PAGE
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1996
---------------------------------------
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------------- -----------------
Commission File Number 1-2313
SOUTHERN CALIFORNIA EDISON COMPANY
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-1240335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2244 Walnut Grove Avenue
(P.O. Box 800)
Rosemead, California
(Address of principal 91770
executive offices) (Zip Code)
818-302-1212
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at August 8, 1996
- -------------------------- -----------------------------
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, Six and
Twelve Months Ended June 30, 1996, and 1995 3
Consolidated Balance Sheets--June 30, 1996,
December 31, 1995, and June 30, 1995 4
Consolidated Statements of Cash Flows--
Three, Six and Twelve Months Ended
June 30, 1996, and 1995 6
Consolidated Statements of Retained Earnings--
Three, Six and Twelve Months Ended
June 30, 1996, and 1995 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 27
Part II. Other Information:
Item 1. Legal Proceedings 37
Item 6. Exhibits and Reports on Form 8-K 41
PAGE
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Southern California Edison Company:
We have audited the accompanying consolidated balance sheets of Southern
California Edison Company (SCE, a California corporation) and its
subsidiaries as of June 30, 1996, December 31, 1995, and June 30, 1995,
and the related consolidated statements of income, retained earnings and
cash flows for each of the three-, six- and twelve-month periods ended
June 30, 1996, and 1995. These financial statements are the
responsibility of SCE'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 SCE and its
subsidiaries as of June 30, 1996, December 31, 1995, and June 30, 1995,
and the results of their operations and their cash flows for each of the
three-, six- and twelve-month periods ended June 30, 1996, and 1995, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
August 2, 1996
page 2
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
In thousands
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
----------------------- ------------------------- ------------------------
1996 1995 1996 1995 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue $1,611,276 $1,737,894 $3,371,408 $3,459,677 $7,784,447 $7,835,103
---------- ---------- ---------- ---------- ---------- ----------
Fuel 129,663 120,566 241,354 267,538 588,770 733,076
Purchased power 560,742 549,730 1,088,174 1,036,822 2,633,230 2,572,851
Provisions for regulatory
adjustment clauses--net (201,506) 16,693 (103,682) 45,454 80,607 139,665
Other operating expenses 340,658 302,820 613,285 586,131 1,253,684 1,282,549
Maintenance 67,030 84,254 150,689 181,744 325,639 340,185
Depreciation and decommissioning 274,549 239,380 516,887 469,332 1,001,695 908,789
Income taxes 133,514 111,807 241,959 234,475 567,177 530,602
Property and other taxes 49,058 51,327 102,565 104,135 198,667 203,120
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses 1,353,708 1,476,577 2,851,231 2,925,631 6,649,469 6,710,837
---------- ---------- ---------- ---------- ---------- ----------
Operating income 257,568 261,317 520,177 534,046 1,134,978 1,124,266
---------- ---------- ---------- ---------- ---------- ----------
Provision for rate phase-in plan (18,867) (28,090) (47,945) (57,865) (112,313) (130,235)
Allowance for equity funds
used during construction 3,066 4,999 7,468 10,523 16,026 17,382
Interest income 7,431 9,579 17,635 17,785 37,495 34,479
Other nonoperating income
(deductions)--net (8,186) 13,970 4,743 17,858 32,533 57,538
---------- ---------- ---------- ---------- ---------- ----------
Total other income
(deductions)--net (16,556) 458 (18,099) (11,699) (26,259) (20,836)
---------- ---------- ---------- ---------- ---------- ----------
Income before interest expense 241,012 261,775 502,078 522,347 1,108,719 1,103,430
---------- ---------- ---------- ---------- ---------- ----------
Interest on long-term debt 94,158 96,631 191,866 192,093 384,959 383,502
Other interest expense 17,635 19,491 36,732 40,620 76,242 71,510
Allowance for borrowed funds
used during construction (1,927) (3,796) (4,695) (7,990) (11,193) (14,626)
Capitalized interest (95) (436) (168) (950) (749) (1,069)
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense--net 109,771 111,890 223,735 223,773 449,259 439,317
---------- ---------- ---------- ---------- ---------- ----------
Net income 131,241 149,885 278,343 298,574 659,460 664,113
Dividends on preferred stock 8,599 9,546 17,197 19,566 34,395 39,606
---------- ---------- ---------- ---------- ---------- ----------
Earnings available for
common stock $ 122,642 $ 140,339 $ 261,146 $ 279,008 $ 625,065 $ 624,507
========== ========== ========== ========== ========== ==========
</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>
June 30, December 31, June 30,
1996 1995 1995
-------------- ------------ --------------
ASSETS
<S> <C> <C> <C>
Utility plant, at original cost $20,120,028 $19,850,179 $19,455,895
Less--accumulated provision for depreciation
and decommissioning 8,905,410 8,569,265 8,129,802
----------- ----------- -----------
11,214,618 11,280,914 11,326,093
Construction work in progress 644,791 727,865 832,665
Nuclear fuel, at amortized cost 124,621 139,411 124,559
----------- ----------- -----------
Total utility plant 11,984,030 12,148,190 12,283,317
----------- ----------- -----------
Nonutility property--less accumulated provision
for depreciation of $26,241, $25,454 and $31,815
at respective dates 88,606 70,191 79,284
Nuclear decommissioning trusts 1,342,500 1,260,095 1,090,764
Other investments 84,189 65,963 63,299
----------- ----------- -----------
Total other property and investments 1,515,295 1,396,249 1,233,347
----------- ----------- -----------
Cash and equivalents 515,045 261,767 479,600
Receivables, including unbilled revenue, less
allowances of $22,550, $24,139 and $24,453 for
uncollectible accounts at respective dates 654,055 911,963 873,342
Fuel inventory 105,821 114,357 127,738
Materials and supplies, at average cost 151,253 151,180 161,644
Accumulated deferred income taxes--net 341,224 476,725 326,711
Prepayments and other current assets 29,485 114,289 11,920
----------- ----------- -----------
Total current assets 1,796,883 2,030,281 1,980,955
----------- ----------- -----------
Unamortized debt issuance and reacquisition
expense 362,633 350,563 349,282
Rate phase-in plan 83,709 129,714 189,465
Unamortized nuclear plant--net 16,770 67,185 119,808
Income tax-related deferred charges 1,754,879 1,723,605 1,814,766
Other deferred charges 319,849 309,328 351,718
----------- ----------- -----------
Total deferred charges 2,537,840 2,580,395 2,825,039
----------- ----------- -----------
Total assets $17,834,048 $18,155,115 $18,322,658
=========== =========== ===========
</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>
June 30, December 31, June 30,
1996 1995 1995
----------- ------------ -----------
CAPITALIZATION AND LIABILITIES
Common shareholder's equity:
<S> <C> <C> <C>
Common stock (434,888,104 shares outstanding
at each date) $ 2,168,054 $ 2,168,054 $ 2,168,054
Additional paid-in capital and other 227,062 208,683 202,096
Retained earnings 2,680,388 2,780,058 2,688,402
----------- ----------- -----------
5,075,504 5,156,795 5,058,552
Preferred stock:
Not subject to mandatory redemption 283,755 283,755 283,755
Subject to mandatory redemption 275,000 275,000 275,000
Long-term debt 5,030,731 5,215,117 5,393,037
----------- ----------- -----------
Total capitalization 10,664,990 10,930,667 11,010,344
----------- ----------- -----------
Other long-term liabilities 333,907 344,192 339,017
----------- ----------- -----------
Current portion of long-term debt 201,375 1,375 1,275
Short-term debt 392,340 359,508 604,333
Accounts payable 336,004 346,258 286,641
Accrued taxes 468,912 550,384 563,409
Accrued interest 101,999 86,494 107,496
Dividends payable 112,320 138,334 139,011
Regulatory balancing accounts--net 226,828 337,867 113,613
Deferred unbilled revenue and other current liabilities 756,491 778,476 791,764
----------- ----------- -----------
Total current liabilities 2,596,269 2,598,696 2,607,542
----------- ----------- -----------
Accumulated deferred income taxes--net 3,261,382 3,310,322 3,390,083
Accumulated deferred investment tax credits 358,177 374,142 386,902
Customer advances and other deferred credits 619,323 597,096 588,770
----------- ----------- -----------
Total deferred credits 4,238,882 4,281,560 4,365,755
----------- ----------- -----------
Commitments and contingencies
(Notes 2, 8, 9 and 10)
Total capitalization and liabilities $17,834,048 $18,155,115 $18,322,658
=========== =========== ===========
</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 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
--------------------- --------------------- ------------------------
1996 1995 1996 1995 1996 1995
--------- --------- --------- --------- ---------- ----------
Cash flows from operating activities:
<S> <C> <C> <C> <C> <C> <C>
Net income $ 131,241 $ 149,885 $ 278,343 $ 298,574 $ 659,460 $ 664,113
Adjustments for non-cash items:
Depreciation and
decommissioning 274,549 239,380 516,887 469,332 1,001,695 908,789
Amortization 25,701 9,738 53,589 21,799 99,854 73,807
Rate phase-in plan 17,660 25,010 46,005 51,265 105,756 116,753
Deferred income taxes and
investment tax credit 71,534 (56,986) 36,525 (62,564) (115,489) (128,888)
Other long-term liabilities (39,895) 4,162 (10,285) 27,954 (5,110) 36,444
Other--net 8,315 (8,882) 5,510 (49,484) 54,731 (41,479)
Changes in working capital:
Receivables 210,287 (71,194) 257,908 28,748 219,287 32,291
Regulatory balancing accounts (212,526) 14,930 (111,039) 57,903 113,215 124,039
Fuel inventory, materials
and supplies 4,515 (5,930) 8,463 (43,344) 32,308 (34,929)
Prepayments and other
current assets 40,955 45,486 84,804 86,858 (17,565) 578
Accrued interest and taxes (190,587) (49,910) (65,967) 68,731 (99,994) 37,654
Accounts payable and other
current liabilities 24,522 41,692 (32,239) (974) 14,090 36,799
--------- --------- --------- --------- ---------- ----------
Net cash provided by
operating activities 366,271 337,381 1,068,504 954,798 2,062,238 1,825,971
--------- --------- --------- --------- ---------- ----------
Cash flows from financing activities:
Long-term debt issued 313 294,506 397,607 393,922 397,514 395,248
Long-term debt repayments -- (16,495) (406,372) (216,495) (612,380) (217,695)
Preferred stock redemptions -- (75,000) -- (75,000) -- (75,000)
Nuclear fuel financing--net 2,980 (1,821) (5,457) 20,189 5,488 2,561
Short-term debt financing--net 85,805 142,790 32,832 (71,181) (211,993) (258,888)
Dividends paid (259,509) (147,798) (404,011) (269,768) (694,128) (520,707)
--------- --------- --------- --------- ---------- ----------
Net cash provided (used)
by financing activities (170,411) 196,182 (385,401) (218,333) (1,115,499) (674,481)
--------- --------- --------- --------- ---------- ----------
Cash flows from investing activities:
Additions to property and plant (156,553) (177,351) (340,922) (373,038) (740,832) (886,601)
Funding of nuclear decommissioning
trusts (36,657) (48,399) (72,632) (72,557) (150,671) (126,725)
Unrealized gains on equity
investments 12,155 4,961 18,315 7,785 24,919 7,881
Other--net (26,926) (6,629) (34,586) (11,147) (44,710) (13,556)
--------- --------- --------- --------- ---------- ----------
Net cash used by
investing activities (207,981) (227,418) (429,825) (448,957) (911,294) (1,019,001)
--------- --------- --------- --------- ---------- ----------
Net increase (decrease) in cash
and equivalents (12,121) 306,145 253,278 287,508 35,445 132,489
Cash and equivalents, beginning
of period 527,166 173,455 261,767 192,092 479,600 347,111
--------- --------- --------- --------- ---------- ----------
Cash and equivalents, end
of period $ 515,045 $ 479,600 $ 515,045 $ 479,600 $ 515,045 $ 479,600
========= ========= ========= ========= ========== ===========
Cash payments for interest and taxes:
Interest $ 95,386 $ 104,200 $ 171,854 $ 176,500 $ 378,169 $ 360,200
Taxes 153,304 111,996 183,351 141,326 734,785 590,130
</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 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
---------------------- ---------------------- ------------------------
1996 1995 1996 1995 1996 1995
---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $2,737,651 $2,685,417 $2,780,058 $2,683,568 $2,688,402 $2,568,970
Net income 131,241 149,885 278,343 298,574 659,460 664,113
Dividends declared on common
stock (179,888) (136,590) (360,799) (273,410) (633,062) (504,311)
Dividends declared on preferred
stock (8,599) (9,546) (17,197) (19,566) (34,395) (39,606)
Reacquired capital stock
expense (17) (764) (17) (764) (17) (764)
---------- ---------- ---------- ---------- ---------- ----------
Balance at end of period $2,680,388 $2,688,402 $2,680,388 $2,688,402 $2,680,388 $2,688,402
========== ========== ========== ========== ========== ==========
</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 (SCE) outstanding common stock is
owned entirely by its parent company, Edison International (formerly
SCEcorp). SCE is a public utility which produces and supplies electric
energy for its 4.2 million customers in Central and Southern California.
The consolidated financial statements include SCE and its subsidiaries.
Intercompany transactions have been eliminated.
SCE's accounting policies conform with generally accepted accounting
principles, including the accounting principles for rate-regulated
enterprises which reflect the rate-making policies of the California
Public Utilities Commission (CPUC) and the Federal Energy Regulatory
Commission (FERC).
SCE currently operates in a highly regulated environment in which it has
an obligation to provide electric service to customers in return for an
exclusive franchise within its service territory. This regulatory
environment is changing, as further discussed in Note 2 to the
Consolidated Financial Statements. Financial statements prepared in
compliance with generally accepted accounting principles require
management to make estimates and assumptions that affect the amounts
reported in the financial statements and disclosure of contingencies.
Actual results could differ from those estimates. Certain significant
estimates related to the CPUC restructuring decision, decommissioning and
contingencies are further discussed in Notes 2, 9 and 10, respectively.
Certain prior-period amounts were reclassified to conform to the June 30,
1996, 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.
Financial Instruments
SCE enters into interest rate swap and cap agreements to manage its
interest rate exposure. Interest rate differentials and premiums for
interest rate caps to be paid or received are recorded as adjustments to
interest expense.
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 ($433 million at June 30,
1996, $235 million at December 31, 1995, and $450 million at June 30,
1995), and time deposits and other investments ($50 million at June 30,
1996, $23 million at December 31, 1995, and $22 million at June 30, 1995)
with maturities of three months or less.
Unrealized gains (losses) on equity investments are recorded as a separate
component of shareholder's equity under "Additional paid-in capital and
other." Unrealized gains and losses on decommissioning trust funds are
recorded in the accumulated provision for decommissioning.
page 8
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All investments are classified as available-for-sale.
Nuclear
The CPUC authorized rate phase-in plans to defer the collection of $200
million in revenue for each unit at Palo Verde Nuclear Generating Station
during the first four years of operation and recover the deferred revenue
(including interest) evenly over the following six years. Unit 1's plan
ended in February 1996; the plans end in September 1996 and January 1998
for Units 2 and 3, respectively.
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, SCE is liable for its share of the
estimated costs to decommission three federal nuclear enrichment
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 August 1992, the CPUC approved a settlement agreement between SCE and
the CPUC's Division of Ratepayer Advocates (DRA) to discontinue operation
of San Onofre Nuclear Generating Station Unit 1 at the end of its then-
current fuel cycle because operation of the unit was no longer cost-
effective. In November 1992, SCE discontinued operation of Unit 1. As
part of the agreement, SCE will recover its remaining investment by August
1996, earning an 8.98% rate of return on rate base.
In October 1994, the CPUC authorized accelerated recovery of SCE's nuclear
plant investments by $75 million per year, with a corresponding
deceleration in recovery of its transmission and distribution assets
through revised depreciation estimates over their remaining useful lives.
In April 1996, the CPUC authorized, and SCE began accelerating, the
recovery of its remaining investment of $2.6 billion in San Onofre Units
2 and 3. The accelerated recovery will continue through December 2003,
earning a 7.35% fixed rate of return (compared to the current 9.55%).
Future operating costs, including nuclear fuel and nuclear fuel financing
costs and incremental capital expenditures at San Onofre Units 2 and 3 are
subject to an incentive pricing plan whereby SCE receives about 4 cents
per kilowatt-hour. Any differences from the incentive price will flow
through to the shareholders. Beginning in 2004, after SCE's investment
is fully recovered, SCE would be required to share equally with ratepayers
the benefits received from operation of the units.
The cost of nuclear fuel for Palo Verde, including disposal, is currently
amortized to fuel expense on the basis of generation. Under CPUC rate-
making procedures in effect for Palo Verde, nuclear-fuel financing costs
are capitalized until the fuel is placed into production.
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.
page 9
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Research, Development and Demonstration (RD&D)
SCE capitalizes RD&D costs that are expected to result in plant
construction. If construction does not occur, these costs are charged to
expense. RD&D expenses are recorded in a balancing account, and any
authorized but unspent RD&D funds at the end of the rate-case cycle are
refunded to customers. RD&D expenses were $5 million, $9 million and $23
million for the three, six and twelve months ended June 30, 1996,
respectively, and $9 million, $15 million and $52 million for the three,
six and twelve months ended June 30, 1995, respectively.
Revenue
Operating revenue includes amounts for services rendered but unbilled at
the end of each period.
Utility Plant
Plant additions, including replacements and betterments, are capitalized.
Such costs include direct material and labor, construction overhead and
an allowance for funds used during construction (AFUDC). AFUDC represents
the estimated cost of debt and equity funds that finance utility-plant
construction. AFUDC is capitalized during plant construction and reported
in current earnings. AFUDC is recovered in rates through depreciation
expense over the useful life of the related asset. Depreciation of
utility plant is computed on a straight-line, remaining-life basis.
Replaced or retired property and removal costs less salvage are charged
to the accumulated provision for depreciation. Depreciation expense
stated as a percent of average original cost of depreciable utility plant
was 4.3%, 4.0% and 3.8% for the three, six and twelve month periods ended
June 30, 1996, respectively, and 3.7%, 3.6% and 3.6% for the three, six
and twelve months ended June 30, 1995, respectively.
Note 2. Regulatory Matters
Performance-Based Ratemaking (PBR)
SCE originally filed for a PBR mechanism in 1993, requesting a revenue-
indexing formula to combine operating expenses and capital-related costs
into a single index to determine most of its revenue (excluding fuel) from
1996-2000. The filing was subsequently divided between transmission and
distribution, and power generation. Hearings concluded on the
transmission and distribution phase in December 1994. The CPUC's
restructuring decision, as further discussed below, requested comments
addressing whether SCE's transmission and distribution PBR proposal should
be amended or reviewed as filed. In January 1996, SCE requested the CPUC
approve its transmission and distribution PBR as filed. On July 3, 1996,
a CPUC administrative law judge (ALJ) issued a proposed decision denying
SCE's application. The ALJ concluded that PBR for SCE's transmission and
distribution systems would be in effect for too short a period to provide
meaningful benefits to SCE's shareholders or ratepayers (assuming the
transfer of transmission to an independent system operator (ISO) under
FERC jurisdiction on January 1, 1998), and that SCE should revise its PBR
proposal to address only distribution following the FERC's order to split
transmission and distribution services. On July 23, 1996, SCE filed
comments rejecting the ALJ's proposal. A final CPUC decision is expected
by year-end 1996. On July 15, 1996, SCE filed a PBR proposal for its
hydroelectric plants and the proposed structure for performance-based
local reliability contracts for fossil-fueled plants. If approved, the
hydro PBR would be in effect for three years and the local reliability
contracts, which are subject to FERC approval, would be in effect for up
page 10
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to three years, both beginning January 1, 1998. A final CPUC decision on
hydro PBR is expected by year-end 1997.
CPUC Restructuring Decision
On December 20, 1995, the CPUC issued its decision on restructuring
California's electric industry, which it had been considering since April
1994. The new market structure would provide competition and customer
choice. The transition to a competitive electric market would begin
January 1, 1998, with all consumers participating by 2003. Key elements
of the decision include:
o Creation of an independent power exchange to manage electric supply
and demand. California's investor-owned utilities would be required
to purchase from and sell to the exchange all of their power during
the transition period, while other generators could voluntarily
participate.
o Creation of an ISO to have operational control of the utilities'
transmission facilities and, therefore, control the scheduling and
dispatch of all electricity on the state's power grid.
o Availability of customer choice through time-of-use rates, direct
customer access to generation providers with transmission arrangements
through the system operator, and customer-arranged "contracts for
differences" to manage price fluctuations from the power exchange.
o Recovery of costs to transition to a competitive market (utility
investments and obligations incurred to serve customers under the
existing framework) through a non-bypassable charge, applied to all
customers, called the competition transition charge (CTC).
o CPUC-established incentives to encourage voluntary divestiture
(through spin-off or sale to an unaffiliated entity) of at least 50%
of utilities' gas-fueled generation to address market power issues.
o PBR for those utility services not subject to competition.
On March 19, 1996, SCE filed a plan outlining how it would propose to
divest 50% of its gas-fueled generation. SCE's plan is contingent on
assurances about transition cost recovery and the resolution of key issues
related to: worker protection measures being in place for utility
employees who could suffer hardship as a result of divestiture; utilities
being permitted full recovery of the transition costs incurred during the
divestiture process; appropriate rate-making measures to cover the
contingency if the completion of the divestiture plan or commencement of
the power exchange is delayed; and prudently incurred costs associated
with fuel supply, and transportation and storage contracts not being
stranded by the divestiture.
On April 29, 1996, SCE, Pacific Gas & Electric Company and San Diego Gas
& Electric Company filed a proposal with the FERC regarding the creation
of the independent power exchange and the ISO. On July 9, 1996, the three
utilities jointly filed an application with the CPUC requesting approval
to establish a restructuring trust which would obtain loans up to $250
million for the development of the ISO and power exchange through January
1, 1998. The loans would be backed by utility guarantees and SCE's share
would be 45%. Once the ISO and power exchange are formed, they will repay
the trust's loans and recover funds from future ISO and power exchange
customers.
page 11
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 15, 1996, SCE filed a proposal with the CPUC related to separating
the costs associated with generation, transmission, distribution, public
goods programs and the CTC. The filing is in response to CPUC and FERC
directives that electric services, such as transmission and distribution,
be functionally separate and available to all customers on a
nondiscriminatory basis without cost-shifting among customers.
Recovery of costs to transition to a competitive market would be
implemented through a non-bypassable CTC. This charge would apply to all
customers who currently use utility services or begin utility service
after this decision is effective. SCE estimates its potential transition
costs through 2025 to be approximately $8.3 billion to $9.1 billion (1996
net present value), based on incurred costs, and forecasts of future costs
and assumed market prices. However, changes in the assumed market prices
could require material revisions to such estimates. The potential
transition costs are comprised of: $5.1 billion from SCE's qualifying
facility contracts, which are the direct result of legislative and
regulatory mandates; and $3.2 billion to $4.0 billion from costs
pertaining to certain generating plants and regulatory commitments
consisting of costs incurred (whose recovery has been deferred by the
CPUC) to provide service to customers. Such commitments include the
recovery of income tax benefits previously flowed-through to customers,
postretirement benefit transition costs, accelerated recovery of San
Onofre (as discussed in Note 1), nuclear decommissioning and certain other
costs. The undepreciated book value of a utility's generation plant will
be calculated on the amount in rate base as of the decision date.
Further, adverse financial consequences could result if an ambiguity in
the CPUC's restructuring decision is not eliminated. The ambiguity
relates to the recovery of capital expenditures made for SCE's fossil
generation units in 1996 and beyond in the calculation of the CTC. SCE
believes that recovery of such capital expenditures is consistent with the
intent of the restructuring decision and filed a petition on March 25,
1996, to clarify the decision. If these efforts at clarification are
unsuccessful, SCE estimates the negative effect on 1996 earnings to be
approximately $50 million (pre-tax), based on SCE's 1996 capital budget
for its fossil generation units.
Because the restructuring of California's electric industry has widespread
impact and the market structure requires the participation and oversight
of the FERC, the CPUC will seek to build a California consensus involving
the legislature, governor, public and municipal utilities, and customers.
Once the consensus is in place, FERC approval will be sought, and together
both agencies would move forward to implement the new market structure.
In addition, the CPUC will prepare an environmental impact report. If the
CPUC's restructuring decision is upheld and implemented as outlined, SCE
would be allowed to recover its CTC (subject to a lower return on equity)
and would continue to apply accounting standards that recognize the
economic effects of rate regulation. The effect of such an outcome would
not be expected to materially affect SCE's results of operations or
financial position during the transition period.
If revisions are made to the CPUC's restructuring decision that result in
SCE no longer meeting the criteria to apply regulatory accounting
standards to its generation operations, SCE may be required to write off
its recorded generation-related regulatory assets. At June 30, 1996,
these amounts totaled $1.3 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. Although depreciation-
related differences could result from applying a regulatory prescribed
depreciation method (straight-line, remaining-life method) rather than a
method that would have been applied absent the regulatory process, SCE
page 12
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
believes that the depreciable lives of its generation-related assets would
not vary significantly from that of an unregulated enterprise, as the CPUC
bases depreciable lives on periodic studies that reflect the physical
useful lives of the assets. SCE also believes that any depreciation-
related differences would be recovered through the CTC.
Additionally, if revisions are made to the CPUC's restructuring decision
that result in all or a portion of the CTC being improbable of recovery,
SCE could have additional write-offs associated with these costs if they
are not recovered through another regulatory mechanism. At this time, SCE
cannot predict when, or if, a consensus on restructuring will be reached,
what revisions will ultimately be made in the CPUC's restructuring plan
in subsequent proceedings or implementation phases, or the effect, after
the transition period, that competition will have on its results of
operations or financial position.
FERC Stranded Cost/Open Access Transmission Decision
On April 24, 1996, the FERC issued its decision on stranded cost recovery
and open access transmission, which it had been considering since March
1995. The decision, which became effective in July 1996, requires all
electric utilities subject to the FERC's jurisdiction to file transmission
tariffs which provide competitors with increased access to transmission
facilities for wholesale transactions and also establishes information
requirements for the transmission utility. The decision also provides
utilities with the recovery of stranded costs, which are prior-service
costs incurred under the current regulatory framework. In addition to
providing recovery of stranded costs associated with existing wholesale
customers, the FERC directed that it would have primary jurisdiction over
the recovery of stranded costs associated with retail-turned-wholesale
customers, such as the formation of a new municipal electric system.
Retail stranded costs resulting from a state-authorized retail direct-
access program are the responsibility of the states and the FERC would
only address recovery of these costs if the state has no authority to do
so. In compliance with the April 1996 FERC decision, SCE filed a revised
open access tariff with the FERC on July 9, 1996. The tariff became
effective as of its filing date.
Mohave Generating Station
A 1994 CPUC decision stated that SCE 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. In December
1995, SCE and the DRA filed a settlement agreement. On July 17, 1996, the
CPUC approved the settlement agreement which will result in a $39 million
(including interest) refund to SCE's customers beginning in August 1996.
This refund has been fully reflected in the financial statements.
Canadian Gas Contracts
In May 1994, SCE filed its testimony in the non-Qualifying Facilities
phase of the 1994 Energy Cost Adjustment Clause proceeding. In May 1995,
the DRA filed its report on the reasonableness of SCE's gas supply costs
for both the 1993 and 1994 record periods. The report recommends a
disallowance of $13.3 million for excessive costs incurred from November
1993 through March 1994 associated with SCE's Canadian gas purchase and
supply contracts. The report requests that the CPUC defer finding SCE's
Canadian supply and transportation agreements reasonable for the duration
of their terms and that the costs under these contracts be reviewed on a
yearly basis. SCE and the DRA have filed several rounds of testimony on
this issue. Hearings are scheduled for late 1996.
page 13
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Palo Verde Rate-making Proposal
In February 1996, SCE filed a proposal with the CPUC requesting a new rate
mechanism for its 15.8% share of the three units at Palo Verde. The
filing was made in compliance with the CPUC's December 20, 1995,
restructuring decision that directed SCE to file a rate-making proposal
similar to the ratemaking approved for San Onofre in the 1995 general rate
case. The proposed rate mechanism would allow SCE to accelerate the
recovery of its share of Palo Verde's sunk cost (forecast to be $1.2
billion as of December 31, 1996), over a seven-year period, beginning
January 1, 1997, and ending in 2003. During the seven-year period, SCE's
return on rate base for Palo Verde's sunk cost would be reduced to 7.35%
from the current 9.55%, and SCE would have the opportunity to recover the
incremental costs of continued operation of Palo Verde at approximately
3.4 cents per kilowatt-hour, provided the Palo Verde units operate at an
average capacity factor of 77%. Hearings are scheduled to begin in August
with a decision expected by year-end 1996.
Note 3. Financial Instruments
Long-Term Debt
California law prohibits SCE from incurring or guaranteeing debt for its
nonutility affiliates.
Almost all SCE properties are subject to a trust indenture lien.
SCE has pledged first and refunding mortgage bonds as security for
borrowed funds obtained from pollution-control bonds issued by government
agencies. SCE uses these proceeds to finance construction of pollution-
control facilities. Bondholders have limited discretion in redeeming
certain pollution-control bonds, and SCE has arranged with securities
dealers to remarket or purchase them if necessary.
Long-term debt maturities and sinking-fund requirements for the five
twelve-month periods following June 30, 1996, are: 1997--$201 million;
1998--$576 million; 1999--$322 million; 2000--$330 million; and 2001--$400
million.
Long-term debt consisted of:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
-------------- ------------ -------------
(In millions)
First and refunding mortgage bonds:
<C> <C> <S><C> <C> <C> <C>
1997--2000 (5.45% to 7.5%) $1,025 $1,025 $1,025
2001--2005 (5.625% to 6.25%) 450 450 450
2017--2026 (6.9% to 8.875%) 1,250 1,637 1,834
Pollution-control bonds:
1999--2027 (5.4% to 7.2% and variable) 1,205 1,205 1,207
Funds held by trustees (2) (2) (2)
Debentures and notes:
1998--2006 (5.6% to 8.25%) 1,195 795 795
Subordinated debentures:
2044 (8-3/8%) 100 100 100
Commercial paper for nuclear fuel 65 70 59
Long-term debt due within one year (201) (1) (1)
Unamortized debt discount--net (56) (64) (74)
------ ------ ------
Total $5,031 $5,215 $5,393
====== ====== ======
</TABLE>
page 14
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Short-Term Debt
SCE has lines of credit it can use at negotiated or bank index rates. At
June 30, 1996, available lines totaled $1.1 billion, with $600 million for
short-term debt and $500 million available for the long-term refinancing
of certain variable-rate pollution-control debt.
Short-term debt consisted of commercial paper used to finance fuel
inventories, balancing account undercollections and general cash
requirements. Commercial paper outstanding at June 30, 1996, December
31, 1995, and June 30, 1995, was $460 million, $433 million and $668
million, respectively. 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 5.4%, 5.8% and 6.1%, at June 30, 1996, December 31,
1995, and June 30, 1995, respectively.
Other Financial Instruments
SCE's risk management policy allows the use of derivative financial
instruments to manage financial exposure on its investments and
fluctuations in interest rates, but prohibits the use of these instruments
for speculative or trading purposes.
Interest rate swaps and caps are used to reduce the potential impact of
interest rate fluctuations on floating rate long-term debt. The interest
rate swap agreement requires the parties to pledge collateral according
to bond rating and market interest rate changes. At June 30, 1996, SCE
had pledged $5 million as collateral due to a decline in market interest
rates. SCE is exposed to credit loss in the event of nonperformance by
counterparties to these agreements, but does not expect the counterparties
to fail to meet their obligations.
For all balance sheet dates presented, SCE had the following derivative
financial instruments:
<TABLE>
<CAPTION>
Category Contract Amount/Terms Purpose
- -------- --------------------- -------
<S> <C> <S>
Interest rate swap $196 million fix interest rate exposure at
due 2008 5.585%
Interest rate cap $30 million fix interest rate exposure at
expires 1997 6% over variable term of the
debt due 2027 debt
</TABLE>
page 15
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair values of financial instruments were:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
-------------------- ------------------- -----------------
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 $1,142 $1,343 $1,069 $1,260 $ 991 $1,091
Equity investments 11 61 9 41 9 34
Financial liabilities:
DOE decommissioning and
decontamination fees 58 46 58 49 62 50
Interest rate swap & cap -- 12 -- 18 -- 13
Long-term debt 5,031 5,100 5,215 5,487 5,393 5,521
Preferred stock subject to
mandatory redemption 275 277 275 288 275 285
</TABLE>
Financial assets are carried at their fair value based on quoted market
prices. Financial liabilities are recorded at cost. Financial
liabilities' fair values were based on: termination costs for the interest
rate swap; brokers' quotes for long-term debt, preferred stock and the
cap; and discounted future cash flows for U.S. Department of Energy (DOE)
decommissioning and decontamination fees. Due to their short maturities,
amounts reported for cash equivalents and short-term debt approximate fair
value.
Gross unrealized holding gains on financial assets were:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
------------- ------------ -------------
(In millions)
Decommissioning trusts:
<S> <C> <C> <C>
Municipal bonds $ 58 $ 52 $ 37
Stocks 103 122 33
U.S. government issues 28 11 17
Short-term and other 12 6 13
---- ---- ----
201 191 100
Equity investments 50 32 25
---- ---- ----
Total $251 $223 $125
==== ==== ====
There were no unrealized holding losses on financial assets for all
periods presented.
Note 4. Equity
The CPUC regulates SCE's capital structure, limiting the dividends it may
pay Edison International. At June 30, 1996, SCE had the capacity to pay
$480 million in additional dividends and continue to maintain its
authorized capital structure.
Authorized common stock is 560 million shares with no par value.
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.
page 16
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Cumulative preferred stock consisted of:
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
---------------------------
Shares Redemption June 30, December 31, June 30,
Outstanding Price 1996 1995 1995
----------- ---------- ------------- ------------ -------------
(In millions)
Not subject to mandatory redemption:
$25 Par value:
<C> <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
---- ---- ----
Total $284 $284 $284
==== ==== ====
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
SCE and its subsidiaries will be included in Edison International's
consolidated federal income tax and combined state franchise tax returns.
Under income tax allocation agreements, each subsidiary calculates its own
tax liability.
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 17
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net accumulated deferred income tax liability were:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
------------- ------------ -------------
(In millions)
Deferred tax assets:
<S> <C> <C> <C>
Property-related $ 256 $ 276 $ 266
Investment tax credits 213 222 229
Regulatory balancing accounts 148 166 102
Other 600 674 582
------ ------ ------
Total $1,217 $1,338 $1,179
------ ------ ------
Deferred tax liabilities:
Property-related $3,630 $3,670 $3,702
Other 507 501 540
------ ------ ------
Total $4,137 $4,171 $4,242
------ ------ ------
Accumulated deferred income taxes--net $2,920 $2,833 $3,063
====== ====== ======
Classification of accumulated deferred income taxes:
Included in deferred credits $3,261 $3,310 $3,390
Included in current assets 341 477 327
</TABLE>
The current and deferred components of income tax expense were:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
----------------- ----------------- ------------------
1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------
(In millions)
Current:
<S> <C> <C> <C> <C> <C> <C>
Federal $ 30 $ 111 $ 120 $ 203 $ 476 $ 466
State 11 41 52 64 154 135
----- ----- ----- ----- ----- -----
41 152 172 267 630 601
----- ----- ----- ----- ----- -----
Deferred--federal and state:
Accrued charges (21) (7) (22) (3) (17) (10)
Depreciation 2 10 (5) 12 4 38
Investment and energy tax credits--net (6) (8) (13) (13) (25) (22)
Nuclear Target Capacity Factor Reward 6 -- 6 -- 6 --
Rate phase-in plan (7) (10) (18) (21) (43) (48)
Regulatory balancing accounts 83 (8) 34 (29) (55) (51)
Retirement of debt (3) (3) (6) (5) (11) (9)
State tax-privilege year (3) (14) 36 20 4 10
Unbilled revenue 46 (17) 48 (22) 63 (9)
Workforce management (21) -- (19) -- (25) --
Other (4) -- (4) (2) (17) (28)
----- ----- ----- ----- ----- -----
72 (57) 37 (63) (116) (129)
----- ----- ----- ----- ----- -----
Total income tax expense $ 113 $ 95 $ 209 $ 204 $ 514 $ 472
===== ===== ===== ===== ===== =====
Classification of income taxes:
Included in operating income $ 134 $ 112 $ 242 $ 234 $ 567 $ 531
Included in other income (21) (17) (33) (30) (53) (59)
</TABLE>
The composite federal and state statutory income tax rate was 41.045% for
all periods presented.
page 18
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The federal statutory income tax rate is reconciled to the effective tax
rate below:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
------------------ ------------------ ------------------
1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
Capitalized software (0.7) (1.0) (0.7) (1.0) (0.7) (1.5)
Depreciation and related timing
differences not deferred 9.0 1.5 5.0 2.1 4.2 3.4
Investment and energy tax credits (2.6) (3.3) (2.6) (2.5) (2.2) (1.9)
State tax--net of federal deduction 7.7 8.1 7.2 5.8 7.1 5.7
Tax rate change -- -- -- 2.1 -- 0.9
Other (2.2) (1.4) (1.0) (0.9) 0.4 --
---- ---- ---- ---- ---- ----
Effective tax rate 46.2% 38.9% 42.9% 40.6% 43.8% 41.6%
==== ==== ==== ==== ==== ====
</TABLE>
Note 6. Employee Benefit Plans
Pension Plan
SCE 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. SCE 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. In June 1996, SCE recorded
a $78 million pension gain from a special voluntary early retirement
program.
The plan's funded status was:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
-------------- ------------- --------------
(In millions)
Actuarial present value of benefit obligation:
<S> <C> <C> <C>
Vested benefits $2,071 $1,696 $1,285
Nonvested benefits 70 210 158
------ ------ ------
Accumulated benefit obligation 2,141 1,906 1,443
Value of projected future compensation levels 300 479 481
------ ------ ------
Projected benefit obligation $2,441 $2,385 $1,924
====== ====== ======
Fair value of plan assets $2,782 $2,620 $2,396
====== ====== ======
Plan assets greater than projected benefit
obligation $ (341) $ (235) $ (472)
Unrecognized net gain 464 326 572
Unrecognized prior service cost (126) (6) (5)
Unrecognized net obligation (17-year amortization) (46) (49) (52)
------ ------ ------
Pension liability (asset) $ (49) $ 36 $ 43
====== ====== ======
Discount rate 8.5% 7.25% 8.5%
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>
page 19
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCE recognizes pension expense calculated under the actuarial method used
for ratemaking.
The components of pension expense were:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
-------------- ---------------- ---------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Service cost for benefits earned $ 16 $ 14 $ 33 $ 28 $ 62 $ 59
Interest cost on projected
benefit obligation 44 39 87 77 166 152
Actual return on plan assets (52) (113) (153) (196) (410) (208)
Net amortization and deferral 2 67 52 105 215 32
---- ----- ---- ----- ----- -----
Pension expense under
accounting standards 10 7 19 14 33 35
Special termination
expense (gain) (78) -- (78) -- (75) 15
Regulatory adjustment--
deferred 4 6 9 11 20 13
---- ----- ---- ----- ----- -----
Net expense (gain)
recognized $(64) $ 13 $(50) $ 25 $ (22) $ 63
==== ===== ==== ===== ==== =====
</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 and dental care, life insurance and
other benefits. Health and dental care benefits are subject to
deductibles, copayment provisions and other limitations.
In 1993, SCE 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. SCE is
amortizing its obligation related to prior service over 20 years.
SCE funds these benefits (by contributions to independent trusts) up to
tax-deductible limits, in accordance with rate-making practices. In June
1996, SCE recorded a $49 million special termination expense for post-
retirement benefits other than pensions, due to a special voluntary early
retirement program. Any difference between recognized expense and amounts
authorized for rate recovery is not expected to be material (except for
the above impact) and will be charged to earnings.
Trust assets are primarily common stocks, corporate and government bonds,
and short-term investments.
page 20
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of postretirement benefits other than pensions expense
were:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
-------------- ---------------- ---------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Service cost for benefits earned $ 9 $ 8 $ 19 $ 16 $ 37 $ 28
Interest cost on benefit
obligation 19 18 39 37 79 74
Actual return on plan assets (9) (7) (19) (13) (33) (22)
Amortization of loss 2 -- 4 -- 5 --
Amortization of transition
obligation 7 9 13 17 23 35
---- --- ---- ---- ---- ----
Net expense 28 28 56 57 111 115
Special termination expense 49 -- 49 -- 49 --
---- --- ---- ---- ---- ----
Total expense $ 77 $28 $105 $ 57 $160 $115
==== === ==== ==== ==== ====
</TABLE>
The funded status of these benefits is reconciled to the recorded
liability below:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
------------- ------------- -------------
(In millions)
Actuarial present value of benefit obligation:
<S> <C> <C> <C>
Retirees $ 573 $ 402 $ 530
Employees eligible to retire 47 103 49
Other employees 408 556 322
------ ------ -----
Accumulated benefit obligation $1,028 $1,061 $ 901
====== ====== =====
Fair value of plan assets $ 515 $ 400 $ 351
====== ====== =====
Plan assets less than accumulated benefit
obligation $ 513 $ 661 $550
Unrecognized transition obligation (443) (457) (605)
Unrecognized prior service cost (15) -- --
Unrecognized net loss (gain) (5) (203) 50
------ ------ -----
Recorded liability (asset) $ 50 $ 1 $ (5)
====== ====== =====
Discount rate 8.5% 7.5% 8.75%
Expected long-term rate of return on assets 8.5% 8.5% 8.5%
</TABLE>
The assumed rate of future increases in the per-capita cost of health care
benefits is 10% for 1996, gradually decreasing to 5% for 2003 and beyond.
Increasing the health care cost trend rate by one percentage point would
increase the accumulated obligation as of June 30, 1996, by $166 million
and annual aggregate service and interest costs by $20 million.
page 21
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Savings Plan
SCE has a 401(k) stock plan designed to supplement employees' retirement
income. The plan received employer contributions of $5 million, $10
million and $19 million for the three, six and twelve months ended June
30, 1996, respectively, and $5 million, $10 million and $21 million for
the three, six and twelve months ended June 30, 1995, respectively.
Note 7. Jointly Owned Utility Projects
SCE owns an interest in several generating stations and transmission
systems for which each participant provides its own financing. SCE's
share of expenses for each project is included in the consolidated
statements of income.
The investment in each project, as included in the consolidated balance
sheet as of June 30, 1996, was:
<TABLE>
<CAPTION>
Plant in Accumulated Under Ownership
Service Depreciation Construction Interest
-------- ------------ ------------ ---------
(In millions)
Transmission systems:
<S> <C> <C> <C>
Eldorado $ 29 $ 8 $ -- 60%
Pacific Intertie 225 71 12 50
Generating stations:
Four Corners Units 4 and 5 (coal) 460 234 3 48
Mohave (coal) 293 143 13 56
Palo Verde (nuclear) 1,585 391 13 16
San Onofre (nuclear) 4,185 1,674 11 75
------ ------ ----
Total $6,777 $2,521 $ 52
====== ====== ====
</TABLE>
Note 8. Leases
SCE has operating leases, primarily for vehicles, with varying terms,
provisions and expiration dates.
Estimated remaining commitments for noncancelable leases at June 30, 1996,
were:
<TABLE>
<CAPTION>
Year ended December 31, (In millions)
<C> <C>
1996 $10
1997 18
1998 15
1999 11
2000 8
Thereafter 13
---
Total $75
===
</TABLE>
Note 9. Commitments
Nuclear Decommissioning
SCE 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 $2.0 billion in current-year dollars, based on site-specific studies
performed in 1993 for San Onofre and 1992 for Palo Verde. Changes in the
estimated costs, timing of decommissioning, or the assumptions underlying
page 22
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
these estimates could cause material revisions to the estimated total cost
to decommission in the near term. Decommissioning is scheduled to begin
in 2013 at San Onofre and 2024 at Palo Verde. San Onofre Unit 1, which
shut down in 1992, is expected to 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 $36 million, $73 million and $151 million for the three, six and
twelve months ended June 30, 1996, respectively, and $40 million, $73
million and $127 million for the three, six and twelve months ended June
30, 1995, respectively. The accumulated provision for decommissioning was
$884 million at June 30, 1996, $823 million at December 31, 1995, and $757
million at June 30, 1995. The estimated costs to decommission San Onofre
Unit 1 ($263 million) are recorded as a liability.
Decommissioning funds collected in rates are placed in independent trusts,
which, together with accumulated earnings, will be utilized solely for
decommissioning.
Trust investments include:
<TABLE>
<CAPTION>
Maturity June 30, December 31, June 30,
Dates 1996 1995 1995
---------- ------------- --------------- -------------
(In millions)
<S> <C> <C> <C> <C>
Municipal bonds 1998-2022 $ 366 $ 348 $ 328
Stocks -- 525 390 365
U.S. government issues 1997-2026 180 145 164
Short-term and other 1996-2004 71 186 134
------ ------ ------
Total $1,142 $1,069 $ 991
====== ====== ======
</TABLE>
Trust fund earnings (based on specific identification) increase the trust
fund balance and the accumulated provision for decommissioning. Net
earnings were $11 million, $23 million and $51 million for the three, six
and twelve months ended June 30, 1996, respectively, and $15 million, $23
million and $29 million for the three, six and twelve months ended June
30, 1995, respectively. Proceeds from the sale of securities (which are
reinvested) were $219 million, $587 million and $1.1 billion for the
three, six and twelve months ended June 30, 1996, respectively, and $267
million, $498 million and $1.2 billion for the three, six and twelve
months ended June 30, 1995, respectively. Approximately 88% of the trust
fund contributions were tax-deductible.
The Financial Accounting Standards Board has issued an exposure draft
related to accounting practices for removal costs, including
decommissioning of nuclear power plants. The exposure draft would require
SCE to report its estimated decommissioning costs as a liability, rather
than recognizing these costs over the term of each facility's operating
license (current industry practice). SCE does not believe that the
changes proposed in the exposure draft 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
SCE has fuel supply contracts which require payment only if the fuel is
made available for purchase.
page 23
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCE 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 SCE. There are no requirements to make debt-service
payments.
SCE 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. SCE's
minimum commitment under both contracts is approximately $225 million
through 2017.
Certain commitments for the years 1996 through 2000 are estimated below:
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
------ ------ ------ ------ ------
(In millions)
<S> <C> <C> <C> <C> <C>
Projected construction expenditures $ 751 $ 729 $ 612 $ 658 $ 654
Fuel supply contracts 282 216 236 228 246
Purchased-power capacity payments 725 714 722 724 726
Unconditional purchase obligations 12 12 12 12 12
</TABLE>
Note 10. Contingencies
In addition to the matters disclosed in these notes, SCE is involved in
legal, tax and regulatory proceedings before various courts and
governmental agencies regarding matters arising in the ordinary course of
business. SCE believes the outcome of these proceedings will not
materially affect its results of operations or liquidity.
Environmental Protection
SCE 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.
SCE records its environmental liabilities when site assessments and/or
remedial actions are probable and a range of reasonably likely cleanup
costs can be estimated. SCE 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, SCE records the lower end of this reasonably likely range of costs
(classified as other long-term liabilities at undiscounted amounts).
While SCE 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.
page 24
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCE's recorded estimated minimum liability to remediate its 58 identified
sites was $114 million at June 30, 1996. The ultimate costs to clean up
SCE'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. SCE 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 SCE
among a range of reasonably possible outcomes.
The CPUC allows SCE to recover environmental-cleanup costs at 24 of its
sites, representing $95 million of its recorded liability, through an
incentive mechanism (SCE may request to include additional sites). Under
this mechanism, SCE will recover 90% of cleanup costs through customer
rates; shareholders fund the remaining 10%, with the opportunity to
recover these costs from insurance carriers and other third parties. SCE
has settled insurance claims with most of its carriers, and is continuing
to pursue additional recovery. Costs incurred at the remaining 34 sites
are expected to be recovered through customer rates. SCE has filed a
request with the CPUC to add 11 of these sites (the estimated minimum
liability is $6 million) to the incentive mechanism. SCE has recorded a
regulatory asset of $104 million for its estimated minimum environmental-
cleanup costs expected to be recovered through customer rates.
SCE'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 SCE may be held responsible
for contributing to any costs incurred for remediating these sites. Thus,
no reasonable estimate of cleanup costs can now be made for these sites.
SCE expects to clean up its identified sites over a period of up to 30
years. Remediation costs in each of the next several years are expected
to range from $4 million to $8 million. Recorded costs for the twelve
months ended June 30, 1996, were $4 million.
Based on currently available information, SCE believes it unlikely that
it will incur amounts in excess of the upper limit of the estimated range
and, based upon the CPUC's regulatory treatment of environmental-cleanup
costs, SCE 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. SCE and other owners of San Onofre and Palo Verde have purchased
the maximum private primary insurance available ($200 million). The
balance is covered by the industry's retrospective rating plan that uses
deferred premium charges to every reactor licensee if a nuclear incident
at any licensed reactor in the U.S. results in claims and/or costs which
exceed the primary insurance at that plant site. Federal regulations
require this secondary level of financial protection. The Nuclear
Regulatory Commission exempted San Onofre Unit 1 from this secondary
page 25
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, SCE 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. If the public
liability limit above is insufficient, federal regulations may impose
further revenue-raising measures to pay claims, including a possible
additional assessment on all licensed reactor operators.
Property damage insurance covers losses up to $500 million, including
decontamination costs, at San Onofre and Palo Verde. Decontamination
liability and property damage coverage exceeding the primary $500 million
has also been purchased in amounts greater than federal requirements.
Additional insurance covers part of replacement power expenses during an
accident-related nuclear unit outage. These policies are issued primarily
by mutual insurance companies owned by utilities with nuclear facilities.
If losses at any nuclear facility covered by the arrangement were to
exceed the accumulated funds for these insurance programs, SCE could be
assessed retrospective premium adjustments of up to $42 million per year.
Insurance premiums are charged to operating expense.
page 26
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
In the following Management's Discussion and Analysis of Results of
Operations and Financial Condition and elsewhere in this quarterly report,
the words "estimates," "expects," "anticipates," "believes," and other
similar expressions, are intended to identify forward-looking information
that involves risks and uncertainties. Actual results or outcomes could
differ materially as a result of such important factors as the outcome of
state and federal regulatory proceedings affecting the restructuring
of the electric utility industry, the impacts of new laws and regulations
relating to restructuring and other matters, the effects of increased
competition in the electric utility business, and changes in prices of
electricity and costs for fuel.
RESULTS OF OPERATIONS
Earnings
Southern California Edison Company's (SCE) earnings for the three-, six-
and twelve-month periods ended June 30, 1996, were $123 million, $261
million and $625 million, respectively, compared with $140 million, $279
million and $625 million for the same periods in 1995. Excluding after-
tax special charges of $18 million in the fourth quarter of 1994, $4
million in the first quarter of 1995, $5 million in the second quarter of
1995, $6 million in the third quarter of 1995 and $32 million in the
second quarter of 1996, all related to workforce management, SCE's
earnings increased $9 million, $5 million and $12 million, respectively,
for the three, six and twelve months ended June 30, 1996, compared to the
year-earlier periods. The quarterly and year-to-date increases reflect
improved operating performance despite the lower authorized return on
common equity and lower authorized operating expenses. The twelve-months-
ended increase reflects the higher overall authorized return on common
equity that was in effect during the period July 1, 1995, through June 30,
1996. This increase was partially offset by the financial effects of the
1995 general rate case settlement.
Operating Revenue
Operating revenue decreased during the three and six months ended June
30, 1996, due to a 4.4% decline in California Public Utilities Commission
(CPUC)-authorized rates effective April 1996. Additionally, SCE refunded
$179 million to ratepayers in June 1996 as part of a CPUC-ordered $237
million refund of an energy-cost balancing account overcollection; the
remainder will be refunded during third quarter 1996. The rate decline
was partially offset by an increase in kilowatt-hour sales of 4% and 1%,
respectively, for the three and six months ended June 30, 1996. About 99%
of operating revenue is from retail sales. Retail sales are regulated by
the CPUC and wholesale rates are regulated by the Federal Energy
Regulatory Commission (FERC).
In March 1995, Edison announced its intention 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% (from
10.7 cents per kilowatt-hour to below 10 cents per kilowatt-hour), after
adjusting for inflation. In February 1996, the CPUC approved a system-
wide rate reduction which will drop the average price per kilowatt-hour
from 10.7 cents to 10.1 cents.
Operating Expenses
Fuel expense increased 8% during the second quarter of 1996, compared to
the same period in 1995, primarily due to higher gas prices. For the six
and twelve months ended June 30, 1996, compared to the year-earlier
<page 27>
periods, fuel expense decreased mainly due to decreased power generation
resulting from increased power purchases on the open market. In addition,
the twelve-months-ended decrease reflects a 31% increase in hydro
generation.
Purchased-power expense was virtually unchanged for all periods presented.
SCE makes federally required power purchases from nonutility generators
based on contracts with CPUC-mandated pricing. Energy prices under these
contracts are generally higher than other energy sources. During the
twelve-month period ended June 30, 1996, SCE paid about $1.8 billion
(including energy and capacity payments) more than the cost of power
available from other sources due to these federally required purchases.
Provisions for regulatory adjustment clauses decreased substantially for
the three, six and twelve months ended June 30, 1996, compared to the
year-earlier periods. The decrease is due mainly to the energy-cost-
balancing account-related refund as discussed above, as well as
undercollections related to the accelerated recovery of SCE's remaining
investment in San Onofre Nuclear Generating Station Units 2 and 3 (see
discussion in Regulatory Matters).
Before special charges for workforce management costs, other operating
expenses declined primarily due to ongoing cost reduction efforts.
Maintenance expense decreased 20% and 17%, respectively, for the three
and six months ended June 30, 1996, compared with the year-earlier
periods, due to higher expenses in the first half of 1995 from a scheduled
refueling and maintenance outage at San Onofre Unit 2.
Depreciation and decommissioning expense increased 15%, 10% and 10%,
respectively, for the three, six and twelve month periods ended June 30,
1996, compared to the year-earlier periods. The increase is primarily
due to SCE's accelerated recovery of its investment in San Onofre Unit 2
and Unit 3, which began April 14, 1996, as part of an agreement with the
CPUC (see discussion in Regulatory Matters). The twelve months ended
increase also reflects an increase in the depreciation accrual rates
effective January 1, 1995.
Income taxes increased for the three, six and twelve months ended June
30, 1996, compared to 1995, mainly due to an increase in deferred taxes
resulting from the agreement to accelerate recovery of San Onofre Units
2 and 3.
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. The deferred revenue (including interest) is being collected
evenly over the final six years of each unit's plan. The plan ended in
February 1996 for Unit 1, and will end in September 1996 and January
1998, respectively, for Units 2 and 3. The provision is a non-cash offset
to the collection of deferred revenue.
Interest income decreased 22% during the quarter ended June 30, 1996,
compared to the same period in 1995, due to lower interest rates.
Other nonoperating income decreased for the three, six and twelve months
ended June 30, 1996, compared to the same periods in 1995, primarily due
to additional accruals for regulatory matters in the second quarter of
1996.
Interest Expense
Other interest expense decreased 10% for the three and six months ended
June 30, 1996, compared to the corresponding periods of the prior year,
due to the lower levels of short-term debt and lower interest rates.
page 28
<PAGE>
FINANCIAL CONDITION
SCE's liquidity is primarily affected by debt maturities, dividend
payments and capital expenditures. Capital resources include cash from
operations and external financings.
In June 1994, SCE lowered its quarterly common stock dividend to its
parent, Edison International, by 30%, as the result of uncertainty of
future earnings levels arising from the changing nature of California's
electric utility regulation.
In January 1995, Edison International authorized the repurchase of up to
$150 million (increased to $300 million on April 18, 1996) of its common
stock. As excess cash becomes available, SCE intends to pay cash
dividends to Edison International, while maintaining its CPUC-authorized
capital structure. Edison International has repurchased 10,876,223 shares
($177 million) through August 2, 1996, funded by dividends from its
subsidiaries.
For the second quarter of 1996, SCE's cash flow coverage of dividends
decreased to 1.4 times from 2.3 times compared to the year-earlier period,
reflecting the additional cash needs of Edison International. For the
twelve months ended June 30, 1996, the cash flow coverage of dividends
decreased to 3.0 times from 3.5 times compared to the same period last
year, primarily due to maturities of long-term debt.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $366 million, $1.1
billion and $2.1 billion for the three-, six- and twelve-month periods
ended June 30, 1996, respectively, compared with $337 million, $955
million and $1.8 billion for the same periods in 1995. Cash from
operations exceeded capital requirements for all periods presented.
Cash Flows from Financing Activities
Short-term debt is used to finance fuel inventories, balancing account
undercollections and general cash requirements. Long-term debt is used
mainly to finance capital expenditures. External financings are
influenced by market conditions and other factors, including limitations
imposed by its articles of incorporation and trust indenture. As of June
30, 1996, SCE could issue approximately $7.2 billion of additional first
and refunding mortgage bonds and $4.0 billion of preferred stock at
current interest and dividend rates.
At June 30, 1996, SCE had available lines of credit of $1.1 billion, with
$600 million for short-term debt and $500 million for the long-term
refinancing of its variable-rate pollution-control bonds. These unsecured
lines of credit are at negotiated or bank index rates with various
expiration dates. The majority have five-year terms.
California law prohibits SCE from incurring or guaranteeing debt for its
nonutility affiliates. Additionally, the CPUC regulates SCE's capital
structure, limiting the dividends it may pay Edison International. At
June 30, 1996, SCE had the capacity to pay $480 million in additional
dividends 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. As
further discussed in Note 9 to the Consolidated Financial Statements,
decommissioning costs are accrued and recovered in rates over the term of
each nuclear generating facility's operating license through charges to
depreciation expense. SCE estimates that it will spend approximately
$12.7 billion to decommission its nuclear facilities, primarily between
2013-2070. This estimate is based on SCE's current-dollar decommissioning
<page 29>
costs ($2.0 billion), escalated using a 6.65% rate and an earnings
assumption on trust funds ranging from 5.5% to 5.75%. These amounts are
expected to be funded from independent decommissioning trusts which
receive SCE contributions of approximately $100 million per year (until
decommissioning begins).
Projected Capital Requirements
SCE's projected capital requirements for the next five years are: 1996--
$751 million; 1997--$729 million; 1998--$612 million; 1999--$658 million;
and 2000--$654 million.
Long-term debt maturities and sinking fund requirements for the five
twelve-month periods following June 30, 1996, are: 1997--$201 million;
1998--$576 million; 1999--$322 million; 2000--$330 million; and 2001--$400
million.
REGULATORY MATTERS
SCE's 1996 CPUC-authorized revenue decreased $575 million, or 7.5%,
including a one-time bill credit of $237 million (which had no impact on
operating income) and was related to lower fuel costs than originally
estimated. The remaining $338 million revenue reduction is primarily for
a $242 million decrease in fuel costs, a $53 million decrease for lower
costs of debt and equity (discussed below), a $24 million decrease for
lower nuclear refueling costs, and a $9 million decrease related to the
1995 general rate case (discussed below).
On January 10, 1996, the CPUC issued its decision on SCE's 1995 general
rate case. The decision affirmed the CPUC's interim order to reduce 1995
operating revenue by $67 million, but decreased 1996 operating revenue by
an additional $9 million, which includes a decrease of $44 million for
operating and maintenance expenses. The decision also authorized recovery
of SCE's remaining investment (approximately $2.7 billion) in San Onofre
Units 2 and 3 at a reduced rate of return over an eight-year period. In
April 1996, SCE began accelerating the recovery of its remaining
investment of $2.6 billion. The accelerated recovery will continue
through December 2003, earning a 7.35% fixed rate of return (compared to
the current 9.55%). Future operating costs and incremental capital
expenditures at San Onofre are subject to an incentive pricing plan,
through which SCE receives about 4 cents per kilowatt-hour. Any
differences from the incentive price will flow through to shareholders.
Beginning in 2004, after SCE's investment is fully recovered, SCE would
be required to share equally with ratepayers the benefits received from
operation of the units.
The CPUC's 1996 cost-of-capital decision authorized an increase to SCE's
equity ratio from 47.75% to 48% and authorized SCE an 11.6% return on
common equity, compared to 12.1% for 1995. This decision, excluding the
effects of other rate actions, would reduce 1996 earnings by approximately
$19 million.
A 1994 CPUC decision stated that SCE 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. In December
1995, SCE and the CPUC's Division of Ratepayer Advocates (DRA) filed a
settlement agreement. On July 17, 1996, the CPUC approved the settlement
which will result in a $39 million (including interest) refund to SCE's
customers beginning in August 1996. This refund has been fully reflected
in the financial statements.
In May 1994, SCE filed its testimony in the non-Qualifying Facilities
phase of the 1994 Energy Cost Adjustment Clause proceeding. In May 1995,
the DRA filed its report on the reasonableness of SCE's gas supply costs
for both the 1993 and 1994 record periods. The report recommends a
disallowance of $13.3 million for excessive costs incurred from November
1993 through March 1994 associated with SCE's Canadian gas purchase and
<page 30>
supply contracts. The report requests that the CPUC defer finding SCE's
Canadian supply and transportation agreements reasonable for the duration
of their terms and that the costs under these contracts be reviewed on a
yearly basis. SCE and the DRA have filed several rounds of testimony on
this issue. Hearings are scheduled for late 1996.
In February 1996, SCE filed a proposal with the CPUC requesting a new rate
mechanism for its 15.8% share of the three units at Palo Verde. The
filing was made in compliance with the CPUC's December 20, 1995,
restructuring decision that directed SCE to file a rate-making proposal
similar to the ratemaking approved for San Onofre in the 1995 general rate
case. The proposed rate mechanism would allow SCE to accelerate the
recovery of its share of Palo Verde's sunk cost (forecast to be $1.2
billion as of December 31, 1996), over a seven-year period, beginning
January 1, 1997, and ending in 2003. During the seven-year period, SCE's
return on rate base for Palo Verde's sunk cost would be reduced to 7.35%
from the current 9.55%, and SCE would have the opportunity to recover the
incremental costs of continued operation of Palo Verde at approximately
3.4 cents per kilowatt-hour, provided the Palo Verde units operate at an
average capacity factor of 77%. Hearings are scheduled to begin in August
with a decision expected by year-end 1996.
COMPETITIVE ENVIRONMENT
SCE currently operates in a highly regulated environment in which it has
an obligation to provide electric service to customers in return for an
exclusive franchise within its service territory. This regulatory
environment is changing. The generation sector has experienced
competition from nonutility power producers and regulators are
restructuring California's electric utility regulation.
On December 20, 1995, the CPUC issued its decision on restructuring
California's electric industry, which it had been considering since April
1994. The new market structure would provide competition and customer
choice. The transition to a competitive electric market would begin
January 1, 1998, with all consumers participating by 2003. Key elements
of the decision include:
o Creation of an independent power exchange to manage electric supply and
demand. California's investor-owned utilities would be required to
purchase from, and sell to, the exchange all of their power during the
transition period, while other generators could voluntarily
participate.
o Creation of an independent system operator (ISO) to have operational
control of the utilities' transmission facilities and, therefore, to
control the scheduling and dispatch of all electricity on the state's
power grid.
o Availability of customer choice through time-of-use rates, direct
customer access to generation providers with transmission arrangements
through the system operator, and customer-arranged "contracts for
differences" to manage price fluctuations from the power exchange.
o Recovery of costs to transition to a competitive market (utility
investments and obligations incurred to serve customers under the
existing framework) through a non-bypassable charge, applied to all
customers, called the competition transition charge (CTC).
o CPUC-established incentives to encourage voluntary divestiture (through
spin-off or sale to an unaffiliated entity) of at least 50% of
utilities' gas-fueled generation to address market power issues.
o Performance-based ratemaking (PBR) for those utility services not
subject to competition.
page 31
<PAGE>
SCE originally filed for a PBR mechanism in 1993, requesting a revenue-
indexing formula to combine operating expenses and capital-related costs
into a single index to determine most of its revenue (excluding fuel) from
1996-2000. The filing was subsequently divided between transmission and
distribution, and power generation. Hearings concluded on the
transmission and distribution phase in December 1994. The CPUC's
restructuring decision requested comments addressing whether SCE's
transmission and distribution PBR proposal should be amended or reviewed
as filed. In January 1996, SCE requested the CPUC approve its
transmission and distribution PBR as filed. On July 3, 1996, a CPUC
administrative law judge (ALJ) issued a proposed decision denying SCE's
application. The ALJ concluded that PBR for SCE's transmission and
distribution systems would be in effect for too short a period to provide
meaningful benefits to SCE's shareholders or ratepayers (assuming the
transfer of transmission to an ISO under FERC jurisdiction on January 1,
1998) and that SCE should revise its PBR proposal to address only
distribution following the FERC's order to split transmission and
distribution services. On July 23, 1996, SCE filed comments rejecting the
ALJ's proposal. A final CPUC decision is expected by year-end 1996. On
July 15, 1996, SCE filed a PBR proposal for its hydroelectric plants and
the proposed structure for performance-based local reliability contracts
for fossil-fueled plants. If approved, the hydro PBR would be in effect
for three years and the local reliability contracts, which are subject to
FERC approval, would be in effect for up to three years, both beginning
January 1, 1998. A final CPUC decision on hydro PBR is expected by year-
end 1997.
On March 19, 1996, SCE filed a plan outlining how it would propose to
divest 50% of its gas-fueled generation. SCE's plan is contingent on
assurances about transition cost recovery and the resolution of key issues
related to: worker protection measures being in place for utility
employees who could suffer hardship as a result of divestiture; utilities
being permitted full recovery of the transition costs incurred during
the divestiture process; appropriate rate-making measures to cover the
contingency if the completion of the divestiture plan or commencement of
the power exchange is delayed; and prudently incurred costs associated
with fuel supply, transportation and storage contracts not being stranded
by the divestiture.
On April 29, 1996, SCE, Pacific Gas & Electric Company and San Diego Gas
& Electric Company filed a proposal with the FERC regarding the creation
of the independent power exchange and the ISO. On July 9, 1996, the three
utilities jointly filed an application with the CPUC requesting approval
to establish a restructuring trust which would obtain loans up to $250
million for the development of the ISO and power exchange through January
1, 1998. The loans would be backed by utility guarantees and SCE's share
would be 45%. Once the ISO and power exchange are formed, they will repay
the trust's loans and recover funds from future ISO and power exchange
customers.
On July 15, 1996, SCE filed a proposal with the CPUC related to separating
the costs associated with generation, transmission, distribution, public
goods programs and the CTC. The filing is in response to CPUC and FERC
directives that electric services, such as transmission and distribution,
be functionally separate and available to all customers on a
nondiscriminatory basis without cost-shifting among customers.
SCE estimates its potential transition costs through 2025 to be
approximately $8.3 billion to $9.1 billion (1996 net present value), based
on incurred costs, and forecasts of future costs and assumed market
prices. However, changes in the assumed market price could require
material revisions to such estimates. The potential transition costs are
comprised of: $5.1 billion from SCE's qualifying facility contracts, which
are the direct result of legislative and regulatory mandates; and $3.2
billion to $4.0 billion from costs pertaining to certain generating plants
and regulatory commitments consisting of costs incurred (whose recovery
has been deferred by the CPUC) to provide service to customers. Such
<page 32>
commitments include the recovery of income tax benefits previously flowed-
through to customers, postretirement benefit transition costs,
accelerated recovery of San Onofre, nuclear decommissioning and certain
other costs. The undepreciated book value of a utility's generation plant
will be calculated on the amount in rate base as of the decision date.
Further, adverse financial consequences could result if an ambiguity in
the CPUC's restructuring decision is not eliminated. The ambiguity
relates to the recovery of capital expenditures made for SCE's fossil
generation units in 1996 and beyond in the calculation of the CTC. SCE
believes that recovery of such capital expenditures is consistent with the
intent of the restructuring decision and filed a petition on March 25,
1996, to clarify the decision. If these efforts at clarification are
unsuccessful, then SCE estimates the negative effect on 1996 earnings to
be approximately $50 million (pre-tax), based on SCE's 1996 capital budget
for its fossil generation units.
Because the restructuring of California's electric industry has widespread
impact and the market structure requires the participation and oversight
of the FERC, the CPUC will seek to build a California consensus involving
the legislature, governor, public and municipal utilities, and customers.
Once the consensus is in place, FERC approval will be sought, and together
both agencies would move forward to implement the new market structure.
In addition, the CPUC will prepare an environmental impact report. If the
CPUC's restructuring decision is upheld and implemented as outlined, SCE
would be allowed to recover its CTC (subject to a lower return on equity)
and would continue to apply accounting standards that recognize the
economic effects of rate regulation. The effect of such an outcome would
not be expected to materially affect SCE's results of operations or
financial position during the transition period.
If revisions are made to the CPUC's restructuring decision that result in
SCE no longer meeting the criteria to apply regulatory accounting
standards to its generation operations, SCE may be required to write off
its recorded generation-related regulatory assets. At June 30, 1996,
these amounts totaled $1.3 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. Although depreciation-
related differences could result from applying a regulatory prescribed
depreciation method (straight-line, remaining-life method) rather than a
method that would have been applied absent the regulatory process, SCE
believes that the depreciable lives of its generation-related assets would
not vary significantly from that of an unregulated enterprise, as the CPUC
bases depreciable lives on periodic studies that reflect the physical
useful lives of the assets. SCE also believes that any depreciation-
related differences would be recovered through the CTC.
Additionally, if revisions are made to the CPUC's restructuring decision
that result in all or a portion of the CTC being improbable of recovery,
SCE could have additional write-offs associated with these costs if they
are not recovered through another regulatory mechanism. At this time, SCE
cannot predict when, or if, a consensus on restructuring will be reached,
what revisions will ultimately be made in the CPUC's restructuring plan
in subsequent proceedings or implementation phases, or the effect, after
the transition period, that competition will have on its results of
operations or financial position.
FERC Stranded Cost/Open Access Transmission Decision
On April 24, 1996, the FERC issued its decision on stranded cost recovery
and open access transmission, which it had been considering since March
1995. The decision, which became effective in July 1996, requires all
electric utilities subject to the FERC's jurisdiction to file transmission
tariffs which provide competitors with increased access to transmission
facilities for wholesale transactions and also establishes information
requirements for the transmission utility. The decision also provides
utilities with the recovery of stranded costs, which are prior-service
costs incurred under the current regulatory framework. In addition to
<page 33>
providing recovery of stranded costs associated with existing wholesale
customers, the FERC directed that it would have primary jurisdiction over
the recovery of stranded costs associated with retail-turned-wholesale
customers, such as the formation of a new municipal electric system.
Retail stranded costs resulting from a state-authorized retail direct-
access program are the responsibility of the states and the FERC would
only address recovery of these costs if the state has no authority to do
so. In compliance with the April 1996 FERC decision, SCE filed a revised
open access tariff with the FERC on July 9, 1996. The tariff became
effective as of its filing date.
ENVIRONMENTAL PROTECTION
SCE is subject to numerous environmental laws and regulations, which
require it to incur substantial costs to operate existing facilities,
construct and operate new facilities, and mitigate or remove the effect
of past operations on the environment.
As further discussed in Note 10 to the Consolidated Financial Statements,
SCE records its environmental liabilities when site assessments and/or
remedial actions are probable and a range of reasonably likely cleanup
costs can be estimated. SCE 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, SCE records the lower
end of this reasonably likely range of costs.
SCE's recorded estimated minimum liability to remediate its 58 identified
sites was $114 million at June 30, 1996, and 1995. One of SCE's sites,
a former pole-treating facility, is considered a federal Superfund site
and represents 71% of its recorded liability. The ultimate costs to clean
up SCE's identified sites may vary from its recorded liability due to
numerous uncertainties inherent in the estimation process. SCE 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 SCE among a range of reasonably possible outcomes.
The CPUC allows SCE to recover environmental-cleanup costs at 24 of its
sites, representing $95 million of its recorded liability, through an
incentive mechanism. Under this mechanism, SCE will recover 90% of
cleanup costs through customer rates; shareholders fund this remaining
10%, with the opportunity to recover these costs from insurance carriers
and other third-parties. SCE has settled insurance claims with most of
its carriers, and is continuing to pursue additional recovery. Costs
incurred at the remaining 34 sites are expected to be recovered through
customer rates. SCE has recorded a regulatory asset of $104 million for its
estimated minimum environmental-cleanup costs expected to be recovered
through customer rates.
SCE'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 SCE may be held responsible
for contributing to any costs incurred for remediating these sites. Thus,
no reasonable estimate of cleanup costs can now be made for these sites.
SCE expects to clean up its identified sites over a period of up to 30
years. Remediation costs in each of the next several years are expected
to range from $4 million to $8 million. Recorded costs for the twelve
months ended June 30, 1996, were $4 million.
Based on currently available information, SCE believes it unlikely that
it will incur amounts in excess of the upper limit of the estimated range
and, based upon the CPUC's regulatory treatment of environmental-cleanup
costs, SCE 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,
<page 34>
including additional information about existing sites or the
identification of new sites, will not require material revisions to such
estimates.
The 1990 federal Clean Air Act requires power producers to have emissions
allowances to emit sulfur dioxide. Power companies receive emissions
allowances from the federal government and may bank or sell excess
allowances. SCE expects to have excess allowances under Phase II of the
Clean Air Act (2000 and later). The act also calls for a study to
determine if additional regulations are needed to reduce regional haze in
the southwestern U.S. In addition, another study is underway to determine
the specific impact of air contaminant emissions from the Mohave Coal
Generating Station on visibility in Grand Canyon National Park. The
potential effect of these studies on sulfur dioxide emissions regulations
for Mohave is unknown.
SCE's projected capital expenditures to protect the environment are $653
million for the 1996-2000 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. SCE is unable to predict when or if the
scientific community will be able to reach a consensus on any health
effects of EMF, or the effect that such a consensus, if reached, could
have on future electric operations.
PALO VERDE STEAM TUBE RUPTURE
In 1993, a steam generator tube ruptured at Palo Verde Unit 2; additional
cracking was found in other tubes. Arizona Public Service Company (APS),
the operating agent for Palo Verde, has taken, and will continue to take,
remedial actions that it believes have slowed the rate of steam generator
tube degradation in all three units. APS believes that the steam
generators in only one of the units will have to be replaced within five
to ten years. Based on APS' 100% share estimate, SCE estimates its share
of the costs to be between $22 million and $24 million, plus replacement
power costs which are subject to CPUC reasonableness review. SCE is
evaluating APS' analyses, conducting its own review, and has not yet
decided whether it supports replacement of the steam generators.
WORKFORCE REDUCTIONS
During second quarter 1996, SCE recorded a one time charge against
earnings of $54 million for workforce management costs, as it expects to
reduce its non-represented workforce by approximately 3,100 employees by
year-end 1996. These workforce reductions are related to a voluntary
retirement offer for non-represented employees and outsourcing certain
operations. SCE has reached tentative agreement, subject to ratification
votes, on a similar voluntary retirement program for represented employees
which could increase the total charge against earnings to approximately
$70 million by year-end. Any additional amounts charged to earnings will
depend on the number of represented employees who accept the offer.
PROPOSED NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board has recently issued an exposure
draft, which would establish accounting standards for the recognition and
measurement of closure and removal obligations. The exposure draft would
<page 35>
require the estimated present value of an obligation to be recorded as a
liability, along with a corresponding increase in the plant or regulatory
asset accounts when the obligation is incurred. If the exposure draft is
approved in its present form, it would affect SCE's accounting practices
for decommissioning of its nuclear power plants, obligations for coal mine
reclamation costs, and any other activities related to the closure or
removal of long-lived assets. SCE does not believe that the accounting
changes proposed in the exposure draft 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 36
<PAGE>
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Qualifying Facilities ("QF") Litigation
On May 20, 1993, four geothermal QFs filed a lawsuit against Southern
California Edison Company ("SCE") in Los Angeles County Superior Court,
claiming that SCE underpaid, and continues to underpay, the plaintiffs for
energy. SCE 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 was partially owned
by a subsidiary of Edison Mission Energy ("EME") (a subsidiary of Edison
International) until April of this year when EME sold its interests in the
projects to its nationwide partner. In October 1994, plaintiffs submitted
an amended complaint to the court to add causes of action for unfair
competition and restraint of trade. In July 1995, after several motions
to strike had been heard by the court, the plaintiffs served a fourth
amended complaint, which omitted the previous claims based on alleged
restraint of trade. The plaintiffs alleged that the past underpayments
totaled at least $21,000,000. In other court filings, plaintiffs have
contended that the total amount of additional contract payments owing from
the beginning of the alleged underpayments through the end of the contract
term could total approximately $60,000,000. In addition to seeking
compensatory damages and declaratory relief, the fourth amended complaint
also seeks unspecified punitive damages and an injunction to enjoin SCE
from "future" unfair competition. After a number of continuances, the
matter was set for trial on June 18, 1996. On May 1, 1996, the parties
entered into an agreement providing for a settlement of all claims in
dispute. Pursuant to the agreement, the specific terms of which are
confidential, SCE has paid a settlement amount jointly to the plaintiffs
and the parties have resolved all claims prior to January 1, 1996. SCE
intends to seek recovery of this payment in its annual Energy Cost
Adjustment Clause ("ECAC") filing. SCE has also agreed, subject to
California Public Utilities Commission ("CPUC") approval, to increase
payments to plaintiffs for specified levels of energy deliveries for the
period after December 31, 1995. Plaintiffs have retained the right to
continue the lawsuit as to the period after December 31, 1995, in the
event CPUC approval of the increased payments is not obtained.
Between January 1994 and October 1994, SCE was named as a defendant in a
series of eight lawsuits brought by independent power producers of wind
generation. Seven of the lawsuits were filed in Los Angeles County
Superior Court and one was filed in Kern County Superior Court. The
lawsuits allege SCE incorrectly interpreted contracts with the plaintiffs
by limiting fixed energy payments to a single 10-year period rather than
beginning a new 10-year period of fixed energy payments for each stage of
development. In its responses to the complaints, SCE denied the
plaintiffs' allegations. In each of the lawsuits, the plaintiffs 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 SCE's position that there is only a single, 10-year period
of fixed payments. In March 1995, a ninth lawsuit was filed in the Los
Angeles County Superior Court raising claims similar to those alleged in
the first seven cases in that court. SCE has responded to the complaint
in the new lawsuit by denying its material allegations. On April 5, 1995,
SCE filed a petition for writ of mandate, prohibition or other appropriate
relief, requesting that the Court of Appeal issue a writ directing the Los
Angeles Superior Court to vacate its March 1 order granting summary
adjudication. In a decision filed August 9, 1995, the Court of Appeal
issued a writ directing that the order be overturned, and a new order be
entered denying the motion. A pending summary adjudication motion in the
page 37
<PAGE>
Kern County case has been withdrawn in light of the Court of Appeal
decision. Furthermore, pursuant to stipulation of the parties, the Kern
County case was ordered on April 3, 1996, to be coordinated with the Los
Angeles cases so that it too will be tried in Los Angeles. As a result
of the coordination, the April 22, 1996 trial date for the Kern County
case was stricken. On February 6, 1996, plaintiffs in one of the actions
filed their first amended and supplemental complaint. On March 6, 1996,
SCE filed its new answer, denying the material allegations of the first
amended and supplemental complaint. On April 16, 1996, SCE filed a motion
for summary adjudication of certain of the causes of action in this
complaint. After hearing, the motion was denied without prejudice.
Plaintiffs' motion to consolidate all eight Los Angeles cases for jury
trial was denied without prejudice on March 25, 1996. However, SCE and
all of the plaintiffs, with the exception of Flowind Corporation,
subsequently entered into a court-approved stipulation whereby the cases
involving the stipulating plaintiffs have been consolidated for trial
commencing on January 27, 1997 in return for these plaintiffs' waiver of
a jury trial. No trial date has been established for Flowing
Corporation's claims. 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 SCE's ECAC.
This matter was previously reported under the heading "QF Litigation" in
Part I, Item 3 of SCE's Annual Report on Form 10-K for the year ended
December 31, 1995, and the Quarterly Report on Form 10-Q for the period
ended March 31, 1996.
Electric and Magnetic Fields ("EMF") Litigation
SCE is involved in three lawsuits alleging that various plaintiffs
developed cancer as a result of exposure to EMF from SCE facilities. SCE
denies the material allegations in its responses to each of the lawsuits.
Two of the lawsuits allege, among other things, that certain past and
present employees of Grubb & Ellis ("Employee-Plaintiffs"), a real estate
brokerage firm with offices located in a commercial building known as the
Koll Center in Newport Beach, developed cancer as a result of exposure to
EMF from electrical facilities owned by SCE and/or the other defendants
located on the property. The lawsuits, served on SCE in 1994 ("First
Case") and January 1995 ("Second Case"), respectively, also name Grubb &
Ellis and the owners and developers of the Koll Center as defendants. No
specific damage amounts are alleged in either complaint.
The five named plaintiffs in the First Case, three Employee-Plaintiffs and
the spouses of two of them, allege compensatory damages of $8,000,000 plus
unspecified punitive damages, according to supplemental documentation they
have prepared. In December, 1995 the court granted SCE's motion for
summary judgment and dismissed the case. Plaintiffs have filed a Notice
of Appeal.
Supplemental documentation prepared by the four named plaintiffs in the
Second Case, two Employee-Plaintiffs and their respective spouses,
indicates they allege compensatory damages of approximately $13,500,000
plus unspecified punitive damages. On April 18, 1995, Grubb & Ellis filed
a cross-complaint against the other codefendants, requesting
indemnification and declaratory relief concerning the rights and
responsibilities of the parties. This case has been stayed pending
appellate review of the trial judge's sanction order against the
plaintiffs' attorneys. The Court of Appeals has set oral argument on this
issue for January 21, 1997.
A third case was filed in Orange County Superior Court and served on SCE
in March 1995. The plaintiff alleges, among other things, that he
developed cancer as a result of EMF emitted from SCE facilities which he
alleges were not constructed in accordance with CPUC standards. No
specific damage amounts are alleged in the complaint but supplemental
<page 38>
documentation prepared by the plaintiff indicates that plaintiff will
allege compensatory damages of approximately $5,500,000, plus unspecified
punitive damages. No trial date has been set in this case.
These matters were previously reported under the heading "Environmental
Litigation" in Part I, Item 3 of SCE's Annual Report on Form 10-K for the
year ended December 31, 1995, and the Quarterly Report on Form 10-Q for
the period ended March 31, 1996.
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 SCE, 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. SCE's December 23, 1994, answer to the complaint denied
all material allegations. Trial began on 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. Plaintiffs' motion for
a new trial was denied on December 5, 1995. On April 11, 1996, the
plaintiffs' appeal of the denial of their motion was argued before the
Ninth Circuit Court of Appeals and the case was submitted for decision.
A SCE engineer employed at San Onofre died in 1991 from cancer of the
abdomen. On February 6, 1995, his children sued SCE, 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.
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. SCE'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. On July 26, 1996, the court
entered judgment in favor of SCE dismissing the remaining claim.
Plaintiffs have indicated that they will appeal this ruling to the Ninth
Circuit Court of Appeals. Trial of the case against the other defendants
may be delayed pending this appeal decision and appeal decisions from
other issues regarding the other parties. The impact on SCE, if any, from
further proceedings in this case against the remaining defendants cannot
be determined at this time.
On July 5, 1995, a former SCE reactor operator employed at San Onofre and
his wife sued SCE, 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. On March
25, 1996, the court granted SCE's motion for summary judgment on all
claims. It is anticipated that plaintiffs will appeal this ruling.
Should plaintiffs do so, trial of the case may be delayed pending the
ruling of the Court of Appeals. The impact on SCE, if any, from further
page 39
<PAGE>
proceedings in this case against the remaining defendants cannot be
determined at this time.
On August 31, 1995, the family of a former worker for a contractor at San
Onofre, and later a temporary and then a permanent SCE employee at San
Onofre, sued SCE, 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. SCE's answer to the complaint filed
on November 13, 1995, denied all material allegations. A trial date will
be set at the pretrial conference scheduled for October 7, 1996.
On November 17, 1995, a SCE employee and his wife sued SCE in the U.S.
District Court for the Southern District of California. Plaintiffs also
named Combustion Engineering, the manufacturer of the fuel rods for the
San Onofre plant. The employee worked for SCE at San Onofre from 1981 to
1990. Plaintiffs allege that the employee transported radioactive
byproducts on his person, clothing and/or tools to his home where his wife
was then exposed to radiation that caused her leukemia. Plaintiffs seek
unspecified compensatory and punitive damages. SCE's December 19, 1995,
partial answer to the complaint denied all material non-employment related
allegations. SCE's motion to dismiss the claims of the employee was
granted on March 19, 1996. A trial date will be set at the pretrial
conference that is scheduled for December 2, 1996, relative to his wife's
claims.
On November 28, 1995, a former contract worker at San Onofre, her husband,
and her son, sued SCE in the U.S. District Court for the Southern District
of California. Plaintiffs also named Combustion Engineering, the
manufacturer of the fuel rods for the San Onofre plant. Plaintiffs allege
that the former contract worker transported radioactive byproducts on her
person and clothing to her home where her son was then exposed to
radiation that caused his leukemia. Plaintiffs seek unspecified
compensatory and punitive damages. SCE's January 2, 1996, answer to the
complaint denied all material allegations.
On February 20, 1996, an individual employed by various contractors
intermittently at San Onofre from 1984 to 1993, and who was employed by
SCE as a temporary security officer in 1994, sued SCE in Orange County
municipal court for undiagnosed injuries he allegedly sustained as a
result of radiation exposure at San Onofre. In the complaint, plaintiff
seeks $25,000 in compensatory damages. This case was removed to the U.S.
District for the Southern District of California. SCE's answer to the
complaint, filed on July 2, 1996, denied all material allegations.
With the exception of the last of the above-mentioned matters, these
matters were previously reported under the heading "San Onofre Personal
Injury Litigation" in Part I, Item 3 of SCE's Annual Report on Form 10-K
for the year ended December 31, 1995, and the Quarterly Report on Form 10-Q
for the period ended March 31, 1996.
Employment Discrimination Litigation
On September 21, 1994, nine African-American employees filed a lawsuit
against Edison International and SCE 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.
Edison International and SCE have responded by denying the material
allegations of the complaint and asserting several affirmative defenses.
On May 2, 1996, SCE and the Equal Employment Opportunity Commission
("EEOC") stipulated to the EEOC's intervention in the action.
<page 40>
Subsequently, on May 9, 1996, the Court entered an order allowing the EEOC
to intervene.
Following extensive negotiations, the parties, including the EEOC entered
into a settlement agreement in the form of a proposed consent decree. On
May 13, 1996, the Court preliminarily approved the proposed consent
decree, and a hearing on final approval of the decree was scheduled for
July 22, 1996. At the July 22 hearing on final approval, the Court raised
concerns about some elements of the proposed consent decree. Because of
the Court's concerns, the parties negotiated revisions to the consent
decree and submitted a revised consent decree to the Court. The Court
granted preliminary approval to the revised decree on August 5, 1996 and
set a hearing to determine final approval for September 24, 1996.
The consent decree now before the Court calls for the certification of
a class of all African-American employees of SCE from January 1, 1989 to
May 13, 1996, for purposes of monetary relief, and from January 1, 1989
to the expiration of the decree for purposes of injunctive relief. Under
the proposed decree, SCE would be required to pay $11,250,000 to a
settlement fund for the class within fourteen days of final approval.
After prescribed review, individual class members with adequately
supported claims of discrimination or racial harassment would be paid from
the fund as specified in the consent decree. The consent decree also
would require SCE to implement or revise certain provisions regarding
career development and equal employment opportunity/diversity training,
and human resources processes.
This matter was previously reported under the heading "Employment
Discrimination Litigation" in Part I, Item 3 of SCE's Annual Report on
Form 10-K for the year ended December 31, 1995, and the Quarterly Report
on Form 10-Q for the period ended March 31, 1996.
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:
None
page 41
<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 K. S. STEWART
----------------------------------
K. S. STEWART
Assistant General Counsel
August 13, 1996
<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 June 30, 1996, 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
Form S-3 333-00497 February 2, 1996
ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
August 13, 1996
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