<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 March 31, 1997
---------------------------------------
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 May 13, 1997
- -------------------------- --------------------------
Common Stock, no par value 434,888,104<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 and
Twelve Months Ended March 31, 1997, and 1996 3
Consolidated Balance Sheets--March 31, 1997,
December 31, 1996, and March 31, 1996 4
Consolidated Statements of Cash Flows--
Three and Twelve Months Ended
March 31, 1997, and 1996 6
Consolidated Statements of Retained Earnings--
Three and Twelve Months Ended
March 31, 1997, and 1996 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 30
Part II. Other Information:
Item 1. Legal Proceedings 41
Item 4. Submission of Matters to a Vote of
Security Holders 46
Item 6. Exhibits and Reports on Form 8-K 46
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 March 31, 1997, December 31, 1996, and March 31, 1996,
and the related consolidated statements of income, retained earnings and
cash flows for each of the three- and twelve-month periods ended March 31,
1997, and 1996. 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 March 31, 1997, December 31, 1996, and March 31, 1996,
and the results of their operations and their cash flows for each of the
three- and twelve-month periods ended March 31, 1997, and 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
May 6, 1997
page 2
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
In thousands
<TABLE>
<CAPTION>
3 Months Ended 12 Months Ended
March 31, March 31,
---------------------------- ----------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenue $1,695,436 $1,760,133 $7,518,686 $7,911,065
---------- ---------- ---------- ----------
Fuel 144,616 111,692 663,536 579,674
Purchased power 628,674 527,433 2,807,122 2,622,219
Provisions for regulatory
adjustment clauses--net (88,173) 97,823 (411,904) 298,806
Other operating expenses 240,954 272,624 1,152,002 1,215,845
Maintenance 95,878 83,659 343,017 342,863
Depreciation and decommissioning 305,583 242,338 1,126,750 966,526
Income taxes 95,297 108,443 565,181 545,470
Property and other taxes 38,875 53,508 168,768 200,936
---------- ---------- ---------- ----------
Total operating expenses 1,461,704 1,497,520 6,414,472 6,772,339
---------- ---------- ---------- ----------
Operating income 233,732 262,613 1,104,214 1,138,726
---------- ---------- ---------- ----------
Provision for rate phase-in plan (11,309) (29,078) (66,519) (121,536)
Allowance for equity funds
used during construction 2,003 4,402 13,181 17,959
Interest and dividend income 6,856 10,205 34,508 39,642
Other nonoperating income--net 4,649 12,925 (11,904) 54,693
---------- ---------- ---------- ----------
Total other income (deductions)--net 2,199 (1,546) (30,734) (9,242)
---------- ---------- ---------- ----------
Income before interest expense 235,931 261,067 1,073,480 1,129,484
---------- ---------- ---------- ----------
Interest on long-term debt 91,189 97,707 374,293 387,433
Other interest expense 27,491 19,097 82,309 78,099
Allowance for borrowed funds
used during construction (2,412) (2,767) (9,439) (13,062)
Capitalized interest (1,320) (73) (2,958) (1,090)
---------- ---------- ---------- ----------
Total interest expense--net 114,948 113,964 444,205 451,380
---------- ---------- ---------- ----------
Net income 120,983 147,103 629,275 678,104
Dividends on preferred stock 8,599 8,599 34,395 35,342
---------- ---------- ---------- ----------
Earnings available for
common stock $ 112,384 $ 138,504 $ 594,880 $ 642,762
========== ========== ========== ==========
</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>
March 31, December 31, March 31,
1997 1996 1996
-------- ------------ ---------
ASSETS
<S> <C> <C> <C>
Utility plant, at original cost $20,537,877 $20,400,387 $20,016,984
Less--accumulated provision for depreciation
and decommissioning 9,687,121 9,431,071 8,732,739
----------- ----------- -----------
10,850,756 10,969,316 11,284,245
Construction work in progress 525,265 556,645 684,774
Nuclear fuel, at amortized cost 185,411 176,827 125,983
----------- ----------- -----------
Total utility plant 11,561,432 11,702,788 12,095,002
----------- ----------- -----------
Nonutility property--less accumulated provision
for depreciation of $23,791, $25,102 and $25,839
at respective dates 70,175 63,931 80,765
Nuclear decommissioning trusts 1,499,836 1,485,525 1,294,661
Other investments 115,470 103,973 77,068
----------- ----------- -----------
Total other property and investments 1,685,481 1,653,429 1,452,494
----------- ----------- -----------
Cash and equivalents 223,283 319,942 527,166
Receivables, including unbilled revenue, less
allowances of $24,525, $26,079 and $22,256 for
uncollectible accounts at respective dates 832,123 921,083 864,342
Fuel inventory 58,626 72,480 111,207
Materials and supplies, at average cost 153,458 154,266 150,382
Accumulated deferred income taxes--net 167,699 240,429 386,868
Prepayments and other current assets 59,794 105,137 70,440
----------- ----------- -----------
Total current assets 1,494,983 1,813,337 2,110,405
----------- ----------- -----------
Unamortized debt issuance and reacquisition
expense 339,654 346,834 370,581
Rate phase-in plan 40,013 50,703 101,369
Unamortized nuclear plant--net - - 41,936
Income tax-related deferred charges 1,691,963 1,741,091 1,791,017
Other deferred charges 434,269 428,370 323,307
----------- ----------- -----------
Total deferred charges 2,505,899 2,566,998 2,628,210
----------- ----------- -----------
Total assets $17,247,795 $17,736,552 $18,286,111
=========== =========== ===========
</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>
March 31, December 31, March 31,
1997 1996 1996
----------- ------------ -----------
CAPITALIZATION AND LIABILITIES
Common shareholder's equity:
Common stock (434,888,104 shares outstanding
<S> <C> <C> <C>
at each date) $2,168,054 $ 2,168,054 $ 2,168,054
Additional paid-in capital and other 218,399 210,857 199,511
Retained earnings 2,603,439 2,665,612 2,737,651
----------- ----------- -----------
4,989,892 5,044,523 5,105,216
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 4,660,831 4,778,703 5,026,343
----------- ----------- -----------
Total capitalization 10,209,478 10,381,981 10,690,314
----------- ----------- -----------
Other long-term liabilities 452,048 423,925 373,802
----------- ----------- -----------
Current portion of long-term debt 426,470 501,470 201,375
Short-term debt 134,826 230,149 306,535
Accounts payable 327,191 392,779 316,866
Accrued taxes 560,766 484,688 653,539
Accrued interest 104,677 93,363 107,959
Dividends payable 106,102 108,563 183,343
Regulatory balancing accounts--net 106,505 181,488 439,354
Deferred unbilled revenue and other current liabilities 787,819 825,317 751,107
----------- ----------- -----------
Total current liabilities 2,554,356 2,817,817 2,960,078
----------- ----------- -----------
Accumulated deferred income taxes--net 3,097,468 3,170,696 3,280,689
Accumulated deferred investment tax credits 342,042 347,118 364,516
Customer advances and other deferred credits 592,403 595,015 616,712
----------- ----------- -----------
Total deferred credits 4,031,913 4,112,829 4,261,917
----------- ----------- -----------
Commitments and contingencies
(Notes 2, 8, 9 and 10)
Total capitalization and liabilities $17,247,795 $17,736,552 $18,286,111
=========== =========== ===========
</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 12 Months Ended
March 31, March 31,
-------------------------- --------------------------
1997 1996 1997 1996
---------- --------- ---------- ----------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income $ 120,983 $ 147,103 $ 629,275 $ 678,104
Adjustments for non-cash items:
Depreciation and
decommissioning 305,583 242,338 1,126,750 966,526
Amortization 12,164 27,888 75,207 83,891
Rate phase-in plan 10,690 28,345 61,356 113,106
Deferred income taxes and
investment tax credits 43,554 (32,481) 122,157 (236,733)
Other long-term liabilities 28,123 29,610 78,246 38,947
Other--net (21,043) (2,807) (171,269) 37,533
Changes in working capital:
Receivables 88,960 47,621 32,219 (62,194)
Regulatory balancing accounts (74,983) 101,487 (332,849) 340,671
Fuel inventory, materials
and supplies 14,662 3,948 49,505 21,863
Prepayments and other
current assets 45,343 43,849 10,646 (13,034)
Accrued interest and taxes 87,392 124,620 (96,055) 40,683
Accounts payable and other
current liabilities (103,086) (56,761) 47,037 31,260
--------- --------- ---------- -----------
Net cash provided by
operating activities 558,342 704,760 1,632,225 2,040,623
--------- --------- ---------- -----------
Cash flows from financing activities:
Long-term debt issued - 397,294 - 691,707
Long-term debt repayments (200,005) (406,372) (198,575) (628,875)
Preferred stock redemptions - - - (75,000)
Nuclear fuel financing--net 6,031 (8,437) 56,271 687
Short-term debt financing--net (95,323) (52,973) (171,709) (155,008)
Dividends paid (185,617) (144,501) (840,710) (582,417)
--------- --------- ----------- -----------
Net cash used by
financing activities (474,914) (214,989) (1,154,723) (748,906)
--------- --------- ----------- -----------
Cash flows from investing activities:
Additions to property and plant (151,407) (184,369) (583,465) (761,630)
Funding of nuclear decommissioning
trusts (27,889) (35,975) (140,072) (162,413)
Unrealized gain in equity investments 7,243 3,632 18,511 10,450
Other--net (8,034) (7,660) (76,359) (24,413)
--------- --------- ----------- -----------
Net cash used by
investing activities (180,087) (224,372) (781,385) (938,006)
--------- --------- ----------- -----------
Net increase (decrease) in cash
and equivalents (96,659) 265,399 (303,883) 353,711
Cash and equivalents, beginning
of period 319,942 261,767 527,166 173,455
--------- --------- ----------- -----------
Cash and equivalents, end of period $ 223,283 $ 527,166 $ 223,283 $ 527,166
========= ========= =========== ===========
Cash payments for interest and taxes:
Interest $ 80,947 $ 76,468 $ 353,170 $ 386,978
Taxes 29 30,047 515,238 693,497
</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 12 Months Ended
March 31, March 31,
--------------------------- ---------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of period $2,665,612 $2,780,058 $2,737,651 $2,685,417
Net income 120,983 147,103 629,275 678,104
Dividends declared on common stock (174,557) (180,911) (729,075) (590,528)
Dividends declared on preferred
stock (8,599) (8,599) (34,395) (35,342)
Reacquired capital stock expense - - (17) -
---------- ---------- ---------- ----------
Balance at end of period $2,603,439 $2,737,651 $2,603,439 $2,737,651
========== ========== ========== ==========
</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. 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 of "Notes to
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 electric utility restructuring, decommissioning and
contingencies are further discussed in Notes 2, 9 and 10, respectively.
Certain prior-period amounts were reclassified to conform to the March 31,
1997, financial statement presentation.
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 ($185 million at March 31,
1997, $261 million at December 31, 1996, and $313 million at March 31,
1996), and time deposits and other investments ($23 million at March 31,
1997, $43 million at December 31, 1996, and $206 million at March 31,
1996) with maturities of three months or less.
Net unrealized gains (losses) in 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.
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 the 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.
page 8
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The cost of nuclear fuel, including disposal, is amortized to fuel expense
on the basis of generation. Under CPUC ratemaking procedures, nuclear-
fuel financing costs are capitalized until the fuel is placed into
production.
Decommissioning costs are accrued and recovered in rates over the term of
each nuclear facility's operating license through charges to
decommissioning expense (see Note 9).
Under federal law, 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 November 1992, SCE discontinued operation of San Onofre Nuclear
Generating Station Unit 1, after the CPUC approved a settlement agreement
between SCE and the CPUC's Office (formerly Division) of Ratepayer
Advocates (ORA) to discontinue operation of Unit 1 because operation of
the unit was no longer cost-effective. 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 a further acceleration of the recovery
of SCE's remaining investment of $2.6 billion in San Onofre Units 2 and
3. The accelerated recovery will continue through December 2001, earning
a 7.35% fixed rate of return (compared to the current 9.49%). 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 which allows SCE to receive about 4 cents
per kilowatt-hour through 2003. Any differences between these costs and
the incentive price will flow through to the shareholders. Beginning
January 1, 1998, the incentive pricing plan is expected to become part of
the competition transition charge (CTC) mechanism. Beginning in 2004, SCE
will be required to share equally with ratepayers the net benefits
received from operation of the units.
In January 1997, the CPUC authorized a further acceleration of the
recovery of its remaining investment of $1.2 billion in Palo Verde Units
1, 2 and 3. The accelerated recovery will continue through December 2001,
earning a 7.35% fixed rate of return (compared to the current 9.49%).
Future operating costs, including nuclear fuel and nuclear fuel financing
costs, and incremental capital expenditures, are subject to balancing
account treatment through 2001. Beginning January 1, 1998, the balancing
account is expected to become part of the CTC mechanism. 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. Beginning in 2002, SCE will be required to
share equally with ratepayers the net benefits received from operation of
Palo Verde.
Regulatory Balancing Accounts
The differences between CPUC-authorized and actual base-rate revenue from
kilowatt-hour sales and CPUC-authorized and actual energy costs are
accumulated in balancing accounts until they are refunded to, or recovered
from, utility customers through authorized rate adjustments (with
interest). Income tax effects on balancing account changes are deferred.
page 9
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 1997, in compliance with the new restructuring legislation,
overcollections in the kilowatt-hour sales and energy cost balancing
accounts at December 31, 1996, were transferred to an interim balancing
account and are expected to be used as a credit to the CTC balancing
account beginning in January 1998.
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, at the
end of the rate-case cycle, any authorized but unspent RD&D funds are
refunded to customers. RD&D expenses were $5 million and $22 million for
the three and twelve months ended March 31, 1997, respectively, and $4
million and $27 million for the three and twelve months ended March 31,
1996, 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 5.2% and 4.6% for the three and twelve months ended March 31, 1997,
respectively, and 3.6% for both the three and twelve months ended March
31, 1996.
Note 2. Regulatory Matters
California Electric Utility Industry Restructuring
The CPUC's December 1995 decision on restructuring California's electric
utility industry started the transition to a new market structure, which
is expected to provide competition and customer choice and is scheduled
to begin January 1, 1998. Key elements of the CPUC's restructuring
decision include: creation of an independent power exchange (PX) and
independent system operator (ISO); availability of direct customer access
and customer choice; performance-based ratemaking (PBR) for those utility
services not subject to competition; voluntary divestiture of at least 50%
of utilities' gas-fueled generation, and implementation of a non-
bypassable charge to all customers called the CTC.
In September 1996, the State of California enacted legislation to provide
a transition to a competitive market structure. The legislation
substantially adopts the CPUC's December 1995 restructuring decision by
addressing stranded-cost recovery for utilities and providing a certain
cost-recovery time period for the transition costs associated with
utility-owned generation-related assets. Transition costs related to
page 10
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, which would allow SCE to
reduce rates by 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 transition period. In addition, the legislation mandates
the implementation of a non-bypassable 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.
On May 6, 1997, SCE filed an application with the CPUC requesting approval
of the issuance of an aggregate amount of up to $3 billion of rate
reduction bonds in one or more series or classes and a 10% rate reduction
for the period from January 1, 1998, through May 31, 2001. On the same
day, SCE filed an application with the California Infrastructure and
Economic Development Bank for approval to issue the bonds. Residential
and small commercial customers will repay the bonds over the expected 10-
year term through non-bypassable charges based on electricity consumption.
With the CPUC's decision expected in September 1997, and subject to the
prior approval of the Infrastructure Bank, it is anticipated that the rate
reduction bonds will be issued in the fourth quarter of 1997.
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 November 1996, the FERC conditionally accepted
the proposal and directed the three utilities to file more specific
information, which was filed on March 31, 1997. 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; SCE's share would be 45%.
The ISO and PX 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 the funding level of $250 million
which will be used to build the hardware and software systems for the ISO
and PX.
On May 6, 1997, the CPUC issued a decision describing how all California
investor-owned utility customers will be able to choose who will provide
them with electric generation service. Beginning January 1, 1998,
customers will be able to choose to purchase power from the PX through
SCE, or choose direct access, which means the customer can contract
directly with either independent power producers or retail electric
service providers such as power brokers, marketers and aggregators.
Additionally, all investor-owned utility customers must pay the CTC
whether or not they choose to buy power through SCE. Electric utilities
will continue to provide the core distribution service of delivering
energy through its distribution system regardless of a customer's choice
of electricity supplier. The CPUC will continue to regulate the prices
and service obligations related to distribution services. If the new
page 11
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
competitive market cannot accommodate the volume of direct access
transactions, the CPUC could implement a contingency plan. However, the
CPUC believes it is likely that interest in and migration to direct access
will be gradual.
A second decision issued by the CPUC on May 6, 1997, introduces customer
choice to metering, billing and related services (referred to as revenue
cycle services) that are now provided by California's investor-owned
utilities. Under this revenue cycle services "unbundling" decision,
beginning in January 1998, customers may choose to have either SCE or
their electric generation service provider render consolidated (energy and
distribution) bills, or they may choose to have separate billings from
each service provider. In addition, beginning in January 1998, customers
with maximum demand above 20 kW (primarily industrial and large
commercial) can choose SCE or any other supplier to provide their metering
service. All other customers will have this option beginning in January
1999. In determining whether any credit should be provided by the utility
to firms providing customers with revenue cycle services, and the amount
of any such credit, the CPUC has indicated that it is appropriate to "net"
the cost incurred by the utility and the cost avoided by the utility as
a result of such services being provided by the other firm rather than by
the utility.
The unbundling of revenue cycle services is likely to expose SCE to the
loss of revenue, higher stranded costs and a reduction in revenue
security. SCE is reviewing the potential effect of these decisions on its
results of operations and financial condition.
In July 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 September 1996, the CPUC
adopted a non-generation transmission and distribution (T&D) PBR
mechanism for SCE which began 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 less a productivity
factor; elimination of the kilowatt-hour sales adjustment; adjustments for
cost changes that are not within SCE's control; a cost of capital trigger
mechanism based on changes in a bond index; standards for service
reliability and safety; and a net revenue-sharing mechanism that
determines how customers and shareholders will share gains and losses from
T&D operations.
In November 1996, SCE filed an application with the CPUC to voluntarily
divest, by auction, all of its oil- and gas-fueled generation assets.
This application builds on SCE's March 1996 plan which outlined how SCE
proposed to divest 50% of these assets. Under the new proposal, SCE would
continue to operate and maintain the divested power plants for at least
two years following their sale, as mandated by the recent restructuring
legislation. In addition, SCE would offer work force transition programs
to those employees who may be impacted by divestiture-related job
reductions. SCE's proposal is contingent on the overall electric industry
restructuring implementation process continuing on a satisfactory path.
CPUC approval of the oil- and gas-fueled generation divestiture was
requested for late 1997.
In December 1996, SCE filed a more comprehensive plan (elaborating on its
July 1996 filing related to the conceptual aspects of separating costs as
page 12
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
requested by CPUC and FERC directives) for the functional unbundling of
its rates for electric service, beginning on January 1, 1998. In response
to CPUC and FERC orders, as well as the new restructuring legislation,
this filing addressed the implementation-level detail for the functional
unbundling of rates in separate charges for energy, transmission,
distribution, the CTC, public benefit programs and nuclear
decommissioning. Hearings on SCE's rate unbundling plan were concluded
in April 1997. A final decision on this matter is expected in the third
quarter of 1997.
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 were using or began using utility services on or after the
December 20, 1995, decision date. In August 1996, in compliance with the
CPUC's restructuring decision, SCE filed its application to estimate its
1998 transition costs. In October 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 other cost components for
the PX, T&D, nuclear decommissioning and public benefit 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 $13.1 billion (1998 net
present value), assuming the fossil plants have a market value equal to
their net book value, and $13.8 billion (1998 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 prices could materially affect
these estimates. The potential transition costs are comprised of: $7.5
billion from SCE's qualifying facility contracts, which are the direct
result of legislative and regulatory mandates; and $5.6 billion to $6.3
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 and Palo Verde (as discussed in Note 1) and certain other
costs. On February 14, 1997, SCE submitted an update to the CTC filing
to reflect approval by the CPUC of settlements regarding ratemaking for
SCE's share of Palo Verde and the buyout of a power purchase agreement,
as well as other minor data updates. No substantive changes in the total
CTC estimates were included. Hearings on various phases of this issue
began in December 1996 and will continue throughout 1997. A decision is
expected before January 1, 1998.
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
believes it should be allowed to continue to apply accounting standards
that recognize the economic effects of rate regulation for its generation-
related assets during the 1998-2001 transition period. However, in
response to a request by the staff of the Securities and Exchange
Commission (SEC), in December 1996, SCE submitted its views on the
continued applicability of regulatory accounting standards for its
generation-related assets. In its submittal, SCE and its independent
accountants jointly concluded that, based on their current analysis, SCE
will continue to meet the criteria for applying these accounting standards
through the 1998-2001 transition period. In its February 1997 response,
the SEC staff expressed continuing concern with SCE's conclusion and
indicated that they wanted to meet further with SCE and the other major
California electric utilities to resolve this matter. SCE and the other
major California electric utilities met with the SEC in March 1997.
Subsequently, the SEC asked a series of questions to be answered by each
page 13
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of California's major electric utilities. SCE responded to the SEC's
questions in early April 1997. The authority to require SCE to
discontinue applying regulatory accounting standards rests with the SEC,
although matters such as this can be referred to the Financial Accounting
Standards Board's Emerging Issues Task Force (EITF) for resolution. On
April 28, 1997, this regulatory accounting matter was added to the EITF's
agenda for discussion at its May 21-22, 1997, meeting. If the EITF is
able to reach a consensus on this matter, SCE will be required to follow
the EITF's guidance. If SCE is required to discontinue the application
of these regulatory accounting standards for its generation-related
assets, and the EITF does not change the current requirements of these
standards, SCE would have to write off generation-related regulatory
assets, which at March 31, 1997, totaled approximately $500 million on
an after-tax basis, primarily for the recovery of income tax benefits
previously flowed-through to customers, purchased-power agreement
termination payments, unamortized loss on reacquired debt and the Palo
Verde phase-in plan.
SCE believes that a proper application of regulatory accounting standards
will result in it no longer meeting the criteria to apply these accounting
standards to all of its non-hydroelectric generation-related assets after
the end of the 1998-2001 transition period. If SCE continues the
application of these accounting standards during the transition period,
but during the transition period events occur that result in SCE no longer
meeting the criteria for applying such standards, SCE may be required to
write off the remaining balance of its recorded generation-related
regulatory assets existing at that time.
If a non-cash write-off is required, SCE believes that it should not
affect the stranded-cost recovery plans set forth in the CPUC's December
1995 restructuring decision and legislation enacted by the State of
California in September 1996.
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.
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 Restructuring Decision
In April 1996, the FERC issued its decision on stranded cost recovery and
open access transmission, effective July 1996. The decision, reaffirmed
in a March 1997 FERC order, 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
page 14
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 in July 1996. The tariff became effective on an interim basis,
subject to refund, as of its filing date. The FERC accepted SCE's
compliance filing in February 1997. SCE will revise its tariff to reflect
the few revisions set forth in the FERC's March 1997 order.
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 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. In October 1996, the ORA issued its report
for the 1995 record period recommending a $38 million disallowance for
excessive costs incurred from April 1994 through March 1995. Both
proposed disallowances have been consolidated into one proceeding. SCE
and the ORA have filed several rounds of testimony on this issue.
Hearings concluded in February 1997. A decision is expected in late 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
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.
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.
Long-term debt maturities and sinking-fund requirements for the five
twelve-month periods following March 31, 1997, are: 1998--$426 million;
1999--$322 million; 2000--$480 million; 2001--$200 million; and 2002--$200
million.
page 15
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED STATEMENTS
Long-term debt consisted of:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1997 1996 1996
-------------- ------------ -------------
(In millions)
First and refunding mortgage bonds:
<S> <C> <C> <C>
1997--2026 (5.45% to 8-7/8%) $2,525 $2,725 $2,725
Pollution-control bonds:
1999--2027 (5.4% to 7.2% and variable) 1,204 1,204 1,205
Funds held by trustees (2) (2) (2)
Debentures and notes:
1998--2006 (5.6% to 8-1/4%) 1,195 1,195 1,195
Subordinated debentures:
2044 (8-3/8%) 100 100 100
Commercial paper for nuclear fuel 118 112 61
Long-term debt due within one year (426) (501) (201)
Unamortized debt discount--net (53) (54) (57)
------ ------ ------
Total $4,661 $4,779 $5,026
====== ====== ======
</TABLE>
Short-Term Debt
SCE has lines of credit it can use at negotiated or bank index rates. At
March 31, 1997, 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 March 31, 1997, December 31,
1996, and March 31, 1996, was $254 million, $345 million and $370 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%, 5.5% and 5.3%, at March 31, 1997, December 31, 1996, and March 31,
1996, 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. Interest rate
differentials and premiums for interest rate caps to be paid or received are
recorded as adjustments to interest expense. The interest rate swap
agreement requires the parties to pledge collateral according to bond rating
and market interest rate changes. At March 31, 1997, SCE had pledged $16
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.
page 16
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 July 1, 1997 6% over variable term of the
debt due 2027 debt
</TABLE>
Fair values of financial instruments were:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1997 1996 1996
-------------------- ------------------- -----------------
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 $1,245 $1,499 $1,217 $1,485 $1,105 $1,295
Equity investments 11 75 11 68 9 47
Financial liabilities:
DOE decommissioning and
decontamination fees 54 44 54 45 58 47
Interest rate swap & cap - 9 -- 16 -- 11
Long-term debt 4,661 4,727 4,779 5,001 5,026 5,141
Preferred stock subject to
mandatory redemption 275 289 275 286 275 281
</TABLE>
Financial assets are carried at their fair value based on quoted market
prices. Financial liabilities are recorded at cost. Financial
liabilities' fair values are 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>
March 31, December 31, March 31,
1997 1996 1996
---------- ------------ -------------
(In millions)
Decommissioning trusts:
<S> <C> <C> <C>
Municipal bonds $ 77 $ 79 $ 57
Stocks 129 138 80
U.S. government issues 34 39 19
Short-term and other 14 12 34
---- ---- ----
254 268 190
Equity investments 64 57 38
---- ---- ----
Total $318 $325 $228
==== ==== ====
</TABLE>
There were no unrealized holding losses on financial assets for all
periods presented.
page 17
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Equity
The CPUC regulates SCE's capital structure, limiting the dividends it may
pay Edison International. At March 31, 1997, SCE had the capacity to pay
$285 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.
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>
March 31, 1997
---------------------------
Shares Redemption March 31, December 31, March 31,
Outstanding Price 1997 1996 1996
----------- ---------- ------------- ------------ -------------
(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>
In the second quarter of 1995, 750,000 shares of Series 7.58% preferred
stock were redeemed. There were no other preferred stock issuances or
redemptions for the periods presented.
Note 5. Income Taxes
SCE and its subsidiaries will be included in Edison International's
consolidated federal income tax and combined state franchise tax returns.
Under income tax allocation agreements, each subsidiary calculates its own
tax liability.
page 18
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED STATEMENTS
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.
The components of the net accumulated deferred income tax liability were:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1997 1996 1996
------------- ------------ -------------
(In millions)
Deferred tax assets:
<S> <C> <C> <C>
Property-related $ 237 $ 247 $ 254
Investment tax credits 202 206 218
Regulatory balancing accounts 111 205 193
Decommissioning-related 105 208 79
Other 490 429 526
------ ------ ------
Total 1,145 1,295 1,270
------ ------ ------
Deferred tax liabilities:
Property-related 3,489 3,550 3,669
Other 585 676 495
------ ------ ------
Total 4,074 4,226 4,164
------ ------ ------
Accumulated deferred income taxes--net $2,929 $2,931 $2,894
====== ====== ======
Classification of accumulated deferred income taxes:
Included in deferred credits $3,097 $3,171 $3,281
Included in current assets 168 240 387
</TABLE>
page 19
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO FINANCIAL STATEMENTS
The current and deferred components of income tax expense were:
<TABLE>
<CAPTION>
3 Months Ended 12 Months Ended
March 31, March 31,
---------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
(In millions)
Current:
<S> <C> <C> <C> <C>
Federal $ 24 $ 90 $ 320 $ 557
State 19 41 107 184
----- ----- ----- -----
43 131 427 741
----- ----- ----- -----
Deferred--federal and state:
Accrued charges (2) (1) (14) (4)
Depreciation (12) (6) (20) 12
Investment and energy tax credits--net (5) (6) (22) (27)
Pension reserves (1) (5) 49 (8)
Postretirement benefits other than pensions reserve (8) (8) (25) (10)
Rate phase-in plan (4) (11) (24) (46)
Regulatory balancing accounts 26 (49) 109 (146)
State tax--privilege year 27 40 8 (6)
Other 23 11 15 (9)
----- ----- ----- -----
44 (35) 76 (244)
----- ----- ----- -----
Total income tax expense $ 87 $ 96 $ 503 $ 497
===== ===== ===== =====
Classification of income taxes:
Included in operating income $ 95 $ 108 $ 565 $ 545
Included in other income (8) (12) (62) (48)
</TABLE>
The composite federal and state statutory income tax rate was 40.551% and
40.921% for the three and twelve months ended March 31, 1997,
respectively, and 41.045% for both the three and twelve months ended
March 31, 1996.
page 20
<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 12 Months Ended
March 31, March 31,
------------------ ------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0% 35.0%
Capitalized software (0.9) (0.7) (0.8) (0.8)
Depreciation and other 2.0 1.1 4.9 3.2
Investment and energy tax credits (2.4) (2.6) (2.0) (2.3)
State tax--net of federal deduction 8.1 6.8 7.3 7.2
---- ---- ---- ----
Effective tax rate 41.8% 39.6% 44.4% 42.3%
==== ==== ==== ====
</TABLE>
Note 6. Employee Compensation and Benefit Plans
Stock Option Plans
Under its Long-Term Incentive Compensation Plan, SCE participates in the
use of 8.2 million shares of parent company common stock reserved for
potential issuance under various stock compensation programs to directors,
officers and senior managers of Edison International and its affiliates.
Under these programs, options on 3.8 million shares of Edison
International common stock are currently outstanding to officers and
senior managers of SCE.
Each option may be exercised to purchase one share of Edison International
common stock, and is exercisable at a price equivalent to the fair market
value of the underlying stock at the date of grant. Edison International
stock options include a dividend equivalent feature. Generally, for
options issued before 1994, amounts equal to dividends accrue on the
options at the same time and at the same rate as would be payable on the
number of shares of Edison International common stock covered by the
options. The amounts accumulate without interest. The optionee has no
right to payment of these dividend equivalents until the underlying stock
options are exercised. For Edison International stock options issued
subsequent to 1993, dividend equivalents are subject to reduction unless
certain shareholder return performance criteria are met.
Edison International stock options have a 10-year term with one-third of
the total award vesting after each of the first three years of the award
term. The options are not transferable, except by will or domestic
relations order. If an optionee retires, dies or is permanently and
totally disabled during the three-year vesting period, the unvested
options will vest and be exercisable to the extent of 1/36 of the grant
for each full month of service during the vesting period. Unvested
options of any person who has served in the past on the Edison
International or SCE Management Committee will vest and be exercisable
upon the member's retirement, death or permanent and total disability.
Upon retirement, death or permanent and total disability, the vested
options may continue to be exercised within their original terms by the
recipient or beneficiary. If an optionee is terminated other than by
retirement, death or permanent and total disability, options which had
vested as of the prior anniversary date of the grant are forfeited unless
exercised within 180 days of the date of termination. All unvested
options are forfeited on the date of termination.
page 21
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCE measures compensation expense related to stock-based compensation by
the intrinsic value method. Compensation expense recorded under the
stock-compensation program was $7 million and $14 million for the three
and twelve months ended March 31, 1997, respectively, and $0.3 million and
$3 million for the three and twelve months ended March 31, 1996,
respectively.
Stock-based compensation expense under the fair-value method of accounting
would have resulted in pro forma net income of $122 million and $630
million for the three and twelve months ended March 31, 1997,
respectively, and $147 million and $677 million for the three and twelve
months ended March 31, 1996, respectively.
The weighted-average fair value of options granted during the twelve
months ended March 31, 1997, and March 31, 1996, was $7.62 per share
option and $6.27 per share option, respectively. The weighted-average
remaining life of options outstanding as of March 31, 1997, December 31,
1996, and March 31, 1996, was seven years at each date.
The fair value for each option granted, reflecting the basis for the above
pro forma disclosures, was determined on the date of grant using the
Black-Scholes option-pricing model. The following assumptions were used
in determining fair value through the model:
<TABLE>
<CAPTION>
12 Months Ended
-------------------------------
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Expected life 7 years 7 years
Risk-free interest rate 6.5% 5.5%
Expected volatility 17% 17%
</TABLE>
The recognition of dividend equivalents results in no dividends assumed
for purposes of fair-value determination. The application of fair-value
accounting in arriving at the pro forma disclosures above is not an
indication of future income statement effects. The pro forma disclosures
do not reflect the effect of fair-value accounting on stock-based
compensation awards granted prior to 1995.
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 1996, SCE recorded
pension gains from a special voluntary early retirement program.
page 22
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The plan's funded status was:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1997 1996 1996
-------------- ------------- --------------
(In millions)
Actuarial present value of benefit obligation:
<S> <C> <C> <C>
Vested benefits $1,554 $1,670 $1,864
Nonvested benefits 74 71 165
------ ------ ------
Accumulated benefit obligation 1,628 1,741 2,029
Value of projected future compensation levels 273 261 417
------ ------ ------
Projected benefit obligation $1,901 $2,002 $2,446
====== ====== ======
Fair value of plan assets $2,050 $2,165 $2,713
====== ====== ======
Projected benefit obligation less
than plan assets $ (149) $ (163) $ (267)
Unrecognized net gain 281 300 377
Unrecognized prior service cost (195) (199) (31)
Unrecognized net obligation (17-year amortization) (42) (43) (48)
------ ------ ------
Pension liability (asset) $ (105) $ (105) $ 31
====== ====== ======
Discount rate 7.75% 7.75% 7.25%
Rate of increase in future compensation 5.0% 5.0% 5.0%
Expected long-term rate of return on assets 8.0% 8.0% 8.0%
</TABLE>
SCE recognizes pension expense calculated under the actuarial method used
for ratemaking.
The components of pension expense were:
<TABLE>
<CAPTION>
3 Months Ended 12 Months Ended
March 31, March 31,
-------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C>
Service cost for benefits earned $ 11 $ 17 $ 43 $ 60
Interest cost on projected benefit obligation 35 42 171 160
Actual return on plan assets (22) (101) (265) (471)
Net amortization and deferral (14) 50 81 280
----- ----- ----- -----
Pension expense under accounting standards 10 8 30 29
Special termination benefits - - - 3
Regulatory adjustment--deferred 3 4 21 21
----- ----- ----- -----
Net pension expense recognized 13 12 51 53
Settlement gain - - (121) --
----- ----- ----- -----
Total expense $ 13 $ 12 $ (70) $ 53
===== ===== ===== =====
</TABLE>
page 23
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Postretirement Benefits Other Than Pensions
Employees retiring at or after age 55 (or those eligible for all benefits
under the 1996 special voluntary early retirement program) with at least
10 years of service, are eligible for postretirement health care, dental,
life insurance and other benefits. Health care benefits are subject to
deductibles, copayment provisions and other limitations.
SCE funds these benefits (by contributions to independent trusts) up to
tax-deductible limits, in accordance with rate-making practices. In 1996,
SCE recorded special termination expenses 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 early retirement program) and will be charged to earnings.
Trust assets are primarily common stocks, corporate and government bonds,
and short-term investments.
The funded status of these benefits is reconciled to the recorded
liability below:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1997 1996 1996
------------- ------------- -------------
(In millions)
Actuarial present value of benefit obligation:
<S> <C> <C> <C>
Retirees $ 930 $ 928 $ 401
Employees eligible to retire 36 35 104
Other employees 401 386 577
------ ------ -----
Accumulated benefit obligation $1,367 $1,349 $1,082
====== ====== ======
Fair value of plan assets $ 643 $ 617 $ 427
====== ====== =====
Plan assets less than accumulated benefit
obligation $ 724 $ 732 $ 655
Unrecognized transition obligation (20-year
amortization) (423) (430) (450)
Unrecognized net gain (loss) (229) (231) (203)
------ ------ -----
Recorded liability $ 72 $ 71 $ 2
====== ====== =====
Discount rate 7.75% 7.75% 7.5%
Expected long-term rate of return on assets 8.5% 8.5% 8.5%
</TABLE>
The components of postretirement benefits other than pensions expense were:
<TABLE>
<CAPTION>
3 Months Ended 12 Months Ended
March 31, March 31,
---------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C>
Service cost for benefits earned $ 7 $ 9 $ 29 $ 35
Interest cost on benefit obligation 25 19 96 78
Actual return on plan assets (13) (9) (47) (30)
Amortization of loss 2 2 6 3
Amortization of transition obligation 7 7 27 25
---- --- ---- ----
Net expense 28 28 111 111
Special termination expense - - 72 -
---- --- ---- ----
Total expense $ 28 $28 $183 $111
==== === ==== ====
</TABLE>
page 24
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The assumed rate of future increases in the per-capita cost of health care
benefits is 8.25% for 1997, gradually decreasing to 5% for 2004 and
beyond. Increasing the health care cost trend rate by one percentage
point would increase the accumulated obligation as of March 31, 1997, by
$206 million and annual aggregate service and interest costs by $24
million.
Employee Savings Plan
SCE has a 401(k) defined contribution savings plan designed to supplement
employees' retirement income. The plan received employer contributions
of $3 million and $23 million for the three and twelve months ended March
31, 1997, respectively, and $4 million and $19 million for the three and
twelve months ended March 31, 1996, respectively.
Note 7. Jointly Owned Utility Projects
SCE owns interests 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 March 31, 1997, was:
<TABLE>
<CAPTION>
Plant in Accumulated Under Ownership
Service Depreciation Construction Interest
-------- ------------ ------------ ---------
(In millions)
Transmission systems:
<S> <C> <C> <C> <C>
Eldorado $ 30 $ 9 $ - 60%
Pacific Intertie 231 73 8 50
Generating stations:
Four Corners Units 4 and 5 (coal) 458 238 2 48
Mohave (coal) 299 141 11 56
Palo Verde (nuclear) 1,597 483 7 16
San Onofre (nuclear) 4,189 1,940 29 75
------ ------ ----
Total $6,804 $2,884 $ 57
====== ====== =====
</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 March 31,
1997, were:
<TABLE>
<CAPTION>
Year ended December 31, (In millions)
<S> <C>
1997 $13
1998 16
1999 12
2000 9
2001 6
Thereafter 9
---
Total $65
===
</TABLE>
PAGE 25
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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 secured until decommissioning begins
at the other San Onofre units.
Decommissioning costs, which are recovered through customer rates, are
recorded as a component of depreciation expense. Decommissioning expense
was $36 million and $147 million for the three and twelve months ended
March 31, 1997, respectively, and $37 million and $155 million for the
three and twelve months ended March 31, 1996, respectively. The
accumulated provision for decommissioning was $980 million at March 31,
1997, $949 million at December 31, 1996, and $854 million at March 31,
1996. The estimated costs to decommission San Onofre Unit 1 ($280
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 March 31, December 31, March 31,
Dates 1997 1996 1996
---------- ------------- --------------- -------------
(In millions)
<S> <C> <C> <C> <C>
Municipal bonds 1999-2021 $ 430 $ 400 $ 359
Stocks -- 549 549 406
U.S. government issues 1998-2024 201 212 127
Short-term and other 1996-2024 65 56 213
------ ------ ------
Total $1,245 $1,217 $ 1,105
====== ====== ======
</TABLE>
Trust fund earnings (based on specific identification) increase the trust
fund balance and the accumulated provision for decommissioning. Net
earnings were $11 million and $48 million for the three and twelve months
ended March 31, 1997, respectively, and $12 million and $56 million for
the three and twelve months ended March 31, 1996, respectively. Proceeds
from sales of securities (which are reinvested) were $147 million and $732
million for the three and twelve months ended March 31, 1997,
respectively, and $369 million and $1.1 billion for the three and twelve
months ended March 31, 1996, 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 even after deregulation due to its current and
expected future ability to recover these costs through customer rates.
PAGE 26
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Commitments
SCE has fuel supply contracts which require payment only if the fuel is
made available for purchase.
SCE has power-purchase contracts with certain qualifying facilities
(cogenerators and small power producers) and other utilities. The
qualifying facility contracts provide for capacity payments if a facility
meets certain performance obligations and energy payments based on actual
power supplied to SCE. There are no requirements to make debt-service
payments.
SCE has unconditional purchase obligations for part of a power plant's
generating output, as well as firm transmission service from another
utility. Minimum payments are based, in part, on the debt-service
requirements of the provider, whether or not the plant or transmission
line is operable. The purchased-power contract is not expected to provide
more than 5% of current or estimated future operating capacity. SCE's
minimum commitment under both contracts is approximately $205 million
through 2017.
Certain commitments for the years 1997 through 2001 are estimated below:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001
------ ------ ------ ------ ------
(In millions)
<S> <C> <C> <C> <C> <C>
Projected construction expenditures $819 $881 $756 $730 $711
Fuel supply contracts 223 231 222 244 231
Purchased-power capacity payments 700 702 704 705 699
Unconditional purchase obligations 9 10 10 10 10
</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).
<page 27>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
SCE's recorded estimated minimum liability to remediate its 54 identified
sites was $112 million at March 31, 1997. 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 $211 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 $96 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 all responsible carriers.
Costs incurred at SCE's remaining sites are expected to be recovered
through customer rates. SCE has recorded a regulatory asset of $101
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 $10 million. Recorded costs for the twelve
months ended March 31, 1997, were $9 million.
Based on currently available information, SCE believes it is unlikely that
it will incur amounts in excess of the upper limit of the estimated range
and, based upon the CPUC's regulatory treatment of environmental-cleanup
costs, SCE believes that costs ultimately recorded will not materially
affect its results of operations or financial position. There can be no
assurance, however, that future developments, including additional
information about existing sites or the identification of new sites, will
not require material revisions to such estimates.
Nuclear Insurance
Federal law limits public liability claims from a nuclear incident to $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
page 28
<PAGE>
SOUTHERN CALIFORNIA EDISON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
exceed the primary insurance at that plant site. Federal regulations
require this secondary level of financial protection. The Nuclear
Regulatory Commission exempted San Onofre Unit 1 from this secondary
level, effective June 1994. The maximum deferred premium for each nuclear
incident is $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
also has been purchased in amounts greater than federal requirements.
Additional insurance covers part of replacement power expenses during an
accident-related nuclear unit outage. These policies are issued primarily
by mutual insurance companies owned by utilities with nuclear facilities.
If losses at any nuclear facility covered by the arrangement were to
exceed the accumulated funds for these insurance programs, SCE could be
assessed retrospective premium adjustments of up to $34 million per year.
Insurance premiums are charged to operating expense.
page 29
<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 and
twelve months ended March 31, 1997, were $112 million and $595 million,
respectively, compared with $139 million and $643 million for the same
periods in 1996. The quarterly decrease is directly related to revised
rate-making plans for SCE's nuclear units (see Regulatory Matters) and a
scheduled refueling outage at San Onofre Nuclear Generating Station Unit
2 during the entire first quarter (see also San Onofre Steam Generator
Tubes). These decreases were partially offset by improved overall
operating performance, including a strong performance from San Onofre Unit
3. The decrease in earnings for the twelve months ended March 31, 1997,
compared with the same period in 1996, reflects the revised rate-making
plans for SCE's nuclear facilities. Earnings were also impacted by
nonrecurring charges for workforce management costs. These reductions were
partially offset by improved operating performance due to SCE's voluntary
retirement programs in 1996.
Operating Revenue
Operating revenue decreased 4% during the first quarter of 1997, compared
with the same period in 1996, as increased sales volume was more than
offset by lower average rates. Average retail rates were approximately 5%
lower during the first quarter of 1997 compared with the same period for
the prior year. For the twelve months ended March 31, 1997, operating
revenue decreased 5% when compared to the year-earlier period, as
increased sales volume was more than offset by lower average rates.
Average rates fell approximately 8% when compared to the year-earlier
period. The lower rates are attributable to the continuing effects of the
California Public Utilities Commission (CPUC) decision effective April
1996 which lowered SCE's 1996 authorized revenue by $338 million, or 4.4%.
Rates in 1997 are unchanged from April 1996. Over 98% of operating
revenue is from retail sales. Retail rates are regulated by the CPUC and
wholesale rates are regulated by the Federal Energy Regulatory Commission
(FERC).
In March 1995, SCE announced a five-year goal to reduce system average
rates by 25% on an inflation-adjusted basis (from 10.7 cents per kilowatt-hour
to below 10 cents per kilowatt-hour). In February 1996, the CPUC approved a
system-wide rate reduction which lowered the average price per kilowatt-
hour from 10.7 cents to 10.1 cents, effective June 1996. Legislation enacted in
September 1996 provides for, among other things, at least a 10% rate
reduction for residential and small commercial customers beginning in 1998
(see discussion in Competitive Environment).
page 30
<PAGE>
Operating Expenses
Fuel expense increased 30% and 15%, respectively, in the three and twelve
months ended March 31, 1997, compared with the same periods in 1996. The
increases are due to higher gas prices and changes in the fuel mix. San
Onofre Unit 2 was shut down during the entire first quarter of 1997, thus
resulting in higher gas-powered generation.
Purchased-power expense increased 19% and 7%, respectively, for the three-
and twelve-month periods ended March 31, 1997, compared to the same
periods last year, due to an increase in power purchased under federally
mandated contracts. SCE is required under federal law to purchase power
from certain nonutility generators even though energy prices under these
contracts are generally higher than other sources. During the twelve-month
period ended March 31, 1997, 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. The CPUC has mandated
the prices for these contracts.
Provisions for regulatory adjustment clauses decreased substantially for
the three and twelve months ended March 31, 1997, compared to the year-
earlier periods, due to actual energy costs exceeding CPUC-authorized fuel
and purchased-power cost estimates and undercollections resulting from the
accelerated recovery of SCE's remaining investment in San Onofre Units 2
and 3. These undercollections were partially offset by overcollections
associated with actual base-rate revenue from kilowatt-hour sales
exceeding CPUC-authorized amounts and incentive pricing associated with
operating efficiencies at San Onofre Units 2 and 3.
Other operating expenses decreased 12% during the first quarter of 1997,
compared with the year-earlier period, due to reduced payroll costs after
SCE's voluntary retirement program in 1996.
Maintenance expense increased 15% in the first quarter of 1997, compared
with the year-earlier period, due to the San Onofre Unit 2 scheduled
refueling outage during the entire first quarter. There was no comparable
outage for the same period in 1996.
Depreciation and decommissioning expense increased 26% and 17%,
respectively, for the three- and twelve-month periods ended March 31,
1997, due to higher depreciation rates and the accelerated recovery of San
Onofre Units 2 and 3 effective April 1996 and the accelerated recovery of
the Palo Verde Nuclear Generating Station units effective January 1997.
Property and other taxes decreased 27% and 16%, respectively, for the
three- and twelve-month periods ended March 31, 1997, due to decreases in
property taxes and lower payroll taxes related to workforce reductions
after SCE's voluntary retirement programs in 1996.
Income taxes decreased 12% during the first quarter of 1997, compared to
1996, mainly due to a decrease in pre-tax income.
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 units. The deferred
revenue (including interest) is being collected evenly over the final six
years of each unit's plan. The plan ended in February 1996 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 and dividend income decreased 33% and 13%, respectively, for the
three and twelve months ended March 31, 1997, compared to the year-
page 31
<PAGE>
earlier periods, primarily due to lower investment balances and lower
interest rates.
Other nonoperating income decreased for both the three and twelve months
ended March 31, 1997, compared to the same periods in 1996, primarily due
to increased costs resulting from the effect of a rise in Edison
International's stock price on SCE's stock option plan, and additional
accruals for regulatory matters.
Interest Expense
Other interest expense increased 44% for the first quarter of 1997
compared to the year-earlier period. The increase is mainly due to
interest related to balancing account overcollections.
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.
Edison International's Board of Directors has authorized the repurchase
of up to $800 million of its common stock. Edison International has
repurchased 38.6 million shares ($739 million) through May 5, 1997, funded
by dividends from its subsidiaries and its lines of credit. As excess
cash becomes available, SCE intends to pay cash dividends to Edison
International, while maintaining its CPUC-authorized capital structure.
For the first quarter of 1997, SCE's cash flow coverage of dividends
decreased to 3.0 times from 4.9 times compared to the year-earlier period,
reflecting the ongoing share repurchase program at Edison International.
For the twelve months ended March 31, 1997, the cash flow coverage of
dividends decreased to 1.9 times from 3.5 times compared to the same
period last year, also due to the share repurchase program.
Cash Flows from Operating Activities
Net cash provided by operating activities totaled $558 million and $1.6
billion, respectively, for the three and twelve months ended March 31,
1997, compared with $705 million and $2.0 billion for the same periods in
1996. Cash from operations exceeded capital requirements for all periods
presented.
Cash Flows from Financing Activities
Short-term debt is used to finance fuel inventories, balancing account
undercollections and general cash requirements. Long-term debt is used
mainly to finance capital expenditures. External financings are
influenced by market conditions and other factors, including limitations
imposed by its articles of incorporation and trust indenture. As of March
31, 1997, SCE could issue approximately $7.9 billion of additional first
and refunding mortgage bonds and $4.5 billion of preferred stock at
current interest and dividend rates.
At March 31, 1997, 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
March 31, 1997, SCE had the capacity to pay $285 million in additional
dividends and continue to maintain its authorized capital structure.
page 32
<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 of "Notes to Consolidated Financial
Statements," decommissioning costs are accrued and recovered in rates over
the term of each nuclear generating facility's operating license through
charges to depreciation expense. SCE estimates that it will spend
approximately $12.7 billion to decommission its nuclear facilities,
primarily between 2013-2070. This estimate is based on SCE's current-
dollar decommissioning costs ($2.0 billion), escalated using a 6.65%
annual rate. 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 construction expenditures for the next five years are:
1997--$819 million; 1998--$881 million; 1999--$756 million; 2000--$730
million; and 2001--$711 million.
Long-term debt maturities and sinking fund requirements for the next five
twelve-month periods following March 31, 1997, are: 1998--$426 million;
1999--$322 million; 2000--$480 million; 2001--$200 million; and 2002--$200
million.
REGULATORY MATTERS
SCE's 1997 CPUC-authorized rates are unchanged from 1996 levels due to
the recently enacted legislation which requires that system average rates
remain frozen at the June 10, 1996, level of 10.1 cents per kilowatt-hour (see
discussion in Competitive Environment).
The CPUC's 1997 cost-of-capital decision authorized an 11.6% return on
common equity and a 48% common equity ratio, both unchanged from 1996
levels. SCE's return on rate base was lowered from 9.55% to 9.49%. The
decision, excluding the effects of other rate actions, would reduce 1997
earnings by approximately $5 million.
The CPUC has authorized revised rate-making plans for SCE's nuclear
facilities, which call for the accelerated recovery of its nuclear
investments in exchange for a lower authorized rate of return. SCE's
nuclear assets are now earning an annual rate of return of 7.35%, compared
to the current 9.49% for other assets. In addition, the San Onofre plan
authorizes a fixed rate of approximately 4 cents per kilowatt-hour generated
for incremental operating costs including incremental capital costs, and
nuclear fuel and nuclear fuel financing costs. The San Onofre plan
commenced in April 1996, and ends in December 2001 for the accelerated
recovery portion and in December 2003 for the incremental pricing portion.
Palo Verde's incremental operating costs, including incremental capital
costs, and nuclear fuel and nuclear fuel financing costs, are subject to
balancing account treatment. The Palo Verde plan commenced in January
1997 and ends in December 2001.
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 CPUC's Office of Ratepayer Advocates (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 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. In
October 1996, the ORA issued its report for the 1995 record period
recommending a $38 million disallowance for excessive costs incurred from
page 33
<PAGE>
April 1994 through March 1995. Both proposed disallowances have been
consolidated into one proceeding. SCE and the ORA have filed several
rounds of testimony on this issue. Hearings concluded in February 1997.
A decision is expected in late 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 industry.
California Electric Utility Industry Restructuring
The CPUC's December 1995 decision on restructuring California's electric
utility industry started the transition to a new market structure, which
is expected to provide competition and customer choice and is scheduled
to begin January 1, 1998. Key elements of the CPUC's restructuring
decision include: creation of an independent power exchange (PX) and
independent system operator (ISO); availability of direct customer access
and customer choice; performance-based ratemaking (PBR) for those utility
services not subject to competition; voluntary divestiture of at least 50%
of utilities' gas-fueled generation, and implementation of a non-
bypassable charge to all customers called the competition transition
charge (CTC).
In September 1996, the State of California enacted legislation to provide
a transition to a competitive market structure. The legislation
substantially adopts the CPUC's December 1995 restructuring decision by
addressing stranded-cost recovery for utilities and providing a certain
cost-recovery time period for the transition costs associated with
utility-owned generation-related assets. Transition costs related to
power-purchase contracts 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, which would allow SCE to
reduce rates by 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 transition period. In addition, the legislation mandates
the implementation of a non-bypassable 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.
On May 6, 1997, SCE filed an application with the CPUC requesting approval
of the issuance of an aggregate amount of up to $3 billion of rate
reduction bonds in one or more series or classes and a 10% rate reduction
for the period from January 1, 1998, through May 31, 2001. On the same
day, SCE filed an application with the California Infrastructure and
Economic Development Bank for approval to issue the bonds. Residential
and small commercial customers will repay the bonds over the expected 10-
year term through non-bypassable charges based on electricity consumption.
With the CPUC's decision expected in September 1997, and subject to the
prior approval of the Infrastructure Bank, it is anticipated that the rate
reduction bonds will be issued in the fourth quarter of 1997.
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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 November 1996, the FERC conditionally accepted
the proposal and directed the three utilities to file more specific
information, which was filed on March 31, 1997. 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; SCE's share would be 45%.
The ISO and PX 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 the funding level of $250 million
which will be used to build the hardware and software systems for the ISO
and PX.
On May 6, 1997, the CPUC issued a decision describing how all California
investor-owned utility customers will be able to choose who will provide
them with electric generation service. Beginning January 1, 1998,
customers will be able to choose to purchase power from the PX through
SCE, or choose direct access, which means the customer can contract
directly with either independent power producers or retail electric
service providers such as power brokers, marketers and aggregators.
Additionally, all investor-owned utility customers must pay the CTC
whether or not they choose to buy power through SCE. Electric utilities
will continue to provide the core distribution service of delivering
energy through its distribution system regardless of a customer's choice
of electricity supplier. The CPUC will continue to regulate the prices
and service obligations related to distribution services. If the new
competitive market cannot accommodate the volume of direct access
transactions, the CPUC could implement a contingency plan. However, the
CPUC believes it is likely that interest in and migration to direct access
will be gradual.
A second decision issued by the CPUC on May 6, 1997, introduces customer
choice to metering, billing and related services (referred to as revenue
cycle services) that are now provided by California's investor-owned
utilities. Under this revenue cycle services "unbundling" decision,
beginning in January 1998, customers may choose to have either SCE or
their electric generation service provider render consolidated (energy and
distribution) bills, or they may choose to have separate billings from
each service provider. In addition, beginning in January 1998, customers
with maximum demand above 20 kW (primarily industrial and large
commercial) can choose SCE or any other supplier to provide their metering
service. All other customers will have this option beginning in January
1999. In determining whether any credit should be provided by the utility
to firms providing customers with revenue cycle services, and the amount
of any such credit, the CPUC has indicated that it is appropriate to "net"
the cost incurred by the utility and the cost avoided by the utility as
a result of such services being provided by the other firm rather than by
the utility.
The unbundling of revenue cycle services is likely to expose SCE to the
loss of revenue, higher stranded costs and a reduction in revenue
security. SCE is reviewing the potential effect of these decisions on its
results of operations and financial condition.
In July 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 September 1996, the CPUC
adopted a non-generation transmission and distribution (T&D) PBR
mechanism for SCE which began 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
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2001. Key elements of the non-generation PBR include: T&D rates indexed
for inflation based on the Consumer Price Index less a productivity
factor; elimination of the kilowatt-hour sales adjustment; adjustments for
cost changes that are not within SCE's control; a cost of capital trigger
mechanism based on changes in a bond index; standards for service
reliability and safety; and a net revenue-sharing mechanism that
determines how customers and shareholders will share gains and losses from
T&D operations.
In November 1996, SCE filed an application with the CPUC to voluntarily
divest, by auction, all of its oil- and gas-fueled generation assets.
This application builds on SCE's March 1996 plan which outlined how SCE
proposed to divest 50% of these assets. Under the new proposal, SCE would
continue to operate and maintain the divested power plants for at least
two years following their sale, as mandated by the recent restructuring
legislation. In addition, SCE would offer work force transition programs
to those employees who may be impacted by divestiture-related job
reductions. SCE's proposal is contingent on the overall electric industry
restructuring implementation process continuing on a satisfactory path.
CPUC approval of the oil- and gas-fueled generation divestiture was
requested for late 1997.
In December 1996, SCE filed a more comprehensive plan (elaborating on its
July 1996 filing related to the conceptual aspects of separating costs as
requested by CPUC and FERC directives) for the functional unbundling of
its rates for electric service, beginning on January 1, 1998. In response
to CPUC and FERC orders, as well as the new restructuring legislation,
this filing addressed the implementation-level detail for the functional
unbundling of rates in separate charges for energy, transmission,
distribution, the CTC, public benefit programs and nuclear
decommissioning. Hearings on SCE's rate unbundling plan were concluded
in April 1997. A final decision on this matter is expected in the third
quarter of 1997.
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 were using or began using utility services on or after the
December 20, 1995, decision date. In August 1996, in compliance with the
CPUC's restructuring decision, SCE filed its application to estimate its
1998 transition costs. In October 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 other cost components for
the PX, T&D, nuclear decommissioning and public benefit 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 $13.1 billion (1998 net
present value), assuming the fossil plants have a market value equal to
their net book value, and $13.8 billion (1998 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 prices could materially affect
these estimates. The potential transition costs are comprised of: $7.5
billion from SCE's qualifying facility contracts, which are the direct
result of legislative and regulatory mandates; and $5.6 billion to $6.3
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 and Palo Verde (as discussed in Note 1) and certain other
costs. On February 14, 1997, SCE submitted an update to the CTC filing
to reflect approval by the CPUC of settlements regarding ratemaking for
SCE's share of Palo Verde and the buyout of a power purchase agreement,
as well as other minor data updates. No substantive changes in the total
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CTC estimates were included. Hearings on various phases of this issue
began in December 1996 and will continue throughout 1997. A decision is
expected before January 1, 1998.
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
believes it should be allowed to continue to apply accounting standards
that recognize the economic effects of rate regulation for its generation-
related assets during the 1998-2001 transition period. However, in
response to a request by the staff of the Securities and Exchange
Commission (SEC), in December 1996, SCE submitted its views on the
continued applicability of regulatory accounting standards for its
generation-related assets. In its submittal, SCE and its independent
accountants jointly concluded that, based on their current analysis, SCE
will continue to meet the criteria for applying these accounting standards
through the 1998-2001 transition period. In its February 1997 response,
the SEC staff expressed continuing concern with SCE's conclusion and
indicated that they wanted to meet further with SCE and the other major
California electric utilities to resolve this matter. SCE and the other
major California electric utilities met with the SEC in March 1997.
Subsequently, the SEC asked a series of questions to be answered by each
of California's major electric utilities. SCE responded to the SEC's
questions in early April 1997. The authority to require SCE to
discontinue applying regulatory accounting standards rests with the SEC,
although matters such as this can be referred to the Financial Accounting
Standards Board's Emerging Issues Task Force (EITF) for resolution. On
April 28, 1997, this regulatory accounting matter was added to the EITF's
agenda for discussion at its May 21-22, 1997, meeting. If the EITF is
able to reach a consensus on this matter, SCE will be required to follow
the EITF's guidance. If SCE is required to discontinue the application
of these regulatory accounting standards for its generation-related
assets, and the EITF does not change the current requirements of these
standards, SCE would have to write off generation-related regulatory
assets, which at March 31, 1997, totaled approximately $500 million on
an after-tax basis, primarily for the recovery of income tax benefits
previously flowed-through to customers, purchased-power agreement
termination payments, unamortized loss on reacquired debt and the Palo
Verde phase-in plan.
SCE believes that a proper application of regulatory accounting standards
will result in it no longer meeting the criteria to apply these accounting
standards to all of its non-hydroelectric generation-related assets after
the end of the 1998-2001 transition period. If SCE continues the
application of these accounting standards during the transition period,
but during the transition period events occur that result in SCE no longer
meeting the criteria for applying such standards, SCE may be required to
write off the remaining balance of its recorded generation-related
regulatory assets existing at that time.
If a non-cash write-off is required, SCE believes that it should not
affect the stranded-cost recovery plans set forth in the CPUC's December
1995 restructuring decision and legislation enacted by the State of
California in September 1996.
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.
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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 Restructuring Decision
In April 1996, the FERC issued its decision on stranded cost recovery and
open access transmission, effective July 1996. The decision, reaffirmed
in a March 1997 FERC order, 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 in July 1996. The tariff became effective on an interim basis,
subject to refund, as of its filing date. The FERC accepted SCE's
compliance filing in February 1997. SCE will revise its tariff to reflect
the few revisions set forth in the FERC's March 1997 order.
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 of "Notes to 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 likely range of costs.
SCE's recorded estimated minimum liability to remediate its 54
identified sites was $112 million at March 31, 1997. One of SCE's
sites, a former pole-treating facility, is considered a federal Superfund
site and represents 72% 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 $211 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 $96 million of its recorded liability, through an
incentive mechanism. Under this mechanism, SCE will recover 90% of
cleanup costs through customer rates; shareholders fund the remaining 10%,
with the opportunity to recover these costs from insurance carriers and
other third parties. SCE has successfully settled insurance claims with
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all responsible carriers. Costs incurred at SCE's remaining sites are
expected to be recovered through customer rates. SCE has recorded a
regulatory asset of $101 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 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 $10 million. Recorded costs for the twelve-
month period ending March 31, 1997, were $9 million.
Based on currently available information, SCE believes it is unlikely that
it will incur amounts in excess of the upper limit of the estimated range
and, based upon the CPUC's regulatory treatment of environmental-cleanup
costs, 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
the southwestern U.S. In addition, another study is in progress to
determine the specific impact of air contaminant emissions from the Mohave
Coal Generating Station on visibility in Grand Canyon National Park. The
potential effect of these studies on sulfur dioxide emissions regulations
for Mohave is unknown.
SCE's projected capital expenditures to protect the environment are $831
million for the 1997-2001 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 Unit 2 will have to be replaced within five to ten years.
SCE estimates its share of the steam generator replacement costs to be
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between $16 million and $30 million, plus replacement power costs. SCE
is evaluating APS' analyses, conducting its own review, and has not yet
decided whether it supports replacement of the steam generators.
SAN ONOFRE STEAM GENERATOR TUBES
The San Onofre Units 2 and 3 steam generators have performed relatively
well through the first 15 years of operation, with low rates of ongoing
tube degradation. During the most recent Unit 2 scheduled refueling and
inspection outage, however, an increased rate of degradation was
identified, resulting in removing 1.8% of the tubes from service. The
cumulative total of Unit 2's tubes removed from service is now 5.5%, well
below the maximum 10% allowed in the steam generator design before the
rating capacity of the unit must be reduced. As a result of the increased
degradation, a mid-cycle inspection outage will be conducted in 1998 for
Unit 2. Depending on the results of the current refueling and inspection
outage for Unit 3, a mid-cycle inspection outage may also be required in
1998 for that unit.
During the current, scheduled 75-day refueling outage of Unit 3, which
began in April 1997, inspections of structural supports for steam
generator tubes identified several areas where the thickness of the
supports had been reduced, apparently by erosion during normal plant
operation. Additional inspection and analysis is continuing, and the
results will be reviewed with the Nuclear Regulatory Commission in early
June 1997. Corrective actions may include removing a limited number of
tubes from service by plugging, which could be completed within the
scheduled outage. Additional actions could be required which might extend
the outage. In the recent inspection of Unit 2's steam generators, the
similar tube supports showed no signs of the erosion affecting Unit 3.
PROPOSED NEW ACCOUNTING STANDARD
During 1996, the Financial Accounting Standards Board issued an exposure
draft that 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 the 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 expect that the accounting
changes proposed in the exposure draft would have an adverse effect on its
results of operations even after deregulation 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 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
(a subsidiary of Edison International) at the time of filing. In April
1996, Edison Mission Energy's 50% share in these projects was sold to
CalEnergy. 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
allege in the fourth amended complaint that past underpayments have
totaled at least $21 million. In other court filings, plaintiffs contend
that additional contract payments owing from the beginning of the alleged
underpayments through the end of the contract term could total
approximately $60 million. Plaintiffs also seek unspecified punitive
damages and an injunction to enjoin SCE from "future" unfair competition.
After SCE's motion to strike portions of the fourth amended complaint was
denied, SCE filed an answer to the fourth amended complaint which denies
its material allegations.
On May 1, 1996, the parties entered into an agreement for a settlement of
all claims in dispute. Pursuant to the agreement, the specific terms of
which are confidential, a settlement amount has been paid and the parties
have entered into mutual general releases, with respect to the period
before January 1, 1996. Southern California Edison Company (SCE) intends
to seek recovery of this payment through rates. 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 reserved the
right to continue the litigation with respect to the period after December
31, 1995, if CPUC approval is not obtained. On August 8, 1996, the SCE
filed its application with the CPUC for approval of the settlement as it
pertains to the period after 1995. On December 20, 1996, the Office of
Ratepayer Advocates (ORA) filed a protest to the application. In its
protest, the ORA requests that the CPUC not grant the application or, in
the alternative, that the CPUC conduct hearings on the application. On
January 17, 1997, the Company filed a reply to the ORA's request. On
February 27, 1997, a prehearing conference was held, at which time SCE's
application was set for hearing to commence on April 23, 1997. This
hearing date was subsequently vacated by the assigned administrative law
judge (ALJ) due to ongoing discussions to resolve issues raised by ORA's
protest.
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 million in
damages, which includes consequential damages claimed in seven of the
eight lawsuits. On March 1, 1995, the court in the lead Los Angeles
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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. Following the March 1 ruling, a ninth lawsuit was
filed in the Los Angeles Superior Court raising claims similar to those
alleged in the first eight. SCE subsequently responded to the complaint
in the new lawsuit by denying its material allegations. On April 5, 1995,
SCE filed a petition for Writ of Mandate, Prohibition or Other Appropriate
Relief, requesting that the Court of Appeal of the State of California,
Second Appellate District issue a writ directing the Los Angeles Superior
Court to vacate its March 1 order granting summary adjudication. In a
decision filed August 9, 1995, the Court of Appeal issued a writ directing
that the order be overturned, and a new order be entered denying the
motion. In light of the Court of Appeal decision in the lead Los Angeles
case, a summary adjudication motion in the Kern County case was withdrawn.
On March 25, 1996, pursuant to a court-approved stipulation, all but one
of the cases were consolidated for trial in Los Angeles Superior Court.
Shortly thereafter, on April 3, 1997, pursuant to stipulation of the
parties, the Kern County case was ordered to be coordinated with the Los
Angeles cases so that it too will be tried in Los Angeles. Trial on the
consolidated cases began on March 11, 1997, and is presently in progress.
No trial date has been set in the ninth unconsolidated case.
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
denied the material allegations in its responses to each of these
lawsuits.
The first lawsuit was filed in Orange County Superior Court and served on
SCE in June 1994. There are five named plaintiffs and six named
defendants, including SCE. Three of the five plaintiffs are presently or
were formerly employed by Grubb & Ellis, a real estate brokerage firm with
offices located in a commercial building known as the Koll Center in
Newport Beach. Two of the named plaintiffs are spouses of the other
plaintiffs. Grubb & Ellis and the owners and developers of the Koll
Center are also named as defendants in the lawsuit. This lawsuit alleges,
among other things, that the three plaintiffs employed by Grubb & Ellis
developed various forms of cancer as a result of exposure to EMF from
electrical facilities owned by SCE and/or the other defendants located on
Koll Center property. No specific damage amounts are alleged in the
complaint, but supplemental documentation prepared by the plaintiffs
indicates that plaintiffs allege compensatory damages of approximately $8
million, plus unspecified punitive damages. In December 1995, the court
granted SCE's motion for summary judgment and dismissed the case.
Plaintiffs have filed a Notice of Appeal. Briefs have been submitted but
no date for oral argument has been set.
A second lawsuit was filed in Orange County Superior Court and served on
SCE in January 1995. This lawsuit arises out of the same fact situation
as the June 1994 lawsuit described above and involves the same defendants.
There are four named plaintiffs, two of whom were formerly employed by
Grubb & Ellis and now allegedly have various forms of cancer. The other
two plaintiffs are the spouses of those two individuals. No specific
damage amounts are alleged in the complaint, but supplemental
documentation prepared by the plaintiffs indicates that plaintiffs will
allege compensatory damages of approximately $13.5 million, plus
unspecified punitive damages. On April 18, 1995, Grubb & Ellis filed a
cross-complaint against the other co-defendants, 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 heard oral argument on
this issue, but no decision has been issued.
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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 distribution lines
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 $5.5 million, plus
unspecified punitive damages. No trial date has been set in this case.
San Onofre Nuclear Generating Station Personal Injury Litigation
An SCE engineer employed at San Onofre died in 1991 from cancer of the
abdomen. On February 6, 1995, his children sued SCE and San Diego Gas &
Electric (SDG&E), as well as Combustion Engineering, the manufacturer of
the fuel rods for the plant, in the U.S. District court for the Southern
District of California. Plaintiffs alleged that the former employee's
illness resulted from, and was aggravated by, exposure to radiation at San
Onofre, including contact with radioactive fuel particles released from
failed fuel rods. Plaintiffs sought unspecified compensatory and punitive
damages. On April 3, 1995, the court granted the defendants' motion to
dismiss 14 of the plaintiffs' claims. SCE's April 20, 1995, answer to the
complaint denied all material allegations. On October 10, 1995, the court
granted plaintiffs' motion 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 December 7, 1995, the
court granted SCE's motion for summary judgment on the sole outstanding
claim against it, basing the ruling on the worker's compensation system
being the exclusive remedy for the claim. Plaintiffs have appealed this
ruling to the Ninth Circuit Court of Appeals. All trial court proceedings
have been stayed pending the ruling of the Court of Appeals. The impact
to 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 and his wife sued SCE and
SDG&E 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 plant, and the Institute of Nuclear Power Operations as
defendants. The former employee died of leukemia shortly after the
complaint was filed. Plaintiffs allege that the former operator's illness
resulted from, and was aggravated by, exposure to radiation at San Onofre,
including contact with radioactive fuel particles released from failed
fuel rods. Plaintiffs seek unspecified compensatory and punitive damages.
On November 22, 1995, the complaint was amended to allege wrongful death
and added the former employee's two children as plaintiffs. On December
22, 1995, SCE filed a motion to dismiss or, in the alternative, for
summary judgment based on worker's compensation exclusivity. On March 25,
1996, the court granted SCE's motion for summary judgment. Plaintiffs
have appealed this ruling to the Ninth Circuit Court of Appeals. All
trial court proceedings have been stayed pending the ruling of the Court
of Appeals in this case and in the case described in the above paragraph.
The impact to SCE, if any, from further proceedings in this case against
the remaining defendants cannot be determined at this time.
On August 31, 1995, the wife and daughter of a former San Onofre security
supervisor sued SCE and SDG&E in the U.S. District court for the Southern
District of California. Plaintiffs also named Combustion Engineering, the
manufacturer of fuel rods for the plant, and the Institute of Nuclear
Power Operations as defendants. The security officer worked for a
contractor in 1982, worked for SCE as a temporary employee (1982-1984),
and later worked as an SCE security supervisor (1984-1994). The officer
died of leukemia in 1994. Plaintiffs allege that the former officer's
illness resulted from, and was aggravated by, his exposure to radiation
at San Onofre, including contact with radioactive fuel particles released
from failed fuel rods. Plaintiffs seek unspecified compensatory and
punitive damages. SCE's November 13, 1995, answer to the complaint denied
page 43
<PAGE>
all material allegations. All trial court proceedings have been stayed
pending the rulings of the Court of Appeals in the cases described in the
above two paragraphs.
On November 17, 1995, an 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 alleged 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 employee's employment related
allegations based on worker's compensation exclusivity was granted on
March 19, 1996. The employee's wife died on August 15, 1996. On
September 20, 1996, the complaint was amended to allege wrongful death and
to add the employee's two children as plaintiffs. SCE's motion for
summary judgment was denied on April 9, 1997. The trial is scheduled to
begin on November 24, 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 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 in early 1998, after completion of the trial in
the case described in the preceding paragraph.
Employment Discrimination Litigation
On September 21, 1994, nine African-American employees filed a lawsuit
against Edison International and SCE on behalf of a 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 responded by denying the material allegations of the
complaint and asserting several affirmative defenses.
Simultaneous with discovery, the parties entered into settlement
discussions. The parties agreed to include the Equal Employment
Opportunity Commission (EEOC) in their settlement discussions after that
agency indicated its intent to intervene in the lawsuit in support of the
plaintiffs. The parties and EEOC agreed upon settlement terms and
submitted a proposed Consent Decree to the court for approval. After
certain issues raised by the court were addressed through a modification
of the proposed Decree, the court 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 on September
26, 1996.
Fifteen individuals and an organization filed timely 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.
page 44
<PAGE>
The Decree provides that a settlement fund of $8.15 million for back pay
claims and $3.1 million 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 SCE'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 object to the Consent Decree served notice of appeal from
the court's orders denying intervention and approving the Consent Decree.
The Court of Appeals ordered that the appellants file their opening brief
by March 12, 1997, and that appellees file any responsive brief by
April 11, 1997. Appellants moved for an extension of time to file their
opening brief, and Appellees filed a joint motion to dismiss the appeal
for lack of prosecution. On April 29, 1997, the Court of Appeals granted
Appellees' motion and ordered that the appeal be dismissed.
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.
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 million. Additionally,
plaintiff seeks treble and punitive damages.
The deadline for filing a response to the complaint has been continued
pending the outcome of a motion by plaintiff filed in a related lawsuit
seeking to dismiss the City of Los Angeles' complaint therein against the
U.S. Forest Service and plaintiff. SCE intends to deny the substantive
allegations of the complaint.
page 45
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Election of Directors
At SCE's Annual Meeting of Shareholders on April 17, 1997, shareholders
elected eighteen nominees to the Board of Directors. The number of broker
non-votes for each nominee was zero. The number of votes cast for and
withheld from each Director-nominee were as follows:
<TABLE>
<CAPTION>
Name Number of Votes
---- ---------------------------
For Withheld
----------- ----------
<S> <C> <C>
Howard P. Allen 491,819,188 360,994
John E. Bryson 491,821,042 359,140
Winston H. Chen 491,825,890 354,292
Stephen E. Frank 491,825,890 354,292
Camilla C. Frost 491,820,202 359,980
Joan C. Hanley 491,824,540 355,642
Carl F. Huntsinger 491,823,952 356,230
Charles D. Miller 491,823,388 356,794
Luis G. Nogales 491,816,854 363,328
Ronald L. Olson 491,816,290 363,892
J. J. Pinola 491,819,626 360,556
James M. Rosser 491,823,292 356,890
E. L. Shannon, Jr. 491,821,318 358,864
Robert H. Smith 491,819,290 360,892
Thomas C. Sutton 491,825,290 354,892
Daniel M. Tellep 491,821,918 358,264
James D. Watkins 491,822,788 357,394
Edward Zapanta 491,825,254 354,928
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
23. Consent of Independent Public Accountants
27. Financial Data Schedule
(b) Reports on Form 8-K:
None
page 46
<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 and
Assistant Secretary
May 15, 1997
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
SCE Financial Data Schedule - Exhibit 27
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $11,561,432
<OTHER-PROPERTY-AND-INVEST> 1,685,481
<TOTAL-CURRENT-ASSETS> 1,494,983
<TOTAL-DEFERRED-CHARGES> 2,505,899
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 17,247,795
<COMMON> 2,168,054
<CAPITAL-SURPLUS-PAID-IN> 218,399
<RETAINED-EARNINGS> 2,603,439
<TOTAL-COMMON-STOCKHOLDERS-EQ> 4,989,892
275,000
283,755
<LONG-TERM-DEBT-NET> 4,141,431
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 519,400
<COMMERCIAL-PAPER-OBLIGATIONS> 252,694
<LONG-TERM-DEBT-CURRENT-PORT> 426,470
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 6,359,153
<TOT-CAPITALIZATION-AND-LIAB> 17,247,795
<GROSS-OPERATING-REVENUE> 1,695,436
<INCOME-TAX-EXPENSE> 95,297
<OTHER-OPERATING-EXPENSES> 1,366,407
<TOTAL-OPERATING-EXPENSES> 1,461,704
<OPERATING-INCOME-LOSS> 233,732
<OTHER-INCOME-NET> 2,199
<INCOME-BEFORE-INTEREST-EXPEN> 235,931
<TOTAL-INTEREST-EXPENSE> 114,948
<NET-INCOME> 120,983
8,599
<EARNINGS-AVAILABLE-FOR-COMM> 112,384
<COMMON-STOCK-DIVIDENDS> 174,557
<TOTAL-INTEREST-ON-BONDS> 91,189
<CASH-FLOW-OPERATIONS> 558,342
<EPS-PRIMARY> $.0
<EPS-DILUTED> $.0
</TABLE>
<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 March 31, 1997, 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
May 14, 1997
