism were to be revised or eliminated, the seasonal
variability of Edison's earnings could be affected.
Operating Expenses
Fuel expense decreased 25%, 27% and 22% in the three, nine and twelve
months ended September 30, 1995, compared with the same periods in 1994.
The decreases primarily reflect a change in the fuel mix from the year-
earlier periods. Hydro generation was up significantly in 1995, due to
greater rainfall, resulting in lower gas purchases compared with the same
periods in 1994. In addition, during the third quarter of 1995, San
Onofre Nuclear Generating Station Unit 3 was out of service for two months
for refueling and maintenance. Edison also received an $11 million fuel
credit from the Department of Energy. For the year-to-date and twelve-
month periods, compared with the year-earlier periods, lower overall gas
prices and a higher than average operating capacity at San Onofre Units
2 and 3 also contributed to the decrease in Edison's energy costs.
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.
<page 25>
Energy prices under these contracts are generally higher than other energy
sources, and for the twelve months ended September 30, 1995, Edison paid
about $1.8 billion (including energy and capacity payments) more than the
cost of power available from other sources.
Provisions for regulatory adjustment clauses increased in all periods
presented as CPUC-authorized fuel and purchased-power cost estimates
exceeded Edison's actual energy costs. Edison's actual energy costs were
lower than estimated due to the increase in hydro generation, San Onofre
Unit 3's scheduled refueling outage, and lower gas prices.
Other operating expenses include severance charges of $12 million and $30
million, respectively, for the nine- and twelve-month periods ended
September 30, 1995. As Edison's operating environment continues to evolve
toward a more competitive future, it is anticipated that workforce
reductions will continue to occur. At this time, Edison does not have
plans for company-wide workforce reductions that would be considered a
restructuring for financial reporting purposes; however, each operating
department will continue to review staffing needs during this period of
change. Excluding severance charges, other operating expenses decreased
in all periods presented primarily due to operating efficiencies.
Maintenance expense increased 12% in the third quarter of 1995, compared
with the year-earlier period, due to the scheduled refueling and
maintenance outage at San Onofre Unit 3. Unit 3 returned to service on
September 26, 1995.
Other Income and Deductions
The provision for rate phase-in plan reflects a CPUC-authorized, 10-year
rate phase-in plan, which deferred the collection of revenue during the
first four years of operation for the Palo Verde Nuclear Generating
Station. Revenue previously deferred (including interest) will be
collected by the end of 1996 for Units 1 and 2, and 1998 for Unit 3. The
provision is a non-cash offset to the collection of deferred revenue.
Interest income increased 18% and 20% for the nine- and twelve-month
periods ended September 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 decreased 18% 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 22%
increase for the twelve months ended September 30 1995, compared to the
year-earlier period, reflects an environmental insurance settlement
received in the fourth quarter of 1994 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 30%, 31% and 25% for the three, nine and
twelve months ended September 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.
page 26
<PAGE>
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. As excess cash becomes available, Edison intends to
pay cash dividends to SCEcorp, while maintaining its CPUC-authorized
capital structure. SCEcorp repurchased 2,774,298 shares ($46 million)
through November 3, 1995, funded by dividends from SCEcorp subsidiaries.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $674 million, $1.6
billion and $1.9 billion for the three-, nine- and twelve-month periods
ended September 30, 1995, respectively, compared with $650 million, $1.6
billion and $1.9 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
September 30, 1995, Edison could issue approximately $7.2 billion of
additional first and refunding mortgage bonds and $4.3 billion of
preferred stock at current interest and dividend rates.
At September 30, 1995, Edison had available lines of credit of $1.4
billion with $900 million supporting commercial paper and $500 million for
the long-term refinancing of variable-rate pollution control bonds. These
unsecured, revolving lines of credit are at negotiated or bank index rates
with various expiration dates; the majority with five-year terms.
California law prohibits Edison from incurring or guaranteeing debt for
its nonutility affiliates. Additionally, the CPUC regulates Edison's
capital structure, limiting the dividends Edison may pay SCEcorp. At
September 30, 1995, Edison had the capacity to pay $400 million in
additional dividends to SCEcorp and continue to maintain its authorized
capital structure.
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 rates over the term of
each nuclear generating facility's operating license through charges to
depreciation expense. Edison estimates that it will spend approximately
$12.7 billion to decommission its nuclear facilities, primarily between
2013-2070. This estimate is based on Edison's current-dollar
decommissioning costs ($1.8 billion), escalated using a 6.65% rate and an
earnings assumption on trust funds ranging from 5.50% to 5.75%. These
amounts are expected to be funded from independent decommissioning trusts
(see Notes to Consolidated Financial Statements), which receive Edison
contributions of approximately $100 million per year (until
decommissioning begins). The Financial Accounting Standards Board is
reviewing current accounting practices for removal costs, including
decommissioning of nuclear power plants. If current industry accounting
practices are changed, Edison could be required to report its estimated
decommissioning costs as a liability, rather than recognize these costs
over the term of each facility's operating license. 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.
page 27
<PAGE>
Projected Capital Requirements
Edison's projected capital requirements for the next five years are: 1995-
- - -$973 million; 1996--$995 million; 1997--$948 million; 1998--$907 million;
and 1999--$992 million.
Long-term debt maturities and sinking fund requirements for the five
twelve-month periods following September 30, 1995, are: 1996--$1 million;
1997--$501 million; 1998--$277 million; 1999--$325 million; and 2000--$325
million.
REGULATORY MATTERS
Edison's 1995 CPUC-authorized revenue increased $193 million, or 2.6%,
primarily due to a $192 million increase for fuel and purchased power
($167 million for federally required purchases), a $121 million increase
for higher costs of debt and equity, a $64 million decrease for 1993
postretirement benefits other than pensions (collected in 1994 rates) and
a $67 million decrease for a pending settlement agreement with the CPUC's
Division of Ratepayer Advocates (DRA) related to the 1995 general rate
case (see 1995 General Rate Case Proposed Settlement Agreement below).
The CPUC's 1995 cost-of-capital decision authorized an increase to
Edison's equity ratio from 47.25% to 47.75%, and an increase to Edison's
return on common equity from 11% to 12.1% in 1995. This decision,
excluding the effects of other rate actions, would increase 1995 earnings
by 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 October 6, 1995, a
CPUC administrative law judge (ALJ) issued a proposed decision
recommending a decrease to Edison's return on common equity from 12.1% to
11.6%. This recommendation, if adopted, could reduce 1996 earnings by
about $43 million, excluding the effects of other rate actions. A CPUC
decision is expected in late November 1995.
A 1994 CPUC decision stated that Edison was liable for expenditures
related to a 1985 accident at the Mohave Generating Station. The CPUC
ordered a second phase of this proceeding to quantify the disallowance.
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 Proposed Settlement Agreement
In 1994, Edison and the DRA filed a settlement agreement, which requires
CPUC approval, related to the 1995 general rate case. The settlement
includes: a $67 million reduction in 1995 non-fuel revenue, effective
January 1, 1995; and, accelerated recovery of Edison's remaining
investment (approximately $2.7 billion) in San Onofre Units 2 and 3 at a
reduced rate of return (7.78% compared to 9.8%), beginning February 1,
1996. Future operating costs at San Onofre would be recovered through an
incentive pricing plan. At the end of the accelerated recovery period
(2003, instead of 2012), customers would bear no further obligation for
Units 2 and 3, except for certain costs associated with decommissioning
and permanent closure. Edison would then sell power generated by San
Onofre under prices, terms and conditions which conform to any then-
existing regulatory procedures.
In April 1995, the DRA filed supplemental testimony requesting a decrease
to the incentive prices originally agreed upon in the settlement. Edison
filed rebuttal testimony requesting that the CPUC adopt the original
settlement. Hearings concluded in May 1995.
<page 28>
On September 14, 1995, an ALJ issued a proposed decision recommending that
the settlement agreement with the DRA be rejected, including the portion
related to San Onofre, and recommended an additional reduction to Edison's
1995 revenue of $38 million. The proposed decision stated that recovery
of San Onofre could be resubmitted as part of the CPUC restructuring
proceeding or other appropriate proceeding. A final CPUC decision is
expected by year-end. If the CPUC adopts the ALJ recommendation to move
the San Onofre Units 2 and 3 agreement to another proceeding, Edison
believes the unrecovered investment would be recovered through a
competition transition charge or other mechanism (see Competitive
Environment).
Performance-Based Ratemaking
In 1993, Edison filed a proposal with the CPUC for a performance-based
rate-making mechanism that would determine most of Edison's revenue
(excluding fuel) from 1996-2000. The filing proposed a revenue-indexing
formula that would combine operating expenses and capital-related costs
into a single index. In July 1994, the CPUC ordered Edison to divide its
performance-based rate-making application into two phases - transmission
and distribution, and power generation. Hearings concluded in December
1994 for the transmission and distribution phase and a decision is
expected by year-end. Edison expects to file its proposal for the power
generation phase after the CPUC issues its final decision on industry
restructuring (see Competitive Environment).
COMPETITIVE ENVIRONMENT
Electric utilities operate in a highly regulated environment in which they
have an obligation to provide electric service to their customers in
return for an exclusive franchise within their service territory. This
regulatory environment is changing. The generation sector has experienced
competition from nonutility power producers and regulators have proposed
restructuring the electric utility industry. Edison expects the
generation sector to continue to experience competition and other changes
over the next decade.
Since April 1994, the CPUC has been considering its proposal for
restructuring California's electric utility industry, seeking to lower
energy prices and provide customers with a choice of generation providers.
As part of these proceedings, Edison filed a proposal with the CPUC in
November 1994 recommending implementation of a competition transition
charge (CTC), beginning in 1998, as a mechanism to allow for full recovery
of generation-related utility investments and obligations incurred to
serve customers under the existing regulatory framework. In its filing,
Edison estimates its potential transition costs through 2025 to be
approximately $9.3 billion (net present value), based on an assumed 1998
market price of 4 cents per kilowatt-hour. The potential transition costs
are comprised of: $4.9 billion from qualifying facility contracts, which
are the direct result of legislative and regulatory mandates; $600 million
from costs pertaining to certain generating plants; and $3.8 billion from
regulatory commitments consisting of costs incurred to provide service to
customers whose recovery has been deferred. Such commitments include the
recovery of income-tax benefits previously flowed-through to customers,
postretirement benefit transition costs, accelerated recovery of nuclear
plants (including San Onofre Unit 1, as discussed in the Nuclear section
of Note 1, and San Onofre Units 2 and 3, as discussed in the 1995 General
Rate Case Proposed Settlement Agreement in Note 2), nuclear
decommissioning and certain other costs. At September 30, 1995, these
commitments included recorded generation-related regulatory assets of
approximately $1.2 billion, primarily for the recovery of income-tax
benefits previously flowed-through to customers, the Palo Verde phase-in
plan and unamortized loss on reacquired debt.
On May 24, 1995, the CPUC issued for public comment two policy proposals
that recommend moving to a restructured competitive electric industry
<page 29>
within two years. Although the proposals differ, both generally endorse
recovery of costs incurred under prior regulatory rules. The majority's
proposal, supported by three of the four commissioners, recommends
deregulation of electric generation through a power pool mechanism. The
alternate proposal recommends deregulation of electric generation through
individual customer agreements with power producers. This proposal would
also require the immediate sale or spin-off of all utility owned
generation facilities, and may only allow utilities to recover 90% of
costs incurred under prior regulatory rules. Edison supports the majority
proposal as it believes this proposal would be more successful at
achieving CPUC goals set in April 1994 for a restructured electric
industry in California.
On September 11, 1995, Edison and a broad coalition of electricity
customers and independent power producers submitted a joint recommendation
to the CPUC which would modify and refine the CPUC's two policy proposals.
Key provisions of the joint recommendation include: an independent system
operator to schedule and dispatch statewide electricity; a separate power
exchange to manage supply and demand through an economic auction; five-
year phase-in of direct customer access; a non-bypassable transition
charge to recover past regulatory commitments; and, a separate charge for
funding the state's social and environmental programs during the
transition period. Hearings were held on the joint recommendation in
September 1995 and a final CPUC decision on industry restructuring is
expected by year-end; however, the state legislature has requested the
CPUC to withhold implementation of any restructuring plan until its impact
can be evaluated by the legislature and governor.
Edison is engaged in an ongoing analysis of the effect of industry
restructuring on its internal corporate structure. In addition, Edison
is seeking to enhance its competitive position by cutting costs and
increasing productivity, and by developing new revenue sources.
FERC Restructuring Proposal
In March 1995, the FERC proposed rules which would require utilities to
provide wholesale open transmission access to the nation's interstate
transmission grid, while allowing them to recover stranded costs
associated with open access. The proposal defines stranded costs as
legitimate, prudent and verifiable costs incurred to provide service to
customers that would subsequently become unbundled wholesale transmission
service customers of the utility. Edison supports the FERC's proposal and
filed comments in August 1995. A final FERC decision is expected in mid-
1996.
Financial Impact of Restructuring Proposals
Edison currently applies accounting standards that recognize the economic
effects of rate regulation. As a result of applying these standards,
Edison had recorded net regulatory assets of approximately $2.4 billion
at September 30, 1995, which includes generation-related regulatory assets
of $1.2 billion. Effective January 1996, a new accounting standard will
impose stricter criteria for the retention of regulatory-created assets.
Under this standard, Edison must be able to conclude that regulatory
assets continue to be probable of recovery. Currently, a conclusion that
such assets are not probable of loss is required. Accordingly, if rate
recovery of generation-related costs does not continue to be probable,
whether due to competition or regulatory action, regulatory accounting
standards may no longer apply to Edison's generation operations and the
$1.2 billion ($700 million after-tax) in recorded generation-related
regulatory assets would be a non-cash charge against earnings.
Additionally, Edison may have write-offs associated with its potential
transition costs if all or a portion of these costs are not recovered
through a CTC or other mechanism. Until the CPUC issues a final policy
decision specifying definitive procedures to identify, value, calculate,
allocate and recover transition costs, Edison cannot predict the effect,
if any, on its results of operations.
page 30
<PAGE>
CPUC-MANDATED POWER CONTRACTS
In 1994, the CPUC ordered the California utilities to proceed with an
energy auction to solicit bids for new contracts with unregulated power
producers. This decision would have forced Edison to purchase 686 MW of
new power at fixed prices starting in 1997, costing Edison customers $14
billion over the lives of the contracts. Edison had requested the CPUC
to reconsider its decision as it has no need for additional generating
capacity until at least 2005. Furthermore, Edison believes the contracts
would increase customer rates and the decision is inconsistent with the
CPUC's restructuring goal to ultimately lower rates. Edison negotiated
agreements, at substantially lower costs than those mandated by auction,
with seven unregulated power producers, representing 627 MW of the 686 MW
mandated. These agreements, which are subject to CPUC approval, would
save Edison customers about 80% of anticipated overpayments compared with
the mandated contracts. In January 1995, Edison appealed the CPUC
decision to the FERC. In February 1995, the FERC ruled that the CPUC
violated the federal Public Utility Regulatory Policies Act and FERC
regulations because the CPUC did not consider all potential sources of
capacity in reaching its avoided cost determination. On July 5, 1995, the
CPUC issued a ruling supporting resolution of the energy auction through
negotiated settlements and set criteria to be used to evaluate the
settlements. Edison is currently evaluating these criteria to determine
the impact on its existing settlement agreements and ongoing settlement
negotiations.
ENVIRONMENTAL PROTECTION
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. Unless there is a probable amount, Edison records
the lower end of this reasonably likely range of costs (see Note 10 to
Consolidated Financial Statements).
At September 30, 1995, Edison's recorded estimated minimum liability to
remediate its 58 identified sites was $114 million, compared with $74
million at September 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.
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 this remaining 10%, with the opportunity
to recover these costs through insurance and other third-party recoveries.
Edison has settled insurance claims with several carriers, and is
continuing to pursue additional recovery. Costs incurred at Edison's
remaining 34 sites are expected to be recovered through customer rates.
<page 31>
Edison has filed a request with the CPUC to add 11 of these sites ($12
million) to the incentive mechanism. Edison has recorded regulatory
assets of $104 million for its estimated minimum environmental-cleanup
costs expected to be recovered through customer rates.
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.
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 September 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)
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 the incentive mechanism (discussed below).
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.
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 the 1995-1999 period, mainly for aesthetics treatment,
including undergrounding certain transmission and distribution lines.
The possibility that exposure to electric and magnetic fields (EMF)
emanating from power lines, household appliances and other electric
sources may result in adverse health effects is receiving increased
attention. The scientific community has not yet reached a consensus on
the nature of any health effects of EMF. However, the CPUC has issued a
decision which provides for a rate-recoverable research and public
education program conducted by California electric utilities, and
authorizes these utilities to take no-cost or low-cost steps to reduce EMF
in new electric facilities. Edison is unable to predict when or if the
scientific community will be able to reach a consensus on any health
effects of EMF, or the effect that such a consensus, if reached, could
have on future electric operations.
page 32
<PAGE>
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Qualified Facilities ("QF") Litigation
On May 20, 1993, four geothermal QFs filed a lawsuit against Edison in Los
Angeles County Superior Court, claiming that Edison underpaid, and
continues to underpay, the plaintiffs for energy. Edison denied the
allegations in its response to the complaint. The action was brought on
behalf of Vulcan/BN Geothermal Power Company, Elmore L.P., Del Ranch L.P.,
and Leathers L.P., each of which is partially owned by a subsidiary of
Mission Energy Company (a subsidiary of SCEcorp). In October 1994,
plaintiffs submitted an amended complaint to the court to add causes of
action for unfair competition and restraint of trade. The plaintiffs
alleged that the underpayments totaled at least $21,000,000 as of the
filing of the amended complaint. In other court filings, plaintiffs
contend that the total amount of additional contract payments expected to
be owing through the end of the contract term is approximately
$60,000,000. As a result of motion practice, the plaintiffs have recently
filed a fourth amended complaint which includes all of the previous claims
except for the alleged restraint of trade. In addition to seeking
compensatory damages and declaratory relief, the fourth amended complaint
also seeks unspecified punitive damages and an injunction to enjoin Edison
from "future" unfair competition. Trial on the fourth amended complaint
is set for March 13, 1996. The materiality of a judgment in favor of the
plaintiffs would be largely dependent on the extent to which additional
payments resulting from such a judgment are recoverable through Edison's
Energy Cost Adjustment Clause ("ECAC").
Between January 1994 and October 1994, Edison was named as a defendant in
a series of eight lawsuits brought by independent power producers of wind
generation. Seven of the lawsuits were filed in Los Angeles County
Superior Court and one was filed in Kern County Superior Court. The
lawsuits allege Edison incorrectly interpreted contracts with the
plaintiffs by limiting fixed energy payments to a single 10-year period
rather than beginning a new 10-year period of fixed energy payments for
each stage of development. In its responses to the complaints, Edison
denied the plaintiffs' allegations. In each of the lawsuits, the
plaintiffs seek declaratory relief regarding the proper interpretation of
the contracts. Plaintiffs allege a combined total of approximately
$189,000,000 in damages, which includes consequential damages claimed in
seven of the eight lawsuits. On March 1, 1995, the court in the lead Los
Angeles County Superior Court case granted the plaintiffs' motion seeking
summary adjudication that the contract language in question is not
reasonably susceptible to Edison's position that there is only a single,
10-year period of fixed payments. On April 5, 1995, Edison filed a
petition seeking writ review of the March 1, 1995, ruling in the
California Court of Appeal. On May 3, 1995, the Court of Appeal issued
an Order to Show Cause why the March 1 ruling should not be vacated. The
matter was heard August 3, 1995, and on August 9, 1995, the Court of
Appeal issued its decision vacating the March 1 summary adjudication order
and directing the trial court to issue an order denying the summary
adjudication motion. A pending summary adjudication motion in the Kern
County case has been withdrawn in light of the Court of Appeal decision
and an April 22, 1996, trial date has been set in that case. In March
1995, an eighth lawsuit was filed in the Los Angeles County Superior Court
raising claims similar to those alleged in the first seven cases in that
court. Edison has responded to the complaint in the new lawsuit by
denying its material allegations. The materiality of final judgments in
favor of the plaintiffs in these cases would be largely dependent on the
extent to which any damages or additional payments which might result from
such judgments would be recoverable through Edison's ECAC.
This matter was previously reported under the heading "QF Litigation" in
Part I, Item 3 of Edison's Annual Report on Form 10-K for the year ended
<page 33>
December 31, 1994, and Part II, Item 1 of the Quarterly Reports on Form
10-Q for the periods ended March 31, 1995, and June 30, 1995.
Electric and Magnetic Fields ("EMF") Litigation
Edison has been served with two lawsuits, both of which allege, among
other things, that certain plaintiffs developed cancer as a result of EMF
emitted from Edison facilities in an office building. The lawsuits, filed
in Orange County Superior Court and served on Edison in June 1994 and
January 1995, request compensatory and punitive damages. Although no
specific damage amounts are alleged in the complaints, in subsequent court
filings, plaintiffs estimated general and compensatory damages of
$8,000,000 and $13,500,000, plus unspecified punitive damages. The same
co-defendant in both actions has filed cross-complaints against the other
co-defendants, including Edison, requesting indemnification and
declaratory relief concerning the rights and responsibilities of the
parties. The case served in June 1994 is set to go to trial on January
8, 1996. The case served in January 1995 is proceeding toward trial but
a trial date has not yet been set.
A third case was filed in Orange County Superior Court and served on
Edison in March 1995. The complaint seeks compensatory and punitive
damages. The plaintiff alleges, among other things, that he developed
cancer as a result of EMF emitted from Edison facilities which he alleges
were not constructed in accordance with CPUC standards. No specific
damage amounts are alleged in the complaint but supplemental documentation
prepared by the plaintiff indicates that plaintiff will allege
compensatory damages of approximately $5,500,000, plus unspecified
punitive damages. This case is set to go to trial on May 20, 1996.
Edison believes that there is no proven scientific basis for the
allegation that EMF are hazardous to health and, therefore, believes that
the EMF lawsuits described above are without merit.
These matters were previously reported under the heading "Environmental
Litigation" in Part I, Item 3 of Edison's Annual Report on Form 10-K for
the year ended December 31, 1994, and Part II, Item 1 of the Quarterly
Reports on Form 10-Q for the periods ended March 31, 1995, and June 30,
1995.
San Onofre Personal Injury Litigation
An engineer for two contractors providing services for San Onofre has been
diagnosed with chronic myelogenous leukemia. On July 12, 1994, the
engineer and his wife sued Edison, San Diego Gas and Electric Company
("SDG&E") and Combustion Engineering, the manufacturer of the fuel rods
for the plant, in the United States District Court for the Southern
District of California. The plaintiffs alleged that the engineer's
illness resulted from contact with radioactive fuel particles released
from failed fuel rods. Plant records showed that the engineer's exposure
to radiation was well below Nuclear Regulatory Commission ("NRC") safety
levels. In the complaint, plaintiffs sought unspecified compensatory and
punitive damages. The trial began August 3, 1995, and on October 12,
1995, an eight member jury unanimously decided that radiation exposure at
San Onofre was not the cause of the leukemia. On October 31, 1995,
plaintiffs filed a motion for new trial.
An Edison engineer employed at San Onofre died in 1991 from cancer of the
abdomen. On February 6, 1995, his children sued Edison, SDG&E and
Combustion Engineering in the United States District Court for the
Southern District of California. The plaintiffs allege that the
engineer's illness resulted from, and was aggravated by, exposure to
radiation at San Onofre, including contact with radioactive fuel
particles. Plant records show that the engineer's exposure to radiation
was well below NRC safety levels. In the complaint, plaintiffs sought
unspecified compensatory and punitive damages.
<page 34>
On April 3, 1995, the Court granted the defendants' motion to dismiss 14
of plaintiffs' 15 claims. Punitive damages are not available under the
remaining claim. Edison's April 20, 1995, answer to the complaint denied
all material allegations. On October 10, 1995, the Court ruled in favor
of plaintiffs request to include the Institute of Nuclear Power Operations
(an organization dedicated to achieving excellence in nuclear power
operations) as a defendant in the suit. The trial is set for October 1,
1996.
These matters were previously reported under the heading "San Onofre
Personal Injury Litigation" in Part I, Item 3 of Edison's Annual Report
on Form 10-K for the year ended December 31, 1994, and Part II, Item 1 of
the Quarterly Reports on Form 10-Q for the periods ended March 31, 1995,
and June 30, 1995.
On July 5, 1995, a former Edison reactor operator employed at San Onofre
and his wife sued Edison, SDG&E, Combustion Engineering and the Institute
of Nuclear Power Operations in the U.S. District Court for the Southern
District of California. Plaintiffs allege the former employee's acute
myelogenous leukemia resulted from, and was aggravated by, exposure to
radiation at San Onofre, including contact with radioactive fuel
particles. The former employee subsequently died from his illness.
Plaintiffs seek unspecified compensatory and punitive damages. Edison
intends to deny the plaintiffs' material allegations. Plaintiffs' counsel
has indicated that the complaint will be amended to allege wrongful death.
This matter was previously reported under the heading "San Onofre Personal
Injury Litigation" in Part II, Item 1 of the Quarterly Report on Form 10-
Q for the period ended June 30, 1995.
On August 31, 1995, the family of a former worker for a contractor at San
Onofre, and later a temporary and then a permanent Edison employee at San
Onofre, sued Edison, SDG&E, Combustion Engineering and the Institute of
Nuclear Power Operations in the U.S. District Court for the Southern
District of California. Plaintiffs allege the former employee's acute
myelogenous leukemia, which resulted in his death in 1994, resulted from,
and was aggravated by, exposure to radiation at San Onofre, including
contact with radioactive fuel particles. Plaintiffs seek unspecified
compensatory and punitive damages. Edison intends to deny the plaintiffs'
material allegations.
Employment Discrimination Litigation
On September 21, 1994, nine African-American employees filed a lawsuit
against SCEcorp and Edison on behalf of an alleged class of African-
American employees, alleging racial discrimination in job advancement,
pay, training and evaluation. The lawsuit was filed in the United States
District Court for the Central District of California. The plaintiffs
seek injunctive relief, as well as an unspecified amount of compensatory
and punitive damages, attorneys' fees, costs and interest. SCEcorp and
Edison have responded by denying the material allegations of the complaint
and asserting several affirmative defenses. The Court has ordered that
plaintiffs file their motion for class certification no later than
December 6, 1995, and that the hearing on that motion be held on March 4,
1996.
This matter was previously reported under the heading "Employment
Discrimination Litigation" in Part I, Item 3 of Edison's Annual Report on
Form 10-K for the year ended December 31, 1994, and the Quarterly Reports
on Form 10-Q for the periods ended March 31, 1995, and June 30, 1995.
page 35
<PAGE>
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:
August 15, 1995 -- Item 5--Other Events--
Proposed Restructuring of
California Utility Industry
September 20, 1995 -- Item 5--Other Events--
Industry Restructuring
Proposed General Rate
Case Decision
page 36
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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
November 9, 1995
<page 37>
PAGE
<PAGE>
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 September 30, 1995, of Southern California
Edison Company into 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
November 9, 1995
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
Edison Financial Data Schedule -- Exhibit 27
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1995
<BOOK-VALUE> PER-BOOK
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<OTHER-PROPERTY-AND-INVEST> 1,318,264
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<TOTAL-DEFERRED-CHARGES> 2,727,397
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 18,722,675
<COMMON> 2,168,054
<CAPITAL-SURPLUS-PAID-IN> 177,351
<RETAINED-EARNINGS> 2,794,832
<TOTAL-COMMON-STOCKHOLDERS-EQ> 5,140,237
275,000
283,755
<LONG-TERM-DEBT-NET> 5,225,926
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0
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<GROSS-OPERATING-REVENUE> 5,969,553
<INCOME-TAX-EXPENSE> 435,832
<OTHER-OPERATING-EXPENSES> 4,630,433
<TOTAL-OPERATING-EXPENSES> 5,066,265
<OPERATING-INCOME-LOSS> 903,288
<OTHER-INCOME-NET> (16,306)
<INCOME-BEFORE-INTEREST-EXPEN> 886,982
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28,165
<EARNINGS-AVAILABLE-FOR-COMM> 521,799
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