PAGE
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 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 November 7, 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, Nine and
Twelve Months Ended September 30, 1996, and 1995 3
Consolidated Balance Sheets--September 30, 1996,
December 31, 1995, and September 30, 1995 4
Consolidated Statements of Cash Flows--
Three, Nine and Twelve Months Ended
September 30, 1996, and 1995 6
Consolidated Statements of Retained Earnings--
Three, Nine and Twelve Months Ended
September 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 28
Part II. Other Information:
Item 1. Legal Proceedings 38
Item 6. Exhibits and Reports on Form 8-K 44
page 1
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Southern California Edison Company:
We have audited the accompanying consolidated balance sheets of Southern
California Edison Company (SCE, a California corporation) and its
subsidiaries as of September 30, 1996, December 31, 1995, and September
30, 1995, and the related consolidated statements of income, retained
earnings and cash flows for each of the three-, nine- and twelve-month
periods ended September 30, 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 September 30, 1996, December 31, 1995, and September
30, 1995, and the results of their operations and their cash flows for
each of the three-, nine- and twelve-month periods ended September 30,
1996, and 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
November 6, 1996
page 2
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
In thousands
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
----------------------- ------------------------- ------------------------
1996 1995 1996 1995 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue $2,346,229 $2,509,877 $5,717,637 $5,969,553 $7,620,798 $7,815,198
---------- ---------- ---------- ---------- ---------- ----------
Fuel 220,563 196,266 461,917 463,806 613,067 668,109
Purchased power 938,588 917,547 2,026,762 1,954,370 2,654,271 2,567,584
Provisions for regulatory
adjustment clauses--net (66,531) 146,463 (170,214) 191,918 (132,387) 164,592
Other operating expenses 263,417 305,133 876,705 891,263 1,211,970 1,269,087
Maintenance 66,933 86,080 217,622 267,823 306,492 349,473
Depreciation and decommissioning 278,181 239,402 795,068 708,734 1,040,475 922,892
Income taxes 218,278 201,358 460,234 435,832 584,097 535,578
Property and other taxes 45,182 48,384 147,748 152,519 195,465 199,920
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses 1,964,611 2,140,633 4,815,842 5,066,265 6,473,450 6,677,235
---------- ---------- ---------- ---------- ---------- ----------
Operating income 381,618 369,244 901,795 903,288 1,147,348 1,137,963
---------- ---------- ---------- ---------- ---------- ----------
Provision for rate phase-in plan (22,021) (33,082) (69,966) (90,947) (101,252) (126,121)
Allowance for equity funds
used during construction 3,466 4,392 10,934 14,915 15,100 17,967
Interest income 9,056 9,993 26,691 27,775 36,559 35,399
Other nonoperating income
(deductions)--net (6,534) 14,089 (1,792) 31,951 11,911 57,746
---------- ---------- ---------- ---------- ---------- ----------
Total other income
(deductions)--net (16,033) (4,608) (34,133) (16,306) (37,682) (15,009)
---------- ---------- ---------- ---------- ---------- ----------
Income before interest expense 365,585 364,636 867,662 886,982 1,109,666 1,122,954
---------- ---------- ---------- ---------- ---------- ----------
Interest on long-term debt 94,386 96,309 286,252 288,402 383,037 384,332
Other interest expense 18,277 20,766 55,008 61,386 73,751 76,245
Allowance for borrowed funds
used during construction (2,179) (3,335) (6,874) (11,326) (10,038) (14,229)
Capitalized interest (479) (494) (647) (1,444) (734) (1,555)
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense--net 110,005 113,246 333,739 337,018 446,016 444,793
---------- ---------- ---------- ---------- ---------- ----------
Net income 255,580 251,390 533,923 549,964 663,650 678,161
Dividends on preferred stock 8,599 8,599 25,796 28,165 34,395 38,185
---------- ---------- ---------- ---------- ---------- ----------
Earnings available for
common stock $ 246,981 $ 242,791 $ 508,127 $ 521,799 $ 629,255 $ 639,976
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
page 3
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
In thousands
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
-------------- ------------ --------------
ASSETS
<S> <C> <C> <C>
Utility plant, at original cost $20,259,757 $19,850,179 $19,628,641
Less--accumulated provision for depreciation
and decommissioning 9,149,918 8,569,265 8,360,622
----------- ----------- -----------
11,109,839 11,280,914 11,268,019
Construction work in progress 605,774 727,865 791,058
Nuclear fuel, at amortized cost 150,092 139,411 152,668
----------- ----------- -----------
Total utility plant 11,865,705 12,148,190 12,211,745
----------- ----------- -----------
Nonutility property--less accumulated provision
for depreciation of $26,129, $25,454 and $31,094
at respective dates 81,585 70,191 78,269
Nuclear decommissioning trusts 1,401,553 1,260,095 1,172,079
Other investments 82,456 65,963 67,916
----------- ----------- -----------
Total other property and investments 1,565,594 1,396,249 1,318,264
----------- ----------- -----------
Cash and equivalents 649,450 261,767 407,895
Receivables, including unbilled revenue, less
allowances of $25,863, $24,139 and $23,326 for
uncollectible accounts at respective dates 1,122,248 911,963 1,174,757
Fuel inventory 76,202 114,357 118,286
Materials and supplies, at average cost 153,820 151,180 156,797
Accumulated deferred income taxes--net 458,411 476,725 465,573
Prepayments and other current assets 143,230 114,289 141,961
----------- ----------- -----------
Total current assets 2,603,361 2,030,281 2,465,269
----------- ----------- -----------
Unamortized debt issuance and reacquisition
expense 354,684 350,563 357,347
Rate phase-in plan 65,912 129,714 158,930
Unamortized nuclear plant--net -- 67,185 108,367
Income tax-related deferred charges 1,730,821 1,723,605 1,754,953
Other deferred charges 314,723 309,328 347,800
----------- ----------- -----------
Total deferred charges 2,466,140 2,580,395 2,727,397
----------- ----------- -----------
Total assets $18,500,800 $18,155,115 $18,722,675
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
page 4
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
In thousands, except share amounts
<TABLE>
<CAPTION>
September 30, December 31, September 30,
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 207,126 195,815 194,610
Retained earnings 2,748,983 2,780,058 2,794,832
----------- ----------- -----------
5,124,163 5,143,927 5,157,496
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 4,756,324 5,215,117 5,225,926
----------- ----------- -----------
Total capitalization 10,439,242 10,917,799 10,942,177
----------- ----------- -----------
Other long-term liabilities 347,766 344,192 345,029
----------- ----------- -----------
Current portion of long-term debt 501,470 1,375 1,375
Short-term debt 275,342 359,508 432,301
Accounts payable 409,425 346,258 394,262
Accrued taxes 918,044 550,384 829,352
Accrued interest 98,136 86,494 116,265
Dividends payable 110,797 138,334 138,787
Regulatory balancing accounts--net 206,053 337,867 296,764
Deferred unbilled revenue and other current liabilities 996,585 778,476 903,519
----------- ----------- -----------
Total current liabilities 3,515,852 2,598,696 3,112,625
----------- ----------- -----------
Accumulated deferred income taxes--net 3,224,766 3,323,190 3,347,311
Accumulated deferred investment tax credits 352,242 374,142 380,521
Customer advances and other deferred credits 620,932 597,096 595,012
----------- ----------- -----------
Total deferred credits 4,197,940 4,294,428 4,322,844
----------- ----------- -----------
Commitments and contingencies
(Notes 2, 8, 9 and 10)
Total capitalization and liabilities $18,500,800 $18,155,115 $18,722,675
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
page 5
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
--------------------- --------------------- ------------------------
1996 1995 1996 1995 1996 1995
--------- --------- --------- --------- ---------- ----------
Cash flows from operating activities:
<S> <C> <C> <C> <C> <C> <C>
Net income $ 255,580 $ 251,390 $ 533,923 $ 549,964 $ 663,650 $ 678,161
Adjustments for non-cash items:
Depreciation and
decommissioning 278,181 239,402 795,068 708,734 1,040,475 922,892
Amortization 24,428 21,406 78,017 43,205 102,876 68,688
Rate phase-in plan 17,797 30,535 63,802 81,800 93,018 113,501
Deferred income taxes and
investment tax credit (156,065) (140,630) (112,021) (200,009) (120,692) (150,561)
Other long-term liabilities 13,859 6,012 3,574 33,966 2,737 29,920
Other--net 3,333 2,807 8,841 (46,668) 55,251 (20,832)
Changes in working capital:
Receivables (468,193) (301,415) (210,285) (272,667) 52,509 15,419
Regulatory balancing accounts (20,775) 183,151 (131,814) 241,054 (90,711) 187,016
Fuel inventory, materials
and supplies 27,052 14,299 35,515 (29,045) 45,061 (23,608)
Prepayments and other
current assets (113,745) (130,041) (28,941) (43,183) (1,269) (9,819)
Accrued interest and taxes 445,269 274,712 379,302 343,443 70,563 41,230
Accounts payable and other
current liabilities 313,515 219,376 281,276 218,402 108,229 (1,487)
--------- --------- --------- --------- ---------- ----------
Net cash provided by
operating activities 620,236 671,004 1,696,257 1,628,996 2,021,697 1,850,520
--------- --------- --------- --------- ---------- ----------
Cash flows from financing activities:
Long-term debt issued (1,375) -- 396,232 393,922 396,139 395,248
Long-term debt repayments 2,415 (205,697) (403,958) (422,192) (404,267) (422,192)
Preferred stock redemptions -- -- -- (75,000) -- (75,000)
Nuclear fuel financing--net 25,967 22,586 20,510 42,775 8,869 37,245
Short-term debt financing--net (116,998) (172,032) (84,166) (243,213) (156,959) (7,168)
Dividends paid (188,507) (145,178) (592,517) (414,946) (737,458) (543,915)
--------- --------- --------- --------- ---------- ----------
Net cash used
by financing activities (278,498) (500,321) (663,899) (718,654) (893,676) (615,782)
--------- --------- --------- --------- ---------- ----------
Cash flows from investing activities:
Additions to property and plant (146,751) (200,186) (487,673) (573,224) (687,397) (825,500)
Funding of nuclear decommissioning
trusts (37,609) (39,340) (110,242) (111,897) (148,940) (141,021)
Unrealized gain on equity
investments 448 2,671 11,246 7,260 12,469 7,344
Other--net (23,421) (5,533) (58,006) (16,678) (62,598) (17,978)
--------- --------- --------- --------- ---------- ----------
Net cash used by
investing activities (207,333) (242,388) (644,675) (694,539) (886,466) (977,155)
--------- --------- --------- --------- ---------- ----------
Net increase (decrease) in cash
and equivalents 134,405 (71,705) 387,683 215,803 241,555 257,583
Cash and equivalents, beginning
of period 515,045 479,600 261,767 192,092 407,895 150,312
--------- --------- --------- --------- ---------- ----------
Cash and equivalents, end
of period $ 649,450 $ 407,895 $ 649,450 $ 407,895 $ 649,450 $ 407,895
========= ========= ========= ========= ========== ===========
Cash payments for interest and taxes:
Interest $ 84,700 $ 81,196 $ 256,554 $ 257,677 $ 381,673 $ 351,103
Taxes $ 42,190 $ 209,456 $ 225,542 $ 333,806 $ 551,058 $ 520,295
</TABLE>
The accompanying notes are an integral part of these financial statements.
page 6
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
In thousands
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
---------------------- ---------------------- ------------------------
1996 1995 1996 1995 1996 1995
---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $2,680,388 $2,688,402 $2,780,058 $2,683,568 $2,794,832 $2,677,342
Net income 255,580 251,390 533,923 549,964 663,650 678,161
Dividends declared on common
stock (178,386) (136,361) (539,185) (409,771) (675,087) (521,722)
Dividends declared on preferred
stock (8,599) (8,599) (25,796) (28,165) (34,395) (38,185)
Reacquired capital stock
expense -- -- (17) (764) (17) (764)
---------- ---------- ---------- ---------- ---------- ----------
Balance at end of period $2,748,983 $2,794,832 $2,748,983 $2,794,832 $2,748,983 $2,794,832
========== ========== ========== ========== ========== ==========
</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
September 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 ($570 million at
September 30, 1996, $235 million at December 31, 1995, and $371 million
at September 30, 1995), and time deposits and other investments ($73
million at September 30, 1996, $23 million at December 31, 1995, and $30
million at September 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. The phase-in
plans ended in February 1996 and September 1996 for Units 1 and 2,
respectively. The plan ends in January 1998 for Unit 3.
Decommissioning costs are accrued and recovered in rates over the term of
each nuclear facility's operating license through charges to
decommissioning 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 Organization (formerly Division) of Ratepayer Advocates (ORA)
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 recovered its
remaining investment over a four-year period ending 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 2001
(the original end date of 2003 was changed by legislation enacted in
September 1996), 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 through 2003. Any differences
between these costs and the incentive price will flow through to the
shareholders. Beginning in 2004, 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.
According to the new legislation, any overcollections in the kilowatt-hour
sales and energy cost balancing accounts at December 31, 1996, shall be
used for transition cost reduction.
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 $6 million, $15 million and $23
million for the three, nine and twelve months ended September 30, 1996,
respectively, and $6 million, $21 million and $45 million for the three,
nine and twelve months ended September 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 4.5%, 4.1% and 4.1% for the three, nine and twelve month periods ended
September 30, 1996, respectively, and 3.7%, 3.6% and 3.6% for the three,
nine and twelve months ended September 30, 1995, respectively.
Note 2. Regulatory Matters
Performance-Based Ratemaking (PBR)
On September 20, 1996, the CPUC adopted a non-generation transmission and
distribution (T&D) PBR mechanism for SCE beginning on January 1, 1997.
According to the CPUC decision, beginning in 1998, the transmission
portion is to be separated from non-generation PBR and subject to
ratemaking under the rules of the FERC. The distribution-only PBR will
extend through December 2001. Key elements of the non-generation PBR
include: T&D rates indexed for inflation based on the Consumer Price
Index; elimination of the kilowatt-hour sales adjustment; adjustments for
cost changes that are not within SCE's control; a cost of capital trigger
mechanism based on changes in a bond index; standards for service
reliability and safety; and a net revenue-sharing mechanism that
determines how customers and shareholders will share gains and losses from
T&D operations. On July 15, 1996, SCE filed a PBR proposal for its
hydroelectric plants and a proposed structure for performance-based local
reliability contracts for certain fossil-fueled plants. If approved, the
hydro PBR would be in effect for three years and the initial terms of 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.
Restructuring Legislation
On September 23, 1996, the State of California enacted legislation to
provide a rapid, but orderly, transition to a competitive market
page 10
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
structure. The legislation substantially adopts the CPUC's December 1995
restructuring decision (discussed below) by favorably addressing stranded-
cost recovery for utilities, providing a certain cost recovery time period
for the transition costs associated with utility-owned generation-related
assets. Transition costs related to power purchase contracts would be
recovered through the terms of their contracts while most of the remaining
transition costs would be recovered through 2001. The legislation also
includes provisions to finance a portion of the stranded costs that
residential and small commercial customers would have paid between 1998
and 2001, allowing SCE to give a rate reduction of at least 10% to these
customers, beginning January 1, 1998. The financing would occur with
securities issued by the California Infrastructure and Economic
Development Bank, or an entity approved by the Bank. The legislation
includes a rate freeze for all other customers, including large commercial
and industrial customers, as well as provisions for continued funding for
energy conservation, low-income programs and renewable resources. Despite
the rate freeze, SCE expects to be able to recover its revenue requirement
based on cost-of-service regulation during the 1998-2001 period. In
addition, the legislation mandates the implementation of a competition
transition charge (CTC) that provides utilities the opportunity to recover
costs made uneconomic by electric utility restructuring. Finally, the
legislation contains provisions for the recovery (through 2006) of
reasonable employee-related transition costs incurred and projected for
retraining, severance, early retirement, outplacement and related expenses
for utility workers.
CPUC Restructuring Decision
In December 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. However, the
legislation enacted in September 1996 specifies that all customers should
be eligible to participate through direct transactions in the competitive
market no later than January 1, 2002. Key elements of the CPUC decision
include:
o Creation of an independent power exchange (PX) 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,
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 PX.
o Recovery of costs to transition to a competitive market (utility
investments, obligations incurred to serve customers under the
existing framework, and reasonable employee-related costs) through a
non-bypassable charge, applied to all customers, called the 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.
page 11
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o PBR for those utility services not subject to competition.
In March 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 PX is delayed; and prudently incurred costs associated with fuel
supply, and transportation and storage contracts not being stranded by the
divestiture.
In April 1996, SCE, Pacific Gas & Electric Company and San Diego Gas &
Electric Company filed a proposal with the FERC regarding the creation of
the PX and the ISO. In July 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 PX through January 1, 1998. The loans would be backed by
utility guarantees and SCE's share would be 45%. Once the ISO and PX are
formed, they will repay the trust's loans and recover funds from future
ISO and PX customers. In August 1996, the CPUC issued an interim order
establishing the restructuring trust and funding it with $250 million in
order to build the hardware and software systems for the ISO and PX.
In July 1996, SCE filed a proposal with the CPUC related to the conceptual
aspects of 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 T&D,
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. On August 30, 1996, in compliance with
the CPUC's restructuring decision, SCE filed its application to estimate
its 1998 transition costs. On October 21, 1996, SCE amended its
transition cost filing to reflect the effects of the legislation enacted
in September 1996. Under the rate freeze codified in the legislation, the
CTC will be determined residually (i.e. after subtracting components for
the PX, T&D, nuclear decommissioning, and public benefits programs).
Nevertheless, the CPUC directed that the amended application provide
estimates of SCE's potential transition costs from 1998 through 2030. SCE
provided two estimates between approximately $11.9 billion (1997 net
present value), assuming the fossil plants have a market value equal to
the net book value, and $12.6 billion (1997 net present value), assuming
the fossil plants have no market value. These estimates are based on
incurred costs, and forecasts of future costs and assumed market prices.
However, changes in the assumed market price could materially affect these
estimates. The potential transition costs are comprised of: $6.8 billion
from SCE's qualifying facility contracts, which are the direct result of
legislative and regulatory mandates; and $5.1 billion to $5.8 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) and Palo Verde, nuclear decommissioning
and certain other costs.
page 12
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In light of the legislation, the CPUC is reassessing the need to prepare
an environmental impact report. If the CPUC's restructuring is
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 for its
generation-related assets during the rate recovery period. 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 during the restructuring process events occur 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 September 30, 1996, these
amounts totaled approximately $1.0 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 events occur during the restructuring process that result
in all or a portion of the CTC being improbable of recovery, SCE could
have additional write-offs associated with these costs if they are not
recovered through another regulatory mechanism. At this time, SCE cannot
predict what other revisions will ultimately be made during the
restructuring process in subsequent proceedings or implementation phases,
or the effect, after the transition period, that competition will have on
its results of operations or financial position.
FERC Stranded Cost/Open Access Transmission Decision
In April 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 on an interim
basis, subject to refund, as of its filing date. Several wholesale
customers have filed protests with the FERC on the transmission rate
levels, and a ruling from the FERC setting the rates for formal hearing
is anticipated by the end of 1996 or by early 1997.
Mohave Generating Station
In 1994, the CPUC found SCE liable for expenditures related to an accident
which occurred at the Mohave Generating Station in 1985. SCE and the ORA
page 13
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreed on a $39 million settlement (including interest) which was approved
by the CPUC in July 1996. As of September 30, 1996, approximately $32.7
million had been refunded to customers via a bill credit. The remainder
will be refunded by year-end. 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 ORA 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 ORA have filed several rounds of testimony on
this issue. Hearings are scheduled for early 1997.
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
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%. In addition, SCE proposed an incentive pricing plan 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%. The legislation has accelerated the
proposed recovery period to five years (1997-2001). On November 1, 1996,
all of the active parties to the Palo Verde proceeding signed a Memorandum
of Understanding (MOU) which will form the basis for a definitive
settlement agreement. The portion of the MOU concerning accelerated
recovery of Palo Verde's sunk costs is consistent with SCE's proposal, as
modified by the new legislation. However, instead of the incremental cost
incentive pricing proposed by SCE, the MOU proposes to pass-through Palo
Verde incremental costs to ratepayers through a balancing account. These
costs will be considered reasonable so long as they do not exceed 30% of
a baseline forecast and the site's capacity factor does not go below
55%. The existing nuclear unit incentive procedure will continue only
for purposes of calculating a reward for performance of any unit above an
80% capacity factor for a fuel cycle. For post-2001 operations, SCE's
ratepayers will receive 50% of the operational benefits. A definitive
settlement agreement is expected to be filed with the CPUC in late 1996
with a decision expected in late 1996 or early 1997.
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
page 14
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 1996, are: 1997--$501
million; 1998--$277 million; 1999--$325 million; 2000--$325 million; and
2001--$400 million.
Long-term debt consisted of:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
-------------- ------------ -------------
(In millions)
First and refunding mortgage bonds:
<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 1,638
Pollution-control bonds:
1999--2027 (5.4% to 7.2% and variable) 1,204 1,205 1,205
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 90 70 82
Long-term debt due within one year (501) (1) (1)
Unamortized debt discount--net (55) (64) (66)
------ ------ ------
Total $4,756 $5,215 $5,226
====== ====== ======
</TABLE>
page 15
<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
September 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 September 30, 1996, December
31, 1995, and September 30, 1995, was $368 million, $433 million and $516
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 5.5%, 5.8% and 5.8%, at September 30, 1996, December 31, 1995, and
September 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 September 30, 1996, SCE had
pledged $11 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> <C>
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 16
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair values of financial instruments were:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
-------------------- ------------------- -----------------
Cost Fair Cost Fair Cost Fair
Instrument Basis Value Basis Value Basis Value
- ---------- -------- ------ -------- -------- ------- -----
(In millions)
Financial assets:
<S> <C> <C> <C> <C> <C> <C>
Decommissioning trusts $1,180 $1,402 $1,069 $1,260 $1,031 $1,172
Equity investments 11 61 9 41 9 38
Financial liabilities:
DOE decommissioning and
decontamination fees 58 47 58 49 62 50
Interest rate swap & cap -- 10 -- 18 -- 9
Long-term debt 4,756 4,908 5,215 5,487 5,226 5,505
Preferred stock subject to
mandatory redemption 275 279 275 288 275 291
</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>
September 30, December 31, September 30,
1996 1995 1995
------------- ------------ -------------
(In millions)
Decommissioning trusts:
<S> <C> <C> <C>
Municipal bonds $ 64 $ 52 $ 46
Stocks 115 122 49
U.S. government issues 29 11 28
Short-term and other 14 6 18
---- ---- ----
222 191 141
Equity investments 50 32 29
---- ---- ----
Total 272 223 170
==== ==== ====
</TABLE>
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 September 30, 1996, SCE had the capacity to
pay $295 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 17
<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>
<CAPTION>
September 30, 1996
---------------------------
Shares Redemption September 30, December 31, September 30,
Outstanding Price 1996 1995 1995
----------- ---------- ------------- ------------ -------------
(In millions)
Not subject to mandatory redemption:
$25 Par value:
<S> <C> <C> <C> <C> <C>
4.08% Series 1,000,000 $25.50 $25 $25 $25
4.24 1,200,000 25.80 30 30 30
4.32 1,653,429 28.75 41 41 41
4.78 1,296,769 25.80 33 33 33
5.80 2,200,000 25.25 55 55 55
7.36 4,000,000 25.00 100 100 100
---- ---- ----
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>
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 18
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net accumulated deferred income tax liability were:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
------------- ------------ -------------
(In millions)
Deferred tax assets:
<S> <C> <C> <C>
Property-related 262 276 267
Investment tax credits 209 222 226
Regulatory balancing accounts 212 166 177
Other 733 674 651
------ ------ ------
Total 1,416 1,338 1,321
Deferred tax liabilities:
Property-related 3,591 3,670 3,691
Other 592 514 511
------ ------ ------
Total 4,183 4,184 4,202
------ ------ ------
Accumulated deferred income taxes--net 2,767 2,846 2,881
====== ====== ======
Classification of accumulated deferred income taxes:
Included in deferred credits 3,225 3,323 3,347
Included in current assets 458 477 466
</TABLE>
The current and deferred components of income tax expense were:
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
----------------- ----------------- ------------------
1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------
(In millions)
Current:
<S> <C> <C> <C> <C> <C> <C>
Federal 279 258 399 461 497 492
State 76 71 128 135 158 144
----- ----- ----- ----- ----- -----
355 329 527 596 655 636
----- ----- ----- ----- ----- -----
Deferred--federal and state:
Accrued charges 3 14 (19) 11 (29) 9
Depreciation (5) 2 (9) 14 (4) 27
Investment and energy tax credits--net (6) (6) (19) (19) (25) (24)
Nuclear Target Capacity Factor Reward -- -- 6 -- 6 --
Rate phase-in plan (7) (13) (25) (34) (38) (47)
Regulatory balancing accounts (19) (74) 14 (103) -- (78)
Retirement of debt (3) (3) (9) (7) (11) (9)
State tax-privilege year (26) (23) 10 (3) 1 1
Unbilled revenue (95) (36) (46) (58) 5 (13)
Workforce management 11 -- (8) -- (14) --
Other (9) (3) (14) (6) (20) (22)
----- ----- ----- ----- ----- -----
(156) (142) (119) (205) (129) (156)
----- ----- ----- ----- ----- -----
Total income tax expense 199 187 408 391 526 480
===== ===== ===== ===== ===== =====
Classification of income taxes:
Included in operating income 218 201 460 436 584 536
Included in other income (19) (14) (52) (45) (58) (56)
</TABLE>
The composite federal and state statutory income tax rate was 41.045% for
all periods presented.
page 19
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The federal statutory income tax rate is reconciled to the effective tax
rate below:
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
------------------ ------------------ ------------------
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 (0.8) (0.6) (0.7) (0.8) (0.8) (1.3)
Depreciation and related timing
differences not deferred 4.1 1.7 4.5 1.9 5.1 2.4
Investment and energy tax credits (1.3) (1.5) (2.0) (2.0) (2.1) (2.0)
State tax--net of federal deduction 6.8 6.7 7.0 6.2 7.2 5.9
Other -- 1.4 (0.5) 1.3 (0.2) 1.4
---- ---- ---- ---- ---- ----
Effective tax rate 43.8 42.7% 43.3 41.6% 44.2 41.4%
==== ===== ==== ===== ==== =====
</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 and September 1996,
SCE recorded pension gains from a special voluntary early retirement
program.
The plan's funded status was:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
-------------- ------------- --------------
(In millions)
Actuarial present value of benefit obligation:
<S> <C> <C> <C>
Vested benefits 1,741 1,696 1,296
Nonvested benefits 71 210 162
------ ------ ------
Accumulated benefit obligation 1,812 1,906 1,458
Value of projected future compensation levels 306 479 497
------ ------ ------
Projected benefit obligation 2,118 2,385 1,955
====== ====== ======
Fair value of plan assets 2,374 2,620 2,507
====== ====== ======
Plan assets greater than projected benefit
obligation (256) (235) (552)
Unrecognized net gain 419 326 648
Unrecognized prior service cost (178) (6) (5)
Unrecognized net obligation (17-year amortization) (45) (49) (52)
------ ------ ------
Pension liability (asset) (60) 36 39
====== ====== ======
Discount rate 8.50% 7.25% 8.50%
Rate of increase in future compensation 5.00% 5.00% 5.00%
Expected long-term rate of return on assets 8.00% 8.00% 8.00%
</TABLE>
page 20
<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 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
-------------- ---------------- ---------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Service cost for benefits earned $ 11 $ 15 $ 44 $ 43 $ 58 $ 57
Interest cost on projected
benefit obligation 46 39 133 116 174 153
Actual return on plan assets (50) (121) (203) (318) (339) (229)
Net amortization and deferral -- 74 52 180 140 49
---- ---- ---- ---- ---- ----
Pension expense under
accounting standards 7 7 26 21 33 30
Special termination
expense (gain) (8) -- (86) -- (83) 15
Regulatory adjustment--
deferred 4 5 13 16 19 18
---- ----- ---- ----- ----- -----
Net expense (gain)
recognized $ 3 $ 12 $(47) $ 37 $(31) $ 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
and September 1996, SCE recorded special termination expenses 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 impact of the early retirement program) and will be charged to
earnings.
Trust assets are primarily common stocks, corporate and government bonds,
and short-term investments.
page 21
<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 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
-------------- ---------------- ---------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Service cost for benefits earned $ 9 $ 8 $ 29 $ 23 $ 39 $ 28
Interest cost on benefit
obligation 19 18 59 56 80 75
Actual return on plan assets (9) (7) (28) (20) (35) (24)
Amortization of loss 2 -- 5 -- 7 --
Amortization of transition
obligation 7 9 20 26 21 35
---- --- ---- ---- ---- ----
Net expense 28 28 85 85 112 114
Special termination expense 11 -- 60 -- 60 --
---- --- ---- ---- ---- ----
Total expense $ 39 $ 28 $145 $ 85 $172 $114
==== === ==== ==== ==== ====
</TABLE>
The funded status of these benefits is reconciled to the recorded
liability below:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
------------- ------------- -------------
(In millions)
Actuarial present value of benefit obligation:
<S> <C> <C> <C>
Retirees $ 571 $ 402 $ 530
Employees eligible to retire 49 103 50
Other employees 428 556 336
------ ------ -----
Accumulated benefit obligation $1,048 $1,061 $ 916
====== ====== =====
Fair value of plan assets $ 542 $ 400 $ 374
====== ====== =====
Plan assets less than accumulated benefit
obligation $ 506 $ 661 $ 542
Unrecognized transition obligation (437) (457) (596)
Unrecognized prior service cost (15) -- --
Unrecognized net loss (gain) (5) (203) 50
------ ------ -----
Recorded liability (asset) $ 49 $ 1 $( 4)
====== ====== =====
Discount rate 8.50% 7.50% 8.75%
Expected long-term rate of return on assets 8.50% 8.50% 8.50%
</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 September 30, 1996, by $166
million and annual aggregate service and interest costs by $20 million.
page 22
<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 $4 million, $14
million and $19 million for the three, nine and twelve months ended
September 30, 1996, respectively, and $4 million, $15 million and $20
million for the three, nine and twelve months ended September 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 September 30, 1996, was:
<TABLE>
<CAPTION>
Plant in Accumulated Under Ownership
Service Depreciation Construction Interest
-------- ------------ ------------ ---------
(In millions)
Transmission systems:
<S> <C> <C> <C> <C>
Eldorado 28 8 1 60%
Pacific Intertie 227 71 11 50
Generating stations:
Four Corners Units 4 and 5 (coal) 457 233 3 48
Mohave (coal) 300 143 7 56
Palo Verde (nuclear) 1,592 408 8 16
San Onofre (nuclear) 4,188 1,752 14 75
------ ------ ----
Total 6,792 2,615 44
====== ====== ====
</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 September 30,
1996, were:
Year ended December 31, (In millions)
1996 7
1997 18
1998 15
1999 11
2000 8
Thereafter 12
---
Total 71
===
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 23
<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 $38 million, $111 million and $150 million for the three, nine and
twelve months ended September 30, 1996, respectively, and $39 million,
$112 million and $133 million for the three, nine and twelve months ended
September 30, 1995, respectively. The accumulated provision for
decommissioning was $916 million at September 30, 1996, $823 million at
December 31, 1995, and $792 million at September 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 September 30, December 31, September 30,
Dates 1996 1995 1995
---------- ------------- --------------- -------------
(In millions)
<S> <C> <C> <C> <C>
Municipal bonds 1998-2021 $ 372 $ 348 $ 334
Stocks -- 545 390 358
U.S. government issues 1997-2026 181 145 206
Short-term and other 1996-2024 82 186 133
------ ------ ------
Total $1,180 $1,069 $1,031
====== ====== ======
</TABLE>
Trust fund earnings (based on specific identification) increase the trust
fund balance and the accumulated provision for decommissioning. Net
earnings were $12 million, $35 million and $49 million for the three, nine
and twelve months ended September 30, 1996, respectively, and $15 million,
$37 million and $34 million for the three, nine and twelve months ended
September 30, 1995, respectively. Proceeds from the sale of securities
(which are reinvested) were $189 million, $776 million and $1.0 billion
for the three, nine and twelve months ended September 30, 1996,
respectively, and $261 million, $759 million and $1.2 billion for the
three, nine and twelve months ended September 30, 1995, respectively.
Approximately 89% 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 24
<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 an unconditional purchase obligation 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 operating capacity. SCE's minimum commitment
under this contract is approximately $84 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 $ 660 $ 802 $ 636 $ 664 $ 647
Fuel supply contracts 295 215 236 228 246
Purchased-power capacity payments 725 714 714 721 723
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 25
<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 September 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 35 of its
sites, representing $101 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 successfully settled insurance claims with a number of its carriers
and is no longer pursuing any additional recoveries. Costs incurred at
the remaining 23 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 September 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 26
<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 27
<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-, nine-
and twelve-month periods ended September 30, 1996, were $247 million, $508
million and $629 million, respectively, compared with $243 million, $522
million and $640 million for the same periods in 1995. Included in third
quarter 1996 earnings is a $24 million benefit (after-tax) for the
reversal of workforce management costs related to outsourcing certain
operations previously accrued in the second quarter of 1996. This was
partially offset by a $7 million (after-tax) charge for additional costs
associated with its voluntary retirement program.
During the year-earlier quarter, SCE recorded a $6 million special charge
against earnings related to workforce management costs. During the nine
and twelve months ended September 30, 1996, special charges related to
workforce management costs totaled $15 million for each period, compared
with $15 million and $33 million, respectively, during the corresponding
periods of 1995. Excluding these one-time adjustments quarterly, year-to-
date and twelve-month earnings decreased $19 million, $14 million and $29
million, respectively, when compared with the corresponding periods of the
prior year. The decreased earnings are primarily attributable to the
impact of the 1996 cost-of-capital decision which reduced the authorized
return on common equity to 11.6% from 12.1% and the impact of SCE's 1995
general rate case which reduced authorized revenues and operating and
maintenance expenses.
Operating Revenue
Operating revenue decreased for all periods presented, as increased
kilowatt-hour sales volume was offset by lower average rates. The lower
rates are attributable to the California Public Utilities Commission's
(CPUC) decision to lower SCE's 1996 authorized revenues by 4.4%, or $338
million. Additionally, SCE refunded $237 million to ratepayers as part of
a CPUC-ordered refund of energy-cost balancing account overcollections.
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. Legislation enacted in September 1996,
provides, among other things, a 10% rate reduction for residential and
small commercial customers beginning in 1998 contingent upon the issuance
of rate reduction bonds (see discussion under "Regulatory Matters").
page 28
<PAGE>
Operating Expenses
Fuel expense increased 12% during the third quarter of 1996, compared to
the same period in 1995, primarily due to higher gas prices. For the
twelve months ended September 30, 1996, compared to the year-earlier
periods, fuel expense decreased 8% due to decreased power generation
caused by increased power purchases on the open market.
Purchased-power expense increased slightly 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 September 30, 1996, SCE paid about $1.7 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, nine and twelve months ended September 30, 1996, compared to
the year-earlier periods. The decreases are due to the energy-cost-
balancing account-related refund as discussed above, lower base rate
revenues and 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).
Other operating expenses declined for all periods presented primarily due
to ongoing cost reduction efforts. In the third quarter of 1996, SCE
recorded a $40 million (pre-tax) one-time benefit from the reversal of a
portion of workforce management costs it had accrued in the previous
quarter, based on a decision not to outsource certain operations. This
was partially offset by $12 million (pre-tax) in additional accruals for
a voluntary retirement program for represented employees.
Maintenance expense decreased 22%, 19% and 12%, for the three, nine and
twelve months ended September 30, 1996, compared with the year-earlier
periods, due to lower overall maintenance cost at SCE's generation,
transmission and distribution operating facilities. Additionally, there
were higher expenses during 1995 from scheduled refueling and maintenance
outages at San Onofre Units 2 and 3.
Depreciation and decommissioning expense increased 16%, 12% and 13%,
respectively, for the three, nine and twelve months ended September 30,
1996, compared to the year-earlier periods. The increases are primarily
due to increased depreciation rates, and 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).
Income taxes increased for the three, nine and twelve months ended
September 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 plans ended in
February and September 1996 for Units 1 and 2, respectively. The plan
ends in January 1998 for Unit 3. The provision is a non-cash offset to
the collection of deferred revenue.
Interest income decreased slightly for the three and nine months ended
September 30, 1996, compared to the same periods in 1995, due to lower
interest rates.
page 29
<PAGE>
Other nonoperating income (deductions) decreased for the three, nine and
twelve months ended September 30, 1996, compared to the same periods in
1995, primarily due to additional accruals for regulatory matters.
Interest Expense
Other interest expense decreased for all periods presented compared to the
corresponding periods of the prior year, due to the lower levels of short-
term debt and lower interest rates.
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 $800 million on September 27, 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 16.5 million
shares ($277 million) through November 7, 1996, funded by dividends from
its subsidiaries.
SCE's cash flow coverage of dividends for the three, nine and twelve
months ended September 30, 1996, decreased to 3.3 times, 2.9 times, and
2.7 times compared to 4.6 times, 3.9 times, and 3.4 times for the
corresponding periods of the prior year, due to the additional cash needs
of Edison International for the repayment of long-term debt and the
repurchase of stock.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $620 million, $1.7
billion and $2.0 billion, respectively, for the three, nine and twelve
months ended September 30, 1996, compared with $671 million, $1.6 billion
and $1.9 billion for the same periods in 1995. Cash from operations
exceeded capital requirements for all periods presented.
Cash Flows from Financing Activities
SCE's short-term debt is used to finance fuel inventories, balancing
account undercollections and general cash requirements. Long-term debt
is used mainly to finance capital expenditures. External financings are
influenced by market conditions and other factors, including limitations
imposed by its articles of incorporation and trust indenture. As of
September 30, 1996, SCE could issue approximately $7.9 billion of
additional first and refunding mortgage bonds and $4.4 billion of
preferred stock at current interest and dividend rates.
At September 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
September 30, 1996, SCE had the capacity to pay $295 million in additional
dividends and continue to maintain its authorized capital structure.
page 30
<PAGE>
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 between 2013-2070 to decommission its nuclear facilities.
This estimate is based on SCE's current-dollar decommissioning 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--
$660 million; 1997--$802 million; 1998--$636 million; 1999--$664 million;
and 2000--$647 million.
Long-term debt maturities and sinking fund requirements for the five
twelve-month periods following September 30, 1996, are: 1997--$501
million; 1998--$277 million; 1999--$325 million; 2000--$325 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) for 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.
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 reduction 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 2001 (the original end date of 2003 was changed by
legislation enacted in September 1996), 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 are subject to an incentive pricing plan,
through which SCE receives about 4 cents per kilowatt-hour through 2003.
Any differences from the incentive price will flow through to
shareholders. Beginning in 2004, 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. On August 27, 1996, SCE agreed to terms regarding key
components of its 1997 cost-of-capital. The agreement provides that SCE
will continue to receive the same 11.6% return on common equity as well
page 31
<PAGE>
as maintain its equity ratio at 48%. Final approval by the CPUC is
expected in November 1996.
In 1994, the CPUC found SCE liable for expenditures related to an accident
which occurred at the Mohave Generating Station in 1985. SCE and the
Organization (formerly Division) of Ratepayer Advocates (ORA) agreed on
a $39 million settlement (including interest) which was approved by the
CPUC in July 1996. As of September 30, 1996, approximately $32.7 million
had been refunded to customers via a bill credit. The remainder will be
refunded by year-end. 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 ORA 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 ORA have filed several rounds of testimony on
this issue. Hearings are scheduled for early 1997.
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
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%. In addition, SCE proposed an incentive pricing plan 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%. The legislation has accelerated the
proposed recovery period to five years (1997-2001). On November 1, 1996,
all of the active parties to the Palo Verde proceeding signed a Memorandum
of Understanding (MOU) which will form the basis for a definitive
settlement agreement. The portion of the MOU concerning accelerated
recovery of Palo Verde's sunk costs is consistent with SCE's proposal, as
modified by the legislation enacted in September 1996. However, instead
of the incremental cost incentive pricing proposed by SCE, the MOU
proposes to pass-through Palo Verde incremental costs to ratepayers
through a balancing account. These costs will be considered reasonable
so long as they do not exceed 30% of a baseline forecast and the site's
capacity factor does not go below 55%. The existing nuclear unit
incentive procedure will continue only for purposes of calculating a
reward for performance of any unit above an 80% capacity factor for a fuel
cycle. For post-2001 operations, SCE's ratepayers will receive 50% of the
operational benefits. A definitive settlement agreement is expected to
be filed with the CPUC in late 1996 with a decision expected in late 1996
or early 1997.
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.
In December 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
page 32
<PAGE>
January 1, 1998, with all consumers participating by 2003. However, the
legislation enacted in September 1996 (discussed below) specifies that all
customers should be eligible to participate through direct transactions
in the competitive market, no later than January 1, 2002. Key elements
of the CPUC decision include:
o Creation of an independent power exchange (PX) 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 PX.
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.
On September 20, 1996, the CPUC adopted a non-generation (transmission and
distribution-T&D) PBR mechanism for SCE beginning on January 1, 1997.
According to the CPUC decision, beginning in 1998, the transmission
portion is to be separated from non-generation PBR and subject to
ratemaking under the rules of the FERC. The distribution-only PBR will
extend through December 2001. Key elements of the non-generation PBR
include: T&D rates indexed for inflation based on the Consumer Price
Index; elimination of the kilowatt-hour sales adjustment; adjustments for
cost changes that are not within SCE's control; a cost of capital trigger
mechanism based on changes in a bond index; standards for service
reliability and safety; and a net revenue-sharing mechanism that
determines how customers and shareholders will share gains and losses from
T&D operations. On July 15, 1996, SCE filed a PBR proposal for its
hydroelectric plants and a proposed structure for performance-based local
reliability contracts for certain fossil-fueled plants. If approved, the
hydro PBR would be in effect for three years and the initial terms of 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.
In March 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 PX is delayed; and prudently incurred costs associated with fuel
supply, transportation and storage contracts not being stranded by the
divestiture.
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In April 1996, SCE, Pacific Gas & Electric Company and San Diego Gas &
Electric Company filed a proposal with the FERC regarding the creation of
the PX and the ISO. In July 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 PX through January 1, 1998. The loans would be backed by
utility guarantees and SCE's share would be 45%. Once the ISO and PX are
formed, they will repay the trust's loans and recover funds from future
ISO and PX customers. In August 1996, the CPUC issued an interim order
establishing the restructuring trust and funding it with $250 million in
order to build the hardware and software systems for the ISO and PX.
In July 1996, SCE filed a proposal with the CPUC related to the conceptual
aspects of 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 T&D,
be functionally separate and available to all customers on a
nondiscriminatory basis without cost-shifting among customers.
On August 30, 1996, in compliance with the CPUC's restructuring decision,
SCE filed its application to estimate its 1998 transition costs. On
October 21, 1996, SCE amended its transition cost filing to reflect the
effects of the legislation enacted in September 1996 (see discussion
below). Under the rate freeze codified in the legislation, the CTC will
be determined residually (i.e., after subtracting components for the PX,
T&D, nuclear decommissioning, and public benefits programs).
Nevertheless, the CPUC directed that the amended application provide
estimates of SCE's potential transition costs from 1998 through 2030. SCE
provided two estimates between approximately $11.9 billion (1997 net
present value), assuming the fossil plants have a market value equal to
the net book value, and $12.6 billion (1997 net present value), assuming
the fossil plants have no market value. These estimates are 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: $6.8 billion from SCE's qualifying facility contracts, which are the
direct result of legislative and regulatory mandates; and $5.1 billion to
$5.8 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 nuclear plants (including San Onofre Unit 1 as discussed in
Note 1 and San Onofre Units 2 and 3 as discussed above) and Palo Verde
Units 1, 2 and 3, nuclear decommissioning and certain other costs.
On September 23, 1996, the State of California enacted legislation to
provide a rapid, but orderly, transition to a competitive market
structure. The legislation substantially adopts the CPUC's December 1995
restructuring decision (previously discussed) by favorably addressing
stranded-cost recovery for utilities, providing a certain cost recovery
time period for the transition costs associated with utility-owned
generation-related assets. Transition costs related to power purchase
contracts would be recovered through the terms of their contracts while
most of the remaining transition costs would be recovered through 2001.
The legislation also includes provisions to finance a portion of the
stranded costs that residential and small commercial customers would have
paid between 1998 and 2001, allowing SCE to give a rate reduction of at
least 10% to these customers, beginning January 1, 1998. The financing
would occur with securities issued by the California Infrastructure and
Economic Development Bank, or an entity approved by the Bank. The
legislation includes a rate freeze for all other customers, including
large commercial and industrial customers, as well as provisions for
continued funding for energy conservation, low-income programs and
renewable resources. Despite the rate freeze, SCE expects to be able to
recover its revenue requirement based on cost-of-service regulation during
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the 1998-2001 period. In addition, the legislation mandates the
implementation of a CTC that provides utilities the opportunity to recover
costs made uneconomic by electric utility restructuring. Finally, the
legislation contains provisions for the recovery (through 2006) of
reasonable employee-related transition costs incurred and projected for
retraining, severance, early retirement, outplacement, and related expense
for utility workers. It also presents substantial challenges to SCE
related to the stranded cost recovery that must be completed by 2001,
while still maintaining a rate freeze for some customers and a rate
reduction for others.
In light of the legislation, the CPUC is reassessing the need to prepare
an environmental impact report. If the CPUC's restructuring is
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 for its
generation-related assets during the rate recovery period. 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, during the restructuring process, events occur 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 September 30, 1996, these
amounts totaled approximately $1.0 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 events occur during the restructuring process that result
in all or a portion of the CTC being improbable of recovery, SCE could
have additional write-offs associated with these costs if they are not
recovered through another regulatory mechanism. At this time, SCE cannot
predict what other revisions will ultimately be made during the
restructuring process in subsequent proceedings or implementation phases,
or the effect, after the transition period, that competition will have on
its results of operations or financial position.
FERC Stranded Cost/Open Access Transmission Decision
In April 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 on an interim
basis, subject to refund, as of its filing date. Several wholesale
customers have filed protests with the FERC on the transmission rate
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levels, and a ruling from the FERC setting the rates for formal hearing
is anticipated by the end of 1996 or early 1997.
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 September 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 35 of its
sites, representing $101 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 successfully settled insurance claims
with a number of its carriers and is no longer pursuing any additional
recoveries. Costs incurred at the remaining 23 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 September 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.
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
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the southwestern US. 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 third quarter 1996, SCE decided not to outsource certain operations
and reversed a $40 million charge it had accrued in the previous quarter.
During the third quarter, an additional $12 million was accrued as a
charge against earnings for a voluntary retirement program for represented
employees (these employees voted to accept SCE's voluntary retirement
package in August 1996 and elections became irrevocable on September 30,
1996). SCE expects to reduce its workforce by approximately 3,400
employees (2,400 non-represented and 1,000 represented employees) by year-
end 1996. SCE has expensed a total of $26 million in 1996 for workforce
reductions associated with its voluntary retirement program.
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
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.
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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. On August
8, 1996, SCE filed its application with the CPUC for approval of the
settlement as it pertains to the period after 1995. The application is
currently pending.
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
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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
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 Flowind
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 Reports on Form 10-Q for the periods
ended March 31, 1996 and June 30, 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. A briefing schedule for the appeal has been established, but
no date for oral argument has been set.
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.
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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
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 Reports on Form 10-Q for
the periods ended March 31, 1996 and June 30, 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. 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 August 15,
1996, the plaintiffs' appeal of the denial of their motion was denied by
the Ninth Circuit Court of Appeals. Plaintiffs have until November 13,
1996 to file a petition for writ of certiorari with the U.S. Supreme
Court.
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 29, 1996, the court
entered judgment in favor of SCE dismissing the remaining claim.
Plaintiffs filed a notice of appeal of this decision to the Ninth Circuit
Court of Appeals on August 22, 1996. Trial of the case against the other
defendants has been stayed by the court until there are final
determinations on any appeals from the judgment entered in favor of SCE
and from a number of other orders. 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
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25, 1996, the court granted SCE's motion for summary judgment on all
claims. Plaintiffs filed a notice of appeal of this decision to the
Ninth Circuit Court of Appeals on September 25, 1996. In addition, the
court stayed all further trial court proceedings until there are final
determinations on any appeals in this case and in the case described
immediately above. 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 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. On August 1, 1996,
the court stayed all further trial court proceedings until there are final
determinations on any appeals from the judgments entered in favor of SCE
in the two cases mentioned immediately above.
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. The employee's wife subsequently died from her
illness. This case is expected to go to trial in March, 1997.
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 August 12, 1996, the court
dismissed the claims of the former worker and her husband with prejudice.
This case is expected to go to trial, after completion of the trial of the
case described immediately above, in mid-1997.
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. This
case was dismissed with prejudice on October 11, 1996.
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 Reports on Form
10-Q for the periods ended March 31, 1996 and June 30, 1996.
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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 sought injunctive relief, as well as an unspecified amount of
compensatory and punitive damages, attorneys' fees, costs and interest.
Edison International and SCE denied the material allegations of the
complaint, asserted several affirmative defenses, and pursued discovery.
On May 2, 1996, SCE and the Equal Employment Opportunity Commission
("EEOC") stipulated to the EEOC's intervention in the action.
Subsequently, on May 9, 1996, the Court entered an order allowing the EEOC
to intervene.
Following extensive negotiations, the parties agreed upon settlement terms
and submitted a proposed Consent Decree to the court for approval. On May
13, 1996, the Court granted the parties' Joint Motion for Preliminary
Approval of Consent Decree, preliminarily accepting the proposed Consent
Decree, provisionally certifying the case as a class action, and approving
notice to the class members. On July 22, 1996, at the hearing on final
approval of the Consent Decree, the court raised issues that resulted in
the parties' agreement to modify the proposed Consent Decree. The court
then granted preliminary approval of the modified Consent Decree on August
5, 1996, ordered that notice be given to the class members, and scheduled
a final fairness hearing for September 26, 1996.
Fifteen individuals and an organization filed objections to the proposed
Consent Decree and a motion to intervene in the lawsuit. Thirteen
individuals filed timely requests to be excluded from the monetary
provisions of the proposed Decree. On September 25, 1996, the court
denied the motion to intervene. After the hearing on September 26, at
which the court heard oral argument from the objectors, the court on
September 30, 1996, overruled the objections and granted final approval
of the Consent Decree.
The Consent Decree provides that a settlement fund of $8,150,000 for back
pay claims and $3,100,000 for emotional distress claims be established,
and it contains an expedited claim review process for class members who
make claims to the settlement fund. The Decree also provides for
improvements in the Company's internal claims resolution process,
expansion of career development and skills training programs, expansion
of diversity training programs, and improvements in other human resources
systems. The Decree has a seven-year term, with the possibility of early
termination after five years.
On October 25, 1996, the organization and individuals who sought to
intervene and/or objected to the Consent Decree served notices of appeal
from the court's orders denying intervention and approving the Consent
Decree.
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 Reports
on Form 10-Q for the periods ended March 31, 1996 and June 30, 1996.
Oil Pipeline Litigation
On November 1, 1996, plaintiff, a crude oil pipeline company, filed a
lawsuit against SCE and the City of Los Angeles (the "City") in the United
States District Court for the Central District of California claiming that
SCE and the City had interfered with its attempt to construct a proposed
132-mile oil pipeline ("Pacific Pipeline") designed to transport oil from
the San Joaquin Valley and Santa Barbara to the Los Angeles refineries.
page 42
<PAGE>
Plaintiff alleges, among other things, that SCE and the City wrongfully
initiated administrative and other legal proceedings in an attempt to
derail and obstruct the construction of the Pacific Pipeline. Plaintiff
alleges that these acts constitute unfair competition, tortious
interference with economic advantage and violate state and federal
antitrust laws. Plaintiff further claims that because of the alleged
delays, it could suffer losses in excess of $300,000,000. Additionally,
plaintiff seeks treble and punitive damages.
Unless the filing deadline is extended, SCE's response to the complaint
is due on or before November 25, 1996. SCE intends to deny the material
allegations of the complaint. This matter has not been previously
reported.
page 43
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
23. Consent of Independent Public Accountants
27. Financial Data Schedule
(b) Reports on Form 8-K:
October 3, 1996 -- Item 5 -- Other Events--
Governor Signs Restructuring Legislation
CPUC Incentive-Based Rate Decision
page 44
<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
November 12, 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 September 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
November 6, 1996
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
SCE Exhibit 27 Financial Data Schedule
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $11,865,705
<OTHER-PROPERTY-AND-INVEST> 1,565,594
<TOTAL-CURRENT-ASSETS> 2,603,361
<TOTAL-DEFERRED-CHARGES> 2,466,140
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 18,500,800
<COMMON> 2,168,054
<CAPITAL-SURPLUS-PAID-IN> 207,126
<RETAINED-EARNINGS> 2,748,983
<TOTAL-COMMON-STOCKHOLDERS-EQ> 5,124,163
275,000
283,755
<LONG-TERM-DEBT-NET> 3,461,324
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 1,295,000
<COMMERCIAL-PAPER-OBLIGATIONS> 368,075
<LONG-TERM-DEBT-CURRENT-PORT> 501,470
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 7,192,013
<TOT-CAPITALIZATION-AND-LIAB> 18,500,800
<GROSS-OPERATING-REVENUE> 5,717,637
<INCOME-TAX-EXPENSE> 460,234
<OTHER-OPERATING-EXPENSES> 4,355,608
<TOTAL-OPERATING-EXPENSES> 4,815,842
<OPERATING-INCOME-LOSS> 901,795
<OTHER-INCOME-NET> (34,133)
<INCOME-BEFORE-INTEREST-EXPEN> 867,662
<TOTAL-INTEREST-EXPENSE> 333,739
<NET-INCOME> 533,923
25,796
<EARNINGS-AVAILABLE-FOR-COMM> 508,127
<COMMON-STOCK-DIVIDENDS> 539,185
<TOTAL-INTEREST-ON-BONDS> 286,252
<CASH-FLOW-OPERATIONS> 1,699,497
<EPS-PRIMARY> $.0
<EPS-DILUTED> $.0
</TABLE>
